BEVERLY ENTERPRISES INC /DE/, 10-K, 1997-03-28

BEVERLY ENTERPRISES INC /DE/
10-K, 1997-03-28
SKILLED NURSING CARE FACILITIES

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================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

<TABLE>
<S> <S> <C>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
</TABLE>

COMMISSION FILE NUMBER: 1-9550

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

<TABLE>
<S> <C>
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)
</TABLE>

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

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

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Stock, $.10 par value New York Stock Exchange
Pacific Stock Exchange
5 1/2% Convertible Subordinated
Debentures New York Stock Exchange
due August 1, 2018 Pacific Stock Exchange
7 5/8% Convertible Subordinated
Debentures New York Stock Exchange
due March 15, 2003
Zero Coupon Notes due July 16, 2003 New York Stock Exchange
9% Senior Notes due February 15, 2006 New York Stock Exchange
</TABLE>

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

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

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

THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF
REGISTRANT WAS $1,404,540,511 AS OF FEBRUARY 28, 1997.

99,139,700
(NUMBER OF SHARES OF COMMON STOCK OUTSTANDING, NET OF TREASURY SHARES, AS OF
FEBRUARY 28, 1997)

PART III IS INCORPORATED BY REFERENCE FROM THE PROXY STATEMENT FOR THE
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 29, 1997.
================================================================================
<PAGE> 2

PART I

ITEM 1. BUSINESS.

GENERAL

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

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

The Company is the largest operator of nursing facilities in the United
States. At January 31, 1997, the Company operated 632 nursing facilities with
71,245 licensed beds. The facilities are located in 32 states and the District
of Columbia, and range in capacity from 20 to 355 beds. At January 31, 1997, the
Company also operated 65 institutional and mail service pharmacies, 33 assisted
living centers containing 892 units, 11 transitional hospitals containing 578
beds, 32 outpatient therapy clinics, 19 hospices and six home health care
centers. The Company's facilities had average occupancy of 87.4%, 88.1% and
88.5% during the years ended December 31, 1996, 1995 and 1994, respectively. See
"Item 2. Properties."

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, 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.

OPERATIONS

The Company is organized into four operating units, which support the
Company's delivery of vertically integrated services to the long-term healthcare
market: (i) Beverly Health and Rehabilitation Services, Inc. ("BHRS") and its
subsidiaries provide long-term and subacute care through the operation of
nursing facilities, assisted living centers and hospices; (ii) Spectra Rehab
Alliance, Inc. ("Spectra") and its subsidiaries operate outpatient therapy
clinics and manage the Company's rehabilitation services business; (iii)
American Transitional Hospitals, Inc. ("ATH") and its subsidiaries operate the
Company's transitional hospitals; and (iv) Pharmacy Corporation of America
("PCA") and its subsidiaries operate the Company's institutional and mail
service pharmacy businesses. Each operating unit is headed by a President who is
also a senior officer of the Company and reports directly to the President of
the Company. Each of the four operating units also has a separate Board of
Directors consisting of four senior executives of the Company and the President
of the unit.

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

Rehabilitation Therapies. The Company has developed and expanded its
healthcare expertise in rehabilitation and provides skilled rehabilitation
(occupational, physical, speech and respiratory) therapies in substantially all
of its nursing facilities. Through Spectra, the Company offers industrial
rehabilitation, outpatient therapy clinics, acute hospital therapy contracts and
management/consulting rehabilitation programs within the Company's network of
facilities and to other healthcare providers.

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

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<PAGE> 3

Pharmacy Services. PCA is one of the nation's largest institutional
pharmacies delivering drugs and related products and services, infusion therapy
and other healthcare products (enteral and urological) to nursing facilities,
acute care and transitional care hospitals, home care providers, psychiatric
facilities, correctional facilities, assisted living centers, retirement homes
and their patients. PCA also provides consultant pharmacist services, which
include evaluations of patient drug therapy, and drug handling, distribution and
administration within a nursing facility as well as assistance with state and
federal regulatory compliance. PCA's mail service pharmacy delivers drugs and
medical equipment to workers' compensation payors, claimants and employers.

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

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

GOVERNMENTAL REGULATION AND REIMBURSEMENT

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

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

<TABLE>
<CAPTION>
MEDICAID MEDICARE PRIVATE AND VA
------------------- ------------------- -------------------
ROOM AND ROOM AND ROOM AND
PATIENT BOARD PATIENT BOARD PATIENT BOARD ANCILLARY AND
DAYS REVENUES DAYS REVENUES DAYS REVENUES OTHER REVENUES
------- -------- ------- -------- ------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended:
December 31, 1996................ 69% 42% 12% 12% 19% 14% 32%
December 31, 1995................ 68% 43% 12% 11% 20% 15% 31%
December 31, 1994................ 68% 47% 12% 11% 20% 16% 26%
</TABLE>

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

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

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

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

Arkansas, California, Louisiana and Texas provide for reimbursement at a
flat daily rate, as determined by the responsible state agency. In all other
states with a Medicaid program in which the Company operated in 1996, payments
are based upon facility-specific cost reimbursement formulas established by the
applicable state. The Medicaid and Medicare programs each contain specific
requirements which must be adhered to by healthcare facilities in order to
qualify under the programs.

Governmental funding for healthcare programs is subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to healthcare
facilities. 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 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, 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

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position, results of operations or cash flows. However, future healthcare reform
legislation and regulatory changes may negatively impact the Company.

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

HCFA adopted survey, certification and enforcement procedures by
regulations effective July 1, 1995 to implement the Medicare and Medicaid
provisions of the Omnibus Budget Reconciliation Act of 1987 ("OBRA 1987")
governing survey, certification and enforcement of the requirements for contract
participation by skilled nursing facilities under Medicare and nursing
facilities under Medicaid. Among the provisions that HCFA has adopted are
requirements that (i) surveys focus on residents' outcomes; (ii) all deviations
from the participation requirements will be considered deficiencies, but that
all deficiencies will not constitute noncompliance; and (iii) certain types of
deficiencies must result in the imposition of a sanction. The regulations also
identify alternative remedies and specify the categories of deficiencies for
which they will be applied. These remedies include: temporary management; denial
of payment for new admissions; denial of payment for all residents; civil money
penalties of $50 to $10,000 per day of violation; closure of facility and/or
transfer of residents in emergencies; directed plans of correction; and directed
inservice training. The regulations also specify under what circumstances
alternative enforcement remedies or termination, or both, will be imposed on
facilities which are not in compliance with the participation requirements. The
Company has undertaken an analysis of the procedures in respect of its programs
and facilities covered by the final HCFA regulations. While the Company is
unable to predict with total accuracy the degree to which its programs and
facilities will be determined to be in compliance with regulations, compliance
data for the past year is available. Results of HCFA surveys for the past year
determined that approximately 96% of the Company's facilities were in compliance
with the HCFA criteria. HCFA reports have determined that of the non-Company
facilities surveyed nationally, approximately 95% of such facilities were
determined to be in compliance with such HCFA criteria. Although the Company
could be adversely affected if a substantial portion of its programs or
facilities were eventually determined not to be in compliance with the HCFA
regulations, the Company believes its programs and facilities generally exceed
industry standards.

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

The Medicaid and Medicare programs provide criminal penalties for entities
that knowingly and willfully offer, pay, solicit or receive remuneration in
order to induce business that is reimbursed under these programs. The illegal
remuneration provisions of the Social Security Act, also known as the
"anti-kickback" statute, prohibit the payment or receipt of remuneration
intended to induce the purchasing, leasing, ordering or arranging for any good,
facility, service or item paid by Medicaid or Medicare programs. The violation
of the illegal remuneration provisions is a felony and can result in the
imposition of fines of up to $25,000 per occurrence. In addition, certain states
in which the Company's facilities are located have enacted statutes which
prohibit the payment of kickbacks, bribes and rebates for the referral of
patients. The Medicare program has published certain "Safe Harbor" regulations
which describe various criteria and guidelines for

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transactions which are deemed to be in compliance with the anti-remuneration
provisions. Although the Company has contractual arrangements with some
healthcare providers, management believes it is in compliance with the
anti-kickback statute and other provisions of the Social Security Act and with
the applicable state statutes. However, there can be no assurance that
government officials responsible for enforcing these statutes will not assert
that the Company or certain transactions in which it is involved are in
violation of these statutes. The Social Security Act also imposes criminal and
civil penalties for making false claims to the Medicaid and Medicare programs
for services not rendered or for misrepresenting actual services rendered in
order to obtain higher reimbursement.

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

While federal regulations do not provide states with grounds to curtail
funding of their Medicaid cost reimbursement programs due to state budget
deficiencies, states have nevertheless curtailed funding in such circumstances
in the past. No assurance can be given that states will not do so in the future
or that the future funding of Medicaid programs will remain at levels comparable
to the present levels. The United States Supreme Court ruled in 1990 that
healthcare providers may bring suit in federal court to enforce the Medicaid Act
requirement that the states reimburse nursing facilities at rates which are
reasonable and adequate. Nursing facility operators, such as the Company, have
utilized and should continue to be able to utilize the federal courts to require
states to comply with their legal obligation to adequately fund Medicaid
programs. However, certain of the legislative proposals discussed above contain
provisions which would repeal the provisions of the Medicaid Act which require
states to pay reasonable and adequate rates and which would also eliminate the
right to judicial review of certain aspects of the reimbursement systems of
state Medicaid programs; therefore, there can be no assurance that nursing
facility operators will be able to utilize federal courts for such purposes in
the future.

COMPETITION

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

EMPLOYEES

At December 31, 1996, the Company had approximately 81,000 employees. The
Company is subject to both federal minimum wage and applicable federal and state
wage and hour laws and maintains various employee benefit plans.

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believes there may continue to be competitive pressures to increase the wage
levels of associates earning above the new minimum wage. The effect of the new
minimum wage on the Company's future operations is not expected to be material
as the Company believes that a significant portion of such increase will be
reimbursed through Medicare and Medicaid rate increases.

In recent years, the Company has experienced increases in its labor costs
primarily due to higher wages and greater benefits required to attract and
retain qualified personnel, increased staffing levels in its nursing facilities
due to greater patient acuity and the hiring of therapists on staff. Although
the Company expects labor costs to increase in the future, it is anticipated
that any increase in costs will generally result in higher patient rates in
subsequent periods, subject to the time lag in most states, of up to 18 months,
between increases in reimbursable costs and the receipt of related reimbursement
rate increases. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Operating Results."

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

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

Excessive litigation is a tactic common to "corporate campaigns" and one
that is being employed against the Company. There have been several proceedings
against facilities operated by the Company before the National Labor Relations
Board ("NLRB"). These proceedings consolidate individual cases from separate
facilities and are currently pending before the NLRB. The Company is vigorously
defending these proceedings and believes that many of the cases are without
merit.

ITEM 2. PROPERTIES.

At January 31, 1997, the Company operated 632 nursing facilities, 33
assisted living centers, 11 transitional hospitals, 65 pharmacies, 32 outpatient
therapy clinics, 19 hospices and six home health care centers in 35 states and
the District of Columbia. Most of the Company's 216 leased nursing facilities
are subject to "net" leases which require the Company to pay all taxes,
insurance and maintenance costs. Most of the Company's leases have original
terms from ten to fifteen years and contain at least one renewal option, which
could extend the original term of the leases by five to fifteen years. Many of
the Company's leases also contain purchase options. The Company considers its
physical properties to be in good operating condition and suitable for the
purposes for which they are being used. Certain of the nursing facilities and
assisted living centers owned by the Company are included in the collateral
securing the obligations under its various debt agreements. See "Part II, Item
8 -- Note 4 of Notes to Consolidated Financial Statements."

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The following is a summary of the Company's nationwide network of nursing
facilities, assisted living centers, transitional hospitals, pharmacies,
outpatient therapy clinics and hospices at January 31, 1997:

<TABLE>
<CAPTION>
OUTPATIENT
NURSING ASSISTED TRANSITIONAL THERAPY
FACILITIES LIVING CENTERS HOSPITALS PHARMACIES CLINICS HOSPICES
----------------- -------------- ----------------- ---------- ---------- --------
TOTAL TOTAL
LICENSED TOTAL LICENSED
LOCATION NUMBER BEDS NUMBER UNITS NUMBER BEDS NUMBER NUMBER NUMBER
-------- ------ -------- ------ ----- ------ -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama............... 21 2,663 1 24 -- -- 2 -- --
Arizona............... 3 480 -- -- 2 78 1 -- --
Arkansas.............. 33 4,083 3 48 -- -- 1 -- 1
California............ 71 7,406 2 113 -- -- 7 -- 5
Colorado.............. -- -- -- -- -- -- 1 -- --
Connecticut........... 3 435 -- -- -- -- 2 -- --
District of
Columbia............ 1 355 -- -- -- -- -- -- --
Florida............... 64 7,948 5 290 -- -- 8 -- --
Georgia............... 17 2,100 3 48 -- -- 3 16 1
Hawaii................ 2 396 -- -- -- -- 9 -- --
Illinois.............. 3 275 -- -- -- -- -- -- --
Indiana............... 26 3,817 1 16 1 40 1 -- 1
Kansas................ 33 2,146 3 39 -- -- 2 -- --
Kentucky.............. 8 1,047 -- -- -- -- 1 -- --
Louisiana............. 1 200 -- -- -- -- -- -- --
Maryland.............. 4 585 1 16 -- -- 1 -- --
Massachusetts......... 24 2,402 -- -- -- -- 2 -- --
Michigan.............. 2 206 -- -- -- -- -- -- --
Minnesota............. 36 3,230 2 28 -- -- 1 -- 1
Mississippi........... 21 2,456 -- -- -- -- 1 -- --
Missouri.............. 28 2,918 3 101 -- -- 2 -- 1
Nebraska.............. 24 2,209 1 16 -- -- 1 -- 2
New Jersey............ 1 120 -- -- -- -- -- -- --
North Carolina........ 12 1,508 1 16 -- -- 2 -- --
Ohio.................. 12 1,435 -- -- 1 44 1 3 --
Oklahoma.............. -- -- -- -- 2 64 -- -- --
Pennsylvania.......... 42 4,912 3 48 -- -- 2 -- 3
Rhode Island.......... -- -- -- -- -- -- 1 -- --
South Carolina........ 3 302 -- -- -- -- -- -- --
South Dakota.......... 17 1,236 -- -- -- -- 1 -- --
Tennessee............. 7 948 2 57 1 35 1 -- --
Texas (A)............. 49 6,061 -- -- 4 317 7 13 3
Virginia.............. 17 2,355 2 32 -- -- -- -- --
Washington............ 11 1,091 -- -- -- -- 2 -- --
West Virginia......... 3 310 -- -- -- -- -- -- --
Wisconsin............. 33 3,610 -- -- -- -- 2 -- 1
--- ------ --- --- --- --- --- -- ---
632 71,245 33 892 11 578 65 32 19
=== ====== === === === === === == ===
CLASSIFICATION
Owned................. 415 46,139 29 700 1 198 -- -- --
Leased................ 216 25,031 4 192 10 380 65 32 19
Managed............... 1 75 -- -- -- -- -- -- --
--- ------ --- --- --- --- --- -- ---
632 71,245 33 892 11 578 65 32 19
=== ====== === === === === === == ===
</TABLE>

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

(A) See "Part II, Item 8 -- Note 2 of Notes to Consolidated Financial
Statements" for discussion regarding pending disposition of such nursing
facilities.

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ITEM 3. 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 financial position
or results of operations.

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

No matters were submitted to a vote of the Company's security holders
during the last quarter of its fiscal year ended December 31, 1996.

EXECUTIVE OFFICERS AND DIRECTORS

The table below sets forth, as to each executive officer and director of
the Company, such person's name, positions with the Company and age. Each
executive officer and director of the Company holds office until a successor is
elected, or until the earliest of death, resignation or removal. Each executive
officer is elected or appointed by the Board of Directors. The information below
is given as of March 18, 1997.

<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
David R. Banks(1)........................ Chairman of the Board, Chief Executive Officer and
Director 60
Boyd W. Hendrickson(1)................... President, Chief Operating Officer and Director 52
William A. Mathies....................... Executive Vice President and President of BHRS 37
T. Jerald Moore.......................... Executive Vice President and President of ATH 56
Robert W. Pommerville.................... Executive Vice President, General Counsel and
Secretary 56
C. Arnold Renschler, M.D. ............... Executive Vice President and President of PCA 55
Bobby W. Stephens........................ Executive Vice President -- Asset Management 52
Scott M. Tabakin......................... Executive Vice President and Chief Financial Officer 38
Mark D. Wortley.......................... Executive Vice President and President of Spectra 41
Pamela H. Daniels........................ Vice President, Controller and Chief Accounting
Officer 33
Beryl F. Anthony, Jr.(2)(3)(5)........... Director 59
James R. Greene(2)(4).................... Director 75
Edith E. Holiday(3)(4)(5)................ Director 45
Jon E. M. Jacoby(1)(2)................... Director 58
Risa J. Lavizzo-Mourey, M.D.(2)(4)....... Director 42
Louis W. Menk(3)(4)(5)................... Director 78
Marilyn R. Seymann(1)(4)(5).............. Director 54
</TABLE>

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

(1) Member of the Executive Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

(4) Member of the Quality Management Committee.

(5) Member of the Nominating Committee.

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

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

8
<PAGE> 10

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

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

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

Mr. Renschler joined the Company in 1996 as Executive Vice President and
President of PCA. From 1990 to 1996, Mr. Renschler was Senior Vice President and
Chief Clinical Officer, as well as President of three operating divisions of
NovaCare, Inc. and a member of its board of directors. Prior to that time, he
held a series of key executive positions at Manor Healthcare Corp., including
President and Chief Operating Officer.

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

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

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

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

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

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

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

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

Dr. Lavizzo-Mourey is Director of the Institute of Aging, Chief of the
Division of Geriatric Medicine and Associate Executive Vice President for health
policy at the University of Pennsylvania, Ralston-Penn Center.

9
<PAGE> 11

From 1992 to 1994, Dr. Lavizzo-Mourey was in the Senior Executive Service in the
Agency for Health Care Policy and Research, U.S. Public Health Service of the
Department of Health and Human Services. She is a director of Medicus Systems,
Inc. and Nellcor Puritan Bennett. She has been a director of the Company since
March 1995.

Mr. Menk is Chairman of Black Mountain Gas Company. He retired in 1982 as
Chairman and Chief Executive Officer of International Harvester Company, the
predecessor to Navistar International Corporation. He has been a director of the
Company since July 1989.

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

During 1996, there were nine meetings of the Board of Directors. Each
director attended 75% or more of the meetings of the Board and committees on
which he or she served.

In 1996, directors, other than Mr. Banks and Mr. Hendrickson, received a
retainer fee of $23,750 for serving on the Board and an additional fee of $1,000
for each Board or committee meeting attended. Mr. Banks, the Company's current
Chairman of the Board and Chief Executive Officer, and Mr. Hendrickson, the
Company's current President and Chief Operating Officer, received no additional
cash compensation for serving on the Board or its committees.

During 1993, the Retirement Plan for Outside Directors was approved and
implemented whereby, upon retirement, as defined, each director is eligible to
continue receiving annually, for a number of years equal to the years of service
on the Board up to a maximum of ten years, the retainer fee on the date of
retirement, with no survivor benefits. These benefits are paid on a monthly
basis beginning on the date of retirement. The Company paid $18,000 under such
plan during each of the years ended December 31, 1996, 1995 and 1994.

During 1994, the Company's Nonemployee Directors' Stock Option Plan (the
"Nonemployee Directors' Plan") was approved. Such plan became effective June 1,
1994 and will remain in effect until May 31, 2004, subject to earlier
termination by the Board of Directors. There are 200,000 shares of the Company's
$.10 par value common stock ("Common Stock") authorized for issuance, subject to
certain adjustments, under the Nonemployee Directors' Plan. The Nonemployee
Directors' Plan provides that 2,500 nonqualified stock options be granted to
each nonemployee director on June 1 of each year until the plan is terminated,
subject to the availability of shares. Such grants were made in 1994, 1995 and
1996 to each of the nonemployee directors. Such nonqualified stock options are
granted at a purchase price equal to fair market value on the date of grant,
become exercisable one year after date of grant and expire ten years after date
of grant.

EMPLOYEE STOCK PURCHASE PLAN

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charge to the Company's statement of operations for the
year ended December 31, 1996 related to this plan was approximately $2,258,000.
At December 31, 1996, there were approximately 4,700 participants in the plan.

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

10
<PAGE> 12

PART II

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

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

<TABLE>
<CAPTION>
PRICES
------------
HIGH LOW
---- ----
<S> <C> <C>
1995
First Quarter............................................. $14 3/4 $ 121/2
Second Quarter............................................ 16 1/8 107/8
Third Quarter............................................. 14 3/8 117/8
Fourth Quarter............................................ 14 1/2 9
1996
First Quarter............................................. $12 3/8 $ 101/8
Second Quarter............................................ 12 5/8 11
Third Quarter............................................. 12 1/8 91/4
Fourth Quarter............................................ 13 3/4 105/8
1997
First Quarter (through March 18).......................... $16 1/8 $ 121/4
</TABLE>

The Company is subject to certain restrictions under its long-term debt
agreements related to the payment of cash dividends on its Common Stock. During
1996 and 1995, no cash dividends were paid on the Company's Common Stock and no
future dividends are currently planned.

At March 18, 1997, there were 7,123 record holders of the Common Stock.

11
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA.

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

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net operating revenues........................ $ 3,267,189 $ 3,228,553 $ 2,969,239 $ 2,884,451 $ 2,607,756
Interest income............................... 13,839 14,228 14,578 15,269 14,502
----------- ----------- ----------- ----------- -----------
Total revenues............................ 3,281,028 3,242,781 2,983,817 2,899,720 2,622,258
Costs and expenses:
Operating and administrative:
Wages and related......................... 1,819,500 1,736,151 1,600,580 1,593,410 1,486,191
Other..................................... 1,139,442 1,224,681 1,114,916 1,069,536 921,750
Interest.................................... 91,111 84,245 64,792 66,196 70,943
Depreciation and amortization............... 105,468 103,581 88,734 82,938 80,226
Impairment of long-lived assets:
Adoption of SFAS No. 121.................. -- 68,130 -- -- --
Development and other costs............... -- 32,147 -- -- --
Restructuring costs......................... -- -- -- -- 57,000
----------- ----------- ----------- ----------- -----------
Total costs and expenses.................. 3,155,521 3,248,935 2,869,022 2,812,080 2,616,110
----------- ----------- ----------- ----------- -----------
Income (loss) before provision for income
taxes, extraordinary charge and cumulative
effect of change in accounting for income
taxes....................................... 125,507 (6,154) 114,795 87,640 6,148
Provision for income taxes.................... 73,481 1,969 37,882 29,684 4,203
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary charge and
cumulative effect of change in accounting
for income taxes............................ 52,026 (8,123) 76,913 57,956 1,945
Extraordinary charge, net of income taxes of
$1,099 in 1996, $1,188 in 1994, $1,155 in
1993 and $5,415 in 1992..................... (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in accounting for
income taxes................................ -- -- -- -- (5,454)
----------- ----------- ----------- ----------- -----------
Net income (loss)............................. $ 50,300 $ (8,123) $ 74,501 $ 55,611 $ (12,344)
=========== =========== =========== =========== ===========
Net income (loss) applicable to common
shares...................................... $ 50,300 $ (14,998) $ 66,251 $ 31,173 $ (13,344)
=========== =========== =========== =========== ===========
Income (loss) per share of common stock:
Before redemption premium on preferred
stock, extraordinary charge and cumulative
effect of change in accounting for income
taxes..................................... $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on preferred stock....... -- -- -- (.25) --
----------- ----------- ----------- ----------- -----------
Before extraordinary charge and cumulative
effect of change in accounting for income
taxes..................................... .52 (.16) .79 .41 .01
Extraordinary charge........................ (.02) -- (.03) (.03) (.11)
Cumulative effect of change in accounting
for income taxes.......................... -- -- -- -- (.07)
----------- ----------- ----------- ----------- -----------
Net income (loss)........................... $ .50 $ (.16) $ .76 $ .38 $ (.17)
=========== =========== =========== =========== ===========
Shares used to compute per share amounts...... 99,646,000 92,233,000 87,087,000 81,207,000 77,685,000
CONSOLIDATED BALANCE SHEET DATA:
Total assets.................................. $ 2,525,082 $ 2,506,461 $ 2,322,578 $ 2,000,804 $ 1,859,361
Current portion of long-term obligations...... $ 38,826 $ 84,639 $ 60,199 $ 43,125 $ 30,466
Long-term obligations, excluding current
portion..................................... $ 1,106,256 $ 1,066,909 $ 918,018 $ 706,917 $ 712,896
Stockholders' equity.......................... $ 861,095 $ 820,333 $ 827,244 $ 742,862 $ 593,505
OTHER DATA:
Patient days.................................. 23,670,000 25,297,000 26,766,000 29,041,000 29,341,000
Average occupancy percentage.................. 87.4% 88.1% 88.5% 88.5% 88.4%
Number of nursing home beds................... 71,204 75,669 78,058 85,001 89,298
</TABLE>

12
<PAGE> 14

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

GENERAL

Healthcare system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for both federal and state governments.
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 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, 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.

The federal government recently increased the minimum wage. This new
legislation is being rolled out in two phases. The initial increase took effect
October 1, 1996, and the final increase is scheduled to take effect September 1,
1997. This new legislation did not result in a material increase in the
Company's wage rates in 1996, and the Company does not anticipate a material
impact on its wage rates in 1997, since a substantial portion of the Company's
associates earn in excess of the new minimum wage levels; however, the Company
believes there may continue to be competitive pressures to increase the wage
levels of associates earning above the new minimum wage. The effect of the new
minimum wage on the Company's future operations is not expected to be material
as the Company believes that a significant portion of such increase will be
reimbursed through Medicare and Medicaid rate increases.

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

1996 Compared to 1995

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

13
<PAGE> 15

development costs, as well as a charge of $4,000,000 related to an overhead and
staff reduction program implemented during the fourth quarter of 1995.

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

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

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

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

Interest expense increased approximately $6,900,000 as compared to the same
period in 1995 primarily due to the exchange of Preferred Stock into 5 1/2%
Convertible Subordinated Debentures in November 1995, the issuance and
assumption of approximately $40,000,000 of long-term obligations in conjunction
with certain acquisitions and the issuance of $25,000,000 of taxable revenue
bonds during 1995, partially offset by a

14
<PAGE> 16

reduction of approximately $52,800,000 of long-term obligations in conjunction
with the disposition of certain facilities. Although depreciation and
amortization expense increased only $1,900,000 as compared to the same period in
1995, it was affected by the following: approximately $5,800,000 increase
primarily due to capital additions and improvements and, to a lesser extent,
acquisitions; partially offset by a decrease of approximately $3,900,000 related
to the disposition of, or lease terminations on, certain nursing facilities.

1995 Compared to 1994

Net loss was $8,123,000 for the year ended December 31, 1995, as compared
to net income of $74,501,000 for the same period in 1994. Net loss for 1995
included a pre-tax charge of $100,277,000 for impaired long-lived assets related
primarily to the adoption of SFAS No. 121 (as defined below) and the write-off
of software and business development costs, as well as a charge of $4,000,000
related to an overhead and staff reduction program implemented during the fourth
quarter of 1995. Net income for 1994 included a $2,412,000 extraordinary charge,
net of income taxes, related to the write-off of unamortized deferred financing
costs related to certain refinanced debt.

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

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

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

The Company had a negative annual effective tax rate of 32% for the year
ended December 31, 1995, compared to an annual effective tax rate of 33% for the
same period in 1994. The annual effective tax rate in 1995 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121. In
addition, the 1994 annual effective tax rate was lower than the federal
statutory rate primarily due to the utilization of certain tax credit
carryforwards, partially offset by the impact of state income taxes. At December
31, 1995, the Company had general business tax credit carryforwards of
$20,784,000 for income tax purposes which expire in years 2005 through 2009. For
financial reporting purposes, the general business tax credit carryforwards have
been utilized to offset existing net taxable temporary differences reversing
during the carryforward periods. Due to

15
<PAGE> 17

taxable losses in prior years, future taxable income was not assumed and a
valuation allowance of $198,000 for the year ended December 31, 1994 was
recognized to offset the deferred tax assets related to those carryforwards. The
valuation allowance was eliminated in 1995 due to the utilization of general
business tax credits.

Net operating revenues and operating and administrative costs increased
approximately $259,300,000 and $245,300,000, respectively, for the year ended
December 31, 1995, as compared to the same period in 1994. 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 years ended December 31, 1995 and 1994 ("same facility operations") of
approximately $157,600,000 and $148,900,000, respectively; increases in net
operating revenues and operating and administrative costs of approximately
$239,500,000 and $222,400,000, respectively, related to the expanded operations
of American Transitional Hospitals, Inc. ("ATH") and the acquisitions of
Insta-Care Holdings, Inc. ("Insta-Care") and the institutional pharmacy
subsidiaries of Synetic, Inc. ("Synetic pharmacies") in late 1994 as well as
Pharmacy Management Services, Inc. ("PMSI") in mid-1995; and decreases in net
operating revenues and operating and administrative costs of approximately
$137,800,000 and $126,000,000, respectively, due to the disposition of, or lease
terminations on, 29 facilities in 1995 and 77 facilities in 1994.

The increase in net operating revenues for same facility operations for the
year ended December 31, 1995, as compared to the same period in 1994, was due to
the following: approximately $111,800,000 due primarily to increases in Medicaid
room and board rates, and to a lesser extent, private and Medicare room and
board rates; approximately $37,500,000 due primarily to increases in
pharmacy-related revenues; approximately $23,000,000 due to increased ancillary
revenues as a result of providing additional ancillary services to the Company's
Medicare and private-pay patients; and approximately $8,300,000 due to various
other items. These increases in net operating revenues were partially offset by
approximately $23,000,000 due to a decrease in same facility occupancy to 88.5%
for the year ended December 31, 1995, as compared to 89.5% for the same period
in 1994.

The increase in operating and administrative costs for same facility
operations for the year ended December 31, 1995, as compared to the same period
in 1994, was due to the following: approximately $125,700,000 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 $4,000,000 due to an overhead and staff reduction
program implemented during the fourth quarter of 1995; approximately $38,100,000
due to increases in nursing supplies and other variable costs; and approximately
$38,800,000 due primarily to increases in pharmacy-related costs and various
other items. These increases in operating and administrative costs were
partially offset by approximately $57,700,000 due to a decrease in contracted
therapy expenses as a result of hiring therapists on staff as opposed to
contracting for their services.

Interest expense increased approximately $19,500,000 as compared to the
same period in 1994 primarily due to additional interest related to the issuance
of approximately $308,000,000 of long-term obligations during late 1994 and in
1995 primarily in conjunction with certain acquisitions. Depreciation and
amortization expense increased approximately $14,800,000 as compared to the same
period in 1994 primarily due to acquisitions, capital additions and improvements
and the opening of newly constructed facilities, partially offset by a decrease
due to the dispositions of, or lease terminations on, certain facilities.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1996, the Company had approximately $69,800,000 in cash and
cash equivalents and net working capital of approximately $318,200,000. The
Company anticipates that approximately $21,700,000 of its existing cash at
December 31, 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.

16
<PAGE> 18

Net cash provided by operating activities for the year ended December 31,
1996 was approximately $133,200,000, an increase of approximately $27,000,000
from the prior year. Net cash used for investing and financing activities were
approximately $91,500,000 and $28,200,000, respectively, for the year ended
December 31, 1996. The Company primarily used cash generated from operations to
fund capital expenditures totaling approximately $136,400,000. The Company
received net cash proceeds of approximately $174,850,000 from the issuance of
Senior Notes (as discussed below), approximately $48,900,000 from the issuance
of certain other long-term obligations and approximately $121,700,000 from the
dispositions of facilities and other assets. Such net cash proceeds, along with
cash generated from operations and cash on hand, were used to repay
approximately $318,400,000 of long-term obligations, to fund acquisitions of
approximately $81,000,000, 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 on the Term Loan under its 1994 Credit
Agreement, approximately $28,000,000 to prepay certain scheduled maturities on
the Term Loan under its 1992 Credit Facility, 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 July 1996, the Company entered into a term loan facility (the "GE
Capital Facility"), whereby the Company may borrow up to $25,000,000 from time
to time in separate series, in amounts and at interest rates based on the
three-year U.S. Treasury Note rate plus 230 basis points at the date of funding.
The GE Capital Facility requires monthly principal and interest payments and is
secured by a security interest in certain lighting equipment of various nursing
facilities. As of December 31, 1996, approximately $14,900,000 of aggregate
principal amount under the GE Capital Facility remained unissued.

In December 1996, the Company entered into a $375,000,000 Amended and
Restated Credit Agreement (the "1996 Credit Agreement") which provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds
from the 1996 Credit Agreement were used to repay the Term Loan and Revolver
borrowings under the 1994 Credit Agreement, the Term Loan under the 1992 Credit
Facility and the Nippon Term Loan. Borrowings under the 1996 Credit Agreement
bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest
rates may be adjusted quarterly based on certain financial ratio calculations.
The Company pays certain commitment fees and commissions with respect to the
Revolver/LOC Facility and had approximately $186,800,000 of unused commitments
under such facility at December 31, 1996. The 1996 Credit Agreement is secured
by a security interest in the stock of Pharmacy Corporation of America and
certain of its subsidiaries and imposes on the Company certain financial tests
and restrictive covenants.

The Company entered into various other notes and mortgages during 1996
totaling approximately $38,700,000, in conjunction with the purchase of certain
nursing facilities. Such debt instruments bear interest at rates ranging from
8.25% to 9.08%, require monthly installments of principal and interest, and are
secured by mortgage interests in the real property and security interests in the
personal property of the purchased nursing facilities.

During 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 December 31, 1996, no securities have been issued under such
registration statement.

17
<PAGE> 19

amounts, at prices and on terms to be determined at the time of sale. The
Company issued $20,000,000 of 8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8%
First Mortgage Bonds and $25,000,000 of 8 3/4% Notes under such registration. As
of December 31, 1996, $25,000,000 of aggregate principal amount of debt
securities under such registration remained unissued.

In June 1996, the Company announced that its Board of Directors had
authorized a stock repurchase program whereby the Company may repurchase, from
time to time on the open market, up to a total of 10,000,000 shares of its
outstanding Common Stock. During 1996, the Company repurchased approximately
1,500,000 shares of its Common Stock at a cost of approximately $17,800,000. The
repurchases were financed primarily through proceeds from dispositions and
borrowings under the Company's Revolver/LOC Facility.

On March 13, 1997, the Company announced that it has entered into a
definitive agreement to sell 49 of its skilled nursing facilities in the state
of Texas to Complete Care Services, L.P. The transaction is scheduled to close
during the second quarter of 1997 and is subject to normal regulatory review.
The Company anticipates using the net cash proceeds generated from the sale for
one or more of the following purposes: strategic investments; repay
indebtedness; and repurchase Common Stock. The operations of these facilities
are immaterial to the Company's financial position and results of operations.

The Company believes that its existing cash and cash equivalents, working
capital from operations, net cash proceeds from the Texas disposition,
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 $38,800,000 (including scheduled
sinking fund redemption requirements with respect to the Company's 7 5/8%
convertible subordinated debentures, which may be funded in whole or in part
from time to time through open market purchases of such debentures), to make
normal recurring capital additions and improvements for the twelve months ending
December 31, 1997 of approximately $138,000,000, to make selective acquisitions,
including the purchase of previously leased facilities, to construct new
facilities, and to meet working capital requirements.

As of December 31, 1996, the Company had total indebtedness of
approximately $1,145,100,000 and total stockholders' equity of approximately
$861,100,000. 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."

18
<PAGE> 20

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 20

Consolidated Balance Sheets................................. 21

Consolidated Statements of Operations....................... 22

Consolidated Statements of Stockholders' Equity............. 23

Consolidated Statements of Cash Flows....................... 24

Notes to Consolidated Financial Statements.................. 25

Supplementary Data (Unaudited) -- Quarterly Financial
Data...................................................... 43
</TABLE>

19
<PAGE> 21

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Beverly Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Beverly
Enterprises, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Beverly Enterprises, Inc. at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

/s/ ERNST & YOUNG LLP

Little Rock, Arkansas
February 7, 1997, except
for Note 2, paragraph 3,
as to which the date is
March 13, 1997

20
<PAGE> 22

BEVERLY ENTERPRISES, INC.

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................. $ 69,761 $ 56,303
Accounts receivable -- patient, less allowance for
doubtful accounts:
1996 -- $25,618; 1995 -- $22,860....................... 491,063 514,820
Accounts receivable -- nonpatient, less allowance for
doubtful accounts:
1996 -- $401; 1995 -- $497............................. 13,480 15,995
Notes receivable.......................................... 10,746 7,460
Operating supplies........................................ 55,348 59,109
Deferred income taxes..................................... 14,543 24,892
Prepaid expenses and other................................ 42,304 38,013
---------- ----------
Total current assets.............................. 697,245 716,592
Property and equipment, net................................. 1,248,785 1,189,985
Other assets:
Notes receivable, less allowance for doubtful notes:
1996 -- $4,951; 1995 -- $4,953......................... 37,306 41,915
Designated and restricted funds........................... 75,848 57,082
Goodwill, net............................................. 356,197 380,681
Other, net................................................ 109,701 120,206
---------- ----------
Total other assets................................ 579,052 599,884
---------- ----------
$2,525,082 $2,506,461
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 99,121 $ 155,385
Accrued wages and related liabilities..................... 131,072 134,391
Accrued interest.......................................... 16,969 10,261
Other accrued liabilities................................. 93,042 88,869
Current portion of long-term obligations.................. 38,826 84,639
---------- ----------
Total current liabilities......................... 379,030 473,545
Long-term obligations....................................... 1,106,256 1,066,909
Deferred income taxes payable............................... 83,610 54,687
Other liabilities and deferred items........................ 95,091 90,987
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000............ -- --
Common stock, shares issued: 1996 -- 104,432,848;
1995 -- 102,618,241.................................... 10,443 10,262
Additional paid-in capital................................ 774,672 766,549
Retained earnings......................................... 133,957 83,657
Treasury stock, at cost: 1996 -- 5,423,408 shares;
1995 -- 3,972,208 shares............................... (57,977) (40,135)
---------- ----------
Total stockholders' equity........................ 861,095 820,333
---------- ----------
$2,525,082 $2,506,461
========== ==========
</TABLE>

See accompanying notes.

21
<PAGE> 23

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net operating revenues................................... $3,267,189 $3,228,553 $2,969,239
Interest income.......................................... 13,839 14,228 14,578
---------- ---------- ----------
Total revenues................................. 3,281,028 3,242,781 2,983,817
Costs and expenses:
Operating and administrative:
Wages and related................................... 1,819,500 1,736,151 1,600,580
Other............................................... 1,139,442 1,224,681 1,114,916
Interest............................................... 91,111 84,245 64,792
Depreciation and amortization.......................... 105,468 103,581 88,734
Impairment of long-lived assets:
Adoption of SFAS No. 121............................ -- 68,130 --
Development and other costs......................... -- 32,147 --
---------- ---------- ----------
Total costs and expenses....................... 3,155,521 3,248,935 2,869,022
---------- ---------- ----------
Income (loss) before provision for income taxes and
extraordinary charge................................... 125,507 (6,154) 114,795
Provision for income taxes............................... 73,481 1,969 37,882
---------- ---------- ----------
Income (loss) before extraordinary charge................ 52,026 (8,123) 76,913
Extraordinary charge, net of income taxes of $1,099 in
1996 and $1,188 in 1994................................ (1,726) -- (2,412)
---------- ---------- ----------
Net income (loss)........................................ $ 50,300 $ (8,123) $ 74,501
========== ========== ==========
Net income (loss) applicable to common shares............ $ 50,300 $ (14,998) $ 66,251
========== ========== ==========
Income (loss) per share of common stock:
Primary:
Before extraordinary charge......................... $ .52 $ (.16) $ .79
Extraordinary charge................................ (.02) -- (.03)
---------- ---------- ----------
Net income (loss)................................... $ .50 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 99,646 92,233 87,087
========== ========== ==========
Fully-diluted:
Before extraordinary charge......................... $ .50 $ (.16) $ .78
Extraordinary charge................................ (.02) -- (.02)
---------- ---------- ----------
Net income (loss)................................... $ .48 $ (.16) $ .76
========== ========== ==========
Shares used to compute per share amounts............ 111,002 92,233 98,428
========== ========== ==========
</TABLE>

See accompanying notes.

22
<PAGE> 24

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
--------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1994................ $ 150,000 $ 8,825 $590,909 $ 33,263 $(40,135) $ 742,862
Exercise of stock option grant........... -- 100 11,900 -- -- 12,000
Employee stock transactions, net......... -- 37 4,830 -- -- 4,867
Preferred stock dividends................ -- -- -- (8,250) -- (8,250)
Issuance of ATH preferred stock(1)....... -- -- 1,264 -- -- 1,264
Accretion of amounts due upon redemption
of ATH preferred stock(1)............. -- -- 859 (859) -- --
Net income............................... -- -- -- 74,501 -- 74,501
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1994.............. 150,000 8,962 609,762 98,655 (40,135) 827,244
Issuance of 12,361,184 shares of common
stock for the purchase of PMSI........ -- 1,236 149,693 -- -- 150,929
Exchange of Preferred Stock into 5 1/2%
Debentures............................ (150,000) -- -- -- -- (150,000)
Employee stock transactions, net......... -- 64 7,094 -- -- 7,158
Preferred stock dividends................ -- -- -- (6,875) -- (6,875)
Net loss................................. -- -- -- (8,123) -- (8,123)
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1995.............. -- 10,262 766,549 83,657 (40,135) 820,333
Employee stock transactions, net......... -- 181 8,123 -- -- 8,304
Purchase of common stock for treasury.... -- -- -- -- (17,842) (17,842)
Net income............................... -- -- -- 50,300 -- 50,300
--------- -------- -------- -------- -------- ---------
Balances at December 31, 1996.............. $ -- $ 10,443 $774,672 $133,957 $(57,977) $ 861,095
========= ======== ======== ======== ======== =========
</TABLE>

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

(1) Amounts were recorded by ATH prior to its merger with the Company in
September 1994.

See accompanying notes.

23
<PAGE> 25

BEVERLY ENTERPRISES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
----------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 50,300 $ (8,123) $ 74,501
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization.................... 105,468 103,581 88,734
Impairment of long-lived assets.................. -- 100,277 --
Provision for reserves and discounts on patient,
notes and other receivables, net............... 28,544 15,889 14,107
Amortization of deferred financing costs......... 3,210 4,379 4,241
Extraordinary charge............................. 2,825 -- 3,600
Gains on dispositions of facilities and other
assets, net.................................... (20,951) (2,253) (9,749)
Deferred taxes................................... 33,765 (20,394) (2,031)
Net increase (decrease) in insurance related
accounts....................................... (22,336) (10,531) 8,342
Changes in operating assets and liabilities, net
of acquisitions and dispositions:
Accounts receivable -- patient................. (25,851) (84,420) (76,320)
Operating supplies............................. 3,226 1,649 (2,777)
Prepaid expenses and other receivables......... 771 (154) 1,597
Accounts payable and other accrued expenses.... (53,029) 16,370 (2,809)
Income taxes payable........................... 26,711 (6,194) 7,332
Other, net..................................... 527 (3,867) (13,361)
----------- ---------- ---------
Total adjustments........................... 82,880 114,332 20,906
----------- ---------- ---------
Net cash provided by operating activities... 133,180 106,209 95,407
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired..... (80,981) (34,184) (267,227)
Proceeds from dispositions of facilities and other
assets........................................... 121,660 46,892 77,211
Collections on notes receivable and REMIC
investment....................................... 12,809 15,594 8,393
Capital expenditures................................ (136,442) (161,911) (124,742)
Other, net.......................................... (8,547) (10,945) (12,375)
----------- ---------- ---------
Net cash used for investing activities...... (91,501) (144,554) (318,740)
Cash flows from financing activities:
Revolver borrowings................................. 1,308,000 1,017,000 62,000
Repayments of Revolver borrowings................... (1,230,000) (939,000) (62,000)
Proceeds from issuance of long-term obligations..... 228,862 25,000 309,308
Repayments of long-term obligations................. (318,447) (68,400) (98,340)
Purchase of common stock for treasury............... (15,445) -- --
Proceeds from exercise of stock options............. 3,620 2,146 14,509
Proceeds from issuance of ATH preferred stock....... -- -- 1,264
Deferred financing costs............................ (7,560) (2,161) (7,653)
Dividends paid on preferred stock................... (688) (8,250) (8,250)
Proceeds from designated funds, net................. 3,437 349 3,401
----------- ---------- ---------
Net cash provided by (used for) financing
activities................................ (28,221) 26,684 214,239
----------- ---------- ---------
Net increase (decrease) in cash and cash
equivalents......................................... 13,458 (11,661) (9,094)
Cash and cash equivalents at beginning of year........ 56,303 67,964 77,058
----------- ---------- ---------
Cash and cash equivalents at end of year.............. $ 69,761 $ 56,303 $ 67,964
=========== ========== =========
Supplemental schedule of cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized)............. $ 81,193 $ 80,433 $ 59,242
Income taxes (net of refunds).................... 11,906 28,557 31,501
</TABLE>

See accompanying notes.

24
<PAGE> 26

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

References herein to the Company include Beverly Enterprises, Inc. and its
wholly-owned subsidiaries. The Company provides long-term healthcare in 35
states and the District of Columbia. Its operations include nursing facilities,
acute long-term transitional hospitals, institutional and mail service
pharmacies, rehabilitation therapy services, outpatient therapy clinics,
assisted living centers, hospices and home health care centers. The consolidated
financial statements of the Company include the accounts of the Company and all
of its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

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

Cash and Cash Equivalents

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

Property and Equipment

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

Intangible Assets

Goodwill (stated at cost less accumulated amortization of $38,446,000 in
1996 and $30,431,000 in 1995) is being amortized over 40 years or, if
applicable, the life of the lease using the straight-line method. Operating and
leasehold rights and licenses, which are included in the consolidated balance
sheet caption "Other, net," (stated at cost less accumulated amortization of
$18,716,000 in 1996 and $19,040,000 in 1995) are being amortized over the lives
of the related assets (principally 40 years) and leases (principally 10 to 15
years), using the straight-line method.

On an ongoing basis, the Company reviews the carrying value of its
intangible assets in light of any events or circumstances that indicate they may
be impaired or that the amortization period may need to be adjusted. If such
circumstances suggest the intangible value cannot be recovered, calculated based
on undiscounted cash flows over the remaining amortization period, the carrying
value of the intangible will be reduced by such shortfall. As of December 31,
1996, the Company does not believe there is any indication that the carrying
value or the amortization period of its intangibles needs to be adjusted. See
"-- Impairment of Long-Lived Assets."

Impairment of Long-Lived Assets

25
<PAGE> 27

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amounts. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. In accordance with SFAS No. 121, the Company
assesses the need for an impairment write-down when such indicators of
impairment are present. There were no material impairment adjustments recorded
during the year ended December 31, 1996.

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

Insurance

The Company insures auto liability, general liability and workers'
compensation risks, in most states, through insurance policies with third
parties, some of which may be subject to reinsurance agreements between the
insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of the Company.
The liabilities for estimated incurred losses not covered by third party
insurance are discounted at 10% to their present value based on expected loss
payment patterns determined by independent actuaries. The discounted insurance
liabilities are included in the consolidated balance sheet captions as follows
(in thousands):

<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued wages and related liabilities....................... $ 32,644 $ 35,265
Other accrued liabilities................................... 8,226 6,572
Other liabilities and deferred items........................ 90,714 84,720
-------- --------
$131,584 $126,557
======== ========
</TABLE>

On an undiscounted basis, the total insurance liabilities as of December
31, 1996 and 1995 were $170,099,000 and $164,060,000, respectively. As of
December 31, 1996, the Company had deposited approximately $94,500,000 in funds
(the "Beverly Indemnity funds") that are restricted for the payment of

26
<PAGE> 28

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
insured claims. In addition, the Company anticipates that approximately
$21,700,000 of its existing cash at December 31, 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.

Stock-Based Awards

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

Revenues

The Company's revenues are derived primarily from providing long-term
healthcare services. Approximately 75%, 77% and 80% of the Company's net
operating revenues for 1996, 1995 and 1994, respectively, were derived from
funds under federal and state medical assistance programs, and approximately
73%, 72% and 78% of the Company's net patient accounts receivable at December
31, 1996, 1995 and 1994, respectively, are due from such programs. These
revenues and receivables are reported at their estimated net realizable amounts
and are subject to audit and retroactive adjustment. Provisions for estimated
third-party payor settlements are provided in the period the related services
are rendered and are adjusted in the period of settlement. Changes in estimates
related to third party receivables resulted in the recording of approximately
$10,900,000, $19,700,000 and $11,000,000 of revenues for the years ended
December 31, 1996, 1995 and 1994, respectively.

Concentration of Credit Risk

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

Earnings per Share

For the years ended December 31, 1995 and 1994, net income (loss)
applicable to common shares was computed by deducting preferred stock dividends
from net income (loss), when dilutive. 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
years ended December 31, 1996 and 1994 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 year ended December 31, 1996
was computed as above and assumed conversion of the Company's 5 1/2% convertible
subordinated debentures. Fully diluted earnings per share for the year ended
December 31, 1994

27
<PAGE> 29

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
was computed as above and assumed conversion of the Company's cumulative
convertible exchangeable preferred stock. 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. For the year ended
December 31, 1995, primary and fully diluted earnings per share were computed by
dividing net loss applicable to common shares by the weighted average number of
shares of Common Stock outstanding during the period.

Other

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

2. ACQUISITIONS AND DISPOSITIONS

During the year ended December 31, 1996, the Company acquired 22 nursing
facilities (2,138 beds)(15 of such facilities (1,747 beds)were previously
leased), one previously managed nursing facility (180 beds) and certain other
assets including, among other things, pharmacy, hospice and outpatient therapy
businesses, for approximately $80,000,000 cash, approximately $7,500,000
acquired debt, approximately $7,000,000 closing and other costs, approximately
$4,800,000 reduction in receivables and approximately $1,900,000 security and
other deposits. The acquisitions of such facilities and other assets were
accounted for as purchases. The Company does not operate three of such nursing
facilities which were subleased to other nursing home operators in prior year
transactions. Also during such period, the Company sold or terminated the leases
on 83 nursing facilities (5,230 beds) (including the three nursing facilities
which were not operated by the Company, as mentioned above) and certain other
assets for cash proceeds of approximately $36,700,000 and approximately
$4,200,000 of notes receivable. The operations of these facilities and certain
other assets were immaterial to the Company's financial position and results of
operations.

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

During the year ended December 31, 1995, the Company purchased 17
previously leased nursing facilities (2,118 beds), one previously leased
retirement living center (17 units) and certain other assets for approximately
$32,700,000 cash, approximately $40,400,000 acquired debt and approximately
$1,700,000 security and other deposits. The Company does not operate four of
such facilities which were subleased to other nursing home operators in prior
year transactions. Also during such period, the Company sold, subleased or
terminated the leases on 11 nursing facilities (1,199 beds), 12 homes for the
developmentally disabled (1,065 beds), six retirement living centers (1,141
units) and certain other assets for cash proceeds of approximately $39,400,000,
approximately $3,700,000 of notes receivable and the assumption of approximately
$52,800,000 of debt. In addition, the Company terminated a management agreement
on two nursing

28
<PAGE> 30

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

2. ACQUISITIONS AND DISPOSITIONS -- (CONTINUED)
facilities (150 beds) and four assisted living centers (510 units). The
operations of these facilities were immaterial to the Company's financial
position and results of operations.

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

During the year ended December 31, 1994, the Company purchased 19
previously leased nursing facilities (2,202 beds), one previously leased
retirement living center (20 units) and certain other assets for approximately
$43,600,000 cash, approximately $1,000,000 issuance of debt, approximately
$16,900,000 assumed and acquired debt and approximately $1,400,000 security and
other deposits. Also during such period, the Company sold, subleased or
terminated the leases on 77 nursing facilities (7,192 beds) and certain other
assets for cash proceeds of approximately $80,200,000, approximately $700,000 of
notes receivable and the assumption of approximately $40,000 of debt. The
operations of these facilities were immaterial to the Company's financial
position and results of operations.

During the third quarter of 1994, the Company issued 2,400,000 shares of
Common Stock for all of the outstanding stock of American Transitional
Hospitals, Inc. ("ATH"). ATH operates licensed hospitals specializing in
long-term acute care and transitional acute care to medically complex,
chronically ill patients. The merger was accounted for as a pooling of interests
and, accordingly the Company's consolidated financial statements were restated
to reflect ATH's financial position, results of operations and cash flows for
each period prior to the merger. All transactions between the Company and ATH
prior to the merger were eliminated in the restated consolidated financial
statements. The merger of ATH was not material to the Company's financial
position or results of operations.

In November 1994, Pharmacy Corporation of America ("PCA"), a wholly-owned
subsidiary of the Company, acquired Insta-Care Holdings, Inc. ("Insta-Care"),
for cash of approximately $112,000,000, as well as other costs incurred totaling
approximately $10,500,000. Insta-Care provides pharmaceutical dispensing
services in six states to approximately 65,000 patients in nursing homes and
correctional facilities. In December 1994, PCA acquired three institutional
pharmacy subsidiaries of Synetic, Inc. ("Synetic pharmacies"), for cash of
approximately $107,300,000, as well as other costs incurred totaling
approximately $6,000,000. The Synetic businesses provide pharmaceutical
dispensing services in the New England area and the state of Indiana to
approximately 45,000 patients in various institutions, including nursing homes,
transitional care facilities, correctional facilities and group homes. These
acquisitions were accounted for as purchases and were not material to the
Company's financial position or results of operations.

29
<PAGE> 31

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

3. PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
TOTAL OWNED LEASED
----------------------- ----------------------- -----------------
1996 1995 1996 1995 1996 1995
---------- ---------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Land, buildings and improvements................ $1,476,988 $1,375,945 $1,424,517 $1,319,008 $52,471 $56,937
Furniture and equipment......................... 375,479 347,478 365,678 340,220 9,801 7,258
Construction in progress........................ 39,403 47,587 39,403 47,587 -- --
---------- ---------- ---------- ---------- ------- -------
1,891,870 1,771,010 1,829,598 1,706,815 62,272 64,195
Less accumulated depreciation and
amortization.................................. 643,085 581,025 601,330 537,704 41,755 43,321
---------- ---------- ---------- ---------- ------- -------
$1,248,785 $1,189,985 $1,228,268 $1,169,111 $20,517 $20,874
========== ========== ========== ========== ======= =======
</TABLE>

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

Depreciation and amortization expense related to property and equipment for
the years ended December 31, 1996, 1995 and 1994 was $85,221,000, $82,752,000
and $77,575,000, respectively.

30
<PAGE> 32

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

4. LONG-TERM OBLIGATIONS

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

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Notes and mortgages, less imputed interest: 1996 -- $257,
1995 -- $312; due in installments through the year 2031,
at effective interest rates of 5.89% to 14.00%, a portion
of which is secured by property, equipment and other
assets with a net book value of $272,875 at December 31,
1996...................................................... $ 178,983 $ 158,597
Industrial development revenue bonds, less imputed interest:
1996 -- $48, 1995 -- $61; due in installments through the
year 2013, at effective interest rates of 4.99% to 10.52%,
a portion of which is secured by property and other assets
with a net book value of $221,964 at December 31, 1996.... 203,606 214,107
9% Senior Notes due February 15, 2006, unsecured............ 180,000 --
1996 Credit Agreement due December 31, 2001................. 156,000 --
1994 Credit Agreement (repaid in December 1996)............. -- 280,500
Term Loan under the 1992 Credit Facility (repaid in December
1996)..................................................... -- 55,000
Nippon Term Loan under the Nippon Credit Agreement (repaid
in December 1996)......................................... -- 20,000
Term Loan under the GE Capital Facility..................... 9,547 --
8 3/4% First Mortgage Bonds due July 1, 2008, secured by
first mortgages on eight nursing facilities with an
aggregate net book value of $16,924 at December 31,
1996...................................................... 19,362 19,765
8 5/8% First Mortgage Bonds due October 1, 2008, secured by
first mortgages on 11 nursing facilities with an aggregate
net book value of $30,417 at December 31, 1996............ 29,062 29,788
8 3/4% Notes due December 31, 2003, unsecured............... 24,845 24,875
7 3/4% Note due in quarterly installments through June 1,
2001, secured by first mortgages on 11 nursing facilities
and one assisted living center with an aggregate net book
value of $22,109 at December 31, 1996..................... 22,554 23,589
Series 1995 Bonds due June 2005, at interest rates of 6.88%
with respect to $7,000 and 7.24% with respect to $18,000,
secured by a letter of credit............................. 25,000 25,000
Medium Term Notes due June 15, 2000, at an interest rate
based on LIBOR, as defined, plus .35%, secured by eligible
receivables of selected nursing facilities of $70,902 at
December 31, 1996, which cannot be used to satisfy claims
of the Company or any of its subsidiaries................. 50,000 50,000
7 5/8% convertible subordinated debentures due March 15,
2003, convertible at $20.47 per share of Common Stock..... 67,924 67,924
5 1/2% convertible subordinated debentures due August 1,
2018, convertible at $13.33 per share of Common Stock..... 150,000 150,000
Zero coupon notes, face amount, less unamortized discount:
1996 -- $785, 1995 -- $1,039; maturing July 16, 2003,
anticipated to be due September 30, 1997, convertible into
13.32 shares of Common Stock per $1 note.................. 1,172 1,288
---------- ----------
1,118,055 1,120,433
Present value of capital lease obligations, less imputed
interest: 1996 -- $863, 1995 -- $972, at effective
interest rates of 5.71% to 13.00%......................... 27,027 31,115
---------- ----------
1,145,082 1,151,548
Less amounts due within one year............................ 38,826 84,639
---------- ----------
$1,106,256 $1,066,909
========== ==========
</TABLE>

31
<PAGE> 33

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

4. LONG-TERM OBLIGATIONS -- (CONTINUED)
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 on the Term Loan under its 1994 Credit
Agreement, approximately $28,000,000 to prepay certain scheduled maturities on
the Term Loan under its 1992 Credit Facility, 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 (collectively, the "Subsidiary
Guarantors"), and impose on the Company certain restrictive covenants. Separate
financial statements of the Subsidiary Guarantors are not considered to be
material to holders of the Senior Notes since the guaranty of each of the
Subsidiary Guarantors is joint and several and full and unconditional (except
that liability thereunder is limited to an aggregate amount equal to the largest
amount that would not render its obligations thereunder subject to avoidance
under Section 548 of the Bankruptcy Code of 1978, as amended, or any comparable
provisions of applicable state law), and Beverly Enterprises, Inc., the parent,
has no operations or assets separate from its investment in its subsidiaries.

In December 1996, the Company entered into a $375,000,000 Amended and
Restated Credit Agreement (the "1996 Credit Agreement") which provides for a
Revolver/Letter of Credit Facility (the "Revolver/LOC Facility"). The proceeds
from the 1996 Credit Agreement were used to repay the Term Loan and Revolver
borrowings under the 1994 Credit Agreement, the Term Loan under the 1992 Credit
Facility and the Nippon Term Loan. Borrowings under the 1996 Credit Agreement
bear interest at adjusted LIBOR plus .875%, the Prime Rate, as defined, or the
adjusted CD rate, as defined, plus 1%, at the Company's option. Such interest
rates may be adjusted quarterly based on certain financial ratio calculations.
The Company pays certain commitment fees and commissions with respect to the
Revolver/LOC Facility and had approximately $186,800,000 of unused commitments
under such facility at December 31, 1996. The 1996 Credit Agreement is secured
by a security interest in the stock of PCA and certain of its subsidiaries and
imposes on the Company certain financial tests and restrictive covenants. The
Company incurred a $1,726,000 extraordinary charge, net of income taxes, in 1996
related to the write-off of unamortized deferred financing costs associated with
the repayment of these debt instruments, as well as certain bond refundings.

The Company entered into various other notes and mortgages during 1996
totaling approximately $38,700,000 in conjunction with the purchase of certain
nursing facilities. Such debt instruments bear interest at rates ranging from
8.25% to 9.08%, require monthly installments of principal and interest, and are
secured by mortgage interests in the real property and security interests in the
personal property of the purchased nursing facilities.

32
<PAGE> 34

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

4. LONG-TERM OBLIGATIONS -- (CONTINUED)
which may include, but are not limited to, working capital, capital
expenditures, repayments of indebtedness and acquisitions. As of December 31,
1996, no securities have been issued under such registration statement.

In 1993, the Company registered with the Securities and Exchange Commission
$100,000,000 aggregate principal amount of certain debt securities, which are to
be offered from time to time as separate series in amounts, at prices and on
terms to be determined at the time of sale. The Company issued $20,000,000 of
8 3/4% First Mortgage Bonds, $30,000,000 of 8 5/8% First Mortgage Bonds and
$25,000,000 of 8 3/4% Notes under such registration. As of December 31, 1996,
$25,000,000 of aggregate principal amount of debt securities under such
registration remained unissued.

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

<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 THEREAFTER TOTAL
------- ------- ------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Future minimum lease payments.................... $ 6,682 $ 5,191 $ 4,272 $ 3,202 $ 3,228 $ 24,920 $ 47,495
Less interest.................................... 2,457 2,127 1,839 1,620 1,446 10,979 20,468
------- ------- ------- ------- -------- -------- ----------
Net present value of future minimum lease
payments....................................... 4,225 3,064 2,433 1,582 1,782 13,941 27,027
Notes, mortgages, bonds and debentures........... 34,601 39,790 34,687 87,076 205,525 716,376 1,118,055
------- ------- ------- ------- -------- -------- ----------
$38,826 $42,854 $37,120 $88,658 $207,307 $730,317 $1,145,082
======= ======= ======= ======= ======== ======== ==========
</TABLE>

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

The industrial development revenue bonds were originally issued prior to
1985 primarily for the construction or acquisition of nursing facilities. Bond
reserve funds are included in designated funds. These funds are invested
primarily in certificates of deposit and in United States government securities
and are carried at cost, which approximates market value. Net capitalized
interest relating to construction was not material in 1996, 1995 or 1994.

5. COMMITMENTS AND CONTINGENCIES

The future minimum rental commitments required by all noncancelable
operating leases with initial or remaining terms in excess of one year as of
December 31, 1996, are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997............................................................... $ 73,533
1998............................................................... 58,579
1999............................................................... 47,373
2000............................................................... 32,578
2001............................................................... 22,036
Thereafter......................................................... 57,076
--------
$291,175
========
</TABLE>

Total future minimum rental commitments are net of approximately
$15,194,000 of minimum sublease rental income due in the future under
noncancelable subleases. Rent expense on operating leases, net of sublease
rental income, for the years ended December 31 was as follows:
1996 -- $116,718,000; 1995 -- $127,074,000; 1994 -- $127,187,000. Sublease rent
income was approximately $4,595,000, $5,426,000 and

33
<PAGE> 35

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

5. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
$5,410,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingent rent expense, based primarily on revenues, was approximately
$18,000,000, $22,000,000 and $22,000,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

In 1992, the Company entered into an agreement to outsource its management
information systems functions for a period of seven years, with an option to
renew based on mutual agreement among the parties. The future minimum
commitments as of December 31, 1996 required under such agreement, as amended,
are as follows: 1997 -- $6,133,000; 1998 -- $6,133,000; 1999 -- $3,578,000. The
Company incurred approximately $8,711,000, $8,529,000 and $8,906,000 under such
agreement during the years ended December 31, 1996, 1995 and 1994, respectively.

The Company is contingently liable for approximately $105,596,000 of
long-term obligations maturing on various dates through 2019, as well as annual
interest and letter of credit fees of approximately $8,460,000. Such contingent
liabilities principally arose from the Company's sale of nursing facilities and
retirement living centers. The Company operates the facilities related to
approximately $25,891,000 of the principal amount for which it is contingently
liable, pursuant to long-term agreements accounted for as operating leases. In
addition, the Company is contingently liable for various operating leases that
were assumed by purchasers and are secured by the rights thereto.

6. STOCKHOLDERS' EQUITY

The Company had 300,000,000 shares of authorized $.10 par value common
stock ("Common Stock") at December 31, 1996 and 1995. The Company is subject to
certain restrictions under its long-term debt agreements related to the payment
of cash dividends on its Common Stock. The Company had 25,000,000 shares of
authorized $1 par value preferred stock at December 31, 1996 and 1995, all of
which remained unissued. The Board of Directors has authority, without further
stockholder action, to set rights, privileges and preferences for any unissued
shares of preferred stock.

34
<PAGE> 36

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
During 1994, the Board of Directors of the Company adopted a Stockholder
Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution
of one Common Stock Purchase Right (the "Rights") for each share of Common Stock
outstanding at the close of business on November 2, 1994. Under certain
circumstances, the Rights become exercisable to purchase shares of Common Stock,
or securities of an acquiring entity, at one-half of market value. The Rights
are designed to protect stockholders in the event of an unsolicited attempt to
acquire the Company and to deal with the possibility of unilateral actions by
hostile acquirors. These Rights are redeemable at the option of the Company at
$.01 per Right. The issuance of the Rights has no dilutive effect on the
Company's earnings per share.

During 1996, the Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
was approved (the "1996 Long-Term Incentive Plan"). Such plan became effective
July 1, 1996 and will remain in effect until December 31, 2006, subject to the
earlier termination by the Board of Directors. The Company has 4,000,000 shares
of Common Stock authorized for issuance, subject to certain adjustments, under
the 1996 Long-Term Incentive Plan in the form of nonqualified stock options,
incentive stock options, stock appreciation rights, restricted stock,
performance awards and other stock unit awards. Nonqualified and incentive stock
options must be granted at a purchase price equal to market price on the date of
grant. All options are exercisable no sooner than six months from the grant date
and expire no later than 10 years from the grant date. Stock appreciation rights
may be granted alone, in tandem with an option or in addition to an option.
Stock appreciation rights are exercisable no sooner than six months from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards and three years for other awards.
Performance awards and other stock unit awards may be granted based on the
achievement of certain performance or other goals and will carry certain
restrictions, as defined. The Compensation Committee of the Board of Directors
is responsible for administering the 1996 Long-Term Incentive Plan and will have
complete discretion in determining the number of shares or units to be granted,
in setting performance goals and in applying other restrictions to awards, as
needed, under the plan.

The Company has 200,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its Nonemployee Directors' Plan. The
Nonemployee Directors' Plan provides that 2,500 nonqualified stock options be
granted to each nonemployee director on June 1 of each year until the plan is
terminated, subject to the availability of shares. Such nonqualified stock
options are granted at a purchase price equal to fair market value on the date
of grant, become exercisable one year after date of grant and expire ten years
after date of grant.

The Company has 3,000,000 shares of Common Stock authorized for issuance,
subject to certain adjustments, under its 1993 Incentive Stock Plan in the form
of nonqualified stock options, incentive stock options, restricted stock,
performance awards and other stock unit awards. Incentive stock options must be
granted at a purchase price equal to market price on the date of grant.
Nonqualified stock options may be granted at no less than 85% of market price on
the date of grant. All grants made at less than market price must be in lieu of
cash payments. All options are exercisable no sooner than one year from the
grant date and expire no later than 10 years from the grant date. Restricted
stock awards are outright stock grants which have a minimum vesting period of
one year for performance-based awards, and three years for other awards.
Performance awards and other stock unit awards, including phantom units, may be
granted based on the achievement of certain performance or other goals and will
carry certain restrictions, as defined. The Compensation Committee of the Board
of Directors is responsible for administering the 1993 Incentive Stock Plan and
will have complete discretion in determining the number of shares or units to be
granted, in setting performance goals and in applying other restrictions to
awards, as needed, under the plan.

35
<PAGE> 37

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company has 2,400,000 shares of Common Stock authorized for issuance
under its 1985 Nonqualified Stock Option Plan. Under the plan, options are
granted at a purchase price equal to market price on the date of grant, become
exercisable no sooner than one year after date of grant and expire no later than
12 years after date of grant, as determined by the Compensation Committee of the
Board of Directors. In addition to options, the plan provides for outright
grants of Common Stock, subject to forfeiture provisions. As a condition
precedent to the release of such shares, the employee must be continuously
employed with the Company from and after the date of grant and remain employed
on share release dates. Commencing one year after the grant date, the shares
will be released in accordance with a schedule determined at the time of grant.

During 1995, in conjunction with the acquisition of PMSI, the Company
assumed PMSI's 1990 Incentive and Non-statutory Stock Option Plan, as amended,
(the "PMSI Plan") and issued options to purchase shares of the Company's Common
Stock in exchange for each option then outstanding under the PMSI Plan. During
1994, in conjunction with the merger of ATH, the Company assumed ATH's 1993
Nonqualified Stock Option Plan (the "ATH Plan") and issued options to purchase
shares of the Company's Common Stock in exchange for each option then
outstanding under the ATH Plan. In addition, the Company signed an option
agreement with an officer of ATH and issued options to purchase shares of ATH
stock previously held by such officer. Also during 1994, in conjunction with the
acquisition of Insta-Care, the Company issued options to purchase shares of its
Common Stock in exchange for each option then outstanding under the Insta-Care
Holdings, Inc. First Employees Stock Option Plan (the "Insta-Care Plan"). No
options are available for grant under the PMSI Plan, the ATH Plan or the
Insta-Care Plan.

36
<PAGE> 38

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes stock option, restricted stock and other
stock units data relative to the Company's 1996 Long-Term Incentive Plan, the
Nonemployee Directors' Plan, the 1993 Incentive Stock Plan, the 1985
Nonqualified Stock Option Plan, the PMSI Plan, the ATH Plan and the Insta-Care
Plan for the years ended December 31:

<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ---------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year...... 4,394,382 $ 9.02 4,375,441 $ 8.74 3,989,411 $ 8.26
Changes during the year:
Granted................ 1,696,500 12.38 355,500 13.04 635,000 14.01
Acquired............... -- -- 342,311 6.17 269,620 1.22
Exercised.............. (833,587) 5.41 (416,010) 5.22 (375,369) 6.35
Cancelled.............. (348,568) 12.39 (262,860) 12.19 (143,221) 10.82
--------- --------- ---------
Options outstanding at
end of year............ 4,908,727(1) 10.55 4,394,382 9.02 4,375,441 8.74
========= ========= =========
Options exercisable at
end of year............ 2,560,209 8.75 3,028,903 7.52 2,340,512 7.24
========= ========= =========
Options available for
grant.................. 3,052,403 1,243,953 1,735,318
========= ========= =========
Restricted stock
outstanding at
beginning of year...... 306,052 267,353 431,800
Changes during the year:
Granted................ 29,000 236,555 14,553
Vested................. (148,352) (182,153) (167,000)
Forfeited.............. (41,500) (15,703) (12,000)
--------- --------- ---------
Restricted stock
outstanding at end of
year................... 145,200 306,052 267,353
========= ========= =========
Phantom units outstanding
at beginning of year... 90,942 44,529 --
Changes during the year:
Granted................ -- 54,110 44,529
Vested................. (6,982) -- --
Cancelled.............. (7,191) (7,697) --
--------- --------- ---------
Phantom units outstanding
at end of year......... 76,769 90,942 44,529
========= ========= =========
Performance units
outstanding at
beginning of year...... -- -- --
Changes during the year:
Granted................ 1,040,000 -- --
Cancelled.............. (48,000) -- --
--------- --------- ---------
Performance units
outstanding at end of
year................... 992,000 -- --
========= ========= =========
</TABLE>

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

(1) Exercise prices for options outstanding as of December 31, 1996 ranged from
$0.83 to $18.63. The weighted-average remaining contractual life of these
options is seven years.

37
<PAGE> 39

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

6. STOCKHOLDERS' EQUITY -- (CONTINUED)
The Company accounts for its stock-based awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25") and related Interpretations because, as discussed
below, the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") requires use of option valuation models that
were not developed for use in valuing employee stock options. Since the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized for
employee stock options under APB No. 25. The Company recognizes compensation
expense for its restricted stock grants, performance unit grants (when the
performance targets are achieved) and other stock unit awards. The total charges
to the Company's consolidated statements of operations for the years ended
December 31, 1996, 1995 and 1994 related to these stock-based awards were
approximately $509,000, $3,065,000 and $1,189,000, respectively.

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

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

For purposes of pro forma disclosures, the estimated fair value of the
stock options and performance units is amortized to expense over their
respective vesting periods. The pro forma effects on reported net income (loss)
and earnings per share assuming the Company had elected to account for its stock
option and performance unit grants in accordance with SFAS No. 123 for the years
ended December 31, 1996 and 1995, respectively, would have been net income of
$48,964,000 or $.49 per share and net loss of $8,408,000 or $.17 per share. Such
pro forma effects are not necessarily indicative of the effect on future years.

The Beverly Enterprises 1988 Employee Stock Purchase Plan (as amended and
restated) enables all full-time employees having completed one year of
continuous service to purchase shares of Common Stock at the current market
price through payroll deductions. The Company makes contributions in the amount
of 30% of the participant's contribution. Each participant specifies the amount
to be withheld from earnings per two-week pay period, subject to certain
limitations. The total charges to the Company's consolidated statements of
operations for the years ended December 31, 1996, 1995 and 1994 related to this
plan were approximately $2,258,000, $2,201,000 and $1,790,000, respectively.

38
<PAGE> 40

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

7. INCOME TAXES

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

<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Federal:
Current............................................ $31,615 $ 17,518 $31,523
Deferred........................................... 29,466 (16,877) (2,824)
State:
Current............................................ 8,101 4,845 8,390
Deferred........................................... 4,299 (3,517) 793
------- -------- -------
$73,481 $ 1,969 $37,882
======= ======== =======
</TABLE>

The Company had an annual effective tax rate of 59% for the year ended
December 31, 1996, compared to a negative annual effective tax rate of 32% and
an annual effective tax rate of 33% for the years ended December 31, 1995 and
1994, respectively. The annual effective tax rate in 1996 was different than the
federal statutory rate primarily due to the impact of nondeductible goodwill
associated with the MedView disposition (see Note 2). The annual effective tax
rate in 1995 was different than the federal statutory rate primarily due to the
impact of nondeductible goodwill included in the adjustments resulting from the
adoption of SFAS No. 121. In addition, the Company's annual effective tax rate
for 1994 was lower than the federal statutory rate primarily due to the
utilization of certain tax credit carryforwards, partially offset by the impact
of state income taxes.

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

<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) at statutory
rate........................... $43,927 35 $(2,154) 35 $ 40,178 35
General business tax credits..... -- -- (1,014) 17 (16,199) (14)
State tax provision, net......... 8,060 6 863 (14) 6,130 5
Nondeductible intangibles........ 20,881 17 3,797 (62) 940 1
Other............................ 613 1 477 (8) 6,833 6
------- -- ------- --- -------- ---
$73,481 59 $ 1,969 (32) $ 37,882 33
======= == ======= === ======== ===
</TABLE>

39
<PAGE> 41

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

7. INCOME TAXES -- (CONTINUED)
Deferred income taxes reflect the impact of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. The tax effects of temporary
differences giving rise to the Company's deferred tax assets and liabilities at
December 31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
ASSET LIABILITY ASSET LIABILITY
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Insurance reserves.............................. $ 55,540 $ -- $ 53,333 $ --
General business tax credit carryforwards....... 12,236 -- 20,784 --
Alternative minimum tax credit carryforwards.... 14,698 -- 15,129 --
Provision for dispositions...................... 11,009 6,152 17,825 6,771
Depreciation and amortization................... 1,401 141,804 25,395 143,267
Operating supplies.............................. -- 14,206 -- 13,378
Other........................................... 22,995 24,784 23,666 22,511
-------- -------- -------- --------
$117,879 $186,946 $156,132 $185,927
======== ======== ======== ========
</TABLE>

At December 31, 1996, the Company had general business tax credit
carryforwards of $12,236,000 for income tax purposes which expire in years 2005
through 2011. For financial reporting purposes, the general business tax credit
carryforwards have been utilized to offset existing net taxable temporary
differences reversing during the carryforward periods.

8. FAIR VALUES OF FINANCIAL INSTRUMENTS

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

Cash and Cash Equivalents

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

Notes Receivable, Net (Including Current Portion)

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

40
<PAGE> 42

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

8. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)
Beverly Indemnity Funds

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

Investment in a Real Estate Mortgage Investment Conduit (REMIC)

The fair value of the Company's REMIC investment, which is included in the
consolidated balance sheet caption "Other, net," is based on information
obtained from the REMIC servicer. The Company intends to convert the REMIC
investment to notes receivable from the underlying note makers during 1997. Such
conversion to notes in 1997 is not expected to have a material adverse effect on
the carrying amount or fair value disclosed.

Long-term Obligations (Including Current Portion)

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

The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 69,761 $ 69,761 $ 56,303 $ 56,303
Notes receivable, net (including
current portion)................ 48,052 49,900 49,375 51,800
Beverly Indemnity funds........... 94,472 94,821 58,284 59,806
REMIC investment.................. 8,052 8,084 17,974 18,000
Long-term obligations (including
current portion)................ 1,145,082 1,161,031 1,151,548 1,175,000
</TABLE>

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

9. ADDITIONAL INFORMATION

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

41
<PAGE> 43

BEVERLY ENTERPRISES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

9. ADDITIONAL INFORMATION -- (CONTINUED)
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. Beverly Delaware (the parent) provides financial,
administrative and legal services to its subsidiaries, including BHRS, for which
it charges management fees.

The following summarized 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 these Debt Securities. Summary
financial information for BHRS is as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Total revenues.......................................... $2,717,360 $2,797,348 $2,985,107
Total costs and expenses................................ 2,581,647 2,780,463 2,870,529
Income before extraordinary charge...................... 80,071 7,598 76,767
Net income.............................................. 78,345 7,598 74,777
</TABLE>

<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C> <C>
Current assets.......................................... $ 369,501 $ 421,641
Long-term assets........................................ 1,404,292 1,365,413
Current liabilities..................................... 184,887 367,074
Long-term liabilities................................... 795,593 709,515
</TABLE>

42
<PAGE> 44

BEVERLY ENTERPRISES, INC.

SUPPLEMENTARY DATA (UNAUDITED)

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

The following is a summary of the quarterly results of operations for the
years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------ ------------------------------
1ST 2ND 3RD 4TH TOTAL 1ST 2ND 3RD
-------- -------- -------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.................... $814,507 $801,808 $825,939 $838,774 $3,281,028 $799,119 $793,637 $838,410
======== ======== ======== ======== ========== ======== ======== ========
Income (loss) before provision for
(benefit from) income taxes and
extraordinary charge............ $ 22,827 $ 28,325 $ 38,130 $ 36,225 $ 125,507 $ 26,692 $ 23,074 $ 39,965
Provision for (benefit from)
income taxes.................... 9,131 11,330 15,252 37,768 73,481 10,143 8,768 15,187
-------- -------- -------- -------- ---------- -------- -------- --------
Income (loss) before extraordinary
charge.......................... 13,696 16,995 22,878 (1,543) 52,026 16,549 14,306 24,778
Extraordinary charge.............. -- -- -- (1,726) (1,726) -- -- --
-------- -------- -------- -------- ---------- -------- -------- --------
Net income (loss)................. $ 13,696 $ 16,995 $ 22,878 $ (3,269) $ 50,300 $ 16,549 $ 14,306 $ 24,778
======== ======== ======== ======== ========== ======== ======== ========
Net income (loss) applicable to
common shares................... $ 13,696 $ 16,995 $ 22,878 $ (3,269) $ 50,300 $ 14,486 $ 12,244 $ 22,715
======== ======== ======== ======== ========== ======== ======== ========
Income (loss) per share of common
stock:
Before extraordinary charge..... $ .14 $ .16 $ .22 $ (.01) $ .50 $ .17 $ .14 $ .23
Extraordinary charge............ -- -- -- (.02) (.02) -- -- --
-------- -------- -------- -------- ---------- -------- -------- --------
Net income (loss)............... $ .14 $ .16 $ .22 $ (.03) $ .48 $ .17 $ .14 $ .23
======== ======== ======== ======== ========== ======== ======== ========
Common stock price range:
High.......................... $ 12.38 $ 12.63 $ 12.13 $ 13.75 $ 14.75 $ 16.13 $ 14.38
Low........................... $ 10.13 $ 11.00 $ 9.25 $ 10.63 $ 12.50 $ 10.88 $ 11.88

<CAPTION>
1995
---------------------
4TH TOTAL
-------- ----------
<S> <C> <C>
Total revenues.................... $811,615 $3,242,781
======== ==========
Income (loss) before provision for
(benefit from) income taxes and
extraordinary charge............ $(95,885) $ (6,154)
Provision for (benefit from)
income taxes.................... (32,129) 1,969
-------- ----------
Income (loss) before extraordinary
charge.......................... (63,756) (8,123)
Extraordinary charge.............. -- --
-------- ----------
Net income (loss)................. $(63,756) $ (8,123)
======== ==========
Net income (loss) applicable to
common shares................... $(64,443) $ (14,998)
======== ==========
Income (loss) per share of common
stock:
Before extraordinary charge..... $ (.65) $ (.16)
Extraordinary charge............ -- --
-------- ----------
Net income (loss)............... $ (.65) $ (.16)
======== ==========
Common stock price range:
High.......................... $ 14.50
Low........................... $ 9.00
</TABLE>

The Company had an annual effective tax rate of 59% for the year ended
December 31, 1996 compared to a negative annual effective tax rate of 32% for
the year ended December 31, 1995. The annual effective tax rate in 1996 was
different than the federal statutory rate primarily due to the impact of
nondeductible goodwill associated with the MedView disposition (as discussed
herein). In addition, the annual effective tax rate in 1995 was different than
the federal statutory rate primarily due to the impact of nondeductible goodwill
included in the adjustments resulting from the adoption of SFAS No. 121 (as
defined herein).

Where fully diluted earnings per share would be anti-dilutive, primary
earnings per share was used.

43
<PAGE> 45

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 29, 1997, to
be filed pursuant to Regulation 14A.

ITEM 11. EXECUTIVE COMPENSATION.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 29, 1997, to
be filed pursuant to Regulation 14A.

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

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 29, 1997, to
be filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 29, 1997, to
be filed pursuant to Regulation 14A.

PART IV

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

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

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

3. Exhibits

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

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.

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

(d) Financial Statement Schedule

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

44
<PAGE> 46

BEVERLY ENTERPRISES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

(ITEM 14(A))

<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. Consolidated financial statements:
Report of Ernst & Young LLP, Independent Auditors........... 20
Consolidated Balance Sheets at December 31, 1996 and 1995... 21
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1996.......... 22
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31,
1996........................................................ 23
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1996.......... 24
Notes to Consolidated Financial Statements.................. 25
Supplementary Data (Unaudited) -- Quarterly Financial
Data........................................................ 43
2. Consolidated financial statement schedule for each of the
three years in the period ended December 31, 1996:
II -- Valuation and Qualifying Accounts..................... 46
</TABLE>

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

45
<PAGE> 47

BEVERLY ENTERPRISES, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)

<TABLE>
<CAPTION>
CHARGED DUE TO
BALANCE AT (CREDITED) ACQUISITIONS BALANCE
BEGINNING TO AND AT END
DESCRIPTION OF YEAR OPERATIONS WRITE-OFFS DISPOSITIONS OTHER OF YEAR
----------- ---------- ---------- ---------- ------------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts:
Accounts receivable -- patient....... $22,860 $ 28,637 $(29,163) $ 2,555 $ 729 $25,618
Accounts receivable -- nonpatient.... 813 56 (223) -- (9) 637*
Notes receivable..................... 4,953 (149) (257) 24 380 4,951
------- -------- -------- -------- -------- -------
$28,626 $ 28,544 $(29,643) $ 2,579 $ 1,100 $31,206
======= ======== ======== ======== ======== =======
Year ended December 31, 1995:
Allowance for doubtful accounts:
Accounts receivable -- patient....... $28,293 $ 21,008 $(30,326) $ 3,885 $ -- $22,860
Accounts receivable -- nonpatient.... 2,802 (1,919) (70) -- -- 813*
Notes receivable..................... 6,429 (3,200) (61) 1,285 500 4,953
------- -------- -------- -------- -------- -------
$37,524 $ 15,889 $(30,457) $ 5,170 $ 500 $28,626
======= ======== ======== ======== ======== =======
Valuation allowance on deferred tax
assets............................... $ 198 $ (198) $ -- $ -- $ -- $ --
======= ======== ======== ======== ======== =======
Year ended December 31, 1994:
Allowance for doubtful accounts:
Accounts receivable -- patient....... $19,999 $ 18,124 $(20,109) $ 10,339 $ (60) $28,293
Accounts receivable -- nonpatient.... 343 233 (334) -- 2,560 2,802*
Notes receivable..................... 10,440 (4,250) (58) -- 297 6,429
------- -------- -------- -------- -------- -------
$30,782 $ 14,107 $(20,501) $ 10,339 $ 2,797 $37,524
======= ======== ======== ======== ======== =======
Accrued restructuring costs............. $34,310 $ (2,400) $ -- $(15,684) $(16,226)(1) $ --
======= ======== ======== ======== ======== =======
Valuation allowance on deferred tax
assets.................................... $15,097 $(14,899) $ -- $ -- $ -- $ 198
======= ======== ======== ======== ======== =======
</TABLE>

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

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

(1) Primarily relates to costs of relocating certain administrative, operational
and management information system support functions.

46
<PAGE> 48

BEVERLY ENTERPRISES, INC.

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of Beverly
Enterprises, Inc. (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Current Report on Form 8-K
dated July 31, 1987)
3.2 By-Laws of Beverly Enterprises, Inc. (incorporated by
reference to Exhibit 3 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992)
4.1 Indenture dated as of February 1, 1996 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 9% Senior Notes due
February 15, 2006 (incorporated by reference to Exhibit 4.1
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995)
4.2 Indenture dated as of August 1, 1993 between Beverly
Enterprises, Inc. and Chemical Bank, as Trustee, with
respect to Beverly Enterprises, Inc.'s 5 1/2% Convertible
Subordinated Debentures due August 1, 2018, issuable upon
exchange of Beverly Enterprises, Inc.'s $2.75 Cumulative
Convertible Exchangeable Preferred Stock (the "Subordinated
Debenture Indenture") (incorporated by reference to Exhibit
4.10 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993)
4.3 Certificate of Designation, Powers, Preferences and Rights,
and the Qualifications, Limitations or Restrictions Thereof,
of the Series of Preferred Stock to be designated $2.75
Cumulative Convertible Exchangeable Preferred Stock of
Beverly Enterprises, Inc. (the "$2.75 Certificate of
Designation") (incorporated by reference to Exhibit 4.12 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993)
4.4 Indenture dated as of April 1, 1993 (the "First Mortgage
Bond Indenture"), among Beverly Enterprises, Inc., Delaware
Trust Company, as Corporate Trustee, and Richard N. Smith,
as Individual Trustee, with respect to First Mortgage Bonds
(incorporated by reference to Exhibit 4.1 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1993)
4.5 First Supplemental Indenture dated as of April 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 3/4%
First Mortgage Bonds due 2008 (incorporated by reference to
Exhibit 4.2 to Beverly Enterprises, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended March 31, 1993)
4.6 Second Supplemental Indenture dated as of July 1, 1993 to
the First Mortgage Bond Indenture, with respect to 8 5/8%
First Mortgage Bonds due 2008 (replaces Exhibit 4.1 to
Beverly Enterprises, Inc.'s Current Report on Form 8-K dated
July 15, 1993) (incorporated by reference to Exhibit 4.15 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993)
4.7 Indenture dated as of December 30, 1993 (the "Notes
Indenture"), between Beverly Enterprises, Inc. and Boatmen's
Trust Company, as Trustee, with respect to the Notes
(incorporated by reference to Exhibit 4.2 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-3 filed
on November 9, 1993 (File No. 33-50965))
4.8 First Supplemental Indenture dated as of December 30, 1993
to the Notes Indenture, with respect to 8 3/4% Notes due
2003 (incorporated by reference to Exhibit 4.4 to Beverly
Enterprises, Inc.'s Current Report on Form 8-K dated January
4, 1994)
</TABLE>

47
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.9 Rights Agreement dated as of September 29, 1994, between
Beverly Enterprises, Inc. and The Bank of New York, as
Rights Agent (incorporated by reference to Exhibit 1 to
Beverly Enterprises, Inc.'s Registration Statement on Form
8-A filed on October 18, 1994)
4.10 Amendment, dated as of April 6, 1995, to the Rights
Agreement between Beverly Enterprises, Inc. and The Bank of
New York, as Rights Agent (incorporated by reference to
Exhibit 4.20 to Beverly Enterprises, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995)
In accordance with item 601(b)(4)(iii) of Regulation
S-K, certain instruments pertaining to Beverly
Enterprises, Inc.'s long-term obligations have not
been filed; copies thereof will be furnished to the
Securities and Exchange Commission upon request.
10.1* Amended and Restated 1981 Beverly Incentive Stock Option
Plan (incorporated by reference to Post-Effective Amendment
No. 2 on Form S-8 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on July 31, 1987
(File No. 33-13243))
10.2* 1985 Beverly Nonqualified Stock Option Plan (incorporated by
reference to Post-Effective Amendment No. 2 on Form S-8 to
Beverly Enterprises, Inc.'s Registration Statement on Form
S-4 filed on July 31, 1987 (File No. 33-13243))
10.3* Amended and Restated Beverly Enterprises, Inc. 1993
Long-Term Incentive Stock Plan (the "1993 Plan") (as amended
by Amendment No. 1) (incorporated by reference to Exhibit
10.4 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1994)
10.4* Beverly Enterprises, Inc. Annual Incentive Plan
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed
on February 13, 1995 (File No. 33-57663))
10.5* Form of Other Stock Unit Agreement under the 1993 Plan
(incorporated by reference to Exhibit 10.5 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed
on February 13, 1995 (File No. 33-57663))
10.6* Form of Phantom Unit Agreement under the 1993 Plan
(incorporated by reference to Exhibit 10.6 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995)
10.7* Form of Performance Share Award Agreement under the 1993
Plan (incorporated by reference to Exhibit 10.7 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995)
10.8* Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.9* Retirement Plan for Outside Directors (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1993)
10.10* Beverly Enterprises, Inc. Non-Employee Directors' Stock
Option Plan (incorporated by reference to Exhibit 4.1 to
Beverly Enterprises, Inc.'s Registration Statement on Form
S-8 filed on September 21, 1994 (File No. 33-55571))
10.11* Executive Medical Reimbursement Plan (incorporated by
reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Annual Report on Form 10-K for the year ended December 31,
1987)
</TABLE>

48
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.12* Amended and Restated Beverly Enterprises, Inc. Executive
Life Insurance Plan and Summary Plan Description (the
"Executive Life Plan") (incorporated by reference to Exhibit
10.7 to Beverly Enterprises, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1993)
10.13* Amendment No. 1, effective September 29, 1994, to the
Executive Life Plan (incorporated by reference to Exhibit
10.10 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-4 filed on February 13, 1995 (File No. 33-57663))
10.14* Executive Physicals Policy (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1993)
10.15* Amended and Restated Deferred Compensation Plan effective
July 18, 1991 (incorporated by reference to Exhibit 10.6 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1991)
10.16* Amendment No. 1, effective September 29, 1994, to the
Deferred Compensation Plan (incorporated by reference to
Exhibit 10.13 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File No.
33-57663))
10.17* Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1987)
10.18* Amendment No. 1, effective as of July 1, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.8 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1991)
10.19* Amendment No. 2, effective as of December 12, 1991, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.9 to Beverly Enterprises, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1991)
10.20* Amendment No. 3, effective as of July 31, 1992, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.10 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1992)
10.21* Amendment No. 4, effective as of January 1, 1993, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.18 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1994)
10.22* Amendment No. 5, effective as of September 29, 1994, to the
Executive Retirement Plan (incorporated by reference to
Exhibit 10.19 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1994)
10.23* Beverly Enterprises, Inc. Executive Deferred Compensation
Plan
10.24* Beverly Enterprises, Inc. Supplemental Long-Term Disability
Plan
10.25* Form of Indemnification Agreement between Beverly
Enterprises, Inc. and its officers, directors and certain of
its employees (incorporated by reference to Exhibit 19.14 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1987)
10.26* Form of request by Beverly Enterprises, Inc. to certain of
its officers or directors relating to indemnification rights
(incorporated by reference to Exhibit 19.5 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987)
10.27* Form of request by Beverly Enterprises, Inc. to certain of
its officers or employees relating to indemnification rights
(incorporated by reference to Exhibit 19.6 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1987)
</TABLE>

49
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.28* Agreement dated December 29, 1986 between Beverly
Enterprises, Inc. and Stephens Inc. (incorporated by
reference to Exhibit 10.20 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on January 18, 1990
(File No. 33-33052))
10.29* Severance Plan for Corporate and Regional Employees
effective December 1, 1989 (incorporated by reference to
Exhibit 10.21 to Amendment No. 1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-1 filed on February
26, 1990 (File No. 33-33052))
10.30* Form of Restricted Stock Performance Agreement dated June
28, 1990 under the 1985 Beverly Nonqualified Stock Option
Plan (incorporated by reference to Exhibit 10.22 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-1 filed
on July 30, 1990 (File No. 33-36109))
10.31* Employment Contract, made as of December 8, 1995, between
Beverly Enterprises, Inc. and David R. Banks (incorporated
by reference to Exhibit 10.2 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)
10.32* Employment Contract, made as of December 8, 1995, between
Beverly Enterprises, Inc. and Boyd W. Hendrickson
(incorporated by reference to Exhibit 10.3 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.33* Employment Contract, made as of June 3, 1996, between
Beverly Enterprises, Inc. and C. Arnold Renschler
(incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)
10.34* Amendment to Employment Contract between Beverly
Enterprises, Inc. and C. Arnold Renschler
10.35* Addendum to Employment Contract between Beverly Enterprises,
Inc. and C. Arnold Renschler (incorporated by reference to
Exhibit 10.5 to Beverly Enterprises, Inc.'s Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996)
10.36* Form of Change In Control Severance Agreement, made as of
December 8, 1995, between Beverly Enterprises, Inc. and its
Executive Vice Presidents (incorporated by reference to
Exhibit 10.31 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995)
10.37* Form of Change In Control Severance Agreement, made as of
December 8, 1995, between Beverly Enterprises, Inc. and
certain of its officers (incorporated by reference to
Exhibit 10.32 to Beverly Enterprises, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1995)
10.38* Form of Change In Control Severance Agreement, made as of
December 8, 1995, between Beverly Enterprises, Inc. and
David L. Redmond (incorporated by reference to Exhibit 10.33
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995)
10.39* Form of First Amendment to Change In Control Severance
Agreement between Beverly Enterprises, Inc. and David L.
Redmond (incorporated by reference to Exhibit 10.34 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1995)
10.40* Beverly Enterprises Company Car Policy effective May 1, 1988
(incorporated by reference to Exhibit 10.18 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1992)
</TABLE>

50
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.41* American Transitional Hospitals, Inc. 1993 Nonqualified
Stock Option Plan assumed by Beverly Enterprises, Inc.
(incorporated by reference to Exhibit 10.39 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4
(Amendment No. 1) filed on August 5, 1994 (File No.
33-54501))
10.42 Master Lease Document -- General Terms and Conditions dated
December 30, 1985 for Leases between Beverly California
Corporation and various subsidiaries thereof as lessees and
Beverly Investment Properties, Inc. as lessor (incorporated
by reference to Exhibit 10.12 to Beverly California
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1985)
10.43 Agreement dated as of December 29, 1986 among Beverly
California Corporation, Beverly Enterprises -- Texas, Inc.,
Stephens Inc. and Real Properties, Inc. (incorporated by
reference to Exhibit 28 to Beverly California Corporation's
Current Report on Form 8-K dated December 30, 1986) and
letter agreement dated as of July 31, 1987 among Beverly
Enterprises, Inc., Beverly California Corporation, Beverly
Enterprises -- Texas, Inc. and Stephens Inc. with reference
thereto (incorporated by reference to Exhibit 19.13 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1987)
10.44 Amended and Restated Credit Agreement, dated as of December
20, 1996, among Beverly Enterprises, Inc., the Banks listed
therein, and Morgan Guaranty Trust Company of New York, as
Issuing Bank and as Agent
10.45 Trust Indenture dated as of December 1, 1994 from Beverly
Funding Corporation, as Issuer, to Chemical Bank, as Trustee
(the "Chemical Indenture") (incorporated by reference to
Exhibit 10.45 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-4 filed on February 13, 1995 (File No.
33-57663))
10.46 Series Supplement dated as of December 1, 1994 to the
Chemical Indenture (incorporated by reference to Exhibit
10.46 to Beverly Enterprises, Inc.'s Registration Statement
on Form S-4 filed on February 13, 1995 (File No. 33-57663))
10.47 Data Processing Agreement, dated as of August 1, 1992, by
and between Systematics Telecommunications Services, Inc.
and Beverly California Corporation (incorporated by
reference to Exhibit 10 to Beverly Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended June 30,
1992)
10.48 Form of Irrevocable Trust Agreement for the Beverly
Enterprises, Inc. Executive Benefits Plan (incorporated by
reference to Exhibit 10.55 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13,
1995 (File No. 33-57663))
11.1 Computation of Net Income (Loss) Per Share for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
27.1 Financial Data Schedule for the year ended December 31, 1996
</TABLE>

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

* Exhibits 10.1 through 10.41 are the management contracts, compensatory plans,
contracts and arrangements in which any director or named executive officer
participates.

51
<PAGE> 53

SIGNATURES

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

BEVERLY ENTERPRISES, INC.
Registrant

Dated: March 27, 1997 By: /s/ DAVID R. BANKS
----------------------------------
David R. Banks
Chairman of the Board, Chief
Executive Officer and Director

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

<TABLE>
<C> <S> <C>
/s/ DAVID R. BANKS Chairman of the Board, Chief
- ----------------------------------------------------- Executive Officer and
David R. Banks Director March 27, 1997

/s/ BOYD W. HENDRICKSON President, Chief Operating
- ----------------------------------------------------- Officer and Director
Boyd W. Hendrickson March 27, 1997

/s/ SCOTT M. TABAKIN Executive Vice President and
- ----------------------------------------------------- Chief Financial Officer
Scott M. Tabakin March 27, 1997

/s/ PAMELA H. DANIELS Vice President, Controller and
- ----------------------------------------------------- Chief Accounting Officer
Pamela H. Daniels March 27, 1997

/s/ BERYL F. ANTHONY, JR. Director
- -----------------------------------------------------
Beryl F. Anthony, Jr. March 27, 1997

/s/ JAMES R. GREENE Director
- -----------------------------------------------------
James R. Greene March 27, 1997

EDITH E. HOLIDAY Director
- -----------------------------------------------------
Edith E. Holiday March 27, 1997

/s/ JON E. M. JACOBY Director
- -----------------------------------------------------
Jon E. M. Jacoby March 27, 1997

/s/ RISA J. LAVIZZO-MOUREY Director
- -----------------------------------------------------
Risa J. Lavizzo-Mourey March 27, 1997

/s/ LOUIS W. MENK Director
- -----------------------------------------------------
Louis W. Menk March 27, 1997

/s/ MARILYN R. SEYMANN Director
- -----------------------------------------------------
Marilyn R. Seymann March 27, 1997
</TABLE>

52
<PAGE> 54

INDEX TO EXHIBITS

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

3.1 Restated Certificate of Incorporation of Beverly Enterprises, Inc.
(incorporated by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Current Report on Form 8-K dated July 31, 1987)

3.2 By-Laws of Beverly Enterprises, Inc.(incorporated by reference to
Exhibit 3 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1992)

4.1 Indenture dated as of February 1, 1996 between Beverly Enterprises,
Inc. and Chemical Bank, as Trustee, with respect to Beverly
Enterprises, Inc.'s 9% Senior Notes due February 15, 2006
(incorporated by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995)

4.2 Indenture dated as of August 1, 1993 between Beverly Enterprises,
Inc. and Chemical Bank, as Trustee, with respect to Beverly
Enterprises, Inc.'s 5 1/2% Convertible Subordinated Debentures due
August 1, 2018, issuable upon exchange of Beverly Enterprises,
Inc.'s $2.75 Cumulative Convertible Exchangeable Preferred Stock
(the "Subordinated Debenture Indenture") (incorporated by reference
to Exhibit 4.10 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993)

4.3 Certificate of Designation, Powers, Preferences and Rights, and the
Qualifications, Limitations or Restrictions Thereof, of the Series
of Preferred Stock to be designated $2.75 Cumulative Convertible
Exchangeable Preferred Stock of Beverly Enterprises, Inc. (the
"$2.75 Certificate of Designation")(incorporated by reference to
Exhibit 4.12 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993)

4.4 Indenture dated as of April 1, 1993 (the "First Mortgage Bond
Indenture"), among Beverly Enterprises, Inc., Delaware Trust
Company, as Corporate Trustee, and Richard N. Smith, as Individual
Trustee, with respect to First Mortgage Bonds (incorporated by
reference to Exhibit 4.1 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993)

4.5 First Supplemental Indenture dated as of April 1, 1993 to the First
Mortgage Bond Indenture, with respect to 8 3/4% First Mortgage Bonds
due 2008 (incorporated by reference to Exhibit 4.2 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993)

4.6 Second Supplemental Indenture dated as of July 1, 1993 to the First
Mortgage Bond Indenture, with respect to 85/8% First Mortgage Bonds
due 2008 (replaces Exhibit 4.1 to Beverly Enterprises, Inc.'s
Current Report on Form 8-K dated July 15, 1993)(incorporated by
reference to Exhibit 4.15 to Beverly Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993)

4.7 Indenture dated as of December 30, 1993 (the "Notes Indenture"),
between Beverly Enterprises, Inc. and Boatmen's Trust Company, as
Trustee, with respect to the Notes (incorporated by reference to
Exhibit 4.2 to Beverly Enterprises, Inc.'s Registration Statement on
Form S-3 filed on November 9, 1993 (File No. 33-50965))

4.8 First Supplemental Indenture dated as of December 30, 1993 to the
Notes Indenture, with respect to 8 3/4% Notes due 2003 (incorporated
by reference to Exhibit 4.4 to Beverly Enterprises, Inc.'s Current
Report on Form 8-K dated January 4, 1994)

4.9 Rights Agreement dated as of September 29, 1994, between Beverly
Enterprises, Inc. and The Bank of New York, as Rights Agent
(incorporated by reference to Exhibit 1 to Beverly Enterprises,
Inc.'s Registration Statement on Form 8-A filed on October 18, 1994)

4.10 Amendment, dated as of April 6, 1995, to the Rights Agreement
between Beverly Enterprises, Inc. and The Bank of New York, as
Rights Agent (incorporated by reference to Exhibit 4.20 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1995)

In accordance with item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Beverly Enterprises, Inc.'s
long-term obligations have not been filed; copies thereof will
be furnished to the Securities and Exchange Commission upon
request.

10.1* Amended and Restated 1981 Beverly Incentive Stock Option Plan
(incorporated by reference to Post-Effective Amendment No. 2 on Form
S-8 to Beverly Enterprises, Inc.'s Registration Statement on Form
S-4 filed on July 31, 1987 (File No. 33-13243))

10.2* 1985 Beverly Nonqualified Stock Option Plan (incorporated by
reference to Post-Effective Amendment No. 2 on Form S-8 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed on July
31, 1987 (File No. 33- 13243))

10.3* Amended and Restated Beverly Enterprises, Inc. 1993 Long-Term
Incentive Stock Plan (the "1993 Plan") (as amended by Amendment No.
1) (incorporated by reference to Exhibit 10.4 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1994)

10.4* Beverly Enterprises, Inc. Annual Incentive Plan (incorporated by
reference to Exhibit 10.4 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))

10.5* Form of Other Stock Unit Agreement under the 1993 Plan (incorporated
by reference to Exhibit 10.5 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-4 filed on February 13, 1995 (File
No. 33-57663))

10.6* Form of Phantom Unit Agreement under the 1993 Plan (incorporated by
reference to Exhibit 10.6 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1995)

10.7* Form of Performance Share Award Agreement under the 1993 Plan
(incorporated by reference to Exhibit 10.7 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995)

10.8* Beverly Enterprises, Inc. 1996 Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.1 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1996)

<PAGE> 55
INDEX TO EXHIBITS (CONTINUED)

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

10.9* Retirement Plan for Outside Directors (incorporated by reference to
Exhibit 10.5 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1993)

10.10* Beverly Enterprises, Inc. Non-Employee Directors' Stock Option Plan
(incorporated by reference to Exhibit 4.1 to Beverly Enterprises,
Inc.'s Registration Statement on Form S-8 filed on September 21,
1994 (File No. 33- 55571))

10.11* Executive Medical Reimbursement Plan (incorporated by reference to
Exhibit 10.5 to Beverly Enterprises, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1987)

10.12* Amended and Restated Beverly Enterprises, Inc. Executive Life
Insurance Plan and Summary Plan Description (the "Executive Life
Plan") (incorporated by reference to Exhibit 10.7 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1993)

10.13* Amendment No. 1, effective September 29, 1994, to the Executive Life
Plan (incorporated by reference to Exhibit 10.10 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))

10.14* Executive Physicals Policy (incorporated by reference to Exhibit
10.8 to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993)

10.15* Amended and Restated Deferred Compensation Plan effective July 18,
1991 (incorporated by reference to Exhibit 10.6 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1991)

10.16* Amendment No. 1, effective September 29, 1994, to the Deferred
Compensation Plan (incorporated by reference to Exhibit 10.13 to
Beverly Enterprises, Inc.'s Registration Statement on Form S-4 filed
on February 13, 1995 (File No. 33-57663))

10.17* Executive Retirement Plan (incorporated by reference to Exhibit 10.9
to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1987)

10.18* Amendment No. 1, effective as of July 1, 1991, to the Executive
Retirement Plan (incorporated by reference to Exhibit 10.8 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1991)

10.19* Amendment No. 2, effective as of December 12, 1991, to the Executive
Retirement Plan (incorporated by reference to Exhibit 10.9 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1991)

10.20* Amendment No. 3, effective as of July 31, 1992, to the Executive
Retirement Plan (incorporated by reference to Exhibit 10.10 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1992)

10.21* Amendment No. 4, effective as of January 1, 1993, to the Executive
Retirement Plan (incorporated by reference to Exhibit 10.18 to
Beverly Enterprises, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1994)

10.22* Amendment No. 5, effective as of September 29, 1994, to the
Executive Retirement Plan (incorporated by reference to Exhibit
10.19 to Beverly Enterprises, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1994)

10.23* Beverly Enterprises, Inc. Executive Deferred Compensation Plan

10.24* Beverly Enterprises, Inc. Supplemental Long-Term Disability Plan

10.25* Form of Indemnification Agreement between Beverly Enterprises, Inc.
and its officers, directors and certain of its employees
(incorporated by reference to Exhibit 19.14 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
1987)

10.26* Form of request by Beverly Enterprises, Inc. to certain of its
officers or directors relating to indemnification rights
(incorporated by reference to Exhibit 19.5 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
30, 1987)

10.27* Form of request by Beverly Enterprises, Inc. to certain of its
officers or employees relating to indemnification rights
(incorporated by reference to Exhibit 19.6 to Beverly Enterprises,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended September
30, 1987)

10.28* Agreement dated December 29, 1986 between Beverly Enterprises, Inc.
and Stephens Inc. (incorporated by reference to Exhibit 10.20 to
Beverly Enterprises, Inc.'s Registration Statement on Form S-1 filed
on January 18, 1990 (File No. 33-33052))

10.29* Severance Plan for Corporate and Regional Employees effective
December 1, 1989 (incorporated by reference to Exhibit 10.21 to
Amendment No. 1 to Beverly Enterprises, Inc.'s Registration
Statement on Form S-1 filed on February 26, 1990 (File No.
33-33052))

10.30* Form of Restricted Stock Performance Agreement dated June 28, 1990
under the 1985 Beverly Nonqualified Stock Option Plan (incorporated
by reference to Exhibit 10.22 to Beverly Enterprises, Inc.'s
Registration Statement on Form S-1 filed on July 30, 1990 (File No.
33-36109))

10.31* Employment Contract, made as of December 8, 1995, between Beverly
Enterprises, Inc. and David R. Banks (incorporated by reference to
Exhibit 10.2 to Beverly Enterprises, Inc.'s Quarterly Report on Form
10-Q for the quarter ended June 30, 1996)

10.32* Employment Contract, made as of December 8, 1995, between Beverly
Enterprises, Inc. and Boyd W. Hendrickson (incorporated by reference
to Exhibit 10.3 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)

10.33* Employment Contract, made as of June 3, 1996, between Beverly
Enterprises, Inc. and C. Arnold Renschler (incorporated by reference
to Exhibit 10.4 to Beverly Enterprises, Inc.'s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996)

10.34* Amendment to Employment Contract between Beverly Enterprises, Inc.
and C. Arnold Renschler

10.35* Addendum to Employment Contract between Beverly Enterprises, Inc.
and C. Arnold Renschler (incorporated by reference to Exhibit 10.5
to Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996)

<PAGE> 56
INDEX TO EXHIBITS (CONTINUED)

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

10.36* Form of Change In Control Severance Agreement, made as of December
8, 1995, between Beverly Enterprises, Inc.and its Executive Vice
Presidents (incorporated by reference to Exhibit 10.31 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)

10.37* Form of Change In Control Severance Agreement, made as of December
8, 1995, between Beverly Enterprises, Inc. and certain of its
officers (incorporated by reference to Exhibit 10.32 to Beverly
Enterprises, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1995)

10.38* Form of Change In Control Severance Agreement, made as of December
8, 1995, between Beverly Enterprises, Inc. and David L. Redmond
(incorporated by reference to Exhibit 10.33 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1995)

10.39* Form of First Amendment to Change In Control Severance Agreement
between Beverly Enterprises, Inc. and David L. Redmond (incorporated
by reference to Exhibit 10.34 to Beverly Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1995)

10.40* Beverly Enterprises Company Car Policy effective May 1, 1988
(incorporated by reference to Exhibit 10.18 to Beverly Enterprises,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1992)

10.41* American Transitional Hospitals, Inc. 1993 Nonqualified Stock Option
Plan assumed by Beverly Enterprises, Inc. (incorporated by reference
to Exhibit 10.39 to Beverly Enterprises, Inc.'s Registration
Statement on Form S- 4 (Amendment No. 1) filed on August 5, 1994
(File No. 33-54501))

10.42 Master Lease Document -- General Terms and Conditions dated December
30, 1985 for Leases between Beverly California Corporation and
various subsidiaries thereof as lessees and Beverly Investment
Properties, Inc. as lessor (incorporated by reference to Exhibit
10.12 to Beverly California Corporation's Annual Report on Form 10-K
for the year ended December 31, 1985)

10.43 Agreement dated as of December 29, 1986 among Beverly California
Corporation, Beverly Enterprises -- Texas, Inc., Stephens Inc. and
Real Properties, Inc. (incorporated by reference to Exhibit 28 to
Beverly California Corporation's Current Report on Form 8-K dated
December 30, 1986) and letter agreement dated as of July 31, 1987
among Beverly Enterprises, Inc., Beverly California Corporation,
Beverly Enterprises -- Texas, Inc. and Stephens Inc. with reference
thereto (incorporated by reference to Exhibit 19.13 to Beverly
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 1987)

10.44 Amended and Restated Credit Agreement, dated as of December 20,
1996, among Beverly Enterprises, Inc., the Banks listed therein, and
Morgan Guaranty Trust Company of New York, as Issuing Bank and as
Agent

10.45 Trust Indenture dated as of December 1, 1994 from Beverly Funding
Corporation, as Issuer, to Chemical Bank, as Trustee (the "Chemical
Indenture") (incorporated by reference to Exhibit 10.45 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))

10.46 Series Supplement dated as of December 1, 1994 to the Chemical
Indenture (incorporated by reference to Exhibit 10.46 to Beverly
Enterprises, Inc.'s Registration Statement on Form S-4 filed on
February 13, 1995 (File No. 33-57663))

10.47 Data Processing Agreement, dated as of August 1, 1992, by and
between Systematics Telecommunications Services, Inc. and Beverly
California Corporation (incorporated by reference to Exhibit 10 to
Beverly Enterprises, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1992)

10.48 Form of Irrevocable Trust Agreement for the Beverly Enterprises,
Inc. Executive Benefits Plan (incorporated by reference to Exhibit
10.55 to Beverly Enterprises, Inc.'s Registration Statement on Form
S-4 filed on February 13, 1995 (File No. 33-57663))

11.1 Computation of Net Income (Loss) Per Share for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992

21.1 Subsidiaries of Registrant

23.1 Consent of Ernst & Young LLP, Independent Auditors

27.1 Financial Data Schedule for the year ended December 31, 1996

* Exhibits 10.1 through 10.41 are the management contracts,
compensatory plans, contracts and arrangements in which any
director or named executive officer participates.

<PAGE> 1
EXHIBIT 10.23

BEVERLY ENTERPRISES, INC.

EXECUTIVE DEFERRED COMPENSATION PLAN

Effective January 1, 1997

* * * * *

SECTION 1. PURPOSE. The purpose of the Plan is for the Company to
provide certain select executives of the Company with an opportunity to defer
receipt of compensation for services rendered to the Company. It is intended
that the Plan shall aid the Company in retaining and attracting employees whose
abilities, experience and judgment can contribute to the continued progress of
the Company. The Plan is intended to be a so-called "top hat plan" under
ERISA, i.e., an unfunded plan of deferred compensation for the benefit of a
select group of highly compensated or management employees. The Plan is also a
nonqualified deferred compensation arrangement under Internal Revenue Code
Section 3121 (v).

SECTION 2. DEFINITIONS.

(a) "Account(s)" means the Deferral Account, the Supplemental
Contributions Account and/or the Matching Contributions Account, as the
context requires.

(b) "Bonus" means any special and/or discretionary cash
compensation amounts in excess of Salary, determined by the Company to be
payable to a Participant with respect to services rendered.
<PAGE> 2
(c) 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 or merge with any other
Person and the Company shall not be the continuing or surviving corporation, b
any Person shall consolidate 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 fifty percent (50%) or more of the
assets or earning power of the Company and its subsidiaries (taken as a whole)
to any Person or Persons.

(d) "Committee" means the Compensation Committee of the
Company's Board of Directors.

(e) "Company" means Beverly Enterprises, Inc.

(f) "Continuous Service" means a Participant's uninterrupted
services with the Company or any affiliate. Service shall not be deemed
interrupted by a leave of absence authorized by the Committee, an absence due
to mandatory military service or an

2
<PAGE> 3
absence due to disability while the Participant is receiving benefits under any
short-term or long-term disability plan or arrangement maintained or sponsored
by the Company.

(g) "Deferred Compensation" means the sum of Salary and Bonus
that are the subject of an elective deferral under Section 5.

(h) "Deferred Compensation Plan" means the Beverly
Enterprises, Inc. Deferred Compensation Plan that was amended and restated
effective July 17, 1991.

(i) "Deferral Account" means the bookkeeping account
established for a Participant under the Plan and to which Deferred Compensation
amounts with respect to such Participant are credited from time to time, as
adjusted from time to time as provided in the Plan.

(j) "Deferred Compensation Election Form" means the form
pursuant to which Eligible Executives elect to become Participants in the Plan
and defer compensation thereunder, in such form as the Committee determines
from time to time in its sole discretion.

(k) "Disability" means total and permanent mental or physical
disability as determined by the Committee in its sole discretion in accordance
with standards and procedures similar to those under the Company's broad-based
regular long-term disability plan, if any. At any time that the Company does
not maintain such a long-term disability plan, Disability shall mean the
inability of a Participant, as determined by the Committee in its sole
discretion, substantially to perform such Participant's regular duties and
responsibilities due to a medically determinable physical or mental illness
which has lasted (or can reasonably be expected to last) for a period of three
(3) consecutive months.

3
<PAGE> 4
(l) "Eligible Executive" means any employee of the Company who
is selected for participation by the Committee.

(m) "Matching Contributions Account" means the bookkeeping
account established for a Participant under the Plan and to which the Company's
matching contributions under Section 5(b) of the Plan are credited from time to
time, as adjusted from time to time under the Plan.

(n) "Participant" means an Eligible Executive who has elected
to defer Salary and/or Bonus amounts pursuant to the Plan.

(o) "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).

(p) "Plan" means the Beverly Enterprises, Inc. Executive
Deferred Compensation Plan for Executives, as set forth herein and as amended
from time to time.

(q) "Plan Year" means the calendar year.

(r) "Retirement" means attainment of sixty (60) years of age
and termination of employment.

(s) "Rollover Account" means the bookkeeping account
established for a Participant under the Plan and to which the Deferred
Compensation Plan balance is credited under Section 12.

(t) "Salary" means the regular base compensation paid by the
Company to an employee (without regard to any reduction thereof pursuant to the
Plan or any other elective salary deferral arrangement under any other plan
(eg. Pre-Tax Premium Plan,

4
<PAGE> 5
Dependent Care Assistance Plan, Health Care Spending Account) maintained by the
Company), exclusive of Bonus payments and any other incentive payments made by
the Company to such employee.

(u) "Supplemental Contributions Account" means the bookkeeping
account established for the Participant under the Plan and to which the
Company's supplemental contributions under Section 5(c) of the Plan are
credited from time to time, as adjusted from time to time under the Plan.

(v) "Unforeseeable Emergency" means a severe financial
hardship to the Participant resulting from a sudden and unexpected illness or
accident of the Participant or a dependent of the Participant, loss of the
Participant's property due to casualty, or other similar extraordinary
unforeseeable circumstances arising as a result of events beyond the control of
the Participant. The circumstances that will constitute an "Unforeseeable
Emergency" would depend on the facts of each case, but, in any case, payment
may not be made in the event that such hardship is or may be relieved:

(1) through reimbursement or compensation by insurance or otherwise,

(2) by liquidation of the Participant's assets, to the extent that
liquidation of such assets would not itself cause severe financial hardship, or

(3) by cessation of Deferred Compensation under the Plan (or cessation
of elective deferrals under any other Company Retirement or Savings Plan). The
need to send a Participant's child to college or the desire to purchase a home
shall not be an Unforeseeable Emergency.

SECTION 3. ELIGIBILITY. Individuals eligible to participate in the
Plan shall consist of the Eligible Executives of the Company, as determined
from time to time by the Committee. The Committee may terminate an
individual's designation as an Eligible Executive at any time.

5
<PAGE> 6
SECTION 4. ADMINISTRATION.

(a) The Plan shall be administered by the Committee. The
Committee has complete fiduciary discretion and authority to construe and
interpret the Plan; promulgate, amend and rescind rules and regulations
relating to the implementation, administration and maintenance of the Plan;
decide all questions of eligibility and benefits (including underlying factual
determinations); and adjudicate all claims and appeals. The Committee may
designate persons other than members of the Committee to carry out the
day-to-day ministerial administration of the Plan under such conditions and
limitations as it may prescribe; provided, however, that the Committee shall
not delegate its authority with regard to the determination of Eligible
Employees. The Committee's determinations under the Plan need not be uniform
and may be made selectively among Participants, whether or not such
Participants are similarly situated. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, implementation or maintenance of the Plan shall be final,
conclusive and binding upon all Participants and any person(s) claiming under
or through any Participants.

(b) The Company will indemnify and hold harmless the Committee
and each member thereof against any cost or expense (including without
limitation attorney's fees) or liability (including without limitation any sum
paid in settlement of a claim with the approval of the Company) arising out of
any act or omission to act, except in the case of willful gross misconduct or
gross negligence.

SECTION 5. PARTICIPATION; ELECTIVE DEFERRALS; MATCHING CONTRIBUTIONS.

(a) To elect to participate in the Plan for a particular Plan
Year, an Eligible Executive must execute a Deferred Compensation Election Form
and file such form with the Committee (or its designee) before the Commencement
of such Plan Year. To

6
<PAGE> 7
participate in the Plan during the year in which the Plan is first implemented,
the Eligible Executive must make an election to defer Salary compensation for
services to be performed subsequent to the election and/or to defer Bonus
compensation, in each case, within 30 days after the effective date of the
Plan. To participate in the Plan during the first year in which an individual
becomes eligible to participate in the Plan, the new Eligible Executive must
make an election to defer Salary compensation for services to be performed
subsequent to the election and/or to defer Bonus compensation, in each case,
within 30 days after the date the new Eligible Executive becomes eligible.
Such election shall:

(i) contain a statement that the Eligible Executive elects to
defer a portion of the Eligible Executive's Salary (up to 25% thereof, in
increments of 1% or in fixed dollar amounts per pay period) and/or Bonus (up to
100% thereof, in increments of 1% or a fixed dollar amount) for a specified
Plan Year that becomes payable to the Eligible Executive after the filing of
such election;

(ii) apply only to the Salary otherwise payable to the
Eligible Executive during the Plan Year for which such election is made and to
any Bonus payment that is attributable to the Eligible Executive's services
rendered to the Company during the Plan Year for which such election is made
(whether or not actually payable in such Plan Year); and

(iii) be irrevocable with respect to the Plan Year to which it
applies. Upon receipt of an Eligible Executive's deferral election, the
Company shall establish as an accounting entry an individual Deferral Account
for such Eligible Executive and such Eligible Executive shall become a
Participant under the Plan. Thereafter, the Company shall credit the
Executive's Deferral Account with all Deferred Compensation which would
otherwise have been payable to the Eligible Executive in the absence of an
election under the Plan. The Deferral Account shall be credited monthly in an
amount equal to the sum of the Deferred Compensation that would otherwise have
been paid by the Company in accordance with the Company's normal payroll
practices for the immediately preceding month as soon as is administratively
feasible.

7
<PAGE> 8
(b) the Company shall, if on the first day of any such month
the Participant is employed by the Company, credit matching contributions to
the Participant's Matching Contributions Account in an amount equal to 25% of
the first 6% of Salary and Bonus actually deferred under the Plan by the
Participant in respect to the preceding month as soon as is administratively
feasible.

(c) From time to time, the Company may, in its sole
discretion, credit supplemental contributions to the Participant's Supplemental
and Matching Contributions Account in such amounts as the Company shall
determine in its sole discretion.

SECTION 6. PAYMENT OF DEFERRED COMPENSATION. The vested accrued
balances in a Participant's Accounts shall be paid to a Participant, or, in the
case of any Participant's death prior to payment, the Participant's designated
beneficiary(ies), in stock in one lump sum commencing as soon as it is
administratively feasible after the month in which the termination of the
Participant's employment occurs. However, if employment ends due to the
Participant's Retirement, then payment will be made or commence within the
first fifteen (15) days of the following calendar year, in the form of either a
single lump sum of company stock or in annual installments of company stock or
with the Committee's consent in cash, up to fifteen (15) years, pursuant to
the participant's advance written election received at least twenty four (24)
months prior to said Retirement. Such election of distribution method shall be
made at the time of deferral and may be changed at any time prior to the
Participant's Retirement as long as it is made at least twenty four (24) months
prior to the Participant's Retirement.

SECTION 7. INVESTMENT OF ACCOUNT BALANCES. During and for each Plan
Year, the accrued balances in each Deferral Account, Supplemental Contributions
Account and Matching Contributions Account will be deemed to be invested, as
soon as is administratively feasible during the month following the month in
which elective deferrals, supplemental contributions and matching contributions
are credited to their respective

8
<PAGE> 9
Accounts under the Plan, in the Company's Common stock, including dividends.
At the end of each Plan Year, the Accounts shall be adjusted and increased or
decreased by the results of such deemed investment for such Plan Year pursuant
to Section 8.

SECTION 8. VALUATION. At the end of each Plan Year, the vested and
unvested balances in the Deferral Account, Supplemental Contributions Account
and the Matching Contributions Account of each Participant shall be determined
by the Company, taking into account any increase or decrease therein for such
Plan Year under Section 7, including dividends. The balance determined, as of
the end of each Plan Year, shall be communicated in writing to each Participant
as soon as practicable after the end of the Plan Year. In the case of any
termination under Section 6 above, the vested and unvested balances in the
Deferral Account, Supplemental Contributions Account and the Matching
Contributions Account of any affected Participant shall be determined by the
Company as of the end of the date in which occurs any such termination.

SECTION 9. DISTRIBUTION IN CASES OF HARDSHIP. The Committee may make
distributions to a Participant from the vested balances in such Participant's
Deferral Account, Supplemental Contributions Account or Matching Contributions
Account upon a showing by such Participant that an Unforeseeable Emergency has
occurred. Such distributions shall be limited to the amount shown to be
necessary to meet the Unforeseeable Emergency.

SECTION 10. VESTING. Notwithstanding anything contained herein to
the contrary, a Participant's accrued balance in such Participant's Deferral
Account (and the amounts payable with respect thereto) shall be fully vested at
all times. A Participant's accrued balance in such Participant's Matching
Contributions Account (and the amounts payable with respect thereto) and in
such Participant's Supplemental Contributions Account (and the amounts payable
with respect thereto) shall, in each case, become 100% vested after a
Participant completes five years of continuous service with the Company.
Notwithstanding the immediately preceding sentence, if (a) the Participant
dies, (b) the

9
<PAGE> 10
Participant's employment with the Company is terminated due to Disability or
(c) a Change of Control occurs, such Participant's accrued balance in the
Matching Contributions Account and Supplemental Contributions Account shall be
fully vested as of the date of death, the date of such termination or the date
of any such Change of Control, as the case may be.

SECTION 11. FORFEITURE. If a Participant's employment with the
Company is terminated for any reason (other than death) prior to such
Participant's vesting under Section 10, such unvested Participant's accrued
balance in such Participant's Matching Contributions Accounts (and the amounts
payable with respect thereto) and in such Participant's Supplemental
Contributions Account (and the amounts payable with respect thereto) shall, in
each case, be forfeited by such Participant.

SECTION 12. ROLL OVER OF DEFERRED COMPENSATION PLAN BALANCES. Those
Participants in this Plan who also have balances in the Deferred Compensation
Plan can elect to have the value of their Deferred Compensation Plan credited
to this plan at any time. The amount credited will not be eligible for the
Matching Contributions under section 5 (b). The balance of the Participant's
Deferred Compensation Plan will be credited to the Participants Rollover
Account as soon as is administratively feasible during the month following the
month in which the election to roll over the balance is made pursuant to
Section 7.

SECTION 13. AMENDMENT. The Plan may be amended, modified or
terminated at any time, for any reason, without notice, by the Committee except
that no such amendment, modification or termination shall have a material
adverse effect on the vested accrued balance of any Participant's Deferral
Account, Supplemental Contributions Account and/or Matching Contributions
Account as of the effective date of any such amendment, modification or
termination (without the consent of the Participant (or, if the Participant is
dead, his or her beneficiary(ies))).

10
<PAGE> 11
SECTION 14. PARTICIPANT'S RIGHT UNSECURED; NO DUTY TO INVEST. The
right of a Participant to receive any distribution hereunder shall be an
unsecured claim against the general assets of the Company. No Company assets
shall in any way be subject to any prior claim by any Participant. The Company
shall have no duty whatsoever to set aside or invest any amounts credited to
any Deferral Account, Supplemental Contributions Account or Matching
Contributions Account established under the Plan. Nothing in the Plan shall
confer upon any employee of the Company any right to continued employment with
the Company, nor shall it interfere in any way with the right of the Company to
terminate the employment of any employee at any time for any reason. A
Participant shall have no right, title, or interest whatsoever in or to any
specific assets of the Company, nor any investments, if any, which the Company
may make to aid it in meeting its obligations hereunder. Nothing contained in
this Plan, and no action taken pursuant to its provisions, shall create or be
construed to create a trust of any kind, or a fiduciary relationship, between
the Company and any Participant or any other person. The Company will maintain
a "rabbi" trust agreement to provide for a source of funds out of which all or
any portion of the benefits under the Plan may be satisfied.

SECTION 15. RESTRICTIONS ON ALIENATION. No amount deferred or
credited to any Account under the Plan shall be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, levy
or charge. Any attempt to so anticipate, alienate, sell, transfer, assign,
pledge, encumber, levy or charge the same shall be void; nor shall any amount
be in any manner be subject to any claims for the debts, contracts,
liabilities, engagements or torts of the Participant (or the Participant's
beneficiary or personal representative) entitled to such benefit. No
Participant shall be entitled to borrow at any time any portion of the
Participant's Account balances under the Plan.

SECTION 16. WITHHOLDING. There shall be deducted from all payments
under the Plan the amount of any taxes required to be withheld by any Federal,
state or local taxing authority. The Participants, their beneficiaries and
personal representatives shall bear any and all Federal, foreign, state or
local income or any other tax imposed on amounts

11
<PAGE> 12
paid under the Plan. Employment taxes on amounts allocated to participant's
Accounts will be withheld when services are rendered or later, when such
amounts vest.

SECTION 17. PARTICIPANTS BOUND BY TERMS OF THE PLAN. By electing to
become a Participant, each Eligible Executive shall be deemed conclusively to
have accepted and consented to all terms of the Plan and all actions or
decisions made by the Company with regard to the Plan. Such terms and consent
shall also apply to and be binding upon the beneficiaries, personal
representatives and other successors in interest of each Participant. Each
Participant shall receive a copy of the Plan.

SECTION 18. DESIGNATION OF BENEFICIARY(IES). Each Participant under
the Plan may designate a beneficiary or beneficiaries to receive any payment
which under the terms of the Plan becomes payable on, after or as a result of
the Participant's death. At any time, and from time to time, any such
designation may be changed or canceled by the Participant without the consent
of any such beneficiary. Any such designation, change or cancellation must be
on a form provided for that purpose by the Committee and shall not be effective
until received by the Committee. If no beneficiary has been designated by a
deceased Participant, the beneficiary shall be the Participant's estate. If
the Participant designates more than one beneficiary, any payments under the
Plan to such beneficiaries shall be made in equal shares unless the Participant
has expressly designated otherwise, in which case the payments shall be made in
the shares designated by the Participant.

SECTION 19. SEVERABILITY OF PROVISIONS. In the event any provision
of the Plan would serve to invalidate the Plan, that provision shall be deemed
to be null and void, and the Plan shall be construed as if it did not contain
the particular provision that would make it invalid. The Plan shall be binding
upon and inure to the benefit of (a) the Company and its respective successors
and assigns, and (b) each Participant, his or her designees and estate.
Nothing in the Plan shall preclude the Company from consolidating or merging
into or with, or transferring all or substantially all of its assets to,

12
<PAGE> 13
another corporation, or engaging in any other corporate transaction.

SECTION 20. GOVERNING LAW AND INTERPRETATION. The Plan shall be
construed and enforced in accordance with, and the rights of the parties hereto
shall be governed by, the laws of the State of Delaware. This Plan shall not
be interpreted as either an employment or trust agreement.

SECTION 21. OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS.
Payments and other benefits received by a Participant under the Plan shall not
be deemed a part of a Participant's compensation for purposes of the
determination of benefits under any other employee benefit plans or
arrangements, if any, provided by the Company or any affiliate of the Company.
The existence of the Plan notwithstanding, the Company may adopt such other
compensation plans or programs and additional compensation arrangements as it
deems necessary to attract, retain and motivate employees. The Committee is
authorized to cause to be established a trust agreement or several trust
agreements or similar arrangements from which the Committee may make payments
of amounts due or to become due to any Participants under the Plan.

SECTION 22. ARBITRATION. Except as otherwise provided in this Plan, any
controversy between the parties arising out of this Plan shall be submitted to
the American Arbitration Association under its Commercial Arbitration Rules for
binding arbitration. The arbitration shall be held in Fort Smith, Arkansas or
such other location where the Company may have its corporate headquarters,
using a single arbitrator. The costs of the arbitration, including any
American Arbitration Association administration fee, the arbitrator's fee, and
costs for the use of facilities during the hearings, shall be borne equally by
the parties to the arbitration. Each side shall bear its own attorney's fees.
The arbitrator shall not have any power to alter, amend, modify or change any
of the terms of this Plan nor to grant punitive, special, extracontractual, on
consequential damages or any other remedy which is either prohibited by the
terms of this Plan, or not available in a court of law. Judgement

13
<PAGE> 14
on the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.

SECTION 23. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective
as of January 1, 1997 upon its adoption by the Company.

IN WITNESS WHEREOF, the Plan is hereby adopted by the Company
on this 12th day of December, 1996.

Beverly Enterprises, Inc.

By:
----------------------------

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

<PAGE> 1
EXHIBIT 10.24

BEVERLY ENTERPRISES, INC.

SUPPLEMENTAL LONG-TERM DISABILITY PLAN

Effective January 1, 1997

* * * * *

SECTION 1. PURPOSE. The purpose of the Plan is for the Company to
augment the disability benefits of certain select executives of the Company
thereby providing incentive, in terms of economic security, which is comparable
with that offered by other employers who are or may in the future be competing
for their services.

SECTION 2. DEFINITIONS.

(a) "Monthly Compensation" means the annual base salary rate
paid to the Participant on the date of Disability, divided by twelve.

(b) "Committee" means the Compensation Committee of the
Company's Board of Directors.

(d) "Disability" means total and permanent mental or physical
disability as determined by the Committee in its sole discretion in accordance
with standards and procedures similar to those under the Company's broad-based
regular long-term disability plan, if any. At any time that the Company does
not maintain such a long-term disability plan, Disability shall mean the
inability of a Participant, as determined by the Committee in it sole
discretion, substantially to perform such Participant's regular duties

1
<PAGE> 2
and responsibilities due to a medically determinable physical or mental illness
which has lasted (or can reasonably be expected to last) for a period of three
(3) consecutive months.

(e) "Participant" means any eligible key executive that the
Committee, in its sole discretion, selects to participate in the Plan in
accordance with Section 3 of the Plan.

(f) "Plan Year" means the calendar year.

(g) "Special Disability Benefit" means the amount to which a
Participant may be entitled to under the Plan as determined pursuant to Section
5 of the Plan.

SECTION 3. ELIGIBILITY AND PARTICIPATION. Individuals eligible to
participate in the Plan shall consist of key executives of the Company who have
the opportunity to make a clear and definitive impact on the Company's
performance. Each Plan Year the Company's chief executive officer shall
nominate, and recommend to the Committee for participation in the Plan, those
executives who such officer believes can so contribute to the overall success
of the Company. The Committee shall, in its sole discretion, select for
participation one or more of the executives so nominated and recommended by the
chief executive officer, and/or may select other key executives of the Company
for participation, including, without limitation, the chief executive officer.
The Committee may terminate the participation of any Participant for any reason
at any time without advance notice prior to the Disability of such Participant.

SECTION 4. ADMINISTRATION.

(a) The Plan shall be administered by the Committee. The
Committee shall have complete fiduciary discretion and authority to construe
and interpret the Plan; promulgate, amend and rescind rules and regulations
relating to the implementation, administration and maintenance of the Plan;
decide on all questions of eligibility and benefits (including underlying
factual determinations); and adjudicate all claims and appeals. The Committee

2
<PAGE> 3
may designate persons other than members of the Committee to carry out the
day-to-day ministerial administration of the Plan under such conditions and
limitations as it may prescribe; provided, however, that the Committee shall
not delegate its authority with regard to the selection for participation in
the Plan. The Committee's determinations under the Plan need not be uniform
and may be made selectively among Participants, whether or not such
Participants are similarly situated. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, implementation or maintenance of the Plan shall be final,
conclusive and binding upon all Participants and any person(s) claiming under
or through any Participants.

SECTION 5. SPECIAL DISABILITY BENEFIT.

(a) If a Participant becomes eligible for benefits under the
Company sponsored long-term disability plan, the Participant shall be entitled
to a monthly Special Disability Benefit. Such Special Disability Benefit shall
be equal to (a) 60% of the Participant's Monthly Compensation, minus (b) the
monthly base salary covered under the Company sponsored long-term-disability
plan (currently, twenty thousand dollars ($20,000)). Any amounts considered
to be Periodic Benefits (as defined under the Company sponsored
long-term-disability plan) will also be considered as Offset Amounts (as
defined under the Company sponsored long-term-disability plan) in calculating
the Special Disability Benefit. In the event of the death of a Participant, no
survivor or other benefit shall be payable under the Plan to the Participant's
spouse, designated beneficiary or estate.

3
<PAGE> 4
EXAMPLE OF SPECIAL DISABILITY BENEFIT CALCULATION (ASSUMING NO OFFSET AMOUNTS):

<TABLE>
<S> <C>
MONTHLY SALARY $37,500

TOTAL LTD BENEFIT AT 60% $22,500

LESS: MAXIMUM BENEFIT FROM GROUP LTD PLAN ($20,000)

EQUALS MONTHLY SPECIAL DISABILITY BENEFIT: $ 2,500
-------
</TABLE>

(b) If (i) a Participant's employment with the Company is
terminated due to Disability, (ii) subsequently thereafter the Participant is
no longer incapacitated by such Disability, and (iii) the Participant is
reemployed by the Company, the Participant, although no longer receiving the
Special Disability Benefit, shall recommence participation in the Plan (unless
the Committee in its sole discretion determines otherwise) and, as such, shall
be entitled to receive a Special Disability Benefit if such Participant is
thereafter again terminated due to Disability, but only if either (a) the
Participant was actively employed as a full-time employee for 90 or more
continuous days following his re-employment, or (b) the new Disability is
wholly unrelated to the prior Disability.

SECTION 6. PAYMENT OF BENEFITS. The Participant's Special Disability
Benefit determined under Section 5 hereof shall be payable monthly commencing
on the first day of the second month next succeeding the month in which occurs
the Participant becomes eligible for benefits under the Company sponsored
long-term disability plan. Such payment of the Special Disability Benefit
shall continue until the earliest to occur of the date on which the Participant
(i) no longer is incapacitated by such Disability, (ii) is gainfully employed
for income or profit, including self-employment or active ownership of a trade
or business, or (iii) no longer eligible for benefits under the Company
sponsored long-term disability plan. In no event shall a Special Disability
Benefit be payable for more than 60 months. A Participant shall from time to
time provide, upon request from the Committee, satisfactory evidence of the
continuation of such Disability as determined pursuant to Section 2 (d) of the
Plan, including submission to a medical exam by a

4
<PAGE> 5
physician chosen by the Committee. A Participant shall also provide to the
Committee, upon request, a copy of his income tax returns.

SECTION 7. RESTRICTIONS ON ALIENATION. No right or benefit of a
Participant under the Plan shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, levy or charge.
Any attempt to so anticipate, alienate, sell, transfer, assign, pledge,
encumber, levy or charge the same shall be void; nor shall any amount be in any
manner be subject to any claims for the debts, contracts, liabilities,
engagements or torts of the Participant entitled to such benefit.

SECTION 8. EMPLOYEE RIGHTS. The right of a Participant to receive
any benefits hereunder shall be an unsecured claim against the general assets
of the Company. No Company assets shall in any way be subject to any prior
claim by any Participant. The Company shall have no duty whatsoever to set
aside any amounts to satisfy its obligations, if any, under the Plan. Nothing
in the Plan shall confer upon any employee of the Company any right to
continued employment with the Company, nor shall it interfere in any way with
the right of the Company to terminate the employment of any employee at any
time for any reason. A Participant shall have no right, title, or interest
whatsoever in or to any specific assets of the Company, nor any investments, if
any, which the Company may make to aid it in meeting its obligations hereunder.
Nothing contained in this Plan, and no action taken pursuant to its provisions,
shall create or be construed to create a trust of any kind, or a fiduciary
relationship, between the Company and any Participant or any other person.

SECTION 9. AMENDMENT. The Plan may be amended, modified or terminated
at any time, for any reason, without notice, by the Committee except that no
such amendment, modification or termination shall (without the consent of any
such Participant) have a material adverse effect on the amount or duration of
any benefit payable to any Participant who is receiving benefits under the Plan
on the effective date of any such amendment, modification or termination.

5
<PAGE> 6
SECTION 10. WITHHOLDING. There shall be deducted from all payments
under the Plan the amount of any taxes required to be withheld by any Federal,
state or local government. Each Participant receiving benefits shall bear any
and all Federal, foreign, state, local, income, or other taxes imposed on
amounts paid under the Plan.

SECTION 11. PARTICIPANTS BOUND BY TERMS OF THE PLAN. By
participating in the Plan, all Participants shall be deemed conclusively to
have accepted and consented to all terms of the Plan and all actions or
decisions made by the Company with regard to the Plan. Such terms and consent
shall also apply to and be binding upon the personal or legal representatives
of each Participant participating in the Plan.

SECTION 12. SEVERABILITY OF PROVISIONS. In the event any provision
of the Plan would serve to invalidate the Plan, that provision shall be deemed
to be null and void, and the Plan shall be construed as if it did not contain
the particular provision that would make it invalid. The Plan shall be binding
upon and inure to the benefit of (a) the Company and its respective successors
and assigns, and (b) each Participant, his or estate or other legal
representative. Nothing in the Plan shall preclude the Company from
consolidating or merging into or with, or transferring all or substantially all
of its assets to, another corporation, or engaging in any other corporate
transaction.

SECTION 13. GOVERNING LAW. The Plan shall be construed and enforced
in accordance with, and the rights of the parties hereto shall be governed by,
the laws of the State of Delaware. The Plan shall not be interpreted as either
an employment or trust agreement.

SECTION 14. OTHER COMPANY BENEFIT AND COMPENSATION PROGRAMS.
Benefits received by a Participant under the Plan shall not be deemed a part of
a Participant's compensation for purposes of the determination of benefits
under any other employee benefit plans or arrangements, if any, provided by the
Company or any affiliate of the Company. The existence of the Plan
notwithstanding, the Company may adopt such other compensation plans or
programs and additional compensation arrangements as it deems necessary to
attract, retain and motivate employees. The Committee is

6
<PAGE> 7
authorized to cause to be established a trust agreement or several trust
agreements or similar arrangements from which the Committee may make payments
of amounts due or to become due to any Participants under the Plan.

SECTION 15. EFFECTIVE DATE OF THE PLAN. The Plan shall be effective
as of January 1, 1997 upon its adoption by the Company.

IN WITNESS WHEREOF, the Plan is hereby adopted by the Company
on this 12th day of December, 1996.

Beverly Enterprises, Inc.

By:
---------------------------

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

<PAGE> 1

EXHIBIT 10.34

AMENDMENT TO EMPLOYMENT CONTRACT

This Amendment to Employment Contract (the "Amendment") is executed by
C. Arnold Renschler, M.D. (the "Executive") and Beverly Enterprises, Inc., a
Delaware corporation (the "Company" or "Beverly"), to amend the Employment
Contract dated as of June 3, 1996, between the Executive and the Company (the
"Agreement"). The Executive and the Company hereby agree as follows:

1. Definitions. Unless expressly defined in this Amendment, the
capitalized terms used in this Amendment have the definitions attributed to
them in the Agreement, and the definitions of those terms in the Agreement are
incorporated herein by reference.

2. Change of Control. Paragraph 1(e)(iii) of the Agreement is
hereby amended to add a new clause at the end thereof to read as follows:

", or e the Company shall sell at least 80 percent of the
capital stock of PCA to a Person other than the Company or any
direct or indirect affiliate thereof, such that, after such
sale, such Person owns at least 80 percent of such stock and
neither the Company nor any affiliate thereof directly or
indirectly owns more than 20 percent of the capital stock or
other securities of PCA; provided, however, that a "Change of
Control,, shall not occur as a result of any public offering
or series of public offerings of the capital stock of PCA or
any distribution, spin-off or other transfer to the Company's
shareholders of the capital stock of PCA."

3. Stock Options. With respect to Paragraph 4(b)(i) of the
Agreement, and as previously referenced in Paragraph 3 of the Employment
Contract Addendum between Executive and the Company, and further subject to
grant by the Committee and execution of a Stock Option Agreement, Executive
will be granted stock options under the Company's Long-Term Incentive Stock
Plan for 50,000 shares of Company stock at an exercise price equal to the fair
market value of such stock on the date of grant. Options for 15,000 shares
shall be incentive stock options (within the meaning of Section 422 of the
Internal Revenue Code), and options for 35,000 shares shall be nonqualified
stock options. The
<PAGE> 2
vesting of the Options will be subject to PCA performance criteria as
established by the Committee and set forth in the Stock Option Agreement.

4. Continued Effectiveness. Except as amended by this Amendment,
the Agreement (as previously amended by the Addendum thereto) continues in full
force and effect. The Amendment will become effective when executed by the
Executive and the Company.

BEVERLY ENTERPRISES, INC. EXECUTIVE

By:
----------------------- --------------------------
Boyd W. Hendrickson C. Arnold Renschler, M.D.
President and Chief
Operating Officer
5111 Rogers Avenue
Suite 40-A
Fort Smith, AR 72919

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

<PAGE> 1
EXHIBIT 10.44

[CONFORMED COPY]

$375,000,000

AMENDED AND RESTATED CREDIT AGREEMENT

dated as of

December 20, 1996

among

BEVERLY ENTERPRISES, INC.

The BANKS Listed Herein

MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Issuing Bank,

and

MORGAN GUARANTY TRUST COMPANY OF NEW YORK,
as Agent
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1
DEFINITIONS
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.02. Accounting Terms and Determinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 1.03. Types of Loans and Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

ARTICLE 2
THE CREDITS
SECTION 2.01. The Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.02. Notice of Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
SECTION 2.03. Notice to Banks; Funding of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 2.04. Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 2.05. Maturity of Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.06. Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 2.07. Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.08. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 2.09. Optional Termination or Reduction of Commitments . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.10. Mandatory Termination of Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.11. Method of Electing Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 2.12. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.13. General Provisions as to Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 2.14. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.15. Computation of Interest, Fees and Commissions . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.16. Withholding Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.17. Maximum Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

ARTICLE 3
CONDITIONS
SECTION 3.01. Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.02. Borrowings and Letter of Credit Issuances . . . . . . . . . . . . . . . . . . . . . . . . . . 40

ARTICLE 4
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Corporate Existence and Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 4.02. Corporate and Governmental Authorization; No Contravention . . . . . . . . . . . . . . . . . 42
SECTION 4.03. Binding Effect; Liens of Pledge Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>

i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 4.04. Financial Information; Valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 4.05. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.06. Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.07. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.08. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.09. Title to and Condition of Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.10. Not an Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.11. Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.12. Representations in Subsidiary Guaranty and Pledge Agreement . . . . . . . . . . . . . . . . . 45
SECTION 4.13. Existing Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

ARTICLE 5
COVENANTS
SECTION 5.01. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 5.02. Maintenance of Property; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 5.03. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
SECTION 5.04. Inspection of Property, Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 5.05. Minimum Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 5.06. Fixed Charge Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 5.07. Adjusted Consolidated Debt Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
SECTION 5.08. Ownership of Stock of Wholly-Owned Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 5.09. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 5.10. Restricted Payments on Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 5.11. Negative Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
SECTION 5.12. Consolidations, Mergers and Sales of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 5.13. Incurrence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
SECTION 5.14. Use of Proceeds and Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5.15. Additional Subsidiary Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5.16. Lease Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5.17. Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

ARTICLE 6
DEFAULTS
SECTION 6.01. Events of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 6.02. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
</TABLE>

<PAGE> 4

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 7
THE AGENT
SECTION 7.01. Appointment and Authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 7.02. Agent and Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 7.03. Action by Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 7.04. Consultation with Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 7.05. Liability of Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 7.06. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 7.07. Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 7.08. Successor Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 7.09. Agent's Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

ARTICLE 8
CHANGE IN CIRCUMSTANCES
SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair . . . . . . . . . . . . . . . . . . 64
SECTION 8.02. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 8.03. Increased Cost and Reduced Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans . . . . . . . . . . . . . . . . . . 68

ARTICLE 9
MISCELLANEOUS
SECTION 9.01. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
SECTION 9.02. No Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 9.03. Expenses; Documentary Taxes; Indemnification . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 9.04. Sharing of Set-Offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 9.05. Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 9.06. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 9.07. Margin Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 9.09. Consent to Execution and Delivery of Certain Financing Documents . . . . . . . . . . . . . . 73
SECTION 9.10. Counterparts; Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 9.11. Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 9.12. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

</TABLE>

ii
<PAGE> 5
Schedule I - Pricing Schedule
Schedule II - Commitment Schedule
Schedule III - Existing Subsidiary Debt
Schedule IV - Subsidiaries of the Borrower
Schedule V - Existing Letters of Credit

Exhibit A Note
Exhibit B Form of Pledge and Security Agreement
Exhibit C Form of Subsidiary Guaranty
Exhibit D Opinion of Special New York Counsel to the Borrower
Exhibit E Opinion of Vice President and Deputy General Counsel
of the Borrower
Exhibit F Opinion of Special Counsel to the Agent
Exhibit G Form of Assignment and Assumption Agreement

iv
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT

AGREEMENT dated as of December 20, 1996 among BEVERLY ENTERPRISES,
INC. (with its successors, the "Borrower"), a Delaware corporation, the BANKS
listed on the signature pages hereof, MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Issuing Bank, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent
(with its successors in such capacity, the "Agent"), amending and restating the
Credit Agreement dated as of November 1, 1994 (as amended, the "Existing Credit
Agreement") among Beverly California Corporation, the Borrower, the banks
listed on the signature pages thereof and Morgan Guaranty Trust Company of New
York, as issuing bank and as agent.

WHEREAS, Beverly California Corporation has changed its name to
Beverly Health and Rehabilitation Services, Inc. ("Beverly Health");

WHEREAS, the Borrower and Beverly Health have requested that certain
provisions of the Existing Credit Agreement be amended, and the Banks and the
Agent have agreed to such amendments, subject to the satisfaction of the terms
and conditions set forth herein, which amendments shall become effective only
at such time as this Agreement becomes effective in accordance with Section
3.01;

WHEREAS, the parties have agreed that Beverly Enterprises, Inc., the
guarantor under the Existing Credit Agreement, shall become the borrower under
the Credit Agreement and shall assume all the obligations of Beverly Health
with respect to the Loans and Letters of Credit under the Existing Credit
Agreement;

WHEREAS, Beverly Health, the borrower under the Existing Credit
Agreement, shall sign a Subsidiary Guaranty Agreement as of the date hereof and
become a Subsidiary Guarantor under the Credit Agreement;

WHEREAS, the parties have agreed that on the Effective Date, (i) all
outstanding Loans made pursuant to the Existing Credit Agreement, all
outstanding "Nippon Loans" made pursuant to the Nippon Credit Agreement and all
outstanding "LTCB Loans" made pursuant to the LTCB Credit Agreement will be
repaid, (ii) certain of the banks party to the Nippon Credit Agreement and the
LTCB Credit Agreement will become parties hereto and (iii) the revolving
Commitments will be increased to $375 million and allocated among the Banks as
set forth in the Commitment Schedule herein;

<PAGE> 7
WHEREAS, the parties have agreed that, upon the effectiveness of this
Agreement, any outstanding "Letters of Credit" issued pursuant to the Existing
Credit Agreement shall constitute "Letters of Credit" hereunder and shall be
governed by the terms and conditions of this Agreement; and

WHEREAS, in order to set forth in one document, for the convenience of
the parties, the text of the Existing Credit Agreement as amended by the
amendments to be made upon the effectiveness hereof, the Existing Credit
Agreement will upon satisfaction of the conditions set forth in Section 3.01
hereof, be amended and restated to read in full as set forth herein;

NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE 1

DEFINITIONS

SECTION 1.01. Definitions. The following terms, as used herein, have
the following meanings:

"Adjusted CD Rate" has the meaning set forth in Section 2.06(b).

"Adjusted Consolidated Debt" means at any date the sum, without
duplication, of (i) all liabilities of the Borrower and its Subsidiaries at
such date of the types classified as "current liabilities: short-term
borrowings", "current liabilities: current portion of long-term obligations"
and "long-term obligations" on the consolidated balance sheet included in the
Base Financials (including any Subordinated Notes), (ii) all guarantees at such
date of obligations of other issuers (other than guarantees outstanding on the
date hereof of obligations outstanding on the date hereof, in amounts not in
excess of $110,901,000 and reported in the Base Financials) and (iii) an amount
equal to the product of eight multiplied by the Consolidated Rental Expense for
the four fiscal quarters of the Borrower most recently completed on or prior to
such date.

"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.06(c).

"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Borrower) duly completed by such Bank.

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<PAGE> 8
"Affiliate" means any Person (other than the Borrower, any Subsidiary
of the Borrower or any Bank) (a) which directly or indirectly through one or
more intermediaries controls, or is controlled by, or is under common control
with, the Borrower or (b) which is the Beneficial Owner of 10% or more of any
class of the Voting Stock of the Borrower. As used herein, the term "control"
means the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of voting stock, by contract or otherwise.

"Agent" means Morgan Guaranty Trust Company of New York in its
capacity as agent for the Banks hereunder, and its successors in such capacity.

"Applicable Lending Office" means, with respect to any Bank, (i) in
the case of its Domestic Loans, its Domestic Lending Office and (ii) in the
case of its Euro-Dollar Loans, its Euro-Dollar Lending Office.

"Appraised Value" means, with respect to any asset subjected to or
released from any Lien, the value of such asset as determined by an independent
appraisal performed within 90 days of, and as of a date not less than 90 days
prior to, the date upon which such asset is subjected to or released from such
Lien.

"Assessment Rate" has the meaning set forth in Section 2.06(b).

"Assignee" has the meaning set forth in Section 9.06(c).

"Authorized Financial Officer" of any Person means the Chief Financial
Officer, Treasurer or Controller of such Person.

"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective
successors.

"Base Financials" means the consolidated balance sheet of the Borrower
and its Consolidated Subsidiaries as of December 31, 1995 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, together with the notes thereto, included in the
Borrower's 1995 Form 10-K and reported on without qualification by Ernst &
Young LLP.

3
<PAGE> 9
"Base Rate" means, for any day, a rate per annum equal to the higher
of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.

"Base Rate Loan" means (i) a Loan which bears interest at the Base
Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate
Election or the provisions of Article 8 or (ii) an overdue amount that was a
Base Rate Loan immediately before it became overdue.

"Base Rate Margin" has the meaning set forth in Section 2.06(a).

"Beneficial Owner" means a Person who is deemed to be the "Beneficial
Owner" of securities pursuant to Rule 13d-3 or 13d-5 of the Securities Exchange
Act of 1934 (as in effect on the date hereof).

"Beverly Health" means Beverly Health and Rehabilitation Services,
Inc., formerly known as Beverly California Corporation, a California
corporation, and its successors.

"Borrower" means Beverly Enterprises, Inc., a Delaware corporation,
and its successors.

"Borrower's 1995 Form 10-K" means the Borrower's annual report on Form
10-K for 1995, as filed with the Securities and Exchange Commission pursuant to
the Securities Exchange Act of 1934, as amended.

"Borrowing" has the meaning set forth in Section 1.03.

"CD Base Rate" has the meaning set forth in Section 2.06(b).

"CD Loan" means (i) a Loan which bears interest at a CD Rate pursuant
to the applicable Notice of Borrowing or Notice of Interest Rate Election or
(ii) an overdue amount that was a CD Loan immediately before it became overdue.

"CD Margin" has the meaning set forth in Section 2.06(b).

"CD Rate" means a rate of interest determined pursuant to Section
2.06(b) on the basis of an Adjusted CD Rate.

"CD Reference Banks" means PNC Bank, National Association,
NationsBank, N.A. and Morgan Guaranty Trust Company of New York.

4
<PAGE> 10
"Collateral" means the property in which the Agent is granted, or is
purported to be granted, a lien or security interest from time to time under
the Pledge Agreement, which lien or security interest has not been released in
accordance with the terms hereof or thereof.

"Commitment" means, with respect to any Bank, the amount set forth
opposite the name of such Bank as such Bank's Commitment on the Commitment
Schedule, as such amount may be reduced from time to time pursuant to Section
2.09.

"Commitment Fee Rate" has the meaning set forth in Section 2.08(a).

"Commitment Schedule" means Schedule II attached hereto.

"Consolidated EBITDA" means, for any period, Consolidated Net Income
of the Borrower and its Consolidated Subsidiaries for such period plus, without
duplication, any amounts deducted in determining such Consolidated Net Income
in respect of (a) Consolidated Interest Charges for such period, (b)
Consolidated Tax Charges for such period and (c) expenses for such period of
the types classified as "depreciation and amortization" on the consolidated
statement of operations included in the Base Financials.

"Consolidated EBITDAR" means, for any period, the sum of Consolidated
EBITDA and Consolidated Rental Expense for such period.

"Consolidated Gross Capital Expenditures" means, for any period the
total amount of additions to property and equipment, other than software
development costs, of the Borrower and its Consolidated Subsidiaries during
such period of the types classified as "Capital expenditures" on the
consolidated statement of cash flows included in the Base Financials.

"Consolidated Interest Charges" means, for any period, all items for
such period of the types classified as "interest" on the consolidated statement
of operations included in the Base Financials.

"Consolidated Net Income" means, for any period, the net income (loss)
(calculated (a) before preferred and common stock dividends and (b) exclusive
of the effect of any extraordinary or other material non-recurring gain or loss
outside the ordinary course of business) of the Borrower and its Consolidated
Subsidiaries, determined on a consolidated basis for such period.

5
<PAGE> 11
"Consolidated Net Worth" means at any date the consolidated
stockholders' equity of the Borrower and its Consolidated Subsidiaries at such
date.

"Consolidated Rental Expense" means, for any period, the rental
expense (net of sublease income) of the Borrower and its Consolidated
Subsidiaries for such period.

"Consolidated Subsidiary" means, with respect to any Person and at any
date, any of its Subsidiaries or any other entity the accounts of which would
be consolidated with those of such Person in its consolidated financial
statements if such statements were prepared as of such date.

"Consolidated Tax Charges" means, for any period, all items for such
period of the types classified as "provision for income taxes" on the
consolidated statement of operations included in the Base Financials.

"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all obligations of such Person with respect to letters of credit and similar
instruments, including, without limitation, obligations under reimbursement
agreements, (vi) all mandatorily redeemable preferred stock of such Person,
(vii) all Debt of others secured by a Lien on any asset of such Person, whether
or not such Debt is assumed by such Person, and (viii) all Debt of others
Guaranteed by such Person.

"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.

"Derivatives Obligations" of any Person means all obligations of such
Person in respect of any rate swap transaction, basis swap, forward rate
transaction, commodity swap, commodity option, equity or equity index swap,
equity or equity index option, bond option, interest rate option, foreign
exchange transaction, cap transaction, floor transaction, collar transaction,
currency swap transaction, cross-currency rate swap transaction, currency
option or any other similar transaction (including any option with respect to
any of the foregoing transactions) or any combination of the foregoing
transactions.

6
<PAGE> 12
"Domestic Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in New York City are authorized by law to
close.

"Domestic Lending Office" means, as to each Bank, its office located
at its address set forth in its Administrative Questionnaire (or identified in
its Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Borrower and the Agent.

"Domestic Loans" means CD Loans or Base Rate Loans or both.

"Domestic Reserve Percentage" has the meaning set forth in Section
2.06(b).

"Effective Date" means the date this Agreement becomes effective in
accordance with Section 3.01.

"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Substances or wastes into the environment, including, without limitation,
ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.

"ERISA Group" means the Borrower and all members of a controlled group
of corporations and all trades or businesses (whether or not incorporated)
under common control which, together with the Borrower, are treated as a single
employer under Section 414(b) or 414(c) of the Internal Revenue Code.

"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.

7
<PAGE> 13
"Euro-Dollar Lending Office" means, as to each Bank, its office,
branch or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice
to the Borrower and the Agent.

"Euro-Dollar Loan" means (i) a Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Borrowing or Notice of
Interest Rate Election or (ii) an overdue amount that was a Euro-Dollar Loan
immediately before it became overdue.

"Euro-Dollar Margin" has the meaning set forth in Section 2.06(c).

"Euro-Dollar Rate" means a rate of interest determined pursuant to
Section 2.06(c) on the basis of an Adjusted London Interbank Offered Rate.

"Euro-Dollar Reference Banks" means the principal Nassau office of PNC
Bank, National Association and the principal London offices of NationsBank,
N.A. and Morgan Guaranty Trust Company of New York.

"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.06(c).

"Event of Default" has the meaning set forth in Section 6.01.

"Existing Bank" means a Bank (as defined in the Existing Credit
Agreement).

"Existing Credit Agreement" means the Credit Agreement dated as of
November 1, 1994 among Beverly Health, the Borrower, the banks listed on the
signature pages thereof, and Morgan Guaranty Trust Company of New York, as
issuing bank and as agent, as the same has been amended on or prior to the
Effective Date.

"Existing Financing Documents" means the Financing Documents (as
defined in the Existing Credit Agreement).

"Existing Letter of Credit" means a Letter of Credit (as defined in
the Existing Credit Agreement).

"Existing Loan" means a Loan (as defined in the Existing Credit
Agreement).

8
<PAGE> 14
"Exposure" means, for any day and with respect to any Bank, the sum on
such day of the Letter of Credit Exposure of such Bank and the aggregate
outstanding principal amount of the Loans of such Bank.

"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100 of 1%) equal to the weighted average
of the rates on overnight Federal funds transactions with members of the
Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business Day
next succeeding such day; provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on the
next succeeding Domestic Business Day, and (ii) if no such rate is so published
on such next succeeding Domestic Business Day, the Federal Funds Rate for such
day shall be the average rate quoted to Morgan Guaranty Trust Company of New
York on such day on such transactions, as determined by the Agent.

"Financing Documents" means this Agreement, the Notes, the Subsidiary
Guaranty and the Pledge Agreement.

"Fixed Charge Coverage Ratio" means, on any date, the ratio of (i)
Consolidated EBITDAR minus Consolidated Gross Capital Expenditures for the four
consecutive fiscal quarters most recently ended on or prior to such date to
(ii) the sum of Consolidated Interest Charges and Consolidated Rental Expense
for such four fiscal quarters.

"Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or both.

"Former Borrower" means Beverly Health.

"Group of Loans" means at any time a group of Loans consisting of (i)
all Loans that are Base Rate Loans at such time or (ii) all Loans that are
Fixed Rate Loans of the same type having the same Interest Period at such time;
provided that, if a Loan of any particular Bank is converted to or made as a
Base Rate Loan pursuant to Section 8.02 or 8.04, such Loan shall be included in
the same Group or Groups of Loans from time to time as it would have been in if
it had not been so converted or made.

"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to

9
<PAGE> 15
purchase or pay (or advance or supply funds for the purchase or payment of)
such Debt or other obligation (whether arising by virtue of partnership
arrangements, by agreement to keep-well, to purchase assets, goods, securities
or services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for the purpose of assuring in any other manner
the obligee of such Debt or other obligation of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided that the term Guarantee shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.

"Hazardous Substance" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.

"Interest Period" means: (1) with respect to each Euro-Dollar Loan, a
period commencing on the date of borrowing specified in the applicable Notice
of Borrowing or the date specified in the applicable Notice of Interest Rate
Election and ending one week or one, two, three or six months thereafter, as
the Borrower may elect in the applicable Notice of Borrowing or Notice of
Interest Rate Election; provided that:

(a) any Interest Period (other than an Interest Period determined
pursuant to clause (c)(i) below) that would otherwise end on a day
that is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day unless, in the case of any
Interest Period other than a one-week Interest Period, such
Euro-Dollar Business Day falls in another calendar month, in which
case such Interest Period shall end on the next preceding Euro-Dollar
Business Day;

(b) any Interest Period (other than an Interest Period of one week
or an Interest Period determined pursuant to clause (c) below) that
begins on the last Euro-Dollar Business Day of a calendar month (or on
a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the
last Euro-Dollar Business Day of a calendar month; and

(c) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.05 but
does not end on such date, then (i) the principal amount (if any) of
each Euro- Dollar Loan required to be repaid on such date shall

10
<PAGE> 16
have an Interest Period ending on such date and (ii) the remainder (if
any) of each such Euro-Dollar Loan shall have an Interest Period
determined as set forth above; and

(2) with respect to each CD Loan, a period commencing on the date of
borrowing specified in the applicable Notice of Borrowing or on the date
specified in the applicable Notice of Interest Rate Election and ending 30, 60,
90 or 180 days thereafter, as the Borrower may elect in the applicable Notice
of Borrowing or Notice of Interest Rate Election; provided that:

(a) any Interest Period (other than an Interest Period determined
pursuant to clause (b)(i) below) that would otherwise end on a day
that is not a Euro-Dollar Business Day shall be extended to the next
succeeding Euro-Dollar Business Day; and

(b) if any Interest Period includes a date on which a payment of
principal of the Loans is required to be made under Section 2.05 but
does not end on such date, then (i) the principal amount (if any) of
each CD Loan required to be repaid on such date shall have an Interest
Period ending on such date and (ii) the remainder (if any) of each
such CD Loan shall have an Interest Period determined as set forth
above.

"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.

"Investment" means any investment in any Person, whether by means of
share purchase, capital contribution, loan, time deposit or otherwise.

"Issuing Bank" means Morgan Guaranty Trust Company of New York in its
capacity as issuer of the Letters of Credit, and its successors in such
capacity.

"Lease Cancellation Payment" means any payment made to cancel or
terminate a lease of a facility and related property prior to the end of its
term.

"Lease Conversion" means any acquisition by the Borrower or any of its
Subsidiaries of a facility and related property that had theretofore been
leased by the Borrower or any such Subsidiary and that the Borrower or any of
its Subsidiaries continues to operate.

"Letter of Credit" means a letter of credit issued, or deemed to have
been issued, by the Issuing Bank pursuant to Section 2.07(a).

11
<PAGE> 17
"Letter of Credit Commission Rate" has the meaning set forth in
Section 2.07(f).

"Letter of Credit Commitment" means, with respect to any Bank at any
time, an amount equal to the lesser of (i) such Bank's Commitment at such time
and (ii) the product of $100,000,000 multiplied by a fraction, the numerator of
which is such Bank's Commitment at such time and the denominator of which is
the aggregate Commitments of all Banks at such time.

"Letter of Credit Exposure" means, with respect to any Bank at any
time, the sum of (i) its participation in the undrawn amount which is then, or
may thereafter become, available for drawing under each outstanding Letter of
Credit and (ii) its participation in the amount of each unpaid Reimbursement
Obligation for drawings theretofore made under any Letter of Credit.

"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Borrower or any of its Subsidiaries shall be deemed to own subject to a Lien
any asset which it has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement relating to such asset.

"Loan" means a loan made by a Bank pursuant to Section 2.01; provided
that if any such loan or loans (or portions thereof) are combined or subdivided
pursuant to a Notice of Interest Rate Election, the term "Loan" shall refer to
the combined principal amount resulting from such combination or to each of the
separate principal amounts resulting from such subdivision, as the case may be.

"London Interbank Offered Rate" has the meaning set forth in Section
2.06(c).

"LTCB Agent" means the Agent (as defined in the LTCB Credit
Agreement).

"LTCB Collateral" means the real property and related personal
property which constitute Collateral (as defined in the LTCB Credit Agreement)
immediately prior to the Effective Date.

"LTCB Credit Agreement" means that certain Credit Agreement, dated as
of March 24, 1992, among Beverly Health, the Borrower, the lenders party
thereto

12
<PAGE> 18
(the "LTCB Lenders"), Bank of Montreal, as co-agent, and The Long-Term Credit
Bank of Japan, Ltd., Los Angeles Agency, as agent, as amended, supplemented or
modified.

"LTCB Financing Documents" means the LTCB Credit Agreement, the LTCB
Notes and the LTCB Mortgages.

"LTCB Loan" means a Loan (as defined in the LTCB Credit Agreement).

"LTCB Mortgages" means the Mortgages (as defined in the LTCB Credit
Agreement).

"LTCB Notes" means the Notes (as defined in the LTCB Credit Agreement)
in favor of the LTCB Lenders.

"Material Commitment" means an outstanding commitment by a financial
institution or a syndicate of financial institutions to provide financial
accommodations to the Borrower and/or one or more of its Subsidiaries, arising
in one or more related transactions, in an amount equal to or exceeding in the
aggregate $50,000,000.

"Material Financial Obligations" means a principal or face amount of
Debt and/or (in the case of Section 6.01(f)) payment obligations in respect of,
or (in the case of Section 6.01(g)) mark-to-market value of, Derivatives
Obligations of the Borrower and/or one or more of its Subsidiaries, arising in
one or more related or unrelated transactions, exceeding in the aggregate
$20,000,000.

"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $1,000,000.

"Material Subsidiary" means, at any time, any Subsidiary of the
Borrower that at such time constitutes a "significant subsidiary" of the
Borrower within the meaning of Regulation S-X promulgated by the Securities and
Exchange Commission; provided that for purposes of this definition of the term
"Material Subsidiary" each reference to "10 percent" contained in the
definition of "significant subsidiary" set forth in Regulation S-X shall be
replaced by "5 percent".

"Multiemployer Plan" means at any time an employee pension benefit
plan within the meaning of Section 4001(a)(3) of ERISA to which any member of
the ERISA Group is then making or accruing an obligation to make contributions
or has within the preceding five plan years made contributions.

13
<PAGE> 19
"Nippon" means The Nippon Credit Bank, Ltd. and its successors.

"Nippon Agent" means the Agent (as defined in the Nippon Credit
Agreement).

"Nippon Collateral" means the real property and related personal
property which constitute Collateral (as defined in the Nippon Credit
Agreement) immediately prior to the Effective Date.

"Nippon Credit Agreement" means that certain Credit Agreement, dated
as of March 2, 1993, among Beverly Health, the Borrower, the lenders party
thereto (the "Nippon Lenders") and Nippon, as agent, as amended, supplemented
or modified.

"Nippon Financing Documents" means the Nippon Credit Agreement, the
Nippon Notes and the Nippon Mortgages.

"Nippon Loan" means a Loan (as defined in the Nippon Credit
Agreement).

"Nippon Mortgages" means the Mortgages (as defined in the Nippon
Credit Agreement).

"Nippon Notes" means the Notes (as defined in the Nippon Credit
Agreement) in favor of the Nippon Lenders.

"Notes" means promissory notes of the Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to repay
the Loans, and "Note" means any one of such promissory notes issued hereunder.

"Notice of Borrowing" has the meaning set forth in Section 2.02.

"Notice of Interest Rate Election" has the meaning set forth in
Section 2.11(a).

"Notice of Issuance" has the meaning set forth in Section 2.07(b).

"Other Plan" means an employee pension benefit plan (other than a Plan
or a Multiemployer Plan) which is covered by Title IV of ERISA or subject to
the minimum funding standards under Section 412 of the Internal Revenue Code.

14
<PAGE> 20
"Parent" means, with respect to any Bank, any Person controlling such
Bank.

"Participant" has the meaning set forth in Section 9.06(b).

"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

"Permitted Receivables Financing Securities" means debt securities or
preferred stock issued by a Special Purpose Receivables Financing Subsidiary
pursuant to a Receivables Financing Program and borrowings by a Special Purpose
Receivables Financing Subsidiary under a related Receivables Financing Backstop
Facility.

"Permitted Preferred Stock" means preferred stock of the Borrower that
has no mandatory redemption or redemption at the option of the holder thereof
prior to the first anniversary of the Termination Date and no required increase
in the rate of dividends payable thereon prior to such first anniversary other
than increases arising from the resetting of the rate of dividends on the basis
of a reasonable market or other similar index or a market interest rate.

"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.

"Pharmacy" means Pharmacy Corporation of America, a California
corporation, and its successors.

"Plan" means at any time an employee pension benefit plan (other than
a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and is
maintained, or contributed to, by any member of the ERISA Group for employees
of any member of the ERISA Group.

"Pledge Agreement" means the Amended and Restated Pledge and Security
Agreement dated as of the date hereof among the Borrower, Pharmacy and the
Agent, substantially in the form of Exhibit B hereto, as the same may be
amended from time to time.

"Pledged Stock" has the meaning set forth in the Pledge Agreement.

15
<PAGE> 21
"Pricing Ratio" has the meaning set forth in the Pricing Schedule
attached hereto.

"Pricing Schedule" means Schedule I attached hereto.

"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.

"Quarterly Date" means any March 31, June 30, September 30 or December
31 or, in the case of any such date that is not a Euro-Dollar Business Day, the
next preceding Euro-Dollar Business Day.

"Receivables Financing Backstop Facility" means a credit facility
entered into by a Special Purpose Receivables Financing Subsidiary for the
purposes of providing liquidity with respect to securities issued by such
Special Purpose Receivables Financing Subsidiary and of financing transactions
of the type intended to be financed with the proceeds of such securities.

"Receivables Financing Program" means a program pursuant to which a
Special Purpose Receivables Financing Subsidiary issues debt securities or
preferred stock secured by (i) Medicaid, Medicare or other patient accounts
receivable or Permitted Receivables Financing Securities purchased from the
Borrower and its Subsidiaries or (ii) security interests in Medicaid, Medicare
or other patient accounts receivable or Permitted Receivables Financing
Securities granted by the Borrower and its Subsidiaries.

"Reference Banks" means the CD Reference Banks or the Euro-Dollar
Reference Banks, as the context may require, and "Reference Bank" means any one
of such Reference Banks.

"Refinanced Debt" has the meaning set forth in clause (v) of Section
5.13(a).

"Refinancing Debt" has the meaning set forth in clause (v) of Section
5.13(a).

"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System, as in effect from time to time.

16
<PAGE> 22
"Reimbursement Obligation" means an obligation of the Borrower to
reimburse the Issuing Bank pursuant to Section 2.07(d) for the amount of a
drawing under a Letter of Credit.

"Relevant Debt" has the meaning set forth in Section 9.04.

"Required Banks" means at any time Banks having at least 66 2/3% of
the aggregate Total Exposures of all Banks.

"Secured Obligations" has the meaning set forth in the Pledge
Agreement.

"Secured Parties" has the meaning set forth in the Pledge Agreement.

"Segregated Collateral Account" has the meaning set forth in the
Pledge Agreement.

"Senior Note Agreement" means that certain Indenture, dated as of
February 1, 1996, among the Borrower, the corporations listed on the signature
pages thereto and The Chase Manhattan Bank, formerly known as Chemical Bank, as
Trustee, as amended, modified or supplemented.

"Special Purpose Receivables Financing Subsidiary" means a
Wholly-Owned Subsidiary of the Borrower the sole purpose of which is to issue
debt securities and/or preferred stock and to purchase Medicare, Medicaid or
other patient accounts receivable of the Borrower and its Subsidiaries and/or
Permitted Receivables Financing Securities and make advances to the Borrower
and its Subsidiaries secured by security interests in such Medicare, Medicaid
or other patient accounts receivable and/or Permitted Receivables Financing
Securities, which accounts receivable, Permitted Receivables Financing
Securities and/or security interests therein may be pledged to secure such debt
securities and/or preferred stock and/or borrowings by such Special Purpose
Receivables Financing Subsidiary under a Receivables Financing Backstop
Facility.

"Subordinated Notes" means the Borrower's 5 1/2% Convertible
Subordinated Debentures issued from time to time in exchange for the Borrower's
$2.75 Cumulative Convertible Exchangeable Preferred Stock.

"Subsidiary" means, with respect to any Person, any corporation or
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions are at the time directly or indirectly owned by
such Person; provided that, with respect to the Borrower, Subsidiary shall not
(except for

17
<PAGE> 23
financial reporting purposes and determination of compliance with financial
covenants) include any corporations or other entities (i) which are inactive,
(ii) each of which has neither assets nor liabilities, calculated on a
consolidated basis for each such corporation or other entity, of $1,600,000 or
more and (iii) which taken together have neither aggregate assets nor aggregate
liabilities, calculated on a consolidated basis, of $3,000,000 or more.

"Subsidiary Guarantor" means, at any time, a Subsidiary of the
Borrower party to the Subsidiary Guaranty at such time.

"Subsidiary Guaranty" means the Amended and Restated Subsidiary
Guaranty dated as of the date hereof by the Borrower and the Subsidiaries of
the Borrower parties thereto in favor of the Banks, the Agent and the Issuing
Bank, substantially in the form of Exhibit C hereto, as the same may be amended
from time to time.

"Temporary Cash Investment" means any Investment in (i) direct
obligations of the United States or any agency thereof, or obligations
guaranteed by the United States or any agency thereof, (ii) commercial paper
with maturities of not more than 180 days rated at least P-1 by Moody's
Investors Service, Inc. or A-1 by Standard & Poor's Ratings Group, (iii)
deposit accounts in, and certificates of deposit, repurchase agreements and
bankers' acceptances of, United States branches of commercial banks whose
unsecured senior long-term debt is rated A or better by Moody's Investors
Service, Inc. or Standard & Poor's Ratings Group, in each case maturing within
one year from the date of acquisition thereof or (iv) in addition to the
accounts and instruments referred to in clause (iii), deposit accounts and
certificates of deposit in United States branches of banks insured by the
Federal Deposit Insurance Corporation which do not aggregate more than $100,000
in any one bank.

"Termination Date" means December 31, 2001.

"Total Exposure" means, for any day and with respect to any Bank, the
greater of (x) the Commitment of such Bank and (y) the Exposure of such Bank.

"Unfunded Liabilities" means, with respect to any employee pension
benefit plan which is covered by Title IV of ERISA, or subject to the minimum
funding standards under Section 412 of the Internal Revenue Code, at any time,
the amount (if any) by which (i) the present value of all benefit liabilities
(within the meaning of Section 4001(a)(16) of ERISA) under such plan exceeds
(ii) the fair market value of all plan assets allocable to such benefit
liabilities (excluding any accrued but unpaid contributions), all determined as
of the then most recent

18
<PAGE> 24
valuation date for such plan in accordance with the relevant provisions of
Title IV of ERISA and regulations promulgated thereunder, but only to the
extent that such excess represents a potential liability of a member of the
ERISA Group to the PBGC or any other Person under Title IV of ERISA.

"Voting Stock" means capital stock of any class or classes (however
designated) having ordinary voting power for the election of directors of the
Borrower, other than stock having such power only by reason of the happening of
a contingency.

"Wholly-Owned Subsidiary" means, with respect to any Person, any
Subsidiary of such Person all of the shares of Voting Stock or other ownership
interests of which (except directors' qualifying shares) are at the time
directly or indirectly owned by such Person.

"Workout Transaction" means any adjustment, renegotiation, exchange,
subordination, amendment, sale or other disposition of any note receivable,
Investment or other similar asset of the Borrower or any of its Subsidiaries,
any release, subordination, renegotiation or other adjustment or any Lien
securing any Debt or other obligation of any Person held by or owed to the
Borrower or any of its Subsidiaries, any acquisition of any asset by the
Borrower or any of its Subsidiaries or the making of any Investment by the
Borrower or any of its Subsidiaries, in each case in connection with (i) the
foreclosure, enforcement or realization by the Borrower or any such Subsidiary
on any Lien securing any Debt or other obligation of any Person held by or owed
to the Borrower or any such Subsidiary or (ii) any renegotiation, composition,
adjustment, amendment or restructuring of, or any other similar arrangement
with respect to, any such Debt or obligation, in each case in connection with
the bankruptcy, insolvency, financial distress or other similar condition of
such Person; provided that any such adjustment, renegotiation, exchange,
subordination, amendment, sale, disposition, release or acquisition or the
making of any such Investment (A) will, in the reasonable opinion of an
Authorized Financial Officer of the Borrower, in light of the circumstances
affecting the relevant obligor, be likely to maximize the amount to be realized
by the Borrower and its Subsidiaries with respect to such Debt or other
obligation or (B) is imposed on the Borrower or any of its Subsidiaries
pursuant to voting arrangements mandated by any law or contract arrangements
binding upon the Borrower or such Subsidiary.

SECTION 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial statements
required to be delivered hereunder shall be prepared in accordance with
generally

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<PAGE> 25
accepted accounting principles as in effect from time to time, applied on a
basis consistent (except for changes concurred in by the Borrower's independent
public accountants) with the Base Financials; provided that if any change in
generally accepted accounting principles after December 31, 1995 in itself
materially affects the calculation of any financial covenant in Article 5, the
Borrower may by notice to the Agent, or the Agent (at the request of the
Required Banks) may by notice to the Borrower, require that such covenant
thereafter be calculated in accordance with generally accepted accounting
principles as in effect, and applied by the Borrower, immediately before such
change in generally accepted accounting principles occurs. If such notice is
given, the compliance certificates delivered pursuant to Section 5.01(d) after
such change occurs shall be accompanied by reconciliations of the difference
between the calculation set forth therein and a calculation made in accordance
with generally accepted accounting principles as in effect from time to time
after such change occurs.

SECTION 1.03. Types of Loans and Borrowings. The term "Borrowing"
denotes the aggregation of Loans made to the Borrower pursuant to Article 2 on
a single date and, in the case of a Borrowing consisting of Fixed Rate Loans,
for a single Interest Period. Loans and Borrowings are distinguished by
"type". The "type" of a Loan (or a Borrowing consisting of such Loans) refers
to the pricing of the Loans, whether such Loan is a Euro-Dollar Loan, a CD Loan
or a Base Rate Loan, each of which constitutes a type.

ARTICLE 2.

THE CREDITS

SECTION 2.01. The Loans. (a) Repayment of Existing Loans, Nippon
Loans and LTCB Loans. Prior to the Effective Date, each Existing Bank, Nippon
Lender and LTCB Lender has made Existing Loans, Nippon Loans and LTCB Loans,
respectively, to the Former Borrower guaranteed by the Borrower pursuant to the
Existing Credit Agreement, the Nippon Credit Agreement and the LTCB Credit
Agreement. On the Effective Date, the Former Borrower shall repay all Existing
Loans, all Nippon Loans and all LTCB Loans outstanding under the Existing
Credit Agreement, the Nippon Credit Agreement and the LTCB Credit Agreement.

(b) Loans on and after the Effective Date. Each Bank severally
agrees, on the terms and conditions set forth in this Agreement, to make loans
to the Borrower pursuant to this Section 2.01(b) from time to time from and
including the Effective Date to but excluding the Termination Date in amounts
such that such Bank's Exposure shall not exceed such Bank's Commitment. Each
Borrowing under this Section 2.01(b) shall be in an aggregate principal amount
of

20
<PAGE> 26
$1,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing
may be in the aggregate amount available under Section 3.02(b) and shall be
made from the several Banks ratably in proportion to their respective
Commitments. Within the foregoing limits, the Borrower may borrow under this
Section 2.01(b), prepay loans to the extent permitted by Section 2.12, and
reborrow pursuant to this Section 2.01(b).

SECTION 2.02. Notice of Borrowing. The Borrower shall give the Agent
notice (a "Notice of Borrowing") not later than (x) 12:00 Noon (New York City
time) on the date of each Base Rate Borrowing, (y) 12:00 Noon (New York City
time) on the second Domestic Business Day before each CD Borrowing and (z)
12:00 Noon (New York City time) on the third Euro-Dollar Business Day before
each Euro-Dollar Borrowing, specifying:

(a) the date of such Borrowing, which shall be a Domestic Business
Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the
case of a Euro-Dollar Borrowing,

(b) the aggregate amount of such Borrowing,

(c) whether the Loans comprising such Borrowing are to bear interest
initially calculated on the basis of the Base Rate, a CD Rate or a Euro-Dollar
Rate,

(d) in the case of a Borrowing consisting of Fixed Rate Loans, the
duration of the Interest Period applicable thereto, subject to the provisions
of the definition of Interest Period.

SECTION 2.03 Notice to Banks; Funding of Loans.

(a) Upon receipt of a Notice of Borrowing, the Agent shall promptly
notify each Bank of the contents thereof and of such Bank's share of such
Borrowing and such Notice of Borrowing shall not thereafter be revocable by the
Borrower.

(b) Not later than 3:00 P.M. (New York City time) on the date of
each Borrowing, each Bank shall (except as provided in subsection (c) below)
make available its ratable share of such Borrowing, in Federal or other funds
immediately available in New York City, to the Agent at its address specified
in or pursuant to Section 9.01. Unless the Agent determines that any
applicable condition specified in Article 3 has not been satisfied, the Agent
will promptly

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<PAGE> 27
make the funds so received from the Banks available to the Borrower at the
Agent's aforesaid address.

(c) If any Bank that makes any Loan on the Effective Date is the
holder, on the Effective Date, of any Existing Loan that is to be repaid on the
Effective Date, such Bank shall apply the proceeds of its Loan to make such
repayment and only an amount equal to the difference (if any) between the
amount of the Loan being borrowed and the amount of such Existing Loan to be so
repaid shall be made available by the Bank to the Agent as provided in
subsection or remitted by the Borrower to such Bank as provided in the Existing
Credit Agreement.

(d) Unless the Agent shall have received notice from a Bank prior
to the date of any Borrowing that such Bank will not make available to the
Agent such Bank's share of such Borrowing, the Agent may assume that such Bank
has made such share available to the Agent on the date of such Borrowing in
accordance with subsection (b) of this Section 2.03 and the Agent may, in
reliance upon such assumption, make available to the Borrower on such date a
corresponding amount. If and to the extent that such Bank shall not have so
made such share available to the Agent, such Bank and the Borrower severally
agree to repay to the Agent forthwith on demand such corresponding amount
together with interest thereon, for each day from and including the date such
amount is made available to the Borrower to but excluding the date such amount
is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum
equal to the higher of the Federal Funds Rate and the interest rate then
applicable to the Loans contained in such Borrowing pursuant to Section 2.06
and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall
repay to the Agent such corresponding amount, such amount so repaid shall
constitute such Bank's Loan included in such Borrowing for purposes of this
Agreement.

SECTION 2.04 Notes.

(a) In connection with the effectiveness of the Existing Credit
Agreement, the Former Borrower delivered to the Agent, for the account of each
Existing Bank, duly executed "Notes" substantially in the form of Exhibit A to
the Existing Credit Agreement (collectively, the "Existing Notes") to evidence
the Existing Loans of each bank under the Existing Credit Agreement. In
connection with the effectiveness of the Nippon Credit Agreement and the LTCB
Credit Agreement, the Former Borrower delivered to the Nippon Agent and the
LTCB Agent, respectively, the Nippon Notes and the LTCB Notes to evidence the
Nippon Loans and the LTCB Loans, respectively, of each bank under the Nippon
Credit Agreement and the LTCB Credit Agreement. On or prior to the Effective
Date, the Borrower shall deliver to the Agent, for the account of each Bank,
duly

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<PAGE> 28
executed Notes, substantially in the form of Exhibit A hereto. On the Effective
Date, each Bank's Existing Note, Nippon Note or LTCB Note shall be
automatically canceled, and from and after the Effective Date, the Loans of
each Bank shall be evidenced by a single Note payable to the order of such Bank
for the account of its Applicable Lending Office in an amount equal to the
aggregate unpaid principal amount of such Bank's Loans. On or promptly after
the Effective Date, each Existing Bank, Nippon Lender and LTCB Lender shall
deliver to the Agent, the Nippon Agent or the LTCB Agent, as the case may be,
for delivery to the Borrower its Existing Note, Nippon Note or LTCB Note (or in
the case of loss thereof, a written agreement of indemnity by such Bank for
such loss in customary form and executed by such Bank) marked "CANCELED".

(b) Each Bank may, by notice to the Borrower and the Agent,
request that its Loans of a particular type be evidenced by a separate Note in
an amount equal to the aggregate unpaid principal amount of its Loans of such
type. Each such Note shall be in substantially the form of Exhibit A hereto
with appropriate modifications to reflect the fact that it evidences solely
Loans of the relevant type. Each reference in this Agreement to the "Note" of
such Bank shall be deemed to refer to and include any or all of such Notes, as
the context may require.

(c) Upon receipt of each Bank's Note pursuant to Section 3.01(b),
the Agent shall forward such Note to such Bank. Each Bank shall record the
date, amount and type of each Loan made by it and the date and amount of each
payment of principal made by the Borrower with respect thereto, and prior to
any transfer of its Note may endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to
each such Loan then outstanding; provided that the failure of any Bank to make
any such recordation or endorsement shall not affect the obligations of the
Borrower hereunder or of the Borrower under the Notes. Each Bank is hereby
irrevocably authorized by the Borrower so to endorse its Note and to attach to
and make a part of its Note a continuation of any such schedule as and when
required.

SECTION 2.05. Maturity of Loans. Each Loan shall mature, and the
principal amount thereof shall be due and payable in full, on the Termination
Date.

SECTION 2.06 Interest Rates. (a) Each Base Rate Loan shall bear
interest on the outstanding principal amount thereof, for each day from and
including the date such Loan is made to but excluding the date it becomes due,
at a rate per annum equal to the sum of the Base Rate Margin for such day plus
the Base Rate for such day. Such interest shall be payable quarterly in
arrears on each Quarterly Date and, with respect to the principal amount of any
Base Rate Loan converted

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<PAGE> 29
to a Fixed Rate Loan, on each day a Base Rate Loan is so converted. Any
overdue principal of or interest on any Base Rate Loan shall bear interest,
payable on demand, for each day from and including the date upon which it
becomes due to but excluding the date upon which it is paid, at a rate per
annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate
Loans for such day.

"Base Rate Margin" means a rate per annum determined in accordance
with the Pricing Schedule.

(b) Each CD Loan shall bear interest on the outstanding principal
amount thereof, for each day during each Interest Period applicable thereto, at
a rate per annum equal to the sum of the CD Margin for such day plus the
Adjusted CD Rate applicable to such Interest Period; provided that if any CD
Loan or any portion thereof shall, as a result of clause (2)(b)(i) of the
definition of Interest Period, have an Interest Period of less than 30 days,
such portion shall bear interest during such Interest Period at the rate
applicable to Base Rate Loans during such period. Such interest shall be
payable for each Interest Period on the last day thereof and, if such Interest
Period is longer than 90 days, at intervals of 90 days after the first day
thereof. Any overdue principal of or interest on any CD Loan shall bear
interest, payable on demand, for each day until paid at a rate per annum equal
to the sum of 2% plus (i) for each day during such Interest Period, the sum of
the CD Margin for such day plus the Adjusted CD Rate applicable to such Loan,
and (ii) for each day after the end of such Interest Period, the rate
applicable to Base Rate Loans for such day.

"CD Margin" means a rate per annum determined in accordance with the
Pricing Schedule.

The "Adjusted CD Rate" applicable to any Interest Period means a rate
per annum determined pursuant to the following formula:

[ CDBR ]*
ACDR = [ ----------- ] + AR
[ 1.00 - DRP ]

ACDR = Adjusted CD Rate
CDBR = CD Base Rate
DRP = Domestic Reserve Percentage
AR = Assessment Rate

__________

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<PAGE> 30
* The amount in brackets being rounded upward, if necessary, to the next
higher 1/100 of 1%

The "CD Base Rate" applicable to any Interest Period is the rate of
interest determined by the Agent to be the average (rounded upward, if
necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum
bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable)
on the first day of such Interest Period by two or more New York certificate of
deposit dealers of recognized standing for the purchase at face value from each
CD Reference Bank of its certificates of deposit in an amount comparable to the
principal amount of the CD Loan of such CD Reference Bank to which such
Interest Period applies and having a maturity comparable to such Interest
Period.

"Domestic Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement (including, without limitation, any
basic, supplemental or emergency reserves) for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of new non-personal time deposits in dollars in New York City having a
maturity comparable to the related Interest Period and in an amount of $100,000
or more. The Adjusted CD Rate shall be adjusted automatically on and as of the
effective date of any change in the Domestic Reserve Percentage.

"Assessment Rate" means for any day the annual assessment rate in
effect on such day which is payable by a member of the Bank Insurance Fund
classified as adequately capitalized and within supervisory subgroup "A" (or a
comparable successor assessment risk classification) within the meaning of 12
C.F.R. Section 327.3(e) (or any successor provision) to the Federal Deposit
Insurance Corporation (or any successor) for such Corporation's (or such
successor's) insuring time deposits at offices of such institution in the
United States. The Adjusted CD Rate shall be adjusted automatically on and as
of the effective date of any change in the Assessment Rate.

(c) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for each day during each Interest Period applicable
thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for
such day plus the Adjusted London Interbank Offered Rate applicable to such
Interest Period. Such interest shall be payable for each Interest Period on
the last day thereof and, if such Interest Period is longer than three months,
at intervals of three months after the first day thereof.

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<PAGE> 31
The "Adjusted London Interbank Offered Rate" applicable to any
Interest Period means the rate per annum equal to the quotient obtained
(rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i)
the applicable London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar
Reserve Percentage.

"Euro-Dollar Margin" means a rate per annum determined in accordance
with the Pricing Schedule. The "London Interbank Offered Rate" applicable to
any Interest Period means the average (rounded upward, if necessary, to the
next higher 1/16 of 1%) of the respective rates per annum at which deposits in
dollars are offered to each of the Euro-Dollar Reference Banks in the London
interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar
Business Days before the first day of such Interest Period in an amount
approximately equal to the principal amount of the Euro-Dollar Loan of such
Euro-Dollar Reference Bank to which such Interest Period is to apply and for a
period of time comparable to such Interest Period.

"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars in
respect of "Eurocurrency liabilities" (or in respect of any other category of
liabilities which includes deposits by reference to which the interest rate on
Euro-Dollar Loans is determined or any category of extensions of credit or
other assets which includes loans by a non-United States office of any Bank to
United States residents).

(d) Any overdue principal of or interest on any Euro-Dollar Loan
shall bear interest, payable on demand, for each day from and including the
date upon which it becomes due to but excluding the date upon which it is paid,
at a rate per annum equal to the sum of 2% plus the higher of (i) the sum of
the Euro-Dollar Margin for such day plus the Adjusted London Interbank Offered
Rate applicable to such Loan at the date such payment was due and (ii) the
Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if
necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded
upward, if necessary, to the next higher 1/16 of 1%) of the respective rates
per annum at which one day (or, if such amount due remains unpaid more than
three Euro-Dollar Business Days, then for such other period of time not longer
than six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such

26
<PAGE> 32
Euro-Dollar Reference Bank in the London interbank market for the applicable
period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve
Percentage (or, if the circumstances described in clause (a) or (b) of Section
8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate
applicable to Base Rate Loans for such day).

(e) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
Banks by telex, cable or facsimile transmission of each rate of interest so
determined, and its determination thereof shall be conclusive in the absence of
manifest error.

(f) Each Reference Bank agrees to use its best efforts to furnish
quotations to the Agent as contemplated by this Section. If any Reference Bank
does not furnish a timely quotation, the Agent shall determine the relevant
interest rate on the basis of the quotation or quotations furnished by the
remaining Reference Bank or Reference Banks, or if none of such quotations is
available on a timely basis, the provisions of Section 8.01 shall apply.

SECTION 2.07. Letters of Credit.

(a) Commitment to Issue Letters of Credit.

(i) The Borrower may from time to time request that the
Issuing Bank issue a letter of credit pursuant to which the Issuing
Bank shall be obligated to the beneficiary to pay any drawings made
thereunder and the Banks shall be obligated to the Issuing Bank to
participate ratably in such drawings in proportion to their respective
Commitments as hereinafter provided.

(ii) Subject to Section 2.07(a)(iv) below, and in
accordance with its customary procedures (to the extent such
procedures are not inconsistent with the terms of this Agreement), the
Issuing Bank agrees, on the terms and conditions set forth in this
Agreement and at the request of the Borrower, to issue Letters of
Credit for the account of the Borrower or any of its Subsidiaries from
time to time prior to the Termination Date. Each Bank agrees to
participate ratably in proportion to its Commitment in any drawings
made under each Letter of Credit.

(iii) Notwithstanding any reference in any Existing Letter
of Credit to the Existing Credit Agreement, on and as of the Effective
Date, each Existing Letter of Credit shall be deemed to be a Letter of
Credit and to have been issued pursuant to clause (ii) above on the
Effective Date.

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<PAGE> 33
(iv) In addition to the conditions precedent set forth in
Article 3, the obligations of the Issuing Bank to issue Letters of
Credit pursuant to clause (ii) above are subject to the additional
conditions that:

(A) no Letter of Credit shall have an expiry date
later than one Domestic Business Day prior to the Termination
Date; provided that with respect to a Letter of Credit issued
for the purpose of providing credit support for obligations of
the Borrower or any of its Subsidiaries in connection with
self-insurance provided by or insurance procured on behalf of
the Borrower and its Subsidiaries, it shall not be a violation
of the condition set forth in this clause (iv) if such Letter
of Credit (1) is certified by an Authorized Officer of the
Borrower to be required by applicable insurance law or
regulation to provide, and does provide, that if there shall
occur with respect to the Issuing Bank one of the events
described in Article 17 of the 1993 revision of the Uniform
Customs and Practice for Documentary Credits of the
International Chamber of Commerce (Publication No. 500), as
the same may be revised, amended, supplemented or superseded,
the expiry date shall be extended until not later than a
specified number of days (the "Extension Period") after the
resumption of business of the Issuing Bank following such
event and (2) provides for an expiry date prior to the
Termination Date by at least 30 days more than the number of
days included in the Extension Period; and

(B) the fact that, immediately after the issuance
of such Letter of Credit, no Bank's Letter of Credit Exposure
will exceed such Bank's Letter of Credit Commitment.

(b) Notice of Issuance. Except in the case of Letters of Credit
deemed, pursuant to clause (iii) of Section above, to be issued on the
Effective Date, the Borrower shall give the Agent and the Issuing Bank notice
(a "Notice of Issuance") at least three Domestic Business Days before each
Letter of Credit is to be issued, specifying: (i) the date of issuance and
expiry date of such Letter of Credit, (ii) the proposed terms of such Letter of
Credit, including the face amount thereof and (iii) the transaction that is to
be supported or financed by such Letter of Credit. Upon receipt of a Notice of
Issuance, the Issuing Bank shall promptly notify each Bank and the Agent of the
contents thereof and of the amount of such

28
<PAGE> 34
Bank's participation in such Letter of Credit and such Notice of Issuance shall
not thereafter be revocable by the Borrower.

(i) Upon receipt from the beneficiary of any Letter of
Credit of demand for payment under such Letter of Credit, the Issuing
Bank shall determine in accordance with the terms of such Letter of
Credit whether such demand for payment should be honored.

(ii) If the Issuing Bank determines that a demand for
payment by the beneficiary of a Letter of Credit should be honored,
the Issuing Bank shall make available to the beneficiary in accordance
with the terms of such Letter of Credit the amount of the drawing
under such Letter of Credit. The Issuing Bank shall thereupon notify
the Borrower, the Agent and each Bank of the amount of such drawing
paid by it and the amount of each Bank's participation therein.

(d) Reimbursement and Other Payments by the Borrower.

(i) If any amount is drawn under any Letter of Credit,
the Borrower irrevocably and unconditionally agrees to reimburse the
Issuing Bank for all amounts paid by the Issuing Bank upon such
drawing, together with any and all reasonable charges and expenses
which any Bank or the Issuing Bank may pay or incur relative to such
drawing and interest on the amount drawn at the average rate charged
to the Issuing Bank on overnight Federal funds transactions for each
day from and including the date such amount is drawn to but excluding
the date such reimbursement payment is due and payable. Such
reimbursement payment shall be due and payable (x) not later than
12:00 Noon (New York City time) on the date the Issuing Bank notifies
the Borrower of such drawing, if such notice is given at or before
10:00 A.M. (New York City time) on such date, or (y) not later than
12:00 Noon (New York City time) on the first Domestic Business Day
succeeding the date such notice is given, if such notice is given
after 10:00 A.M. (New York City time); provided that no payment
otherwise required by this sentence to be made by the Borrower not
later than 12:00 Noon (New York City time) on any day shall be overdue
hereunder if arrangements for such payment satisfactory to the Issuing
Bank, in its sole discretion, shall have been made by the Borrower not
later than 12:00 Noon (New York City time) on such day and such
payment is actually made not later than 3:00 P.M. (New

29
<PAGE> 35
York City time) on such day. The Issuing Bank shall provide a copy of
any such notice to the Agent.

(ii) In addition, the Borrower agrees to pay to the
Issuing Bank (A) interest on any and all amounts unpaid by the
Borrower when due hereunder with respect to a Letter of Credit, for
each day from and including the date when such amount becomes due to
but excluding the date such amount is paid in full, whether before or
after judgment, payable on demand, at a rate per annum equal to the
sum of 2% plus the rate applicable to Base Rate Loans for such day,
and (B) upon each transfer of any Letter of Credit in accordance with
its terms, a sum equal to such amount as shall be necessary to cover
the reasonable costs and expenses of the Issuing Bank incurred in
connection with such transfer.

(iii) Each payment to be made by the Borrower pursuant to
this Section 2.07(d) shall be made, in Federal or other funds
immediately available in New York City, to the Issuing Bank at its
address referred to in or pursuant to Section 9.01.

(e) Payments by Banks with Respect to Letters of Credit.

(i) Each Bank shall make available an amount equal to its
ratable share of any drawing under a Letter of Credit, in Federal or
other funds immediately available in New York City, to the Issuing
Bank by 3:00 P.M. (New York City time) on the Domestic Business Day
following such drawing, together with interest on such amount at the
average rate charged to the Issuing Bank on overnight Federal funds
transactions on the date of such drawing as determined by the Issuing
Bank, at the Issuing Bank's address specified in or pursuant to
Section 9.01; provided that each Bank's obligation shall be reduced by
its pro rata share of any reimbursement theretofore paid by the
Borrower in respect of such drawing pursuant to Section 2.07(d)(i).
The Issuing Bank shall notify each Bank and the Agent of the amount of
such Bank's obligation in respect of any drawing under a Letter of
Credit not later than 1:00 P.M. (New York City time) on the day such
payment by such Bank is due. Each Bank shall be subrogated to the
rights of the Issuing Bank against the Borrower to the extent of all
amounts due from such Bank to the Issuing Bank, plus interest thereon,
for each day from and including the day such amount is due from such
Bank to the Issuing Bank to but excluding the day the Borrower makes
payment to the Issuing Bank pursuant to Section 2.07(d) above, whether
before or after judgment, at a rate per annum equal to the sum of 2%
plus the rate applicable to Base Rate Loans for such day.

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(ii) If any Bank fails to pay any amount required pursuant
to clause (i) of this subsection on the date on which such payment is
due, interest shall accrue on such Bank's obligation to make such
payment, for each day from and including the date such payment becomes
due to but excluding the date such Bank makes such payment, whether
before or after judgment, at a rate per annum equal to (A) in the case
of each day from and including the day such payment is due through and
including the first succeeding Domestic Business Day (and any
intervening days), the average rate charged to the Issuing Bank on
overnight Federal funds transactions for each such day as determined
by the Issuing Bank and (B) thereafter, the sum of 2% plus the rate
applicable to Base Rate Loans for such day. Any payment made by any
Bank after 3:00 P.M., New York City time, on any Domestic Business Day
shall be deemed for purposes of the preceding sentence to have been
made on the next succeeding Domestic Business Day.

(iii) If the Borrower shall reimburse the Issuing Bank for
any drawing under a Letter of Credit after the Banks shall have made
funds available to the Issuing Bank with respect to such drawing in
accordance with clause (i) of this subsection, the Issuing Bank shall
promptly upon receipt of such reimbursement distribute to each Bank
its pro rata share thereof, including interest, to the extent received
by the Issuing Bank.

(f) Letter of Credit Commission; Fronting Fee.

(i) The Borrower shall pay to the Agent for the account
of the Banks, ratably in proportion to their Commitments or, if all
Commitments have been terminated, in proportion to their Commitments
immediately before such termination, a letter of credit commission at
a rate per annum (the "Letter of Credit Commission Rate") determined
daily in accordance with the Pricing Schedule on the daily average
amount available for drawing (whether or not any conditions to drawing
can then be met) on all outstanding Letters of Credit. Such letter of
credit commission shall accrue from and including the Effective Date
to but excluding the Termination Date (or later date of expiration or
termination of the last Letter of Credit to expire or be terminated)
and shall be payable quarterly in arrears on each Quarterly Date, on
the date of termination of the Commitments in their entirety and, if
later, on the date of expiration or termination of the last Letter of
Credit to expire or be terminated.

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(ii) The Borrower agrees to pay to the Agent for the
account of the Issuing Bank a fronting fee in the amounts and at the
times previously agreed between the Borrower and the Issuing Bank.

(g) Payment upon Acceleration. If the Commitments shall be
terminated or the principal of the Notes shall become immediately due and
payable pursuant to Section 6.01, the Borrower shall pay to the Agent for
deposit in the Segregated Collateral Account an amount equal to the aggregate
amount which is then, or may thereafter become, available for drawing under all
outstanding Letters of Credit.

(h) Limited Liability of the Issuing Bank. The Borrower assumes
all risks of the acts or omissions of any beneficiary and any transferee of any
Letter of Credit with respect to its use of such Letter of Credit. The Banks,
the Issuing Bank and their respective officers, directors, employees and agents
shall not be liable or responsible for, and the obligations of each Bank to
make payments (other than obligations of such Bank resulting solely from the
gross negligence or willful misconduct of the Issuing Bank), and of the
Borrower to reimburse the Issuing Bank for payments, pursuant to this Section
shall not be excused by, any action or inaction of any Bank or the Issuing Bank
related to (i) the use which may be made of any Letter of Credit or any acts or
omissions of any beneficiary or transferee in connection therewith; (ii) the
validity, sufficiency or genuineness of documents presented under any Letter of
Credit, or of any endorsements thereon, even if such documents should in fact
prove to be in any or all respects invalid, insufficient, fraudulent or forged;
or (iii) payment by the Issuing Bank against presentation of documents to the
Issuing Bank which do not comply with the terms of any Letter of Credit,
including failure of any documents to bear any reference or adequate reference
to the Letter of Credit. Notwithstanding the foregoing, the Borrower shall
have a claim against the Issuing Bank, and the Issuing Bank shall be liable to
the Borrower, to the extent, but only to the extent, of any direct, as opposed
to consequential, damages suffered by the Borrower which were caused by (i) the
Issuing Bank's willful misconduct or gross negligence in determining whether
documents presented under any Letter of Credit comply with the terms thereof or
(ii) the Issuing Bank's willful failure to pay under any Letter of Credit after
the presentation to the Issuing Bank by any beneficiary (or a successor
beneficiary to whom such Letter of Credit has been transferred in accordance
with its terms) of documents strictly complying with the terms and conditions
of such Letter of Credit. Subject to the preceding sentence, the Issuing Bank
may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary unless any beneficiary (or a successor beneficiary
to whom such Letter of Credit has been transferred in accordance with its
terms) and

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the Borrower shall have notified the Issuing Bank that such documents do not
comply with the terms and conditions of such Letter of Credit. Each Bank
shall, ratably in accordance with its Commitment, indemnify the Issuing Bank
(to the extent not reimbursed by the Borrower) against any cost, expense
(including counsel fees and disbursements), claim, demand, action, loss or
liability (except such as result from the Issuing Bank's gross negligence or
willful misconduct) that the Issuing Bank may suffer or incur in connection
with this Agreement or any action taken or omitted by the Issuing Bank
hereunder.

SECTION 2.08. Fees.

(a) The Borrower shall pay to the Agent for the account of the
Banks, ratably in proportion to their Commitments, a commitment fee at a rate
per annum (the "Commitment Fee Rate") determined daily in accordance with the
Pricing Schedule on the daily average amount by which the aggregate amount of
the Commitments exceeds the aggregate Exposure. Such commitment fee shall
accrue from and including the Effective Date to but excluding the Termination
Date (or earlier date of termination of the Commitments in their entirety).

(b) On the Effective Date, the Borrower shall pay to J.P. Morgan
Securities Inc., for its own account, an arrangement fee in the amount
previously agreed between the Borrower and the Agent.

(c) Accrued fees under Section 2.08(a) above shall be payable
quarterly in arrears on each Quarterly Date and upon the date of termination of
the Commitments in their entirety.

SECTION 2.09 Optional Termination or Reduction of Commitments.

(a) The Borrower may, upon at least three Domestic Business Days'
notice to the Agent, (i) terminate the Commitments at any time, if the
aggregate Exposures of all Banks shall be zero at the time of such termination,
or (ii) ratably reduce from time to time by an aggregate amount of $5,000,000
or any larger multiple of $1,000,000, the aggregate amount of the Commitments
in excess of the aggregate Exposures of all Banks.

(b) Each reduction of the Commitments pursuant to this Section
2.09 shall be applied ratably to the respective Commitments of all Banks.

SECTION 2.10. Mandatory Termination of Commitments. All
Commitments shall terminate in their entirety on the Termination Date.

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SECTION 2.11. Method of Electing Interest Rates. (a) The Loans
included in each Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Borrowing. Thereafter,
the Borrower may from time to time elect to change or continue the type of
interest rate borne by each Group of Loans (subject in each case to the
provisions of Article 8), as follows:

(i) if such Loans are Base Rate Loans, the Borrower may
elect to convert such Loans to CD Loans as of any Domestic Business
Day or to Euro-Dollar Loans as of any Euro-Dollar Business Day;

(ii) if such Loans are CD Loans, the Borrower may elect to
convert such Loans to Base Rate Loans or Euro-Dollar Loans or elect to
continue such Loans as CD Loans for an additional Interest Period, in
each case effective on the last day of the then current Interest
Period applicable to such Loans; and

(iii) if such Loans are Euro-Dollar Loans, the Borrower may
elect to convert such Loans to Base Rate Loans or CD Loans or elect to
continue such Loans as Euro-Dollar Loans for an additional Interest
Period, in each case effective on the last day of the then current
Interest Period applicable to such Loans.

Each such election shall be made by delivering a notice (a "Notice of Interest
Rate Election") to the Agent not later than 12:00 Noon (New York City time) (x)
if the relevant Loans are to be converted to Domestic Loans or continued as
Domestic Loans for an additional Interest Period, the second Domestic Business
Day before such conversion or continuation is to be effective and (y) if the
relevant Loans are to be converted to Euro-Dollar Loans or continued as
Euro-Dollar Loans for an additional Interest Period, the third Euro-Dollar
Business Day before such conversion or continuation is to be effective. A
Notice of Interest Rate Election may, if it so specifies, apply to only a
portion of the aggregate principal amount of the relevant Group of Loans;
provided that (i) such portion is allocated ratably among the Loans comprising
such Group of Loans and (ii) the portion to which such Notice of Interest Rate
Election applies, and the remaining portion to which it does not apply, are
each at least $1,000,000 and not more than one of such portions is other than a
multiple of $1,000,000.

(b) Each Notice of Interest Rate Election shall specify:

(i) the Group of Loans (or portion thereof) to which such
notice applies;

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(ii) the date on which the conversion or continuation
selected in such notice is to be effective, which shall comply with
the applicable clause of Section 2.11(a) above;

(iii) if the Loans comprising such Group are to be
converted, the new type of Loans and, if such new Loans are Fixed Rate
Loans, the duration of the initial Interest Period applicable thereto;
and

(iv) if such Loans are to be continued as Fixed Rate Loans
for an additional Interest Period, the duration of such additional
Interest Period.

Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.

(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to Section 2.11(a) above, the Agent shall promptly notify
each Bank of the contents thereof and such notice shall not thereafter be
revocable by the Borrower. If the Borrower fails to deliver a timely Notice of
Interest Rate Election to the Agent for any Group of Fixed Rate Loans, such
Loans shall be converted into Base Rate Loans on the last day of the then
current Interest Period applicable thereto.

SECTION 2.12. Optional Prepayments.

(a) The Borrower may, upon notice to the Agent not later than
11:00 A.M. (New York City time) on the date of such prepayment, prepay a Group
of Base Rate Loans in whole at any time, or from time to time in part in
amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying
the principal amount to be prepaid together with accrued interest thereon to
the date of prepayment.

(b) The Borrower may, upon at least three Domestic Business Days'
notice to the Agent, in the case of a Group of CD Loans, or upon at least three
Euro-Dollar Business Days' notice to the Agent, in the case of a Group of
Euro-Dollar Loans, prepay the Loans comprising such Group in whole at any time,
or from time to time in part in amounts aggregating $1,000,000 or any larger
multiple of $1,000,000, by paying the principal amount to be prepaid together
with accrued interest thereon to the date of prepayment; provided that the
Borrower shall reimburse each Bank for any loss or expense incurred by it as a
result of any such prepayment in accordance with Section 2.14.

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(c) Each prepayment of all or part of a Group of Loans pursuant to
this Section 2.12 shall be applied to prepay ratably the Loans of the several
Banks included in such Group.

(d) Upon receipt of a notice of prepayment pursuant to this
Section, the Agent shall promptly notify each Bank of the contents thereof and
of such Bank's ratable share of such prepayment and such notice shall not
thereafter be revocable by the Borrower.

SECTION 2.13 General Provisions as to Payments.

(a) The Borrower shall make each payment of principal of, and
interest on, the Loans and of commissions and fees hereunder, not later than
12:00 Noon (New York City time) on the date when due, in Federal or other funds
immediately available in New York City, to the Agent at its address referred to
in or pursuant to Section 9.01. The Agent will promptly distribute to each
Bank its ratable share of each such payment received by the Agent for the
account of the Banks. Whenever any payment of principal of, or interest on,
the Domestic Loans or of commissions or fees shall be due on a day which is not
a Domestic Business Day, the date for payment thereof shall be extended to the
next succeeding Domestic Business Day. Whenever any payment of principal of,
or interest on, the Euro-Dollar Loans shall be due on a day which is not a
Euro-Dollar Business Day, the date for payment thereof shall be extended to the
next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day
falls in another calendar month, in which case the date for payment thereof
shall be the next preceding Euro-Dollar Business Day. If the date for any
payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.

(b) Unless the Agent shall have received notice from the Borrower
prior to the date on which any payment is due to the Banks hereunder that the
Borrower will not make such payment in full, the Agent may assume that the
Borrower has made such payment in full to the Agent on such date and the Agent
may, in reliance upon such assumption, cause to be distributed to each Bank on
such due date an amount equal to the amount then due such Bank. If and to the
extent that the Borrower shall not have so made such payment, each Bank shall
repay to the Agent forthwith on demand such amount distributed to such Bank
together with interest thereon, for each day from and including the date such
amount is distributed to such Bank to but excluding the date such Bank repays
such amount to the Agent, at the Federal Funds Rate.

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SECTION 2.14 Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a Base Rate Loan (whether such payment or conversion is pursuant
to Article 2, 6 or 8 or otherwise) on any day other than the last day of an
Interest Period applicable thereto, or the last day of an applicable period
fixed pursuant to Section 2.06(d), or if the Borrower fails to borrow or prepay
any Fixed Rate Loans after notice has been given to any Bank in accordance with
Section 2.03(a) or 2.12(d), the Borrower shall reimburse each Bank within 15
days after demand for any resulting loss or expense incurred by it (or by an
existing or prospective Participant in the related Loan), including (without
limitation) any loss incurred in obtaining, liquidating or employing deposits
from third parties or terminating, covering, reversing or closing out interest
rate swap agreements with third parties, but excluding loss of margin for the
period after any such payment or conversion or failure to borrow or prepay;
provided that such Bank shall have promptly delivered to the Borrower a
certificate as to the amount of such loss or expense (setting forth in
reasonable detail, if the Borrower so requests, the calculation thereof), which
certificate shall be conclusive in the absence of manifest error.

SECTION 2.15 Computation of Interest, Fees and Commissions. Interest
based on the Prime Rate hereunder shall be computed on the basis of a year of
365 days (or 366 days in a leap year) and paid for the actual number of days
elapsed (including the first day but excluding the last day). All other
interest, fees and commissions shall be computed on the basis of a year of 360
days and paid for the actual number of days elapsed (including the first day
but excluding the last day).

SECTION 2.16. Withholding Tax Exemption. At least five Domestic
Business Days prior to the first date on which interest, fees or commissions
are payable hereunder for the account of any Bank, each Bank that is not
incorporated under the laws of the United States of America or a state thereof
agrees that it will deliver to each of the Borrower and the Agent (and, in the
case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two duly
completed copies of United States Internal Revenue Service Form 1001 or 4224,
certifying in either case that such Bank is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes. Each Bank which so delivers a Form 1001 or 4224
further undertakes to deliver to each of the Borrower and the Agent (and, in
the case of any Bank with any Letter of Credit Exposure, the Issuing Bank) two
additional copies of such form (or a successor form) on or before the date that
such form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent form so delivered by it, and such
amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent (or, in the case of any Bank with any
Letter of Credit Exposure, the Issuing Bank),

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in each case certifying that such Bank is entitled to receive payments under
this Agreement and the Notes without deduction or withholding of any United
States federal income taxes, unless an event (including, without limitation,
any change in any treaty, law or regulation) has occurred prior to the date on
which any such delivery would otherwise be required which renders all such
forms inapplicable or which would prevent such Bank from duly completing and
delivering any such form with respect to it and such Bank advises the Borrower
and the Agent (and, in the case of any Bank with any Letter of Credit Exposure,
the Issuing Bank) that it is not capable of receiving payments without any
deduction or withholding of United States federal income tax.

SECTION 2.17. Maximum Interest Rate. (a) Nothing contained in this
Agreement or the Notes shall require the Borrower to pay interest at a rate
exceeding the maximum rate permitted by applicable law. Neither this Section
nor Section 9.08 is intended to limit the rate of interest payable for the
account of any Bank or the Issuing Bank, as the case may be, to the maximum
rate permitted by the laws of the State of New York if a higher rate is
permitted with respect to such Bank or the Issuing Bank, as the case may be, by
supervening provisions of United States federal law.

(b) If the amount of interest payable for the account of any Bank
or the Issuing Bank, as the case may be, on any date in respect of the
immediately preceding interest computation period, computed pursuant to Section
2.06 or, in the case of interest on Reimbursement Obligations or other amounts
payable in respect of Letters of Credit, Section 2.07, would exceed the maximum
amount permitted by applicable law to be charged by such Bank or the Issuing
Bank, as the case may be, the amount of interest payable for its account on
such date shall be automatically reduced to such maximum permissible amount.

(c) If the amount of interest payable for the account of any Bank
or the Issuing Bank, as the case may be, in respect of any interest computation
period is reduced pursuant to clause (b) of this Section and the amount of
interest payable for its account in respect of any subsequent interest
computation period, computed pursuant to Section 2.06 or, in the case of
interest on Reimbursement Obligations or other amounts payable in respect of
Letters of Credit, Section 2.07, would be less than the maximum permissible
amount permitted by applicable law to be charged by such Bank or the Issuing
Bank, as the case may be, then the amount of interest payable for its account
in respect of such subsequent interest computation period shall be
automatically increased to such maximum permissible amount; provided that at no
time shall the aggregate amount by which interest paid for the account of any
Bank or the Issuing Bank, as the case may be, has been increased

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pursuant to this clause (c) exceed the aggregate amount by which interest paid
for its account has theretofore been reduced pursuant to clause (b) of this
Section.

ARTICLE 3

CONDITIONS

SECTION 3.01. Effectiveness. This Agreement shall become effective on
the date that each of the following conditions shall have been satisfied (or
waived in accordance with Section 9.05):

(a) receipt by the Agent of counterparts hereof signed by each of
the parties hereto (or, in the case of any such party as to which an executed
counterpart shall not have been received, receipt by the Agent in form
satisfactory to it of telegraphic, telex, facsimile transmission or other
written confirmation from such party of execution of a counterpart hereof by
such party);

(b) receipt by the Agent for the account of each Bank of a duly
executed Note dated on or before the Effective Date complying with the
provisions of Section 2.04;

(c) receipt by the Agent, with sufficient copies for each Bank, of
opinions of Weil, Gotshal & Manges LLP, special New York counsel to the
Borrower, and the Vice President and Deputy General Counsel of the Borrower,
substantially in the forms of Exhibits D and E hereto, respectively, and in
each case covering such additional matters relating to the transactions
contemplated hereby as the Agent or the Required Banks may reasonably request;

(d) receipt by the Agent, with sufficient copies for each Bank, of
an opinion of Davis Polk & Wardwell, special counsel to the Agent,
substantially in the form of Exhibit F hereto and covering such additional
matters relating to the transactions contemplated hereby as the Agent or the
Required Banks may reasonably request;

(e) receipt by the Agent of evidence satisfactory to it that
Section 4.12 of the Senior Notes Agreement has been clarified to indicate that
an increase in the dollar amount secured by a Lien existing on the date thereof
does not cause the lien not to be a "Permitted Lien", as defined therein;

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(f) receipt by the Agent of a certificate signed by the chief
financial officer or treasurer of the Borrower to the effect set forth in
subsections (c) and (d) of Section 3.02;

(g) receipt by the Agent of duly executed counterparts of the
Pledge Agreement, together with evidence satisfactory to the Agent that the
securities required to be delivered to the Agent pursuant thereto have been so
delivered;

(h) receipt by the Agent of duly executed counterparts of the
Subsidiary Guaranty duly executed by all Subsidiary Guarantors, including
Beverly Health;

(i) receipt by the Agent of evidence satisfactory to it that such
action (including, without limitation, the filing of appropriately completed
and duly executed Uniform Commercial Code financing statements) as may be
necessary or as the Agent shall have reasonably requested to perfect the Liens
created pursuant to the Pledge Agreement shall have been taken;

(j) receipt by the Agent of evidence satisfactory to it of the
fact that all amounts payable by the Borrower to the Agent or the Banks on or
before such date shall have been paid or arrangements satisfactory to the Agent
shall have been made for such payment;

(k) the Agent shall have received a payoff letter, including an
undertaking to release all liens, executed by each mortgagee along with an
undertaking to file any document necessary to evidence and record the release
of all Liens created under the Nippon Financing Documents and the LTCB
Financing Documents;

(l) receipt by the Agent and the Issuing Bank of evidence
satisfactory to the Agent and the Issuing Bank that each Existing Letter of
Credit shall have been amended to the extent, if any, necessary to reflect the
fact that on and after the Effective Date such Letter of Credit shall be deemed
to have been issued hereunder;

(m) prior to or simultaneously with the transactions hereunder
contemplated to take place on the Effective Date, (i) all "Loans" outstanding
under the Existing Credit Agreement shall be repaid in full (with accrued
interest thereon) and (ii) all other amounts payable under the Existing Credit
Agreement , including without limitation "breakage costs" under Section 2.14
thereof, shall be paid in full;

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(n) receipt by the Agent of evidence satisfactory to it of the
termination of the commitments under the Nippon Credit Agreement and the LTCB
Credit Agreement and that the outstanding loans (together with interest
thereon) and all other amounts payable to the Nippon Lenders and the LTCB
Lenders under the Nippon Credit Agreement and the LTCB Credit Agreement as of
the Effective Date shall have been paid in full or will be paid in full with
the proceeds of a Borrowing to be made on the Effective Date;

(o) upon the effectiveness of this Agreement, the aggregate
amount of the Letter of Credit Exposures shall not exceed the aggregate amount
of the Letter of Credit Commitments; and

(p) receipt by the Agent of all documents it may reasonably
request relating to the existence of the Borrower and each of its Subsidiaries
party to any Financing Document, the corporate authority for and the validity
of the Financing Documents, and any other matters relevant hereto or thereto,
all in form and substance satisfactory to the Agent;

provided that this Agreement shall not become effective or be binding on any
party hereto unless all of the foregoing conditions are satisfied not later
than December 31, 1996. Prior to the effectiveness of this Agreement in
accordance with this Section 3.01, none of the terms and conditions of the
Existing Credit Agreement, Nippon Credit Agreement or LTCB Credit Agreement or
any Existing Financing Document, Nippon Financing Document or LTCB Financing
Document shall be amended, waived or otherwise modified by this Agreement and
all such terms and conditions shall remain in full force and effect and are
hereby ratified and confirmed in all respects. The Agent shall promptly notify
the Borrower, the Issuing Bank and the Banks of the Effective Date, and such
notice shall be conclusive and binding on all parties hereto.

Section 3.02. Borrowings and Letter of Credit Issuances. The
obligation of any Bank to make a Loan on the occasion of any Borrowing, and the
obligation of the Issuing Bank to issue any Letter of Credit (including the
deemed issuance of the initial Letters of Credit pursuant to Section
2.07(a)(iii)), are subject to the satisfaction of the following conditions:

(a) except in the case of the deemed issuance of the initial
Letters of Credit pursuant to Section 2.07(a)(iii), receipt by the Agent of a
Notice of Borrowing or Notice of Issuance as required by Section 2.02 or
2.07(b), as the case may be;

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(b) in the case of any Borrowing or the issuance of a Letter of
Credit, the fact that, immediately after such Borrowing or the issuance of such
Letter of Credit, as the case may be, the aggregate Exposures of all Banks does
not exceed the aggregate Commitments of all Banks;

(c) the fact that, immediately before and after such Borrowing, or
the issuance of such Letter of Credit, as the case may be, no Default shall
have occurred and be continuing; and

(d) the fact that the representations and warranties of the
Borrower or any of its Subsidiaries contained in the Financing Documents shall
be true in all material respects on and as of the date of such Borrowing or
issuance, as the case may be.

Each Borrowing and each issuance of a Letter of Credit hereunder shall be
deemed to be a representation and warranty by the Borrower to the Agent, each
of the Banks and, in the case of an issuance of a Letter of Credit, the Issuing
Bank on the date of such Borrowing or issuance, as the case may be, as to the
facts specified in clauses (b), (c) and (d) of this Section.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

The Borrower hereby makes the following representations and
warranties:

SECTION 4.01 Corporate Existence and Power. Each of the Borrower
and its Subsidiaries party to any Financing Document is a corporation duly
incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation, and has all corporate powers and all
governmental licenses, authorizations, consents and approvals required to carry
on its business as now conducted except where the failure to obtain such
governmental licenses, authorizations, consents and approvals would not
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the Borrower and its Consolidated
Subsidiaries and would not in any manner draw into question the validity of any
Financing Document. The Borrower has no Subsidiaries on the Effective Date
other than those listed on Schedule IV hereto.

SECTION 4.02. Corporate and Governmental Authorization; No
Contravention. The execution, delivery and performance by each of the Borrower
and its Subsidiaries of each Financing Document to which it is a party are
within the Borrower's and each such Subsidiary's corporate powers, have been
duly authorized by all necessary corporate action, require no action by or in
respect of,

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or filing with, any governmental body, agency or official and do not
contravene, or constitute a default under, any provision of applicable law or
regulation or of the certificate of incorporation or by-laws of the Borrower or
any such Subsidiary or of any agreement, judgment, injunction, order, decree or
other instrument that is material, individually or in the aggregate, and that
is binding upon the Borrower or any such Subsidiary or result in the creation
or imposition of any Lien on any asset of the Borrower or any of its
Subsidiaries (except the Liens created pursuant to the Pledge Agreement).

SECTION 4.03. Binding Effect; Liens of Pledge Agreement. (a) Each
Financing Document other than the Notes constitutes a valid and binding
agreement of the Borrower and each of the Subsidiaries party thereto,
enforceable against them in accordance with its terms, and the Notes, when
executed and delivered in accordance with this Agreement, will constitute valid
and binding obligations of the Borrower, enforceable against it in accordance
with their terms.

(b) The Pledge Agreement creates valid security interests in the
Collateral purported to be covered thereby, which security interests are and
will remain perfected security interests, prior to all Liens, subject, in the
case of the Pledged Stock, to the Agent's maintaining possession thereof.

SECTION 4.04. Financial Information; Valuations. (a) The Base
Financials, copies of which have been delivered to each of the Banks, fairly
present, in conformity with generally accepted accounting principles, the
consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of December 31, 1995 and their consolidated results of
operations and cash flows for the fiscal year of the Borrower then ended.

(b) The unaudited condensed consolidated balance sheet of the
Borrower and its Consolidated Subsidiaries as of September 30, 1996 and the
related unaudited condensed consolidated statements of income and cash flows
for the nine months then ended, set forth in the Borrower's quarterly report
for the fiscal quarter ended September 30, 1996 as filed with the Securities
and Exchange Commission on Form 10-Q, a copy of which has been delivered to
each of the Banks, fairly present, in conformity with generally accepted
accounting principles applied on a basis consistent with the Base Financials,
the consolidated financial position of the Borrower and its Consolidated
Subsidiaries as of such date and their consolidated results of operations and
cash flows for such nine month period (subject to normal year-end adjustments,
the absence of footnote disclosure and condensation pursuant to the rules of
the Securities and Exchange Commission).

43
<PAGE> 49
(c) Since September 30, 1996, there has been no material adverse
change in the business, financial position, results of operations or prospects
of the Borrower and its Consolidated Subsidiaries, considered as a whole.

SECTION 4.05. Litigation. Except as disclosed in the Borrower's 1995
Form 10-K or the Borrower's quarterly report for the fiscal quarter ended
September 30, 1996 as filed with the Securities and Exchange Commission on Form
10-Q, there is no action, suit or proceeding pending against, or to the
knowledge of the Borrower threatened against or affecting, the Borrower or any
of its Subsidiaries before any court or arbitrator or any governmental body,
agency or official in which there is a reasonable possibility of an adverse
decision which could materially adversely affect the business, consolidated
financial position or consolidated results of operations of the Borrower and
its Consolidated Subsidiaries or which in any manner draws into question the
validity of any Financing Document.

SECTION 4.06. Compliance with ERISA. Each member of the ERISA Group
has complied with its obligations under the minimum funding standards of ERISA
and the Internal Revenue Code with respect to each Plan and is in compliance in
all material respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan. No member of the ERISA Group
has (i) sought a waiver of the minimum funding standards under Section 412 of
the Internal Revenue Code in respect of any Plan, (ii) failed to make any
contribution or payment to any Plan or Multiemployer Plan, or made any
amendment to any Plan, which has resulted or could reasonably be expected to
result, prior to the first anniversary of the Termination Date, in the
imposition of a Lien or the posting of a bond or other security under Section
302(f) of ERISA or Section 401(a)(29) or 412(n) of the Internal Revenue Code,
(iii) incurred any liability under Title IV of ERISA other than a liability to
the PBGC for premiums under Section 4007 of ERISA or (iv) within the preceding
five plan years, with respect to any Other Plan, engaged in any transaction
described in Section 4069 or Section 4212(c) of ERISA.

Section 4.07. Environmental Matters. (d) In the ordinary course of
its business, the Borrower conducts an ongoing review of the effect of
Environmental Laws on the business, operations and properties of the Borrower
and its Subsidiaries, in the course of which it identifies and evaluates
associated liabilities and costs. On the basis of this review, the Borrower
has reasonably concluded that Environmental Laws are unlikely to have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Borrower and its Consolidated Subsidiaries,
considered as a whole.

44
<PAGE> 50
(b) As of the Effective Date, to the knowledge of the Borrower and
its Subsidiaries no material claim, investigation or written inquiry has been
made, and the Borrower is not aware of any circumstance which would warrant or
give rise to such a claim, investigation or inquiry, with regard to the
Borrower or any of its Subsidiaries, in respect of any facility owned, or to
the knowledge of the Borrower and its Subsidiaries, leased or operated, either
now or in the past, by the Borrower or any of its Subsidiaries, under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended and in effect, or pursuant to any other Environmental Law, or by the
Environmental Protection Agency or by any state, local, municipal or foreign
enforcement agency having jurisdiction over the protection of the environment,
or by any other Person in respect of or under any Environmental Law.

SECTION 4.08. Taxes. United States federal income tax returns of the
Borrower and its Subsidiaries have been closed through the fiscal year ended
December 31, 1992. The Borrower and its Subsidiaries have filed all United
States federal income tax returns and all other material tax returns which are
required to be filed by them and have paid all taxes due pursuant to such
returns or pursuant to any assessment received by the Borrower or any of its
Subsidiaries other than any such taxes the amount or validity of which is
currently being contested in good faith by appropriate proceedings and with
respect to which reserves in conformity with generally accepted accounting
principles have been established. The charges, accruals and reserves on the
books of the Borrower and its Subsidiaries in respect of taxes or other
governmental charges are, in the opinion of the Borrower, adequate.

SECTION 4.09. Title to and Condition of Properties. As of the
Effective Date (e) the Borrower and its Subsidiaries have good and marketable
title to all of the properties and other assets (real or personal, tangible,
intangible or mixed) they own or purport to own and (f) all leases to which the
Borrower or any of its Subsidiaries is a party as lessee or sublessee are in
full force and effect, except for such defects in title and such invalidity or
unenforceability of leases as, in the aggregate, could not materially adversely
affect the condition (financial or otherwise), earnings, business affairs or
business prospects of the Borrower and its Subsidiaries taken as a whole.

SECTION 4.10. Not an Investment Company. Neither the Borrower nor
any of its Subsidiaries is an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.

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<PAGE> 51
Section 4.11. Full Disclosure. All information heretofore furnished
in writing by the Borrower to the Agent, the Issuing Bank or any Bank or
otherwise to the Banks generally for purposes of or in connection with this
Agreement or any transaction contemplated hereby was true and accurate in all
material respects on the date as of which such information was stated or
certified. The Borrower has disclosed to the Agent, the Issuing Bank and the
Banks in writing any and all facts which materially and adversely affect, or
may so affect (to the extent the Borrower can now reasonably foresee), the
business, operations or financial condition of the Borrower and its
Consolidated Subsidiaries, taken as a whole, or the ability of the Borrower or
any of its Subsidiaries party to any of the Financing Documents to perform its
obligations under any Financing Document to which it is a party.

SECTION 4.12. Representations in Subsidiary Guaranty and Pledge
Agreement. Each representation and warranty contained in the Subsidiary
Guaranty or the Pledge Agreement is true and correct.

SECTION 4.13. Existing Letters of Credit. Schedule V hereto
identifies each Existing Letter of Credit outstanding as of November 30, 1996.

ARTICLE 5

COVENANTS

The Borrower agrees that, so long as any Bank has any Commitment or Letter of
Credit Exposure hereunder or any amount payable under any Note remains unpaid:

SECTION 5.01. Information. The Borrower will deliver to each of the
Banks:

(a) as soon as available and in any event within 90 days after the
end of each fiscal year of the Borrower, consolidated balance sheets of the
Borrower and its Consolidated Subsidiaries as of the end of such fiscal year
and the related consolidated statements of operations, stockholders' equity and
cash flows for such fiscal year, setting forth in each case in comparative form
the figures for the previous fiscal year, all reported on in a manner
acceptable to the Securities and Exchange Commission by Ernst & Young LLP or
other independent public accountants of nationally recognized standing and
certified as to consistency in compliance with Section 1.02 by an Authorized
Financial Officer of the Borrower;

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<PAGE> 52
(b) as soon as available and in any event within 45 days after the
end of each of the first three quarters of each fiscal year of the Borrower,
condensed consolidated balance sheets of the Borrower and its Consolidated
Subsidiaries as of the end of such quarter and the related condensed
consolidated statements of income and cash flows for such quarter and for the
portion of the Borrower's fiscal year ended at the end of such quarter, setting
forth in each case in comparative form the figures for the corresponding
quarter and the corresponding portion of the Borrower's previous fiscal year,
all certified (subject to normal year-end adjustments and condensation pursuant
to the rules of the Securities and Exchange Commission) as to fairness of
presentation and consistency in compliance with Section 1.02 by an Authorized
Financial Officer of the Borrower;

(c) as soon as available and in any event within 30 days after the
end of each calendar month, consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries as of the end of such month and the related
consolidated statements of operations, stockholders' equity and cash flows for
such month and for the portion of the Borrower's fiscal year ending at the end
of such month, setting forth in each case in comparative form the figures for
the corresponding month and the corresponding portion of the Borrower's
previous fiscal year, all certified (subject to normal year-end adjustments) as
to fairness of presentation and consistency in compliance with Section 1.02 by
an Authorized Financial Officer of the Borrower;

(d) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of an
Authorized Financial Officer of the Borrower (i) setting forth in reasonable
detail the calculations required to establish whether the Borrower was in
compliance with the requirements of Sections 5.05, 5.06, 5.07, 5.09, 5.10, 5.11
and 5.13 hereof and Section 5(C) of the Pledge Agreement on the date of such
financial statements, (ii) setting forth in reasonable detail calculations of
the Pricing Ratio as at the date of the balance sheet contained therein and for
the period of four fiscal quarters ending on such date, provided that a
certificate signed by an Authorized Financial Officer of the Borrower setting
forth the information in this clause (ii) will be delivered by February 15,
1997 for the fiscal quarter ending December 31, 1996, and (iii) stating whether
any Default exists on the date of such certificate and, if any Default then
exists, setting forth the details thereof and the action which the Borrower is
taking or proposes to take with respect thereto;

(e) promptly upon the occurrence of any Default, a certificate of
an Authorized Financial Officer of the Borrower setting forth the details
thereof and the action which the Borrower is taking or proposes to take with
respect thereto;

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<PAGE> 53
(f) promptly upon the mailing thereof to the shareholders of the
Borrower generally, copies of all financial statements, reports and proxy
statements so mailed;

(g) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements on
Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) which the Borrower shall have filed with the Securities and
Exchange Commission;

(h) if and when any member of the ERISA Group (i) provides or is
required to provide notice to the PBGC of any "reportable event" (as defined in
Section 4043 of ERISA) with respect to any Plan which might constitute grounds
for a termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has provided or is required to provide notice of any
such reportable event, a copy of the notice of such reportable event provided
or required to be provided to the PBGC; (ii) receives notice of complete or
partial withdrawal liability under Title IV of ERISA or notice that any
Multiemployer Plan is in reorganization, is insolvent or has been terminated, a
copy of such notice; (iii) receives notice from the PBGC under Title IV of
ERISA of an intent to terminate, impose liability (other than for premiums
under Section 4007 of ERISA) in respect of, or appoint a trustee to administer
any Plan, a copy of such notice; (iv) applies for a waiver of the minimum
funding standards under Section 412 of the Internal Revenue Code with respect
to any Plan, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
such other information as is filed with the PBGC in connection therewith; (vi)
gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a
copy of such notice; (vii) receives notice from the PBGC or any plan
administrator of an intent to impose liability on any member of the ERISA Group
with respect to any Other Plan on account of a transaction described in Section
4069 or 4212(c) of ERISA, a copy of such notice; (viii) receives notice from
the PBGC or any plan administrator of an intent to impose liability on any
member of the ERISA Group with respect to any Other Plan on the basis that such
member of the ERISA Group is a member of the "controlled group" with respect to
such Other Plan under Section 412(c)(11) of the Internal Revenue Code or
Section 4001(a)(14) of ERISA, a copy of such notice; or (ix) fails to make any
payment or contribution to any Plan or Multiemployer Plan or makes any
amendment to any Plan which has resulted or could result in the imposition of a
Lien or the posting of a bond or other security under Section 302(f) of ERISA
or Section 401(a)(29) or 412(n) of the Internal Revenue Code, a certificate of
an Authorized Financial Officer of the Borrower setting forth all material and
relevant details as to such occurrence or event and

48
<PAGE> 54
the action, if any, which the Borrower, the Borrower or the applicable member
of the ERISA Group proposes or, after consultation with counsel, believes that
it is required to take; and

(i) from time to time such additional information regarding the
financial position or business of the Borrower or any of its Subsidiaries as
any Bank may reasonably request.

SECTION 5.02. Maintenance of Property; Insurance. (a) The Borrower
will keep, and will cause each of its Subsidiaries to keep, all property
necessary in its business in good working order and condition, ordinary wear
and tear excepted.

(b) The Borrower will, and will cause each of its Subsidiaries to,
maintain (either in the name of the Borrower or in such Subsidiary's own name)
with financially sound and responsible insurance companies, insurance on all
their respective properties in at least such amounts and against at least such
risks (and with such risk retention and self insurance) as are usually insured
against in the same general area by companies of established repute engaged in
the same or a similar business at a substantial number of different facilities.
The Borrower will furnish to the Banks, upon request from the Agent,
information presented in reasonable detail as to the insurance so carried.

SECTION 5.03. Compliance with Laws. The Borrower will comply, and
will cause each of its Subsidiaries to comply, with all applicable laws,
ordinances, rules, regulations, and requirements of governmental authorities
(including, without limitation, Environmental Laws and ERISA and the rules and
regulations thereunder) (except (i) where the failure to so comply would not
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the Borrower and its Subsidiaries and
would not in any manner draw into question the validity of any Financing
Document or (ii) where the necessity of compliance therewith is contested in
good faith by appropriate proceedings and for which adequate reserves have been
established in accordance with generally accepted accounting principles) and
will maintain and cause each of its Subsidiaries to maintain all governmental
licenses, approvals, authorizations and consents necessary for the conduct of
the business of the Borrower and its Subsidiaries (except where the failure to
maintain such governmental licenses, approvals, authorizations and consents
would not materially adversely affect the business, consolidated financial
position or consolidated results of operations of the Borrower and its
Subsidiaries and would not in any manner draw into question the validity of any
Financing Document).

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<PAGE> 55
SECTION 5.04. Inspection of Property, Books and Records. The
Borrower will keep, and will cause each of its Subsidiaries to keep, proper
books of record and account in which full, true and correct entries shall be
made of all dealings and transactions in relation to its business and
activities and will permit, and will cause each such Subsidiary to permit,
representatives of any Bank to visit and inspect any of its properties, to
examine and make abstracts from any of its books and records and to discuss its
affairs, finances and accounts with its officers, employees and independent
public accountants, all at such reasonable times and upon reasonable notice to
the Borrower and as often as may reasonably be desired; provided that (i)
subject to the provisions of Section 9.03(a), the Borrower shall not be
obligated to pay the expenses of the Banks' respective representatives and (ii)
the Borrower will have an opportunity to participate in any discussions that
take place between representatives of any Bank and the Borrower's independent
public accountants.

SECTION 5.05. Minimum Consolidated Net Worth. Consolidated Net
Worth shall be at least $715,000,000 plus 50% of the aggregate positive
Consolidated Net Income (excluding any consolidated net loss) of the Borrower
and its Consolidated Subsidiaries for each fiscal quarter ending after December
31, 1996.

SECTION 5.06. Fixed Charge Coverage Ratio. 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>
Effective Date through March 30, 1998 . . . . . . . . . . . . . . . . 1.15 to 1.0
March 31, 1998 through March 30, 1999 . . . . . . . . . . . . . . . . 1.25 to 1.0
March 31, 1999 through March 30, 2000 1.35 to 1.0
March 31, 2000 through March 30, 2001 1.45 to 1.0
March 31, 2001 and thereafter . . . . . . . . . . . . . . . . . . . . 1.50 to 1.0
- -----------------------------------------------------------------------------------
</TABLE>

SECTION 5.07. Adjusted Consolidated Debt Ratio. The ratio at any date
of (g) Adjusted Consolidated Debt to (h) Consolidated Net Worth shall not be
more than the ratio set forth below opposite the period in which such date
falls:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Period Ratio
- ---------------------------------------------------------------------------------
<S> <C>
Effective Date through December 31, 1997 . . . . . . . . . . . . . 2.55 to 1.0
January 1, 1998 through December 31, 1998 . . . . . . . . . . . . . 2.45 to 1.0
January 1, 1999 through December 31, 1999 . . . . . . . . . . . . . 2.35 to 1.0
January 1, 2000 through December 31, 2000 2.25 to 1.0
January 1, 2001 and thereafter . . . . . . . . . . . . . . . . . . 2.15 to 1.0
- -----------------------------------------------------------------------------------
</TABLE>

50
<PAGE> 56
SECTION 5.08 Ownership of Stock of Wholly-Owned Subsidiaries. The
Borrower will at all times maintain, or cause a Wholly-Owned Subsidiary of the
Borrower to maintain, ownership of 100% of each class of voting securities of,
and all other equity securities (except for directors' qualifying shares) in,
each of its Subsidiaries that shall be a Wholly-Owned Subsidiary of the
Borrower on the date hereof and each Person that shall become a Wholly-Owned
Subsidiary of the Borrower after the date hereof, except in each case (i) any
such Wholly-Owned Subsidiary (other than Pharmacy or any of its Subsidiaries)
that shall hereafter be disposed of in its entirety, consolidated or merged
with or into the Borrower or another such Wholly-Owned Subsidiary or liquidated
or (ii) any Subsidiary of Pharmacy that shall hereafter be consolidated or
merged with or into Pharmacy or any Wholly-Owned Subsidiary of Pharmacy or
liquidated, in each case in accordance with the provisions hereof.

SECTION 5.09 Investments. Neither the Borrower nor any of its
Subsidiaries will make or acquire after the date hereof any Investment in any
Person other than:

(a) Investments in the Borrower or in Persons that are
Subsidiaries of the Borrower on the date hereof;

(b) Investments in Persons that are (i) primarily engaged in the
health-care business and (ii) after the making of such Investment, are
Subsidiaries of the Borrower;

(d) extensions of credit or Guarantees of obligations of one or
more other Persons (other than Encore Nursing Center Partners, Ltd.-85 and
Encore Retirement Partners, Ltd.-85) as an integral part of the financing of
the acquisition, construction, equipping or improving of facilities from which
the Borrower or its Subsidiaries will provide medical or related services;

(e) other miscellaneous Investments related to the acquisition and
financing (in the ordinary course of the Borrower's business) of health-care
facilities through industrial development revenue bonds issued for the benefit
of the Borrower and its Subsidiaries;

(f) capital contributions required to be made by the Borrower to
Beverly Indemnity, Ltd. in accordance with applicable law and insurance
regulations;

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<PAGE> 57
(g) stock, obligations or securities received from nursing home
patients in the ordinary course of business of the Borrower and its
Subsidiaries;

(h) negotiable instruments endorsed for deposit or collection or
similar instruments in the ordinary course of business;

(i) promissory notes and other Investments received as
consideration for facilities sold, provided that the aggregate net book value
of all outstanding Investments permitted by this clause (i) shall not, at any
time, exceed $25,000,000;

(j) Guarantees permitted by Section 5.13;

(k) any Investment made by the Borrower or any of its Subsidiaries
in connection with and as part of a Workout Transaction;

(l) Investments made by the Borrower or any of its Subsidiaries in
one or more Special Purpose Receivables Financing Subsidiaries by means of the
sale of, or the granting of security interests in, Medicare, Medicaid or other
patient accounts receivable owing to the Borrower or such Subsidiary, in either
case to such Special Purpose Receivables Financing Subsidiaries pursuant to a
Receivables Financing Program, provided that the net amount of all uncollected
accounts receivable owing to the Borrower or any of its Subsidiaries that have
been so sold or in which a security interest has been so granted shall not
exceed 200% of the aggregate principal or redemption amount of all Permitted
Receivables Financing Securities then outstanding;

(m) Investments made in Beverly Japan Corporation in an aggregate
amount outstanding at any time not to exceed $10,000,000;

(n) Investments made in Persons that are primarily engaged in the
health-care business, the consideration for which consists exclusively of
common stock of the Borrower or Permitted Preferred Stock; and

(o) any Investment not otherwise permitted by the foregoing
clauses of this Section (other than promissory notes and other Investments
received as consideration for facilities sold) in any Person engaged primarily
in the health-care business if, immediately after such Investment is made or
acquired, the

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<PAGE> 58
aggregate net book value of all such Investments then held by the Borrower or
its Subsidiaries and permitted by this clause (o) does not exceed $75,000,000.

SECTION 5.10. Restricted Payments on Stock. Neither the Borrower
nor any of its Subsidiaries shall (x) declare or make any dividend payment or
other distribution on any capital stock of the Borrower (other than dividends
payable solely in shares of the Borrower's capital stock) or (y) declare or
make any payment on account of the purchase, redemption, retirement or
acquisition of the Borrower's capital stock; provided that, so long as at the
time of and after giving effect to any such payment no Event of Default shall
have occurred and be continuing,

(i) the Borrower may make any such payment or
distribution from the proceeds of the sale by the Borrower (other than
a sale to a Subsidiary of the Borrower) after the date hereof of its
common stock,

(ii) the Borrower may make dividend payments with respect
to its preferred stock (A) from any source in an amount not to exceed
$2,500,000 in any fiscal quarter and (B) from proceeds of the sale by
the Borrower (other than a sale to a Subsidiary of the Borrower) after
the date hereof of Permitted Preferred Stock in any amount,

(iii) the Borrower may make payments on account of the
purchase, redemption, retirement or acquisition of its preferred stock
from the proceeds of the sale by the Borrower (other than a sale to a
Subsidiary of the Borrower) after the date hereof of any Permitted
Preferred Stock,

(iv) the Borrower may make odd-lot repurchases of its
common stock for an aggregate consideration not exceeding $10,000 in
any calendar year, and

(v) the Borrower may make any such payment or
distribution if, after giving effect thereto, the aggregate amount of
all such payments or distributions made after February 9, 1996
(including, without limitation, any such payments or distributions
permitted under subclause (ii)(A) or clause (iv) above) does not
exceed the sum of $20,000,000 plus 50% of Consolidated Net Income for
the period after December 31, 1995 through the date of such
declaration, payment or distribution.

Nothing in this Section shall prohibit the payment of any dividend or
distribution within 45 days after the declaration thereof if such declaration
was not prohibited by this Section.

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<PAGE> 59
SECTION 5.11. Negative Pledge. (a) Neither the Borrower nor any of
its Subsidiaries will create, assume or suffer to exist any Lien on any asset
now owned or hereafter acquired by it, except:

(i) Liens existing on the Effective Date securing Debt
and other obligations outstanding on the Effective Date;

(ii) Liens created by the Pledge Agreement;

(iii) any Lien on any asset of any corporation that becomes
a Consolidated Subsidiary of the Borrower after the Effective Date
that exists at the time such corporation becomes such a Consolidated
Subsidiary and (other than in a Workout Transaction) not created in
contemplation thereof;

(iv) any Lien existing on any asset prior to the
acquisition thereof, acquired after the Effective Date by the Borrower
or a Subsidiary of the Borrower and (other than in a Workout
Transaction) not created in contemplation thereof;

(v) any Lien on any asset securing Debt or lease
obligations incurred or assumed for the purpose of financing all or
any part of the cost of acquiring or constructing such asset or
reconstructing substantially all of such asset, provided that such
Lien attaches to such asset concurrently with or within one year after
such acquisition, construction or reconstruction;

(vi) any Lien on any asset securing Debt or lease
obligations incurred or assumed for the purpose of improving or making
any addition to such asset, provided that (A) such Lien attaches to
such asset concurrently with or within one year after the completion
of the improvement thereof or addition thereto and (B) the aggregate
outstanding principal amount of all such Debt incurred after the date
hereof secured by such Liens shall not, at any time, exceed
$30,000,000;

(vii) Liens securing Debt incurred in connection with Lease
Cancellation Payments, provided that the aggregate amount of all such
Debt incurred after the date hereof secured by such Liens shall not,
at any time, exceed $20,000,000;

(viii) Liens securing industrial development revenue bonds
(or securing contingent obligations to issuers of letters of credit
issued to

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<PAGE> 60
support industrial development revenue bonds) arising in connection
with the conversion of the interest rate on such bonds from floating
to long-term fixed rates or from fixed rates to other long-term fixed
rates;

(ix) any Lien arising out of the refinancing, extension,
renewal or refunding of any Debt secured by any Lien permitted by any
of the foregoing clauses of this Section, provided that the principal
amount of such Debt is not increased and such Debt is not secured by
any additional assets other than assets that relate directly to the
facility subject to the original financing;

(x) Liens on Medicare, Medicaid or other patient accounts
receivable of the Borrower or any of its Subsidiaries, or on Permitted
Receivables Financing Securities, granted to secure Permitted
Receivables Financing Securities, provided that the net amount of all
uncollected accounts receivable owing to the Borrower or any of its
Subsidiaries over which such a Lien is granted, together, without
duplication, with the net amount of all uncollected accounts
receivable owing to the Borrower or any of its Subsidiaries that are
assigned to secure such Permitted Receivables Financing Securities,
shall not exceed, at any time, 200% of the aggregate principal or
redemption amount of all Permitted Receivables Financing Securities
then outstanding;

(xi) Liens incidental to the conduct of its business or
the ownership of its assets which (A) do not secure Debt or
Derivatives Obligations and (B) do not in the aggregate materially
detract from the value of its assets or materially impair the use
thereof in the operation of its business;

(xii) Liens on cash and cash equivalents securing
Derivatives Obligations, provided that the aggregate amount of cash
and cash equivalents subject to such Liens may at no time exceed
$10,000,000;

(xiii) Liens on nursing homes and related real estate
improvements and equipment ("Mortgage Assets") given in substitution
for Liens on Mortgage Assets existing on the date hereof or for Liens
on Mortgage Assets incurred pursuant to this clause (xiii) or clause
(xiv) below, provided that the sum of (A) the excess of the Appraised
Value of all Mortgage Assets subjected to Liens pursuant to this
clause (xiii) over the Appraised Value of all such Mortgage Assets
released from Liens on or after the date hereof and (B) all Debt
incurred after the date hereof and

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secured by Liens permitted under clause (xiv) below shall not at any
time exceed $75,000,000; and

(xiv) Liens not otherwise permitted under clauses (i)
through (xiii) of this Section, provided that the sum of the amounts
set forth in subclause (A) of clause (xiii) above and the aggregate
principal amount of all Debt incurred after the date hereof and
secured by Liens permitted under this clause (xiv) shall not at any
time exceed $75,000,000.

(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to create, assume or suffer to exist any Lien on any asset now
owned or hereafter acquired by it, except (i) Liens permitted by clauses (i),
(ii), (iii), (iv), (ix) (to the extent that it relates to the extension,
renewal or refunding of Debt secured by any such Liens) and (xi) of Section
5.11(a) above, (ii) Liens on telephone, computer or other office equipment
securing indebtedness incurred to finance such equipment, provided that the
aggregate principal amount of Debt secured by Liens permitted under this clause
(ii) shall not exceed $15,000,000, and (iii) Liens not otherwise permitted
under this subsection, provided that the aggregate principal amount of all Debt
secured by Liens permitted under this clause (iii) shall not at any time exceed
$5,000,000.

SECTION 5.12. Consolidations, Mergers and Sales of Assets. (i)
Neither the Borrower nor any of its Subsidiaries will (i) consolidate or merge
with or into any other Person, unless the Borrower or, except in the case of a
merger or consolidation to which the Borrower is a party, a Wholly-Owned
Subsidiary of the Borrower is the surviving corporation, (ii) sell, lease or
otherwise transfer all or any substantial part of the assets of the Borrower
and its Subsidiaries, taken as a whole, to any other Person or (iii) sell,
lease, transfer or otherwise dispose of any Pledged Stock, provided that (A)
this Section shall not apply to mergers, dissolutions, reorganizations or
liquidations of Subsidiaries of the Borrower that have disposed of all or
substantially all of their assets and (B) the Borrower and its Subsidiaries
(other than Pharmacy or any of its Subsidiaries) may assign or grant security
interests in their Medicare, Medicaid or other patient accounts receivable to a
Special Purpose Receivables Financing Subsidiary to secure Permitted
Receivables Financing Securities (provided that the net amount at any time of
all uncollected accounts receivable owing to the Borrower or any of its
Subsidiaries that are so assigned or in which a security interest is so granted
shall not exceed 200% of the aggregate principal or redemption amount of all
Permitted Receivables Financing Securities then outstanding).

(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to (i) consolidate or merge with or into any other Person, unless
Pharmacy or, except

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in the case of a merger or consolidation to which Pharmacy is a party, a
Wholly-Owned Subsidiary of Pharmacy is the surviving corporation or (ii) sell,
lease or otherwise transfer all or any substantial part of its assets to any
Person other than Pharmacy or any of its Wholly-Owned Subsidiaries that is an
Issuer (as defined in the Pledge Agreement).

SECTION 5.13. Incurrence of Debt. (a) The Borrower will not permit
any of its Subsidiaries to incur, assume or suffer to exist any Debt, except:

(i) Debt outstanding on the date hereof and included in
the Base Financials or listed in Schedule III hereto;

(ii) Debt incurred after the date hereof in connection
with Lease Cancellation Payments, provided that the aggregate
principal amount of all such Debt outstanding at any time shall not
exceed $20,000,000;

(iii) Debt secured by a Lien permitted pursuant to clause
(iv) of Section 5.11(a);

(iv) Debt of any corporation that becomes a Consolidated
Subsidiary of the Borrower after the Effective Date that exists at the
time such corporation becomes such a Consolidated Subsidiary and
(other than in a Workout Transaction) not created in contemplation
thereof;

(v) Debt ("Refinancing Debt") incurred to refinance Debt
("Refinanced Debt") permitted under clauses (i) through (iv) above,
provided that (A) the principal amount of such Refinancing Debt shall
not exceed the principal amount of such Refinanced Debt and (B) such
Refinancing Debt shall have a weighted average life of not less than
the remaining weighted average life of such Refinanced Debt or such
Refinancing Debt shall not have any required payments of principal
prior to the first anniversary of the Termination Date;

(vi) Permitted Receivables Financing Securities, provided
that the aggregate principal and redemption amount of all Permitted
Receivables Financing Securities outstanding at any time shall not
exceed $150,000,000;

(vii) Debt incurred under the Financing Documents;

(viii) Guarantees by any Subsidiary of the Borrower of any
obligation of the Borrower or any of its other Subsidiaries that such

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guaranteeing Subsidiary would have been permitted to incur hereunder
as a primary obligation;

(ix) Debt consisting of advances from the Borrower or any
of its Subsidiaries in connection with the normal operation of the
business of the Borrower and its Subsidiaries;

(x) Debt incurred in connection with and as part of a
Workout Transaction;

(xi) Debt incurred or assumed for the purpose of financing
the cost of acquiring, constructing or improving an asset of the
Borrower or any of its Subsidiaries;

(xii) Permitted Preferred Stock; and

(xiii) Debt not otherwise permitted under clauses (i)
through (xii) of this Section, provided that the aggregate principal
amount of all Debt permitted under this clause (xiii) shall not at any
time exceed $75,000,000.

(b) The Borrower will not permit Pharmacy or any of its
Subsidiaries to incur, assume or suffer to exist Debt, except (i) Debt
permitted under clauses (i), (iii), (iv), (v) (to the extent the Refinanced
Debt referred to therein is Debt referred to in clauses (i), (iii) and (iv)),
(vii) and (ix) of subsection 5.13(a) above, (ii) Debt incurred to finance the
acquisition of telephone, computer and other office equipment, provided that
the aggregate outstanding principal amount of all Debt permitted under this
clause (ii) shall not at any time exceed $15,000,000, (iii) Guarantees by
Pharmacy or any of its Subsidiaries of any obligation of the Borrower or any of
its Subsidiaries that Pharmacy or such guaranteeing Subsidiary would have been
permitted to incur as a primary obligation under clause (i) of this subsection
(b), and (iv) Debt not otherwise permitted under this subsection (b), provided
that the aggregate outstanding principal amount of all Debt permitted under
this clause (iv) shall not at any time exceed $5,000,000.

SECTION 5.14. Use of Proceeds and Letters of Credit. The Letters
of Credit issued (or deemed issued), and the proceeds of the Loans made, under
this Agreement will be used for (i) the repayment or prepayment of loans made
under the Existing Credit Agreement, the Nippon Credit Agreement and the LTCB
Credit Agreement and (ii) general corporate purposes. None of such proceeds
will be used, directly or indirectly, for the purpose, whether immediate,
incidental or ultimate, of buying or carrying any "margin stock" within the
meaning of Regulation U.

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SECTION 5.15. Additional Subsidiary Guarantors. The Borrower agrees
to cause each Person, other than a Special Purpose Receivables Financing
Subsidiary, that shall, at any time after the date hereof, become a
Wholly-Owned Subsidiary of the Borrower to enter into the Subsidiary Guaranty.

SECTION 5.16. Lease Conversions. The Borrower will not, and will
not permit any of its Subsidiaries to, make any Lease Conversion in any
calendar year unless:

(i) the aggregate consideration paid or to be paid by the
Borrower and its Subsidiaries in connection with the termination of
leases or the acquisition of facilities and related property pursuant
to such Lease Conversion and all other Lease Conversions made during
such calendar year would not exceed $100,000,000; and

(ii) to the extent such Lease Conversion is financed or
will be financed with Debt of the Borrower or any of its Subsidiaries,
such Debt is incurred within one year of such Lease Conversion.

SECTION 5.17. Transactions with Affiliates. The Borrower will not,
after the date hereof, and will not permit any of its Subsidiaries to, after
the date hereof, enter into any transaction or arrangement with any Affiliate
(including, without limitation, the purchase from, sale to or exchange of
property with, or the rendering of any service by or for, any Affiliate),
except in the ordinary course of and pursuant to the reasonable requirements of
the Borrower's or such Subsidiary's (as the case may be) business and upon fair
and reasonable terms no less favorable to the Borrower or such Subsidiary than
would be obtained in a comparable arm's-length transaction with a Person other
than an Affiliate.

ARTICLE 6

DEFAULTS

SECTION 6.01. Events of Defaults. If one or more of the following
events ("Events of Default") shall have occurred andbe continuing:

(a) the Borrower shall fail to pay (i) on the date when due any
principal of any Loan or any Reimbursement Obligation or (ii) within five
Domestic Business Days after the date when due any interest on any Loan or
Reimbursement Obligation or any fees, commissions or other amounts payable
hereunder;

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(b) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.05, 5.06, 5.07, 5.10, 5.12, 5.13, 5.14 or 5.16;

(c) the Borrower shall fail to observe or perform any covenant
contained in Sections 5.08, 5.09, 5.11 or 5.15 for 10 days after the Borrower
shall have obtained actual knowledge of such failure or after written notice
thereof has been given to the Borrower by the Agent at the request of any Bank;

(d) the Borrower or any Subsidiary Guarantor shall fail to observe
or perform any covenant or agreement contained herein or in the Subsidiary
Guaranty (other than those covered by clause (a), (b) or (c) above) for 30 days
after written notice thereof has been given to the Borrower by the Agent at the
request of any Bank;

(e) any representation, warranty, certification or statement made
by the Borrower or any of its Subsidiaries in any Financing Document or in any
certificate, financial statement or other document delivered pursuant to any
Financing Document shall prove to have been incorrect in any material respect
when made (or deemed made);

(f) the Borrower or any of its Subsidiaries shall fail to make any
payment in respect of any Material Financial Obligations when due or, if later,
within any applicable grace period;

(g) any event or condition shall occur which results in the
acceleration of the maturity, or requires the early redemption or prepayment,
of any Material Financial Obligations or any event or condition shall occur and
be continuing which enables (or, with the giving of notice or lapse of time or
both, would enable) the holder of any Material Financial Obligations or any
Person acting on such holder's behalf to accelerate the maturity, or require
the early redemption or prepayment, of such Material Financial Obligations
(unless such event or condition shall have been waived and any acceleration or
required redemption or prepayment rescinded), provided that the fact that the
interest paid on any industrial development revenue bonds ceases to be exempt
from federal income taxation shall not constitute an Event of Default under
this subsection (g) unless such industrial development revenue bonds are
accelerated, redeemed or prepaid or the aggregate principal amount of
industrial development revenue bonds subject to acceleration or early
redemption or prepayment as a result of such event or condition shall be at
least $15,000,000 or (ii) any event or condition constituting a default or
event of default under the agreement, instrument or other document relating
thereto shall occur which results in the termination of any

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Material Commitment or any such event or condition shall occur and be
continuing which enables (or with the giving of notice or lapse of time or
both, would enable) the provider of any Material Commitment or any Person
acting on such provider's behalf to require the early termination of such
Material Commitment (unless such event or condition shall have been waived and
any termination rescinded);

(h) the Borrower or any Material Subsidiary (or any combination of
Subsidiaries that, if treated as a single Subsidiary, would at such time
constitute a Material Subsidiary) shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now
or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part
of its property, or shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debts as they become
due, or shall take any corporate action to authorize any of the foregoing;

(i) an involuntary case or other proceeding shall be commenced
against the Borrower or any Material Subsidiary (or any combination of
Subsidiaries that, if treated as a single Subsidiary, would at such time
constitute a Material Subsidiary) seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower or any Material Subsidiary (or any
combination of Subsidiaries that, if treated as a single Subsidiary, would at
such time constitute a Material Subsidiary) under the federal bankruptcy laws
as now or hereafter in effect;

(j) (i) any member of the ERISA Group shall fail to pay when due
an amount or amounts aggregating in excess of $1,000,000 which it shall have
become liable to pay under Title IV of ERISA; or (ii) notice of intent to
terminate a Material Plan shall be filed under Title IV of ERISA by any member
of the ERISA Group, any plan administrator or any combination of the foregoing;
or (iii) any member of the ERISA Group has been notified in writing that the
PBGC has instituted proceedings under Title IV of ERISA to terminate, to impose
liability (other than for premiums under Section 4007 of ERISA) in respect of,
or to cause a trustee to be appointed to administer any Material Plan; or (iv)
a condition shall

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exist by reason of which the PBGC would be entitled to obtain a decree
adjudicating that any Material Plan must be terminated; or (v) any of the
events described in clause (iii) above shall occur with respect to any Other
Plan or Other Plans (other than a multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA) (A) that have aggregate Unfunded Liabilities in
excess of $1,000,000 and (B) with respect to which either (1) one or more
members of the ERISA Group have engaged in a transaction or transactions
described in Section 4069 of ERISA or (2) one or more members of the ERISA
Group is a member of the "controlled group" under Section 412(c)(11) of the
Internal Revenue Code or Section 4001(a)(14) of ERISA; or (vi) there shall
occur a complete or partial withdrawal from, or a default, within the meaning
of Section 4219(c)(5) of ERISA, with respect to, one or more (A) multiemployer
plans, within the meaning of Section 4001(a)(3) of ERISA (which plans are not
Multiemployer Plans), with respect to which a member of the ERISA Group shall
have engaged, within the previous five plan years, in a transaction described
in Section 4212(c) of ERISA, or (B) Multiemployer Plans, which could reasonably
be expected to result in the incurrence by one or more members of the ERISA
Group of a current payment obligation in excess of $1,000,000; provided that no
Event of Default shall occur under clause (v) or (vi) if (A) the Unfunded
Liabilities of the Other Plans in respect of which events described in clause
(v) have occurred, together with the current payment obligations that could
reasonably be expected to result from complete or partial withdrawals or
defaults described in clause (vi), shall not exceed $2,500,000 and (B) each
member of the ERISA Group that could reasonably be expected to be liable for
such Unfunded Liabilities or current payment obligations is diligently
contesting, in good faith, by appropriate proceedings, the imposition of such
liabilities or obligations;

(k) the Borrower or any of the Borrower's Subsidiaries party
thereto shall fail to observe or perform any of its obligations under the
Pledge Agreement;

(l) one or more judgments or orders for the payment, in the
aggregate, of money in excess of $20,000,000 shall be rendered against the
Borrower or any of its Subsidiaries and such judgments or orders shall continue
unsatisfied and unstayed for a period of 30 days or (ii) one or more judgments
or orders shall be rendered against the Borrower or any of its Subsidiaries,
which judgments or orders shall be stayed on condition that a bond or
collateral equal to or greater than, in the aggregate, $250,000,000 be posted
or provided, and such judgments or orders shall not be overturned or lifted
within a period of 10 days;

(m) any person or group of persons (within the meaning of Section
13 or 14 of the Securities Exchange Act of 1934, as amended) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated by
the

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Securities and Exchange Commission under said Act) of 25% or more of the
outstanding shares of common stock of the Borrower; or

(n) the Pledge Agreement shall at any time after the Effective
Date, for any reason (other than solely due to actions taken by the Agent or
any Bank) fail to create perfected Liens in favor of the Secured Parties on the
Collateral, securing all of the Secured Obligations purported to be secured
thereby, subject to no other Liens other than Liens permitted under Section
5.11(a)(xi) as to which the Liens created under the Pledge Agreement have
priority; then, and in every such event, the Agent shall (i) if requested by
Banks having more than 66 2/3% in aggregate amount of the Commitments, by
notice to the Borrower terminate the Commitments and they shall thereupon
terminate, and (ii) if requested by Banks holding more than 66 2/3% of the sum
of (A) the aggregate principal amount of the Loans and (B) the aggregate Letter
of Credit Exposures, by notice to the Borrower declare the Notes and any
Reimbursement Obligations (together with accrued interest thereon and all fees,
commissions and other amounts payable by the Borrower hereunder) to be, and the
same shall thereupon become, immediately due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower; provided that in the case of any of the Events of Default
specified in clause (h) or (i) above with respect to the Borrower, without any
notice to the Borrower or any other act by the Agent or the Banks, the
Commitments shall thereupon terminate and the Notes and any Reimbursement
Obligations (together with accrued interest thereon and all fees, commissions
and other amounts payable by the Borrower hereunder) shall become immediately
due and payable without presentment, demand, protest or other notice of any
kind, all of which are hereby waived by the Borrower.

SECTION 6.02. Notice of Default. The Agent shall give notice to the
Borrower under Section 6.01(c) or 6.01(d) promptly upon being requested to do
so by any Bank and shall thereupon notify all the Banks and the Issuing Bank
thereof.

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ARTICLE 7

THE AGENT

SECTION 7.01. Appointment and Authorizations. Each Bank
irrevocably appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under the Financing Documents as are
delegated to the Agent by the terms thereof, together with all such powers as
are reasonably incidental thereto.

SECTION 7.02. Agent and Affiliates. Morgan Guaranty Trust Company
of New York shall have the same rights and powers under the Financing Documents
as any other Bank and may exercise or refrain from exercising the same as
though it were not the Agent or the Issuing Bank, and Morgan Guaranty Trust
Company of New York and its affiliates may accept deposits from, lend money to,
and generally engage in any kind of business with the Borrower or any
Subsidiary or affiliate of the Borrower as if it were not the Agent or the
Issuing Bank hereunder.

SECTION 7.03. Action by Agent. The obligations of the Agent
hereunder are only those expressly set forth herein. Without limiting the
generality of the foregoing, the Agent shall not be required to take any action
with respect to any Default, except as expressly provided in Article 6.

SECTION 7.04. Consultation with Experts. The Agent may consult with
legal counsel (who may be counsel for the Borrower), independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts.

SECTION 7.05. Liability of Agent. Neither the Agent nor any of its
directors, officers, agents or employees shall be liable for any action taken
or not taken by it in connection herewith (a) with the consent or at the
request of the Required Banks or (b) in the absence of its own gross negligence
or willful misconduct. Neither the Agent nor any of its directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with the Financing Documents or any borrowing or letter of credit
hereunder, (ii) the performance or observance of any of the covenants or
agreements of the Borrower or any of its Subsidiaries party to any Financing
Document, (iii) the satisfaction of any condition specified in Article 3,
except receipt of items required to be delivered to the Agent, or (iv) the
validity, effectiveness or genuineness of any Financing Document or any other
instrument or writing furnished in connection therewith. The Agent shall not
incur any liability by acting in reliance upon any

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notice, consent, certificate, statement, or other writing (which may be a bank
wire, telex, facsimile transmission or similar writing) believed by it to be
genuine or to be signed by the proper party or parties.

SECTION 7.06. Indemnification. Each Bank shall, ratably in
accordance with its Total Exposure, indemnify the Agent (to the extent not
reimbursed by the Borrower) against any cost, expense (including counsel fees
and disbursements), claim, demand, action, loss or liability (except such as
result from the Agent's gross negligence or willful misconduct) that the Agent
may suffer or incur in connection with any Financing Document or any action
taken or omitted by the Agent hereunder or thereunder.

SECTION 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent, the Issuing Bank or any
other Bank, and based on such documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Bank also acknowledges that it will, independently and without
reliance upon the Agent, the Issuing Bank or any other Bank, and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking any action under this
Agreement.

SECTION 7.08. Successor Agent. The Agent may resign at any time,
effective upon the appointment of a successor Agent and such successor Agent's
acceptance of such appointment, by giving written notice thereof to the Banks,
the Issuing Bank and the Borrower. Upon the giving of any such notice of
resignation, the Required Banks (with, unless an Event of Default shall have
occurred and be continuing, the written consent of the Borrower (which shall
not be unreasonably withheld)) shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required
Banks, and shall have accepted such appointment, within 30 days after the
retiring Agent gives notice of resignation, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent, which shall be a commercial
bank organized or licensed under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$1,000,000,000. Upon the acceptance of its appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations hereunder. After the
effectiveness of any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent.

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SECTION 7.09. Agent's Fee. The Borrower shall pay to the Agent for
its own account fees in the amounts and at the times previously agreed upon
between the Borrower and the Agent.

ARTICLE 8.

CHANGE IN CIRCUMSTANCES

SECTION 8.01. Basis for Determining Interest Rate Inadequate or
Unfair. If on or prior to the first day of any Interest Period for any Fixed
Rate Loan:

(a) the Agent is advised by the Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Reference
Banks in the relevant market for such Interest Period, or

(b) Banks having 50% or more of the aggregate principal amount of
the affected Loans advise the Agent that the Adjusted CD Rate or the Adjusted
London Interbank Offered Rate, as the case may be, as determined by the Agent
will not adequately and fairly reflect the cost to such Banks of funding their
CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period,

the Agent shall forthwith give notice thereof to the Borrower and the Banks,
whereupon until the Agent notifies the Borrower that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make CD Loans or Euro-Dollar Loans, as the case may be, or to convert
outstanding Loans into CD Loans or Euro-Dollar Loans shall be suspended and
(ii) each outstanding CD Loan or Euro-Dollar Loan shall be converted into a
Base Rate Loan on the last day of the then current Interest Period applicable
thereto. Unless the Borrower notifies the Agent at least two Domestic Business
Days before the date of any Fixed Rate Borrowing for which a Notice of
Borrowing has previously been given that it elects not to borrow on such date,
such Borrowing shall instead be made as a Base Rate Borrowing.

SECTION 8.02. Illegality. If, on or after the date of this
Agreement, the adoption of any applicable law, rule or regulation, or any
change therein, or any change in the interpretation or administration thereof
by any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or compliance by any Bank (or its
Euro-Dollar Lending Office) with any request or directive (whether or not
having the force of law) of any such authority, central bank or comparable
agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar
Lending Office) to make, maintain or fund its Euro-Dollar Loans and such Bank
shall so notify the Agent, the Agent shall forthwith give notice thereof to the
other Banks and the Borrower,

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whereupon until such Bank notifies the Borrower and the Agent that the
circumstances giving rise to such suspension no longer exist, the obligation of
such Bank to make Euro-Dollar Loans, or to convert outstanding Domestic Loans
into Euro-Dollar Loans, shall be suspended. Before giving any notice to the
Agent pursuant to this Section, such Bank shall designate a different
Euro-Dollar Lending Office if such designation will avoid the need for giving
such notice and will not, in the judgment of such Bank, be otherwise
disadvantageous to such Bank. If such notice is given, each Euro-Dollar Loan
of such Bank then outstanding shall be converted to a Base Rate Loan either (a)
on the last day of the then current Interest Period applicable to such
Euro-Dollar Loan if such Bank may lawfully continue to maintain and fund such
Loan to such day or (b) immediately if such Bank shall determine that it may
not lawfully continue to maintain and fund such Loan to such day.

SECTION 8.03. Increased Cost and Reduced Return.

(a) If on or after the date hereof the adoption of any applicable
law, rule or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental authority, central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by any Bank (or its Applicable Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency:

(i) shall subject any Bank (or its Applicable Lending
Office) to any tax, duty or other charge with respect to its
Fixed Rate Loans, its Note or its obligation to make Fixed Rate Loans,
or shall change the basis of taxation of payments to any Bank (or its
Applicable Lending Office) of the principal of or interest on its
Fixed Rate Loans or any other amounts due under this Agreement in
respect of its Fixed Rate Loans or its obligation to make Fixed Rate
Loans (except for changes in the rate of tax on the overall net income
of such Bank or its Applicable Lending Office imposed by the
jurisdiction in which such Bank's principal executive office or
Applicable Lending Office is located); or

(ii) shall impose, modify or deem applicable any
reserve, special deposit or similar requirement (including, without
limitation, any such requirement imposed by the Board of Governors of
the Federal Reserve System, but excluding (A) with respect to any CD
Loan any such requirement included in an applicable Domestic Reserve
Percentage or Assessment Rate and (B) with respect to any Euro-Dollar
Loan any such requirement included in a Euro-Dollar Reserve
Percentage) against assets

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of, deposits with or for the account of, or credit extended by, any
Bank (or its Applicable Lending Office) or shall impose on any Bank
(or its Applicable Lending Office) or on the United States market for
certificates of deposit or the London interbank market any other
condition affecting its Fixed Rate Loans, its Note or its obligation
to make Fixed Rate Loans;

and the result of any of the foregoing is to increase the cost to such Bank (or
its Applicable Lending Office) of making or maintaining any Fixed Rate Loan or
to reduce the amount of any sum received or receivable by such Bank (or its
Applicable Lending Office) under this Agreement or under its Note with respect
thereto, by an amount deemed by such Bank to be material, then, within 15 days
after demand by such Bank (with a copy to the Agent), the Borrower shall pay to
such Bank such additional amount or amounts as will compensate such Bank for
such increased cost or reduction.

(b) If, after the date hereof, the adoption of any applicable law,
rule or regulation, or any change therein, or any change in the interpretation
or administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Issuing Bank or any Bank with any request or directive
(whether or not having the force of law) of any such authority, central bank or
comparable agency shall either (i) impose, modify or deem applicable any
reserve, special deposit or similar requirement (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System) against letters of credit issued by the Issuing Bank or participations
in letters of credit by any Bank or (ii) impose on the Issuing Bank or any Bank
any other condition (including, without limitation, any assessment for federal
deposit insurance) regarding any Letter of Credit, the Issuing Bank's
obligation to issue any Letter of Credit or any Bank's obligation to pay the
Issuing Bank its ratable share of any drawing under any Letter of Credit, and
the result of any event referred to in clause (i) or (ii) of this subsection is
to increase the cost to the Issuing Bank or such Bank of issuing or maintaining
any Letter of Credit or participating therein or making any payment under any
Letter of Credit (which increase in cost shall be determined on the basis of
the Issuing Bank's or such Bank's reasonable allocation of the aggregate of
such cost increases resulting from such events), then, within 15 days after
demand by the Issuing Bank or such Bank (with a copy to the Agent), the
Borrower shall pay to the Issuing Bank or such Bank such additional amount or
amounts as will compensate the Issuing Bank or such Bank for such increased
cost.

(c) If any Bank shall have determined that, after the date hereof,
the adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change therein, or any change in the interpretation or
administration thereof

68
<PAGE> 74
by any governmental authority, central bank or comparable agency charged with
the interpretation or administration thereof, or any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank (or its Parent) as a
consequence of such Bank's obligations hereunder or under or with respect to
the Letters of Credit (including any participation therein) to a level below
that which such Bank (or its Parent) could have achieved but for such adoption,
change, request or directive (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by such Bank to be material,
then from time to time, within 15 days after demand by such Bank (with a copy
to the Agent), the Borrower shall pay to such Bank such additional amount or
amounts as will compensate such Bank (or its Parent) for such reduction.

(d) Each of the Issuing Bank and the Banks will promptly notify the
Borrower and the Agent of any event of which it has knowledge, occurring after
the date hereof, which will entitle such Bank to compensation pursuant to this
Section. Each Bank will designate a different Applicable Lending Office if
such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in its judgment, be otherwise disadvantageous to it.
A certificate of the Issuing Bank or any Bank claiming compensation under this
Section and setting forth in reasonable detail an explanation of the basis for
requesting such compensation and stating the additional amount or amounts to be
paid to it hereunder shall be conclusive in the absence of manifest error. In
determining such amount, the Issuing Bank or such Bank may use any reasonable
averaging and attribution methods.

SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate
Loans. If (i) the obligation of any Bank to make or maintain Euro-Dollar Loans
has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded
compensation under Section 8.03(a) with respect to its CD Loans or Euro-Dollar
Loans or its obligation to make CD Loans or Euro-Dollar Loans and the Borrower
shall, by at least five Euro-Dollar Business Days' prior notice to such Bank
through the Agent, have elected that the provisions of this Section shall apply
to such Bank, then, unless and until such Bank notifies the Borrower that the
circumstances giving rise to such suspension or demand for compensation no
longer apply:

(a) all Loans which would otherwise be made by such Bank as (or
continued as or converted to) CD Loans or Euro-Dollar Loans, as the case may
be, shall instead be made as (or continued as or, effective (i) on the last day
of the then current Interest Period applicable thereto unless clause (b) of the
last

69
<PAGE> 75
sentence of Section 8.02 shall apply or (ii) immediately upon the giving of
notice referred to in such sentence if such clause (b) shall apply, converted
to) Base Rate Loans (on which interest and principal shall be payable
contemporaneously with the related Fixed Rate Loans of the other Banks), and

(b) after each of its CD Loans or Euro-Dollar Loans, as the case may
be, has been repaid (or converted to a Base Rate Loan), all payments of
principal which would otherwise be applied to repay such Fixed Rate Loans shall
be applied to repay its Base Rate Loans instead.

If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Base Rate Loan shall
be converted into a CD Loan or a Euro-Dollar Loan, as the case may be, on the
first day of the next succeeding Interest Period applicable to the related CD
Loans or Euro-Dollar Loans of the other Banks.

ARTICLE 9.

MISCELLANEOUS

SECTION 9.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Borrower, the Issuing Bank or the Agent, at its address
or telex or facsimile transmission number set forth on the signature pages
hereof, (y) in the case of any Bank, at its address or telex or facsimile
transmission number set forth in its Administrative Questionnaire or (z) in the
case of any party, at such other address or telex or facsimile transmission
number as such party may hereafter specify for the purpose by notice to the
Agent and the Borrower. Each such notice, request or other communication shall
be effective (i) if given by telex, when such telex is transmitted to the telex
number specified in or pursuant to this Section and the appropriate answerback
is received, (ii) if given by facsimile transmission, when such facsimile is
transmitted to the facsimile transmission number specified in or pursuant to
this Section and telephonic confirmation of receipt thereof is received, (iii)
if given by mail, 72 hours after such communication is deposited in the mails
with first class postage prepaid, addressed as aforesaid or (iv) if given by
any other means, when delivered at the address specified in or pursuant to this
Section; provided that notices to the Agent or the Issuing Bank under Article 2
or Article 8 shall not be effective until received.

SECTION 9.02. No Waivers. No failure or delay by the Agent, the
Issuing Bank or any Bank in exercising any right, power or privilege under any
Financing Document shall operate as a waiver thereof nor shall any single or
partial exercise

70
<PAGE> 76
thereof preclude any other or further exercise thereof or the exercise of any
other right, power or privilege. The rights and remedies herein provided shall
be cumulative and not exclusive of any rights or remedies provided by law.

SECTION 9.03. Expenses; Documentary Taxes; Indemnification. (a) The
Borrower shall pay (i) all out-of-pocket expenses of the Agent and the Issuing
Bank, including reasonable fees and disbursements of any special counsel to the
Agent, in connection with the preparation of the Financing Documents, any
waiver or consent thereunder or any amendment thereof or any Default or alleged
Default thereunder and (ii) if an Event of Default occurs, all out-of-pocket
expenses incurred by the Agent, the Issuing Bank or any Bank, including
reasonable fees and disbursements of counsel, including in-house counsel, in
connection with such Event of Default and collection, bankruptcy, insolvency
and other enforcement proceedings resulting therefrom. The Borrower shall
indemnify each Bank, the Agent and the Issuing Bank against (A) any transfer
taxes, documentary taxes, assessments or charges made by any governmental
authority by reason of the execution and delivery of the Financing Documents
and (B) all costs, expenses and taxes, assessments or other charges incurred in
connection with any filing, registration, recording or perfection of any Lien
contemplated by any of the Financing Documents or any document referred to
therein or the filing or recording of any termination statement with respect to
the release of any Lien on any Collateral.

(b) The Borrower agrees to indemnify the Agent, each Bank and the
Issuing Bank and hold the Agent, each Bank and the Issuing Bank harmless from
and against any and all liabilities, losses, damages, costs and expenses of any
kind, including, without limitation, the reasonable fees and disbursements of
counsel, which may be incurred by the Agent, any Bank or the Issuing Bank in
connection with any investigative, administrative or judicial proceeding
(whether or not the Agent, such Bank or the Issuing Bank shall be designated a
party thereto) relating to or arising out of the Financing Documents or any
actual or proposed use of Letters of Credit or proceeds of Loans hereunder;
provided that neither the Agent nor the Issuing Bank or any Bank shall have the
right to be indemnified hereunder for its own gross negligence or willful
misconduct as determined by a court of competent jurisdiction.

SECTION 9.04. Sharing of Set-Offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest due
with respect to any Note held by it and its participation in any Reimbursement
Obligation and interest (if any) thereon (collectively, its "Relevant Debt")
which is greater than the proportion received by any other Bank in respect of
the Relevant Debt of such

71
<PAGE> 77
other Bank, the Bank receiving such proportionately greater payment shall
purchase such participations in the Relevant Debt of the other Banks, and such
other adjustments shall be made, as may be required so that all such payments
with respect to the Relevant Debt of the Banks shall be shared by the Banks pro
rata; provided that nothing in this Section shall impair the right of any Bank
to exercise any right of set-off or counterclaim it may have and to apply the
amount subject to such exercise to the payment of indebtedness of the Borrower
other than its Relevant Debt. The Borrower agrees, to the fullest extent it
may effectively do so under applicable law, that any holder of a participation
in a Note or Reimbursement Obligation, whether or not acquired pursuant to the
foregoing arrangements, may exercise rights of set-off or counterclaim and
other rights with respect to such participation as fully as if such holder of a
participation were a direct creditor of the Borrower in the amount of such
participation.

SECTION 9.05. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or waiver
is in writing and is signed by the Borrower and the Required Banks (and, if the
rights or duties of the Issuing Bank or the Agent are affected thereby, by the
Agent or the Issuing Bank, as the case may be); provided that no such amendment
or waiver shall, unless signed by all the Banks, (i) increase or decrease any
Commitment of any Bank (except for a ratable decrease in the Commitments of all
Banks) or subject any Bank to any additional obligation, (ii) reduce the
principal of or the rate of interest on any Loan or Reimbursement Obligation or
any commissions or fees hereunder, (iii) postpone the date fixed pursuant to
Section 2.05, 2.06, 2.07, 2.08 or 2.10 for any payment of principal of or
interest on any Loan or Reimbursement Obligation or any commissions or fees
hereunder or for the termination of any Commitment, (iv) agree to release all
or substantially all of the Collateral, (v) release any Material Subsidiary
from its obligations under the Subsidiary Guaranty (other than pursuant to the
terms thereof) or (vi) change the percentage of the Commitments, the aggregate
unpaid principal amount of the Notes or the Loans or of the aggregate Letter of
Credit Exposures, or the number of Banks, which shall be required for the Banks
or any of them to take any action under this Section or any other provision of
this Agreement.

SECTION 9.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that the Borrower may not
assign or otherwise transfer any of its rights or obligations under this
Agreement without the prior written consent of all Banks.

72
<PAGE> 78
(b) Any Bank may, without the consent of the Borrower, the Agent or
the Issuing Bank, upon notice to the Borrower, the Agent and, if any
participating interest in any Letter of Credit or Commitment is to be so
granted, the Issuing Bank, grant to one or more banks or other institutions
(each a "Participant") participating interests in its Commitments or any or all
of its Loans or its participations in Letters of Credit; provided that each
participating interest shall represent an aggregate interest therein of at
least $1,000,000. In the event of any such grant by a Bank of a participating
interest to a Participant, whether or not upon notice to the Borrower, the
Agent and the Issuing Bank, such Bank shall remain responsible for the
performance of its obligations hereunder, and the Borrower, the Agent and the
Issuing Bank shall continue to deal solely and directly with such Bank in
connection with such Bank's rights and obligations under this Agreement. Any
agreement pursuant to which any Bank may grant such a participating interest
shall provide that such Bank shall retain the sole right and responsibility to
enforce the obligations of the Borrower hereunder including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement; provided that such participation agreement may
provide that such Bank will not agree to any modification, amendment or waiver
of this Agreement described in clause (i), (ii) or (iii) of Section 9.05
without the consent of the Participant. The Borrower agrees that each
Participant shall, to the extent provided in its participation agreement, be
entitled to the benefits of Article 8 with respect to its participating
interest. An assignment or other transfer which is not permitted by Section
9.06(c) or (d) below shall be given effect for purposes of this Agreement only
to the extent of a participating interest granted in accordance with this
subsection (b).

(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit G hereto executed by
such Assignee and such transferor Bank, with (and subject to) the subscribed
consent of the Borrower, which shall not be unreasonably withheld, the Agent
and, if any participation in any Letter of Credit or Commitment is to be
assigned, the Issuing Bank; provided that if an Assignee is, prior to such
assignment, a Bank or an affiliate of a Bank, no such consent shall be
required; and provided further that, (i) unless the Loans, Commitments and
participations in Letters of Credit assigned shall constitute all Loans,
Commitments and participations in Letters of Credit of such assignor Bank, the
aggregate principal amount of the Loans, Commitments and participations in
Letters of Credit assigned shall not be less than $10,000,000 and (ii) any such
assignment shall include a pro rata portion of the assigning Bank's Commitment,
Loans and participations in Letters of Credit. Upon the

73
<PAGE> 79
execution and delivery of such instrument, payment by such Assignee to such
transferor Bank of an amount equal to the purchase price agreed between such
transferor Bank and such Assignee and delivery of notice to the Borrower, such
Assignee shall be a Bank party to this Agreement and shall have all the rights
and obligations of a Bank with Commitments as set forth in such instrument of
assumption, and the transferor Bank shall be released from its obligations
hereunder to a corresponding extent, and no further consent or action by any
party shall be required. Upon the consummation of any assignment pursuant to
this subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, a new Note is issued to the
Assignee. In connection with any such assignment, the transferor Bank shall
pay to the Agent an administrative fee for processing such assignment in the
amount of $2,500; provided that no such fee shall be required if the Assignee
is, prior to any such assignment, an affiliate of such Bank. If the Assignee
is not incorporated under the laws of the United States of America or a state
thereof, it shall, prior to the first date on which interest, fees or
commissions are payable hereunder for its account, deliver to the Borrower and
the Agent (and, in the case of any such Assignee to whom any Letter of Credit
Exposure or Commitment has been assigned, the Issuing Bank) certification as to
exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 2.16.

(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Note to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.

(e) No Assignee, Participant or other transferee of any Bank's
rights shall be entitled to receive any greater payment under Section 8.03 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Borrower's prior written
consent or by reason of the provisions of Section 8.02 or 8.03 requiring such
Bank to designate a different Applicable Lending Office under certain
circumstances or at a time when the circumstances giving rise to such greater
payment did not exist.

SECTION 9.07. Margin Stock. Each of the Banks represents to the
Agent, the Issuing Bank and each of the other Banks that it in good faith is
not relying upon any "margin stock" (as defined in Regulation U) as collateral
in the extension or maintenance of the credit provided for in this Agreement.

SECTION 9.08. GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS
AGREEMENT AND EACH NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF

74
<PAGE> 80
NEW YORK. THE BORROWER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY
NEW YORK STATE COURT SITTING IN NEW YORK CITY FOR PURPOSES OF ALL LEGAL
PROCEEDINGS ARISING OUT OF OR RELATING TO THE FINANCING DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED THEREBY. THE BORROWER IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT
AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT
IN AN INCONVENIENT FORUM.

SECTION 9.09. Consent to Execution and Delivery of Certain Financing
Documents. The Issuing Bank, the Agent and the Banks each consents and agrees
to the terms of the Pledge Agreement and the Subsidiary Guaranty.

SECTION 9.10. Counterparts; Integration. This Agreement 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 Agreement, the Subsidiary Guaranty and the Pledge Agreement
constitute the entire agreement and understanding among the parties hereto and
supersede any and all prior agreements and understandings, oral or written,
relating to the subject matter hereof.

SECTION 9.11. Confidentiality. Each Bank agrees not to disclose to
any Person other than the Agent or another Bank any information delivered or
made available by the Borrower or any of its Subsidiaries to it and indicated
in writing as confidential; provided that nothing herein shall prevent any Bank
from disclosing such information (a) to any other Person who is a director,
officer or employee of such Bank or any of its affiliates if reasonably
incidental to the administration of the Loans, (b) upon the order of any court
or administrative agency, (c) upon the request or demand of, or pursuant to any
regulation of, any regulatory agency or authority, (d) which had been publicly
disclosed other than as a result of a disclosure by the Agent or any Bank
prohibited by this Agreement, (e) in connection with any litigation related to
the transactions contemplated by the Financing Documents to which the Agent,
any Bank or its subsidiaries or parent may be a party, (f) to the extent
reasonably required in connection with the exercise of any remedy hereunder,
(g) to such Bank's or Agent's legal counsel or independent auditors, and (h) to
any actual or proposed Assignee or Participant of

75
<PAGE> 81
all or part of its rights hereunder provided that such actual or proposed
Assignee or Participant agrees in writing to be bound by the provisions of this
Section.

SECTION 9.12. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT,
THE ISSUING BANK AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THE
FINANCING DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY.

76
<PAGE> 82
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.

THE BORROWER

BEVERLY ENTERPRISES

By: /s/ Schuyler Hollingsworth Jr.
--------------------------------------------
Title: Senior Vice President and Treasurer

5111 Rogers Avenue, Suite 40-A
Fort Smith, Arkansas 72919-0155
Attention: Chief Financial Officer
Telephone number: (501) 452-6712
Facsimile transmission number: (501) 484-8489

BANKS

MORGAN GUARANTY TRUST COMPANY OF NEW YORK

By: /s/ John M. Mikolay
-----------------------------------------
Title: Vice President

THE CHASE MANHATTAN BANK

By: /s/ Dawn Lee Lum
----------------------------------------
Title: Vice President

BANK OF AMERICA NATIONAL TRUST & SAVINGS
ASSOCIATION

By: /s/ Wyatt R. Ritchie
-----------------------------------------
Title: Managing Director

<PAGE> 83
THE BANK OF NEW YORK

By: /s/ Jonathan Rollins
--------------------------------------
Title: Assistant Vice President

THE BANK OF NOVA SCOTIA

By: /s/ Dana Maloney
--------------------------------------
Title: Relationship Manager

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

By: /s/ Genichi Imai
--------------------------------------
Title: Joint General Manager

NATIONSBANK OF TEXAS, N.A.

By: /s/ Brad W. Despain
--------------------------------------
Title: Vice President

THE NIPPON CREDIT BANK, LTD., LOS
ANGELES AGENCY

By: /s/ Bernardo E. Correa-Henschke
--------------------------------------
Title: Vice President & Senior Manager

PNC BANK, NATIONAL ASSOCIATION

By: /s/ Karen M. George
-------------------------------------
Title: AVP

<PAGE> 84

BANK OF MONTREAL

By: /s/ Peter W. Steelman
----------------------------------
Title: Director

BANK OF HAWAII

By: /s/ Kenneth M. Loveless
----------------------------------
Title:Assistant Vice President

BHF - BANK AKTIENGESELLSCHAFT

By: /s/ Paul Travers
----------------------------------
Title: Vice President

By: /s/ Evon Contos
----------------------------------
Title: Vice President

UNITED STATES NATIONAL BANK OF OREGON

By: /s/ Jonathan A. Horton
----------------------------------
Title: Vice President

<PAGE> 85
AGENT

MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Agent

By: /s/ John M. Mikolay
--------------------------------
Title: Vice President

60 Wall Street
New York, New York 10260
Attention: Robert M. Osieski
Telephone number: (212) 648-7173
Telex number: 177615
Facsimile transmission number:
(212) 648-5014

ISSUING BANK

MORGAN GUARANTY TRUST COMPANY OF NEW
YORK, as Issuing Bank

By: /s/ John M. Mikolay Title: Vice
President

c/o J.P. Morgan Services Inc.
P.O. Box 6071
500 Stanton Christiana Road
Newark, Delaware 19713
Attention: International Trade
Services Standby Unit
Telephone number: (302) 634-4234
Facsimile transmission number:
(302) 634-4061

<PAGE> 86
SCHEDULE I

PRICING SCHEDULE

The "Euro-Dollar Margin", "CD Margin", "Base Rate Margin", "Letter of
Credit Commission Rate" and "Commitment Fee Rate" for any day are the
respective rates per annum set forth below in the applicable row in the column
corresponding to the Pricing Level that applies on such day:

<TABLE>
<CAPTION>
===================================================================================
Level I Level II Level III Level IV Level V
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Euro-Dollar Margin 0.500% 0.750% 0.875% 1.125% 1.500%
- -----------------------------------------------------------------------------------
CD Margin 0.625% 0.875% 1.000% 1.250% 1.625%
- -----------------------------------------------------------------------------------
Base Rate Margin 0.000% 0.000% 0.000% 0.500% 1.000%
- -----------------------------------------------------------------------------------
Letter of Credit
Commission Rate 0.500% 0.750% 0.875% 1.125% 1.500%
- -----------------------------------------------------------------------------------
Commitment Fee
Rate 0.175% 0.200% 0.225% 0.275% 0.350%
===================================================================================
</TABLE>

For purposes of this Pricing Schedule, the following terms have the
following meanings: "Pricing Ratio" means the ratio of Consolidated EBITDAR to
the sum of Consolidated Interest Charges and Consolidated Rental Expense.

"Level I Pricing" applies on any day after December 31, 1996 if, as of
the last day of the fiscal quarter of the Borrower most recently ended on or
prior to such day and, except in respect of the fiscal quarter ending December
31, 1996, as to which the Borrower shall have delivered, or been required to
deliver, on or prior to such day a certificate pursuant to Section 5.01(d), the
Pricing Ratio is greater than 2.50 to 1.0.

"Level II Pricing" applies on any day after December 31, 1996 if, as of
the last day of the fiscal quarter of the Borrower most recently ended on or
prior to such day and, except in respect of the fiscal quarter ending December
31, 1996, as to which the Borrower shall have delivered, or been required to
deliver, on or prior to such day a certificate pursuant to Section 5.01(d), (i)
the Pricing Ratio is greater than 2.25 to 1.0 and (ii) Level I Pricing does not
apply.

<PAGE> 87
"Level III Pricing" applies on any day (a) from and including the
Effective Date to and including December 31, 1996 and (b) if, as of the last
day of the fiscal quarter of the Borrower most recently ended on or prior to
such day and, except in respect of the fiscal quarter ending December 31, 1996,
as to which the Borrower shall have delivered, or been required to deliver, on
or prior to such day a certificate pursuant to Section 5.01(d), (i) the Pricing
Ratio is greater than 2.00 to 1.0 and (ii) neither Level I Pricing nor Level II
Pricing applies.

"Level IV Pricing" applies on any day if, as of the last day of the
fiscal quarter of the Borrower most recently ended on or prior to such day and,
except in respect of the fiscal quarter ending December 31, 1996, as to which
the Borrower shall have delivered, or been required to deliver, on or prior to
such day a certificate pursuant to Section 5.01(d), (i) the Pricing Ratio is
greater than 1.75 to 1.0 and (ii) none of Level I Pricing, Level II Pricing or
Level III Pricing applies.

"Level V Pricing" applies on any day if, on such day, no other Pricing
Level applies.

"Pricing Level" means any one of the five pricing levels denominated
Level I Pricing, Level II Pricing, Level III Pricing, Level IV Pricing or Level
V Pricing.

2
<PAGE> 88
SCHEDULE II

COMMITMENT SCHEDULE
<TABLE>
<CAPTION>
Bank Commitments
---- -----------
<S> <C>
Morgan Guaranty Trust Company of New York $ 40,000,000

The Chase Manhattan Bank $ 36,400,000

Bank of America National Trust & Savings Association $ 33,100,000

The Bank of New York $ 33,100,000

The Bank of Nova Scotia $ 33,100,000

The Long-Term Credit Bank of Japan, Ltd., Los Angeles
Agency $ 33,100,000

NationsBank of Texas, N.A. $ 33,100,000

The Nippon Credit Bank, Ltd., Los Angeles Agency $ 33,100,000

PNC Bank, National Association $ 30,000,000

Bank of Montreal $ 25,000,000

Bank of Hawaii $ 15,000,000

BHF - BANK Aktiengesellschaft $ 15,000,000

United States National Bank of Oregon $ 15,000,000

Total $375,000,000
</TABLE>

<PAGE> 89
SCHEDULE III

EXISTING SUBSIDIARY DEBT(1)

<TABLE>
<CAPTION>
- ------------------------------------------------------------------
TYPE
BALANCE
@ NOVEMBER 30, 1996
<S> <C>
- ------------------------------------------------------------------
NOTES & MORTGAGES $163,210,500
- ------------------------------------------------------------------
TAX EXEMPT BONDS $204,125,000
- ------------------------------------------------------------------
MIFA TAXABLE BONDS $ 25,000,000
- ------------------------------------------------------------------
9% SENIOR NOTES $180,000,000
- ------------------------------------------------------------------
MORGAN TERM LOAN - A (2)(2) $ 56,222,000
- ------------------------------------------------------------------
MORGAN TERM LOAN - B (2) $ 23,000,000
- ------------------------------------------------------------------
MEDIUM TERM NOTES $ 50,000,000
- ------------------------------------------------------------------
LTCB TERM LOAN (2) $ 27,000,000
- ------------------------------------------------------------------
ATRS NOTES $ 22,821,000
- ------------------------------------------------------------------
BANK UNITED $ 19,872,500
- ------------------------------------------------------------------
NIPPON TERM LOAN (2) $ 11,250,000
- ------------------------------------------------------------------
DEPOSIT GUARANTY LOAN $ 10,500,000
- ------------------------------------------------------------------
7 5/8% CONV. SUBORDINATED DEB. $ 67,924,000
- ------------------------------------------------------------------
ZERO COUPON NOTES $ 1,164,000
- ------------------------------------------------------------------
CAPITAL LEASES $ 27,073,000
- ------------------------------------------------------------------
TOTAL $889,162,000
- ------------------------------------------------------------------
</TABLE>

__________________________________

(1) Including debt guaranteed by Subsidiaries

(2) (2) indicated loans to be repaid on Closing Date

2
<PAGE> 90
SCHEDULE IV
SUBSIDIARIES OF THE BORROWER

A.B.C. Health Equipment Corp.
AdviNet, Inc.
AGI-Camelot, Inc.
AGI-McDonald County Health Care, Inc.
Alliance Health Services, Inc.
Alliance Home Health Care, Inc.
Amco Medical Service, Inc.
American Transitional Care Centers of Texas, Inc.
American Transitional Care Dallas - Ft. Worth, Inc.
American Transitional Hospitals, Inc.
American Transitional Hospitals of Indiana, Inc.
American Transitional Hospitals of Oklahoma, Inc.
American Transitional Hospitals of Tennessee, Inc.
American Transitional Hospitals -- Texas Medical Center, Inc.
ATH -- Clear Lake, Inc.
ATH Columbus, Inc.
ATH Del Oro, Inc.
ATH Heights, Inc.
ATH Oklahoma City, Inc.
ATH Tucson, Inc.
Beverly - Bella Vista Holding, Inc.
Beverly - Missouri Valley Holding, Inc.
Beverly - Rapid City Holding, Inc.
Beverly Acquisition Corporation
Beverly Assisted Living, Inc.
Beverly Health and Rehabilitation Services, Inc.
Beverly Enterprises - Alabama, Inc.
Beverly Enterprises - Arizona, Inc.
Beverly Enterprises - Arkansas, Inc.
Beverly Enterprises - California, Inc.
Beverly Enterprises - Colorado, Inc.
Beverly Enterprises - Connecticut, Inc.
Beverly Enterprises - Delaware, Inc.
Beverly Enterprises - Distribution Services, Inc.
Beverly Enterprises - District of Columbia, Inc.
Beverly Enterprises - Florida, Inc.
Beverly Enterprises - Garden Terrace, Inc.
Beverly Enterprises - Georgia, Inc.

<PAGE> 91
Beverly Enterprises - Hawaii, Inc.
Beverly Enterprises - Idaho, Inc.
Beverly Enterprises - Illinois, Inc.
Beverly Enterprises - Indiana, Inc.
Beverly Enterprises - Iowa, Inc.
Beverly Enterprises - Kansas, Inc.
Beverly Enterprises - Kentucky, Inc.
Beverly Enterprises - Louisiana, Inc.
Beverly Enterprises - Maine, Inc.
Beverly Enterprises - Maryland, Inc.
Beverly Enterprises - Massachusetts, Inc.
Beverly Enterprises - Michigan, 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 Jersey, Inc.
Beverly Enterprises - New Mexico, Inc.
Beverly Enterprises - North Carolina, Inc.
Beverly Enterprises - North Dakota, Inc.
Beverly Enterprises - Ohio, Inc.
Beverly Enterprises - Oklahoma, Inc.
Beverly Enterprises - Oregon, Inc.
Beverly Enterprises - Pennsylvania, Inc.
Beverly Enterprises - Rhode Island, Inc.
Beverly Enterprises - South Carolina, Inc.
Beverly Enterprises - Tennessee, Inc.
Beverly Enterprises - Texas, Inc.
Beverly Enterprises - Utah, Inc.
Beverly Enterprises - Vermont, Inc.
Beverly Enterprises - Virginia, Inc.
Beverly Enterprises - Washington, Inc.
Beverly Enterprises - West Virginia, Inc.
Beverly Enterprises - Wisconsin, Inc.
Beverly Enterprises - Wyoming, Inc.
Beverly Enterprises Japan Limited
Beverly Enterprises Medical Equipment Corporation
Beverly Enterprises Rehabilitation Corporation
Beverly Holdings I, Inc.

<PAGE> 92
Beverly Indemnity, Limited
Beverly Real Estate Holdings, Inc.
Beverly REMIC Depositor, Inc.
Beverly Manor Inc. of Hawaii
Beverly Savana Cay Manor, Inc.
Brownstone Pharmacy, Inc.
Columbia-Valley Nursing Home, Inc.
Commercial Management, Inc.
Computran Systems, Inc.
Continental Care Centers of Council Bluffs, Inc.
D.D. Wholesale, Inc.
Dunnington Drug, Inc.
Dunnington Rx Services of Rhode Island, Inc.
Dunnington Rx Services of Massachusetts, Inc.
Forest City Building Ltd.
Hallmark Convalescent Homes, Inc.
Healthcare Prescription Services, Inc.
Home Medical Systems, Inc.
Hospice Preferred Choice, Inc.
Hospital Facilities Corporation
Insta-Care Holdings, Inc.
Insta-Care Pharmacy Services Corporation
Kenwood View Nursing Home, Inc.
Liberty Nursing Home, Incorporated
MATRIX Rehabilitation, Inc.
Medical Arts Health Facility of Lawrenceville, Inc.
Medical Health Industries, Inc.
Moderncare of Lumberton, Inc.
Nebraska City S-C-H, Inc.
Nursing Home Operators, Inc.
Omni Med B, Inc.
Petersen Health Care, Inc.
Pharmacy Corporation of America
Pharmacy Corporation of America - Massachusetts, Inc.
Pharmacy Dynamics Group, Inc.
Phymedsco, Inc.
Salem No. 1, Inc.
South Alabama Nursing Home, Inc.
South Dakota - Beverly Enterprises, Inc.
Spectra Rehab Alliance, Inc.
Synergos, Inc.
Synergos - Scottsdale, Inc.
TMD Disposition Company
Vantage Healthcare Corporation

<PAGE> 93
SCHEDULE V

EXISTING LETTERS OF CREDIT

MORGAN GUARANTY TRUST COMPANY OF NEW YORK

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
BOND LOCATION BENEFICIARY L/C AMOUNT
@November 30, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Lincoln County, KY The Bank of New York $ 110,000.00
- -------------------------------------------------------------------------------------
Wayne County, IN National City Bank $ 1,288,523.96
- -------------------------------------------------------------------------------------
Tift County , GA The Bank of New York $ 150,000.00
- -------------------------------------------------------------------------------------
Jefferson County, KY First American National Bank $ 370,000.00
- -------------------------------------------------------------------------------------
Shelby County, TN Ameristar Investments & Trust $ 320,000.00
- -------------------------------------------------------------------------------------
Franklin County 1985, PA The Bank of New York $ 325,000.00
- -------------------------------------------------------------------------------------
Frankling County 1986, PA The Bank of New York $ 65,000.00
- -------------------------------------------------------------------------------------
Gettysburg The Bank of New York $ 340,000.00
- -------------------------------------------------------------------------------------
TOTAL FOR 'ON BALANCE SHEET' FACILITIES $ 2,968,523.96
- -------------------------------------------------------------------------------------
Encore Term Loan The Bank of New York $ 15,351,110.00
- -------------------------------------------------------------------------------------
HCPI HCPI $ 5,000,000.00
- -------------------------------------------------------------------------------------
Monroe County, FL The Bank of New York $ 4,415,250.00
- -------------------------------------------------------------------------------------
Okaloosa County, FL The Bank of New York $ 2,035,000.00
- -------------------------------------------------------------------------------------
Chagrin Falls, OH Mellon Bank $ 1,070,000.00
- -------------------------------------------------------------------------------------
Heber Springs, AR Thad Realty $ 300,000.00
- -------------------------------------------------------------------------------------
Heber Springs, AR Troy A. Gray $ 100,000.00
- -------------------------------------------------------------------------------------
Rosemont, IL Phoenix Home Life Ins. Co. $ 72,000.00
- -------------------------------------------------------------------------------------
TOTAL FOR 'OFF BALANCE SHEET' FACILITIES $ 28,343,360.00
- -------------------------------------------------------------------------------------
TOTAL MORGAN L/C'S $ 31,311,883.96
- ------------------------------------------------------------------------------------
</TABLE>

7
<PAGE> 94
SCHEDULE V
P.2

EXISTING LETTERS OF CREDIT

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
FACILITY PURPOSE BENEFICIARY L/C AMOUNT
@NOV. 30, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PITTSBURGH NATIONAL BANK
- --------------------------------------------------------------------------------------------
Clarion, PA Meritcare PNC Bank $7,240.054.79
- --------------------------------------------------------------------------------------------
Dedham, MA Meritcare State Street Bank & $8,466,175.00
Trust
- --------------------------------------------------------------------------------------------
VRT Term Notes Meritcare PNC Bank $23,358,000.00
- --------------------------------------------------------------------------------------------
Total for Meritcare Debt: $39,064,229.79
- --------------------------------------------------------------------------------------------
TORONTO DOMINION BANK
- --------------------------------------------------------------------------------------------
7 Facilities MIFA Bonds State Street Bank & $26,481.640.00
Trust
- --------------------------------------------------------------------------------------------
Total for MIFA Debt: $26,481,640.00
- --------------------------------------------------------------------------------------------
L/C SUMMARY BY GROUP:
Morgan Guaranty: $31,311,883.96
- --------------------------------------------------------------------------------------------
PNC Bank (Meritcare) $39,064,229.79
- --------------------------------------------------------------------------------------------
Toronto Dominion (MIFA Bonds) $26,481,640.00
- --------------------------------------------------------------------------------------------
TOTAL L/C EXPOSURE $96,857,753.75
- --------------------------------------------------------------------------------------------
</TABLE>

<PAGE> 95
EXHIBIT A
NOTE
New York, New York
____________, 1996

For value received, BEVERLY ENTERPRISES, INC., a Delaware corporation
(the "Borrower"), promises to pay the order of (the "Bank"), for
the account of its Applicable Lending Office, the unpaid principal amount of
each Loan made by the Bank to the Borrower pursuant to the Credit Agreement
referred to below on the Termination Date provided for in the Credit Agreement.
The Borrower promises to pay interest on the unpaid principal amount of each
such Loan on the dates and at the rate or rates provided for in the Credit
Agreement. All such payments of principal and interest shall be made in lawful
money of the United States in Federal or other immediately available funds at
the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New
York, New York.

All Loans made by the Bank, the type thereof and all repayments of the
principal thereof shall be recorded by the Bank and, prior to any transfer
hereof, appropriate notations to evidence the foregoing information with
respect to each such Loan then outstanding may be endorsed by the Bank on the
schedule attached hereto, or on a continuation of such schedule attached to and
made a part hereof; provided that the failure of the Bank to make any such
recordation or endorsement shall not affect the obligations of the Borrower
hereunder or under the Credit Agreement.

This note is one of the Notes referred to in the Amended and Restated
Credit Agreement dated as of December __, 1996 among the Borrower, the banks
listed on the signature pages thereof and Morgan Guaranty Trust Company of New
York, as Issuing Bank and Agent (as the same may be amended from time to time,
the "Credit Agreement"). Terms defined in the Credit Agreement are used herein
with the same meanings. Reference is made to the Credit Agreement for
provisions for the mandatory and optional repayment and prepayment hereof and
the acceleration of the maturity hereof.

Payment of principal and interest on this Note is (i) unconditionally
guaranteed, subject to the limitations contained in the Subsidiary Guaranty, by
the Subsidiary Guarantors pursuant to the Subsidiary Guaranty and (ii) secured
by security interests in certain collateral pursuant to the Pledge Agreement.

BEVERLY ENTERPRISES, INC.

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

9
<PAGE> 96
NOTE (CONT'D)

LOANS AND PAYMENTS OF PRINCIPAL

<TABLE>
<CAPTION>
Type of Amount of Principal Notation Made
Amount of Loan Loan Repaid By
- ------------------------------------------------------------------------------
<S> <S> <S> <S>
- ------------------------------------------------------------------------------

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

- ------------------------------------------------------------------------------
</TABLE>

<PAGE> 1
BEVERLY ENTERPRISES, INC.
EXHIBIT 11.1
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRIMARY: 1996 1995 1994 1993 1992

---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income (loss) before redemption premium on preferred stock,
extraordinary charge and cumulative effect of change
in accounting for income taxes .................................. $ 52,026 $ (8,123) $ 76,913 $ 57,956 $ 1,945
Redemption premium on preferred stock .............................. -- -- -- (20,000) --
---------- -------- -------- -------- --------
Income (loss) before extraordinary charge and cumulative effect
of change in accounting for income taxes ......................... 52,026 (8,123) 76,913 37,956 1,945
Extraordinary charge, net of income taxes .......................... (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in accounting for income taxes ......... -- -- -- -- (5,454)
---------- -------- -------- -------- --------
Net income (loss) .................................................. 50,300 (8,123) 74,501 35,611 (12,344)
Preferred stock dividends .......................................... -- (6,875) (8,250) (4,438) (1,000)
---------- -------- -------- -------- --------
Net income (loss) applicable to common shares ...................... $ 50,300 $(14,998) $ 66,251 $ 31,173 $(13,344)
========== ======== ======== ======== ========
Applicable common shares:
Weighted average outstanding shares during the period ............ 98,574 92,233 85,430 79,735 76,224
Assumed conversion of preferred stock ............................ -- -- -- (b) -- (a) -- (a)
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock options)
using the "treasury stock" method ................................ 1,072 -- (a) 1,657 1,472 1,461
---------- -------- -------- -------- --------
Total ............................................................ 99,646 92,233 87,087 81,207 77,685
========== ======== ======== ======== ========
Income (loss) per share of common stock:
Before redemption premium on preferred stock,
extraordinary charge and cumulative effect of change
in accounting for income taxes ................................. $ .52 $ (.16) $ .79 $ .66 $ .01
Redemption premium on preferred stock ............................ -- -- -- (.25) --
---------- -------- -------- -------- --------
Before extraordinary charge and cumulative effect
of change in accounting for income taxes ....................... .52 (.16) .79 .41 .01
Extraordinary charge, net of income taxes ........................ (.02) -- (.03) (.03) (.11)
Cumulative effect of change in accounting for income taxes ....... -- -- -- -- (.07)
---------- -------- -------- -------- --------
Net income (loss) per share of common stock ...................... $ .50 $ (.16) $ .76 $ .38 $ (.17)
========== ======== ======== ======== ========

FULLY DILUTED:
Income (loss) before redemption premium on preferred stock,
extraordinary charge and cumulative effect of change
in accounting for income taxes ................................... $ 52,026 $ (8,123) $ 76,913 $ 57,956 $ 1,945
Reduction of interest expense resulting from assumed
conversion of 7 5/8% convertible subordinated debentures ......... -- (a) -- (a) -- (a) -- (a) -- (a)
Reduction of interest expense resulting from assumed
conversion of 5 1/2% convertible subordinated debentures ......... 8,252 -- (a) -- -- --
Reduction of interest expense resulting from assumed
conversion of 9% convertible subordinated debentures ............. -- -- -- (c) 2,711 -- (a)
Reduction of interest expense resulting from assumed
conversion of zero coupon notes .................................. -- (a) -- (a) -- (a) 116 -- (a)
Less applicable income taxes ....................................... (4,832) -- -- (933) --
---------- -------- -------- -------- --------
Adjusted income (loss) before redemption premium on preferred
stock,extraordinary charge and cumulative effect of change
in accounting for income taxes ................................... 55,446 (8,123) 76,913 59,850 1,945
Redemption premium on preferred stock .............................. -- -- -- (20,000) --
---------- -------- -------- -------- --------
Adjusted income (loss) before extraordinary charge and
cumulative effect of change in accounting for
income taxes ..................................................... 55,446 (8,123) 76,913 39,850 1,945
Extraordinary charge, net of income taxes .......................... (1,726) -- (2,412) (2,345) (8,835)
Cumulative effect of change in accounting for income taxes ......... -- -- -- -- (5,454)
---------- -------- -------- -------- --------
Adjusted net income (loss) ......................................... 53,720 (8,123) 74,501 37,505 (12,344)
Preferred stock dividends .......................................... -- (6,875) -- (4,438) (1,000)
---------- -------- -------- -------- --------
Adjusted net income (loss) applicable to common shares ............. $ 53,720 $(14,998) $ 74,501 $ 33,067 $(13,344)
========== ======== ======== ======== ========
Applicable common shares:
Weighted average outstanding shares during the period ............ 98,574 92,233 85,430 79,735 76,224
Assumed conversion of preferred stock ............................ -- -- -- (b) -- (a) -- (a)
Assumed conversion of Preferred Stock ............................ -- -- (d) 11,253 -- (a) --
Weighted average shares issuable upon exercise of common
stock equivalents outstanding (principally stock options)
using the "treasury stock" method .............................. 1,175 -- (a) 1,745 1,678 1,791
Assumed conversion of 7 5/8% convertible subordinated
debentures ..................................................... -- (a) -- (a) -- (a) -- (a) -- (a)
Assumed conversion of 5 1/2% convertible subordinated
debentures ..................................................... 11,253 -- (a) -- -- --
Assumed conversion of 9% convertible subordinated debentures ..... -- -- -- (c) 4,322 -- (a)
Assumed conversion of zero coupon notes .......................... -- (a) -- (a) -- (a) 19 -- (a)
---------- -------- -------- -------- --------
Total ............................................................ 111,002 92,233 98,428 85,754 78,015
========== ======== ======== ======== ========
Income (loss) per share of common stock:
Before redemption premium on preferred stock,
extraordinary charge and cumulative effect of change in
accounting for income taxes .................................... $ .50 $ (.16) $ .78 $ .65 $ .01
Redemption premium on preferred stock ............................ -- -- -- (.24) --
---------- -------- -------- -------- --------
Before extraordinary charge and cumulative effect of
change in accounting for income taxes .......................... .50 (.16) .78 .41 .01
Extraordinary charge, net of income taxes ........................ (.02) -- (.02) (.02) (.11)
Cumulative effect of change in accounting for income taxes ....... -- -- -- -- (.07)
---------- -------- -------- -------- --------
Net income (loss) per share of common stock ...................... $ .48 $ (.16) $ .76 $ .39 $ (.17)
========== ======== ======== ======== ========

</TABLE>

- -------------------
(a) Conversion would be anti-dilutive and is therefore not assumed in the
computation of earnings per share of common stock.
(b) The cumulative convertible preferred stock (the "preferred stock") was
redeemed in January 1994.
(c) The 9% convertible subordinated debentures were converted to Common
Stock during the third quarter of 1993.
(d) The $2.75 Cumulative Convertible Exchangeable Preferred Stock (the
"Preferred Stock") was exchanged into 5 1/2% convertible subordinated
debentures during the fourth quarter of 1995.

<PAGE> 1

EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
A.B.C. Health Equipment Corp. New York

A-1 Home Health Services, Inc. Georgia

AdviNet, Inc. Delaware

AGI-Camelot, Inc. Missouri

AGI-McDonald County Health Care, Inc. Missouri

Alliance Health Services, Inc. Delaware

Alliance Home Health Care, Inc. Connecticut

Amco Medical Service, Inc. Texas

American Transitional Care Centers of Texas, Inc. Texas

American Transitional Care Dallas - Fort Worth, Inc. Texas

American Transitional Health Care, Inc. Delaware

American Transitional Hospitals, Inc. Delaware

American Transitional Hospitals of Indiana, Inc. Indiana

American Transitional Hospitals of Oklahoma, Inc. Oklahoma

American Transitional Hospitals of Tennessee, Inc. Tennessee

American Transitional Hospitals - Texas Medical Center, Inc. Delaware

ATH - Clear Lake, Inc. Delaware

ATH - Columbus, Inc. Delaware

ATH Del Oro, Inc. Texas

ATH Heights, Inc. Texas

ATH Oklahoma City, Inc. Oklahoma

ATH Tucson, Inc. Arizona

Bercy International, Inc. California

Beverly Acquisition Corporation Delaware
</TABLE>

1
<PAGE> 2
EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly Assisted Living, Inc. Delaware

Beverly Enterprises Japan Limited California

Beverly Enterprises Medical Equipment Corporation California

Beverly Enterprises Rehabilitation Corporation California

Beverly Enterprises - Alabama, Inc. California

Beverly Enterprises - Arizona, Inc. California

Beverly Enterprises - Arkansas, Inc. California

Beverly Enterprises - California, Inc. California

Beverly Enterprises - Colorado, Inc. California

Beverly Enterprises - Connecticut, Inc. California

Beverly Enterprises - Delaware, Inc. California

Beverly Enterprises - Distribution Services, Inc. California

Beverly Enterprises - District of Columbia, Inc. California

Beverly Enterprises - Florida, Inc. California

Beverly Enterprises - Garden Terrace, Inc. California

Beverly Enterprises - Georgia, Inc. California

Beverly Enterprises - Hawaii, Inc. California

Beverly Enterprises - Idaho, Inc. California

Beverly Enterprises -Illinois, Inc. California

Beverly Enterprises - Indiana, Inc. California

Beverly Enterprises - Iowa, Inc. California

Beverly Enterprises - Kansas, Inc. California

Beverly Enterprises - Kentucky, Inc. California

Beverly Enterprises - Louisiana, Inc. California
</TABLE>

2
<PAGE> 3
EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly Enterprises - Maine, Inc. California

Beverly Enterprises - Maryland, Inc. California

Beverly Enterprises - Massachusetts, Inc. California

Beverly Enterprises - Michigan, Inc. California

Beverly Enterprises - Minnesota, Inc. California

Beverly Enterprises - Mississippi, Inc. California

Beverly Enterprises - Missouri, Inc. California

Beverly Enterprises - Montana, Inc. California

Beverly Enterprises - Nebraska, Inc. California

Beverly Enterprises - Nevada, Inc. California

Beverly Enterprises - New Hampshire, Inc. California

Beverly Enterprises - New Jersey, Inc. California

Beverly Enterprises - New Mexico, Inc. California

Beverly Enterprises - North Carolina, Inc. California

Beverly Enterprises - North Dakota, Inc. California

Beverly Enterprises - Ohio, Inc. California

Beverly Enterprises - Oklahoma, Inc. California

Beverly Enterprises - Oregon, Inc. California

Beverly Enterprises - Pennsylvania, Inc. California

Beverly Enterprises - Rhode Island, Inc. California

Beverly Enterprises - South Carolina, Inc. California

Beverly Enterprises - Tennessee, Inc. California

Beverly Enterprises - Texas, Inc. California

Beverly Enterprises - Utah, Inc. California

</TABLE>

3
<PAGE> 4
EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Beverly Enterprises - Vermont, Inc. California

Beverly Enterprises - Virginia, Inc. California

Beverly Enterprises - Washington, Inc. California

Beverly Enterprises - West Virginia, Inc. California

Beverly Enterprises - Wisconsin, Inc. California

Beverly Enterprises - Wyoming, Inc. California

Beverly - Bella Vista Holding, Inc. Delaware

Beverly Funding Corporation Delaware

Beverly Health and Rehabilitation Services, Inc. California

Beverly Holdings I, Inc. Delaware

Beverly Indemnity, LTD. Vermont

Beverly Managed Care, Inc. Delaware

Beverly Manor Inc. of Hawaii California

Beverly Manor Inc. of Phoenix California

Beverly - Missouri Valley Holding, Inc. Delaware

Beverly Real Estate Holdings, Inc. Delaware

Beverly REMIC Depositor, Inc. California

Beverly - Rapid City Holding, Inc. Delaware

Beverly Savana Cay Manor, Inc. California

Brownstone Pharmacy, Inc. Connecticut

Columbia Valley Nursing Home, Inc. Ohio

Commercial Management, Inc. Iowa

Computran, Inc. Oregon

Continental Care Centers of Council Bluffs, Inc. Iowa
</TABLE>

4
<PAGE> 5
EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
DD Wholesale, Inc. Massachusetts

Dunnington Drug, Inc. Delaware

Dunnington Rx of Rhode Island, Inc. Rhode Island

Dunnington Rx Services of Massachusetts, Inc. Massachusetts

Edgewood Convalescent Hospital California

Forest City Building, Ltd. Missouri

Hallmark Convalescent Homes, Inc. Michigan

Healthcare Prescription Services, Inc. Indiana

Home Medical Systems, Inc. Delaware

Hospice Preferred Choice, Inc. Delaware

Hospital Facilities Corporation California

Insta-Care Holdings, Inc. Florida

Insta-Care Pharmacy Services Corporation Texas

Kenwood View Nursing Home, Inc. Kansas

Liberty Nursing Homes, Incorporated Virginia

Matrix Rehabilitation, Inc. Delaware

Medical Arts Health Facility of Lawrenceville, Inc. Georgia

Medical Health Industries, Inc. Delaware

Moderncare of Lumberton, Inc. North Carolina

Nebraska City S-C-H, Inc. Nebraska

Nursing Home Operators, Inc. Ohio

Omni Med B, Inc. Connecticut

Peterson Health Care, Inc. Florida

Pharmacy Corporation of America California
</TABLE>

5
<PAGE> 6
EXHIBIT 21.1

BEVERLY ENTERPRISES, INC. AND SUBSIDIARIES
SUBSIDIARY SCHEDULE (CONTINUED)
FEBRUARY 7, 1997

<TABLE>
<CAPTION>
STATE OF
CORPORATION INCORPORATION
- ----------- -------------
<S> <C>
Pharmacy Corporation of America - Massachusetts, Inc. Delaware

Pharmacy Dynamics Group, Inc. Florida

Phymedsco, Inc. West Virginia

Piedmont No. 1, Inc. Missouri

PPI, Inc. New Mexico

Salem No. 1, Inc. Missouri

Shastina Properties, Inc. California

Shastina Realty, Inc. California

South Alabama Nursing Home, Inc. Alabama

South Dakota - Beverly Enterprises, Inc. California

Spectra Rehab Alliance, Inc. Delaware

Synergos - North Hollywood, Inc. California

Synergos - Pleasant Hill, Inc. California

Synergos - Scottsdale, Inc. Arizona

Synergos, Inc. California

Taylor County Health Facility, Inc. Florida

TMD Disposition Company Florida

Vantage Healthcare Corporation Delaware
</TABLE>

<PAGE> 1

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in the following
Registration Statements and amendments thereto:

Form S-8 No. 33-61269 PMSI and Insta-Care Stock Option Plans
Form S-8 No. 33-55571 Nonemployee Directors' Stock Option Plan
and Certain ATH Option Plans
Form S-8 No. 33-21505 Employee Stock Purchase Plan
Form S-4 No. 33-13243 1985 Beverly Nonqualified Stock Option Plan
Form S-8 No. 33-65242 1993 Long-Term Incentive Plan
Form S-3 No. 33-50965 Debt Securities of Beverly Enterprises, Inc.
Form S-8 No. 333-06549 1996 Long-Term Incentive Plan
Form S-3 No. 333-03517 $200,000,000 Debt and Equity Securities of
Beverly Enterprises, Inc.

of Beverly Enterprises, Inc. and in the related Prospectuses of our report
dated February 7, 1997, except for Note 2, paragraph 3, as to which the date is
March 13, 1997, with respect to the consolidated financial statements and
schedule of Beverly Enterprises, Inc. included in this Annual Report (Form
10-K) for the year ended December 31, 1996.

/s/ ERNST & YOUNG LLP

Little Rock, Arkansas
March 26, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITS ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 69,761
<SECURITIES> 0
<RECEIVABLES> 541,308<F1>
<ALLOWANCES> 26,019<F2>
<INVENTORY> 55,348
<CURRENT-ASSETS> 697,245
<PP&E> 1,891,870
<DEPRECIATION> 643,085
<TOTAL-ASSETS> 2,525,082
<CURRENT-LIABILITIES> 379,030
<BONDS> 1,106,256
0
0
<COMMON> 10,443
<OTHER-SE> 850,652
<TOTAL-LIABILITY-AND-EQUITY> 2,525,082
<SALES> 3,267,189
<TOTAL-REVENUES> 3,281,028
<CGS> 0
<TOTAL-COSTS> 2,958,942
<OTHER-EXPENSES> 105,468
<LOSS-PROVISION> 0<F3>
<INTEREST-EXPENSE> 91,111
<INCOME-PRETAX> 125,507
<INCOME-TAX> 73,481
<INCOME-CONTINUING> 52,026
<DISCONTINUED> 0
<EXTRAORDINARY> (1,726)
<CHANGES> 0
<NET-INCOME> 50,300
<EPS-PRIMARY> .50
<EPS-DILUTED> .48
<FN>
<F1>Excludes $42,257 of long-term notes receivable.
<F2>Excludes $4,951 of allowance for long-term notes receivable.
<F3>Included in Total costs and expenses line.
</FN>

</TABLE>