Edgar Filing: BEVERLY ENTERPRISES INC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2001

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

COMMISSION FILE NUMBER 1-9550

BEVERLY ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 62-1691861
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

ONE THOUSAND BEVERLY WAY
FORT SMITH, ARKANSAS 72919
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

INDICATE BY CHECK MARK WHETHER REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO
BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT REGISTRANT WAS REQUIRED
TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR
THE PAST 90 DAYS.

YES [X] NO [ ]

SHARES OF REGISTRANT'S COMMON STOCK, $.10 PAR VALUE, OUTSTANDING,
EXCLUSIVE OF TREASURY SHARES, AT OCTOBER 31, 2001 - 104,265,098

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BEVERLY ENTERPRISES, INC.

FORM 10-Q

SEPTEMBER 30, 2001

TABLE OF CONTENTS

PAGE
----

PART I -- FINANCIAL INFORMATION

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

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings............................................. 20
Item 5. Other Information............................................. 22
Item 6. Reports on Form 8-K........................................... 22

PART I

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2001 AND DECEMBER 31, 2000

(DOLLARS IN THOUSANDS)

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ -----------
(UNAUDITED) (NOTE)

ASSETS

Current assets:
Cash and cash equivalents.................................................................... $ 71,012 $ 25,908
Accounts receivable - patient, less allowance for doubtful accounts:
2001 - $81,283; 2000 - $91,636............................................................ 301,729 323,143
Accounts receivable - nonpatient, less allowance for doubtful accounts:
2001 - $745; 2000 - $1,106................................................................ 6,753 19,831
Notes receivable, less allowance for doubtful notes: 2001 - $380; 2000 - $72................ 18,182 2,197
Operating supplies........................................................................... 26,517 29,134
Deferred income taxes........................................................................ 58,368 24,379
Assets held for sale......................................................................... 116,385 --
Prepaid expenses and other................................................................... 20,141 18,787
----------- -----------
Total current assets.................................................................. 619,087 443,379
Property and equipment, net of accumulated depreciation and amortization:
2001 - $765,451; 2000 - $805,557............................................................. 870,676 1,063,247
Other assets:
Goodwill, net................................................................................ 199,233 203,742
Deferred income taxes........................................................................ 27,193 27,721
Other, less allowance for doubtful accounts and notes: 2001 - $3,901; 2000 - $3,767......... 140,845 137,904
----------- -----------
Total other assets.................................................................... 367,271 369,367
----------- -----------

$ 1,857,034 $ 1,875,993
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LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable............................................................................. $ 84,838 $ 84,420
Accrued wages and related liabilities........................................................ 113,743 106,300
Accrued interest............................................................................. 15,824 15,744
General and professional liabilities......................................................... 44,918 8,655
Other accrued liabilities.................................................................... 85,696 90,481
Current portion of long-term debt............................................................ 63,770 227,111
----------- -----------
Total current liabilities............................................................. 408,789 532,711
Long-term debt................................................................................... 696,411 564,247
Other liabilities and deferred items............................................................. 192,078 195,042
Commitments and contingencies
Stockholders' equity:
Preferred stock, shares authorized: 25,000,000 -- --
Common stock, shares issued: 2001 - 112,780,856; 2000 - 112,818,798......................... 11,278 11,282
Additional paid-in capital................................................................... 885,668 876,981
Accumulated deficit.......................................................................... (228,564) (193,931)
Accumulated other comprehensive income....................................................... 652 718
Treasury stock, at cost: 2001 - 8,515,758 shares; 2000 - 9,061,300 shares................... (109,278) (111,057)
----------- -----------
Total stockholders' equity............................................................ 559,756 583,993
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$ 1,857,034 $ 1,875,993
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NOTE: The balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.

See accompanying notes.

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000

(UNAUDITED)

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------

Net operating revenues........................................ $ 690,875 $ 665,284 $ 2,030,321 $ 1,966,625
Interest income............................................... 1,027 605 2,225 2,079
----------- ----------- ----------- -----------
Total revenues.................................... 691,902 665,889 2,032,546 1,968,704

Costs and expenses:
Operating and administrative:
Wages and related..................................... 417,288 398,906 1,224,858 1,182,463
Provision for insurance and related items............. 27,111 65,189 83,480 100,350
Other................................................. 182,547 185,530 542,631 555,883
Interest.................................................. 19,637 20,011 59,020 59,942
Depreciation and amortization............................. 23,369 24,457 69,983 75,171
Asset impairments, workforce reductions and other
unusual items.......................................... -- 4,627 115,543 4,627
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Total costs and expenses.......................... 669,952 698,720 2,095,515 1,978,436
----------- ----------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes.............................................. 21,950 (32,831) (62,969) (9,732)
Provision for (benefit from) income taxes..................... 9,877 (10,360) (28,336) (2,044)
----------- ----------- ----------- -----------

Net income (loss)............................................. $ 12,073 $ (22,471) $ (34,633) $ (7,688)
=========== =========== =========== ===========
Net income (loss) per share of common stock:
Basic:
Net income (loss) per share of common stock........... $ 0.12 $ (0.22) $ (0.33) $ (0.08)
=========== =========== =========== ===========
Shares used to compute net income (loss) per share.... 104,264 102,473 103,953 102,027
=========== =========== =========== ===========
Diluted:
Net income (loss) per share of common stock........... $ 0.11 $ (0.22) $ (0.33) $ (0.08)
=========== =========== =========== ===========
Shares used to compute net income (loss) per share.... 106,572 102,473 103,953 102,027
=========== =========== =========== ===========

See accompanying notes.

BEVERLY ENTERPRISES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

(UNAUDITED)

(IN THOUSANDS)

2001 2000
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Cash flows from operating activities:
Net loss............................................................................ $ (34,633) $ (7,688)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.................................................... 69,983 75,171
Provision for reserves on patient, notes and other receivables, net.............. 27,509 32,241
Amortization of deferred financing costs......................................... 2,746 1,910
Asset impairments, workforce reductions and other unusual items.................. 115,543 4,627
Gains on dispositions of facilities and other assets, net........................ (153) (2,629)
Deferred income taxes............................................................ (31,290) (4,294)
Insurance related accounts....................................................... 22,138 44,556
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable - patient.................................................. 443 (66,195)
Operating supplies............................................................. (37) 1,386
Prepaid expenses and other receivables......................................... (325) (4,921)
Accounts payable and other accrued expenses.................................... (18,599) (31,517)
Income taxes payable........................................................... (3,450) (70)
Other, net..................................................................... (4,812) (7,436)
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Total adjustments........................................................... 179,696 42,829
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Net cash provided by operating activities................................... 145,063 35,141
Cash flows from investing activities:
Capital expenditures............................................................. (56,439) (58,556)
Proceeds from dispositions of facilities and other assets........................ 11,874 18,810
Payments for acquisitions, net of cash acquired.................................. (1,730) (1,722)
Proceeds from (payments for) designated funds, net............................... (8,908) 359
Collections on notes receivable.................................................. 67 5,787
Other, net....................................................................... (2,485) (5,280)
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Net cash used for investing activities...................................... (57,621) (40,602)
Cash flows from financing activities:
Revolver borrowings.............................................................. 442,000 1,197,000
Repayments of Revolver borrowings................................................ (606,000) (1,167,000)
Proceeds from issuance of long-term debt......................................... 202,617 --
Repayments of long-term debt..................................................... (74,695) (30,755)
Purchase of common stock for treasury............................................ -- (3,874)
Proceeds from exercise of stock options.......................................... 3,280 16
Deferred financing costs paid.................................................... (9,540) (164)
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Net cash used for financing activities...................................... (42,338) (4,777)
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Net increase (decrease) in cash and cash equivalents................................... 45,104 (10,238)
Cash and cash equivalents at beginning of period....................................... 25,908 24,652
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Cash and cash equivalents at end of period............................................. $ 71,012 $ 14,414
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Supplemental schedule of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized............................................. $ 56,194 $ 59,323
Income tax payments, net......................................................... 6,404 2,320

See accompanying notes.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2001

(UNAUDITED)

(1) References throughout this document to the Company include Beverly
Enterprises, Inc. and its wholly owned subsidiaries. In accordance with the
Securities and Exchange Commission's "Plain English" guidelines, this Quarterly
Report on Form 10-Q has been written in the first person. In this document, the
words "we", "our", "ours" and "us" refer only to Beverly Enterprises, Inc. and
its wholly owned subsidiaries and not to any other person.

We have prepared the condensed consolidated financial statements, without
audit. In management's opinion, they include all normal recurring adjustments
necessary for a fair presentation of the results of operations for the
three-month and nine-month periods ended September 30, 2001 and 2000 in
accordance with the rules and regulations of the Securities and Exchange
Commission. Although certain information and footnote disclosures required by
generally accepted accounting principles have been condensed or omitted, we
believe that the disclosures in these condensed consolidated financial
statements are adequate to make the information presented not misleading. These
condensed consolidated financial statements should be read along with our 2000
Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Our results of operations for the three-month and nine-month periods ended
September 30, 2001 are not necessarily indicative of the results for a full
year.

Generally accepted accounting principles require management to make
estimates and assumptions when preparing financial statements that affect:

- the reported amounts of assets and liabilities at the date of the
financial statements; and

- the reported amounts of revenues and expenses during the reporting
period.

They also require management to make estimates and assumptions regarding
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.

Approximately 77% and 74% of our net operating revenues for the nine
months ended September 30, 2001 and 2000, respectively, were derived from funds
under federal and state medical assistance programs. We accrue for revenues when
services are provided at standard charges. These charges are adjusted to amounts
that we estimate to receive under governmental programs and other third-party
contractual arrangements based on contractual terms and historical experience.
These revenues are reported at their estimated net realizable amounts and are
subject to audit and retroactive adjustment.

Retroactive adjustments are considered in the recognition of revenues on
an estimated basis in the period the related services are rendered. Such amounts
are adjusted in future periods as adjustments become known or as cost reporting
years are no longer subject to audits, reviews or investigations. Due to the
complexity of the laws and regulations governing the Medicare and Medicaid
programs, there is at least a reasonable possibility that recorded estimates
will change by a material amount in the near term.

We are currently negotiating with officials from the Centers for Medicare
and Medicaid Services ("CMS") to resolve reimbursement issues relating to costs
of services provided to Medicare patients during 1996 through 1998 under the
government's former cost-reimbursement system. As a result of routine audits
conducted by the government's fiscal intermediary, CMS claims that we were
overpaid for services provided to these Medicare patients. As previously
disclosed, in June 1999, we recorded a pre-tax charge of $39 million related to
open issues surrounding the allocation of nursing labor costs on certain
Medicare filings. We have not accrued for any other open cost report issues for
these years since we believe, and outside legal counsel has advised, that we
have followed appropriate reimbursement procedures for these costs and should be
fully reimbursed. In addition, CMS contends that another issue, reimbursement
for co-payments due from Medicare beneficiaries who were also eligible for
Medicaid, extends into 1999 and 2000. We believe that we have appropriately
followed all Medicare reimbursement regulations; however, under present law, if
the federal government made a formal demand for payment of the contested
amounts, we would have to accrue those amounts and begin payment before being
given an opportunity to appeal. Therefore, we cannot estimate nor can we give
any assurances of the ultimate impact the resolution of these matters will have
on our consolidated financial position, results of operations or cash flows, but
the $39 million charge we recorded in 1999 may prove inadequate.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

The following table sets forth the calculation of basic and diluted earnings
per share for the three-month and nine-month periods ended September 30 (in
thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2001 2000 2001 2000
--------- ------------- ------------- ---------

NUMERATOR:
Numerator for basic and diluted net income (loss) per share..... $ 12,073 $ (22,471) $ (34,633) $ (7,688)
========= ============= ============= =========
DENOMINATOR:
Denominator for basic net income (loss) per share -
weighted average shares....................................... 104,264 102,473 103,953 102,027
Effect of dilutive securities:
Employee stock options........................................ 2,308 -- -- --
--------- ------------- ------------- ---------
Denominator for diluted net income (loss) per share -
weighted average shares and assumed conversions............... 106,572 102,473 103,953 102,027
========= ============= ============= =========
Basic net income (loss) per share............................... $ 0.12 $ (0.22) $ (0.33) $ (0.08)
========= ============= ============= =========
Diluted net income (loss) per share............................. $ 0.11 $ (0.22) $ (0.33) $ (0.08)
========= ============= ============= =========

Comprehensive income (loss) includes net income (loss), as well as charges
and credits to stockholders' equity not included in net income (loss).
Comprehensive income (loss), net of income taxes, consists of the following for
the three-month and nine-month periods ended September 30 (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------

Net income (loss)........................................ $ 12,073 $(22,471) $(34,633) $ (7,688)
Foreign currency translation adjustments, net of
income taxes.......................................... (35) -- (311) 527
Net unrealized gains (losses) on available-for-sale
securities, net of income taxes....................... (302) 356 245 32
-------- -------- -------- --------
Comprehensive income (loss).............................. $ 11,736 $(22,115) $(34,699) $ (7,129)
======== ======== ======== ========

Accumulated other comprehensive income, net of income taxes, consists of
the following (in thousands):

SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -----------

Foreign currency translation adjustments............... $ 72 $383
Net unrealized gains on available-for-sale securities.. 580 335
---- ----
$652 $718
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In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations ("SFAS No. 141"),
which is effective for all business combinations completed after June 30, 2001.
SFAS No. 141 eliminates the pooling-of-interests method of accounting for
business combinations except for qualifying business combinations initiated
prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria
to recognize intangible assets separately from goodwill. We do not expect there
to be any impact on our consolidated financial position, results of operations
or cash flows as a result of adopting SFAS No. 141.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"), which establishes new rules on the accounting for goodwill and
other intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized; however, they will be subject to
annual impairment tests as prescribed by the Statement. Intangible assets with
definite lives will continue to be amortized over their estimated useful lives.
The amortization provisions of SFAS No. 142 apply immediately to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, SFAS No. 142 will be effective
for us beginning in the first quarter of 2002. At that time, we will perform the
required impairment tests on our goodwill and those intangibles we deem to have
indefinite lives. Any impairment loss recognized as a result of initially
adopting SFAS No. 142 will be recorded as a cumulative effect of a change in
accounting principle. Subsequent to adoption, impairment charges will be
recognized in operations. We cannot currently estimate the impact these
impairment tests will have on our consolidated financial position or results of
operations. The amortization provisions of SFAS No. 142 are expected to benefit
our results of operations by approximately $4,300,000, or $.04 per share
diluted, on an annual basis.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes 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")
and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS No. 144 will be effective for us beginning in the first quarter of 2002. We
have not completed our review of SFAS No. 144 but do not expect there to be a
material effect on our consolidated financial position or results of operations.

Certain prior year amounts have been reclassified to conform with the 2001
financial statements presentation.

(2) The provision for (benefit from) income taxes for the three-month and
nine-month periods ended September 30, 2001 and 2000 were based on estimated
annual effective tax rates of 45% and 21%, respectively. Our estimated annual
effective tax rates for 2001 and 2000 were different than the federal statutory
rate primarily due to the impact of state income taxes, amortization of
nondeductible goodwill and the benefit of certain tax credits. Our estimated
annual effective tax rate increased to 45% in 2001 primarily due to the pre-tax
charges for asset impairments, workforce reductions and other unusual items
totaling approximately $115,500,000. These charges reduced our pre-tax income to
a level where the impact of permanent tax differences and state income taxes had
a significant impact on the effective tax rate. In addition, our estimated
annual effective tax rate for 2000 was impacted by pre-tax charges related to
increasing reserves for patient care liability costs, workforce reductions and
other unusual items totaling approximately $49,000,000, which reduced our
pre-tax income to a level where the impact of permanent tax differences and
state income taxes had a significant impact on the effective tax rate.

Our net deferred tax assets at September 30, 2001 will be realized through
the generation of future taxable income. Realization is dependent on generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax assets will be realized. However, the amount of
the deferred tax assets considered realizable could be reduced in the near term
if estimates of future taxable income during the carryforward periods are
reduced.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

The provision for (benefit from) income taxes consists of the following
for the three-month and nine-month periods ended September 30 (in thousands):

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------

Federal:
Current........ $ 46 $ (216) $ 704 $ --
Deferred....... 9,489 (12,167) (27,086) (5,881)

State:
Current........ 225 1,773 2,250 2,250
Deferred....... 117 250 (4,204) 1,587
-------- -------- -------- --------
$ 9,877 $(10,360) $(28,336) $ (2,044)
======== ======== ======== ========

(3) During the nine months ended September 30, 2001, we acquired one
nursing facility (185 beds), four previously leased nursing facilities (484
beds) and certain other assets for cash of approximately $1,600,000, acquired
debt of approximately $8,400,000, closing and other costs of approximately
$200,000 and security deposits of $200,000. Also during such period, we sold,
closed or terminated the leases on 13 nursing facilities (1,160 beds), three
outpatient therapy clinics, one home care center and certain other assets for
cash proceeds of approximately $10,100,000 and a note receivable of
approximately $300,000. We did not operate two of the nursing facilities (234
beds) which had been leased to another nursing home operator. We recognized net
pre-tax gains, which were included in net operating revenues during the nine
months ended September 30, 2001, of approximately $200,000 as a result of these
dispositions. The operations of these facilities and other assets were
immaterial to our consolidated financial position and results of operations.

During the first quarter of 2001, we restructured the lease agreement
related to 10 nursing facilities in the state of Indiana. In addition, we
terminated the lease on one nursing facility (223 beds) leased from the same
landlord. We recorded a pre-tax charge of approximately $3,300,000 related to
the termination of this lease, including the write-off of the net book value of
this property. This pre-tax charge has been included in the condensed
consolidated statement of operations caption "Asset impairments, workforce
reductions and other unusual items."

(4) On July 16, 2001, we announced that we had entered into a definitive
agreement to sell 49 nursing facilities (6,129 beds) and four assisted living
centers (315 units) located in the state of Florida (the "Florida facilities")
to FC Properties, formerly known as NMC of Florida, LLC, and expected to close
such transaction in the fourth quarter of 2001. Subsequent to the events of
September 11, certain debt and equity financing sources were forced to either
reduce their funding commitments or completely withdraw from participation in
the transaction. Consequently, FC Properties is in the process of restructuring
the financing of the transaction. In light of this delay, we intend to lease the
Florida facilities to Florida Health Care Properties on or about December 1,
2001 and continue to pursue a closing of the real estate. This lease would
facilitate eventual transfer of operations and ensure continuity of quality care
for the patients. We anticipate using the net cash proceeds generated from the
final real estate sale to repay indebtedness and for general corporate purposes.

The sale of our Florida facilities is the result of a formal plan
initiated by management during the first quarter of 2001. Our nursing home
operations in Florida include the Florida facilities mentioned above, as well as
one additional nursing facility (56 beds) which was sold during the third
quarter of 2001 and certain other assets which will be sold in separate
transactions. All of these assets are included in the total assets of our
nursing facilities segment (see Note 7). The decision to sell these properties
was made due to the excessive patient care liability costs that we have been
incurring in recent periods in the state of Florida. Accordingly, the property
and equipment, identifiable intangibles and operating supplies of our Florida
nursing home operations at March 31, 2001 were considered assets to be disposed
of, as that term is defined in SFAS No. 121. Management estimated the fair value
less selling costs of such assets based upon verbal and non-binding purchase
prices from potential buyers and determined that an impairment write-down was
necessary as of March 31, 2001. The pre-tax charge recorded during the first
quarter of 2001 related to this write-down was approximately $68,900,000. As a
result of the agreement we entered into with FC Properties, we recorded an
additional impairment write-down of approximately $6,200,000 during the second
quarter of 2001. In addition, we recorded a pre-tax charge during the first
quarter of 2001 of

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

approximately $17,200,000 for certain costs to exit the Florida facilities.
These costs relate to severance agreements, termination payments on certain
contracts and various other items. These pre-tax charges have been included in
the condensed consolidated statement of operations caption "Asset impairments,
workforce reductions and other unusual items." At September 30, 2001, the
Florida assets held for sale totaled approximately $116,400,000 and are
classified as current assets in the condensed consolidated balance sheet, as we
expect to close the sale of these facilities by the end of 2001 or during the
first quarter of 2002.

During the three-month and nine-month periods ended September 30, 2001,
our Florida nursing home operations recorded pre-tax income of approximately
$2,100,000 and $1,200,000, respectively. Such amounts do not include certain
costs which are currently recorded at the parent company level and are not fully
allocated to the individual subsidiaries or facilities. In accordance with SFAS
No. 121, we do not have to record depreciation and amortization expense on the
Florida assets during the period these assets are being held for sale, since
these assets are now recorded at their estimated net realizable value. The
amount of depreciation and amortization expense that we did not have to record
during the three-month and nine-month periods ended September 30, 2001 on the
Florida assets was approximately $2,500,000 and $5,100,000, respectively.

(5) In January 2001, we filed a registration statement under Form S-8 with
the Securities and Exchange Commission registering 1,174,500 shares of our
Common Stock. These shares were previously repurchased by the Company and held
in treasury. Such shares are expected to be issued under the Beverly
Enterprises, Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common
Stock will be issued under the Stock Grant Plan to holders of restricted shares
who, by virtue of the terms of their employment contracts, severance agreements
or other similar arrangements, have a claim to the immediate vesting of their
restricted stock. In conjunction with the reorganization in the first quarter of
2001 (as discussed in Note 7), 545,542 shares of Common Stock under the Stock
Grant Plan were issued to various officers who made such claims, and the shares
of restricted stock held by such officers were cancelled. During the first
quarter of 2001, we incurred a pre-tax charge of approximately $3,700,000
related to the issuance of shares under the Stock Grant Plan, which was included
in the workforce reductions and other reorganization costs (as discussed in Note
7).

During April 2001, we completed the restructuring of our $375,000,000
credit facility, which was scheduled to mature on December 31, 2001. We entered
into a new $150,000,000 revolving credit facility (the "Credit Facility") and
issued $200,000,000 of 9 5/8% senior notes due 2009 (the "Senior Notes") through
a private placement. During the second quarter of 2001, we filed a registration
statement under Form S-4 with the Securities and Exchange Commission registering
the Senior Notes. During the third quarter, we exchanged (the "Exchange Offer")
all of the Senior Notes issued through the private placement for publicly
registered Senior Notes. We did not receive any proceeds as a result of the
Exchange Offer. The Senior Notes are unsecured obligations, guaranteed by
substantially all of our present and future subsidiaries (the "Subsidiary
Guarantors") and impose on us certain restrictive covenants. The net proceeds
from issuance of the Senior Notes were used to repay borrowings under the
$375,000,000 credit facility and for general corporate purposes.

The Credit Facility provides for a Revolver/Letter of Credit Facility.
Borrowings under the Credit Facility bear interest at adjusted LIBOR plus
2.875%, the Base Rate, as defined, plus 1.875% or the adjusted CD rate, as
defined, plus 3%, at our option. Such interest rates may be adjusted quarterly
based on certain financial ratio calculations. The Credit Facility is secured by
mortgages on certain nursing facilities and the stock of certain subsidiaries,
is guaranteed by the Subsidiary Guarantors and imposes on us certain financial
tests and restrictive covenants.

During the third quarter of 2001, we entered into a $2,600,000 promissory
note in conjunction with the construction of a nursing facility and notes
payable of approximately $8,400,000 in conjunction with the acquisitions of
three nursing facilities. Such debt instruments bear interest at rates ranging
from 7.00% to 10.25%, require monthly installments of principal and interest,
and are secured by mortgage interests in the real property and security
interests in the personal property of the nursing facilities.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

(6) There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages that are generally not covered by insurance. We do not believe that the
ultimate resolution of such matters will have a material adverse effect on our
consolidated financial position or results of operations. In addition, we can
give no assurances of the ultimate impact on our consolidated financial
position, results of operations or cash flows as a result of the Class Action or
Derivative Actions lawsuits. (See "Part II, Item 1. Legal Proceedings").

(7) Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, provides disclosure
guidelines for segments of a company based on a management approach to defining
operating segments.

In January 2001, we implemented a new three-year strategic plan aimed at
accomplishing four fundamental strategies:

- streamline our nursing home portfolio to strengthen our long-term
financial position;

- accelerate the growth of our service and knowledge business;

- establish a leadership position in eldercare; and

- reengineer our organization in order to focus our resources on
profitable growth and new opportunities.

In order to support the implementation of these strategies, in the first
quarter of 2001, we reorganized our business into three primary operating
segments:

- nursing facilities, which provide long-term healthcare through the
operation of nursing homes and assisted living centers;

- innovation and services group, which includes rehabilitation
therapy, hospice, home care and a business strategy and development
division; and

- TMX, formerly known as Matrix/Theraphysics, which operates
outpatient therapy clinics and a managed care network.

As a result of this reorganization, we recorded a pre-tax charge of
approximately $18,300,000 during the first quarter of 2001 and an additional
$1,000,000 during the second quarter of 2001. These pre-tax charges are included
in the condensed consolidated statement of operations caption "Asset
impairments, workforce reductions and other unusual items." Approximately
$18,400,000 of these pre-tax charges related to severance and other employment
agreements for 141 associates, including:

- $14,100,000 of cash expenses, which was substantially paid during
the nine months ended September 30, 2001;

- non-cash expenses of $3,700,000 related to the issuance of shares
under the Stock Grant Plan; and

- non-cash expenses of $600,000 related to other long-term incentive
agreements.

During the fourth quarter of 2000, we incurred a pre-tax charge of
approximately $3,500,000 primarily due to severance agreements associated with
four executives who were notified prior to December 31, 2000 of the Company's
intent to terminate their employment in conjunction with this reorganization.
Substantially all of this amount was paid during the first quarter of 2001.

BEVERLY ENTERPRISES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

The following table summarizes certain information for each of our operating
segments (in thousands):

INNOVATION
NURSING AND SERVICES
FACILITIES GROUP TMX ALL OTHER (1) TOTALS
----------- ------------- ----------- ------------- ------------

Three months ended September 30, 2001

Revenues from external customers ........ $ 638,831 $ 28,395 $ 22,567 $ 1,082 $ 690,875
Intercompany revenues ................... -- 46,457 -- 2,787 49,244
Interest income ......................... 59 -- 24 944 1,027
Interest expense ........................ 6,245 15 9 13,368 19,637
Depreciation and amortization ........... 17,596 1,095 2,750 1,928 23,369
Pre-tax income (loss) ................... 31,454 9,071 (3,022) (15,553) 21,950
Total assets ............................ 1,394,045 101,732 160,289 200,968 1,857,034
Capital expenditures .................... 21,394 593 422 476 22,885

Three months ended September 30, 2000

Revenues from external customers ........ $ 611,425 $ 29,629 $ 21,926 $ 2,304 $ 665,284
Intercompany revenues ................... -- 33,005 -- 2,869 35,874
Interest income ......................... 61 1 36 507 605
Interest expense ........................ 6,656 40 6 13,309 20,011
Depreciation and amortization ........... 19,537 838 2,648 1,434 24,457
Pre-tax income (loss) ................... 30,422 5,145 (3,887) (64,511) (32,831)
Total assets ............................ 1,510,605 113,927 211,676 107,655 1,943,863
Capital expenditures .................... 14,878 515 619 1,781 17,793

Nine months ended September 30, 2001

Revenues from external customers ........ $ 1,874,359 $ 84,452 $ 69,769 $ 1,741 $ 2,030,321
Intercompany revenues ................... -- 134,206 -- 8,407 142,613
Interest income ......................... 193 -- 84 1,948 2,225
Interest expense ........................ 19,484 67 33 39,436 59,020
Depreciation and amortization ........... 54,096 3,283 7,648 4,956 69,983
Pre-tax income (loss) ................... 79,482 23,023 (9,061) (156,413) (62,969)
Total assets ............................ 1,394,045 101,732 160,289 200,968 1,857,034
Capital expenditures .................... 51,040 2,354 1,434 1,611 56,439

Nine months ended September 30, 2000

Revenues from external customers ........ $ 1,806,538 $ 84,370 $ 69,737 $ 5,980 $ 1,966,625
Intercompany revenues ................... -- 102,151 -- 8,764 110,915
Interest income ......................... 159 1 97 1,822 2,079
Interest expense ........................ 20,304 137 66 39,435 59,942
Depreciation and amortization ........... 59,308 2,931 8,222 4,710 75,171
Pre-tax income (loss) ................... 73,017 15,869 (8,445) (90,173) (9,732)
Total assets ............................ 1,510,605 113,927 211,676 107,655 1,943,863
Capital expenditures .................... 46,655 2,992 2,706 6,203 58,556

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

(1) Consists of the operations of our corporate headquarters and related
overhead, as well as certain non-operating revenues and expenses. Such
amounts also include pre-tax charges related to asset impairments, workforce
reductions and other unusual items totaling approximately $115,500,000 for
the nine-month period ended September 30, 2001. For the three- month and
nine-month periods ended September 30, 2000, such amounts also include
pre-tax charges totaling approximately $49,000,000 primarily related to
increasing reserves for patient care liability costs.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

GENERAL

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, and other information we provide from
time to time, contains certain "forward-looking" statements as that term is
defined by the Private Securities Litigation Reform Act of 1995. All statements
regarding our expected future financial position, results of operations or cash
flows, our continued performance improvements, our ability to service and
refinance our debt obligations, our ability to finance growth opportunities, our
ability to control our patient care liability costs, our ability to respond to
changes in government regulations, our ability to execute our three-year
strategic plan, our ability to execute a transaction with respect to our Florida
nursing operations and similar statements including, without limitation, those
containing words such as "believes," "anticipates," "expects," "intends,"
"estimates," "plans," and other similar expressions are forward-looking
statements.

Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from those projected or contemplated in the forward-looking
statements as a result of, but not limited to, the following factors:

- national and local economic conditions, including their effect on the
availability and cost of labor, utilities and materials;

- the effect of government regulations and changes in regulations
governing the healthcare industry, including our compliance with such
regulations;

- changes in Medicare and Medicaid payment levels and methodologies and
the application of such methodologies by the government and its fiscal
intermediaries, including our negotiations with CMS (as discussed
below);

- liabilities and other claims asserted against the Company, including
patient care liabilities, as well as the resolution of the Class
Action and Derivative Lawsuits (see "Part II, Item 1. Legal
Proceedings");

- our ability to attract and retain qualified personnel;

- the availability and terms of capital to fund acquisitions and capital
improvements;

- the competitive environment in which we operate;

- our ability to maintain and increase census levels; and

- demographic changes.

Investors should also refer to Item 1. Business in our 2000 Annual Report
on Form 10-K for a discussion of various governmental regulations and other
operating factors relating to the healthcare industry and various risk factors
inherent in them. Given these risks and uncertainties, we can give no assurances
that any forward-looking statements will, in fact, transpire and, therefore,
caution investors not to place undue reliance on them.

GOVERNMENTAL REGULATION AND REIMBURSEMENT

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

opportunity to appeal. Therefore, we cannot estimate nor can we give any
assurances of the ultimate impact the resolution of these matters will have on
our consolidated financial position, results of operations or cash flows, but
the $39 million charge we recorded in 1999 may prove inadequate.

OPERATING RESULTS

THIRD QUARTER 2001 COMPARED TO THIRD QUARTER 2000

RESULTS OF OPERATIONS

We reported net income for the third quarter of 2001 of $12,073,000,
compared to a net loss of $22,471,000 for the same period in 2000. Net loss for
the third quarter of 2000 included pre-tax charges totaling approximately
$49,000,000, including:

- $44,400,000 related to increasing reserves for patient care liability
costs, primarily in the state of Florida, which is included in the
condensed consolidated statement of operations caption "Provision for
insurance and related items;"

- $2,600,000 related to severance agreements associated with three
executives of the Company; and

- $2,000,000 related to the write-off of an investment held in a
physician practice management company.

INCOME TAXES

We had estimated annual effective tax rates of 45% and 21% for 2001 and
2000, respectively. Our estimated annual effective tax rates for 2001 and 2000
were different than the federal statutory rate primarily due to the impact of
state income taxes, amortization of nondeductible goodwill and the benefit of
certain tax credits. Our estimated annual effective tax rate increased to 45% in
2001 primarily due to the pre-tax charges for asset impairments, workforce
reductions and other unusual items totaling approximately $115,500,000. These
charges reduced our pre-tax income to a level where the impact of permanent tax
differences and state income taxes had a significant impact on the effective tax
rate. In addition, our estimated annual effective tax rate for 2000 was impacted
by the $49,000,000 of pre-tax charges discussed above, which reduced our pre-tax
income to a level where the impact of permanent tax differences and state income
taxes had a significant impact on the effective tax rate.

Our net deferred tax assets at September 30, 2001 are expected to be
realized through the generation of future taxable income. Realization is
dependent on generating sufficient taxable income prior to the expiration of
loss carryforwards. Although realization is not assured, management believes it
is more likely than not that all of the deferred tax assets will be realized.
However, the amount of the deferred tax assets considered realizable could be
reduced in the near term if estimates of future taxable income during the
carryforward periods are reduced.

NET OPERATING REVENUES

We reported net operating revenues of $690,875,000 during the third quarter
of 2001 compared to $665,284,000 for the same period in 2000. Approximately 92%
of our total net operating revenues for the quarters ended September 30, 2001
and 2000 were derived from services provided by our nursing facilities segment.
The increase in net operating revenues of approximately $25,600,000 for the
third quarter of 2001, as compared to the same period in 2000, consists of the
following:

- an increase of $44,100,000 due to facilities which we operated during
each of the quarters ended September 30, 2001 and 2000 ("same facility
operations");

- an increase of $4,500,000 due to acquisitions and openings of
newly-constructed facilities; and

- a decrease of $23,000,000 due to dispositions.

The increase in net operating revenues of $44,100,000 from same facility
operations for the third quarter of 2001, as compared to the same period in
2000, was primarily due to the following:

- $48,600,000 due to an increase in Medicaid, Medicare and private
rates;

- $4,600,000 due to a positive shift in our patient mix; and

- $2,500,000 due to an increase in our rehabilitation therapy business'
external contracts.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

Such increases were partially offset by the following:

- $7,600,000 decrease due to a decline in same facility occupancy to
86.6% for the third quarter of 2001, as compared to 87.1% for the same
period in 2000; and

- $5,800,000 decrease due to certain Medicaid prior year revenue
adjustments recorded during the third quarter of 2000 which did not
recur during the third quarter of 2001.

Our Medicare, private and Medicaid census for same facility operations was
10%, 18% and 71%, respectively, for the third quarter of 2001, as compared to
9%, 19% and 71%, respectively, for the same period in 2000.

Acquisitions and openings of newly-constructed facilities which occurred
during the nine months ended September 30, 2001 and the year ended December 31,
2000 caused our net operating revenues to increase $4,500,000 for the third
quarter of 2001, as compared to the same period in 2000. During the nine months
ended September 30, 2001, we acquired one nursing facility (185 beds), four
previously leased nursing facilities (484 beds) and certain other assets. During
2000, we acquired seven nursing facilities (1,210 beds), one previously leased
nursing facility (105 beds) and certain other assets, and we opened four
newly-constructed nursing facilities (418 beds).

Dispositions that occurred during the nine months ended September 30, 2001
and the year ended December 31, 2000 caused our net operating revenues to
decrease $23,000,000 for the third quarter of 2001, as compared to the same
period in 2000. During the nine months ended September 30, 2001, we sold, closed
or terminated the leases on 14 nursing facilities (1,383 beds), three outpatient
therapy clinics, one home care center and certain other assets. We recognized
net pre-tax gains, which were included in net operating revenues during the nine
months ended September 30, 2001, of approximately $200,000 as a result of these
dispositions. In addition, we recorded a pre-tax charge of approximately
$3,300,000 related to the termination of the lease on one of the nursing
facilities (223 beds), which is included in the condensed consolidated statement
of operations caption "Asset impairments, workforce reductions and other unusual
items." See "Nine Months 2001 Compared to Nine Months 2000 - Results of
Operations."

During 2000, we sold, closed or terminated the leases on 39 nursing
facilities (4,263 beds) and certain other assets. We recognized net pre-tax
gains, which were included in net operating revenues during the year ended
December 31, 2000, of approximately $2,000,000 as a result of these
dispositions.

OPERATING AND ADMINISTRATIVE EXPENSES

We reported operating and administrative expenses of $626,946,000 during
the third quarter of 2001 compared to $649,625,000 for the same period in 2000.
The decrease of approximately $22,700,000 consists of the following:

- a decrease of $20,100,000 due to dispositions;

- a decrease of $7,900,000 due to same facility operations; and

- an increase of $5,300,000 due to acquisitions and openings of
newly-constructed facilities.

The decrease in operating and administrative expenses of $7,900,000 from
same facility operations for the third quarter of 2001, as compared to the same
period in 2000, was due primarily to the following:

- $38,100,000 decrease in our provision for insurance and related items
primarily due to the pre-tax charge recorded in the third quarter of
2000 of approximately $44,400,000 related to increasing reserves for
patient care liability costs; and

- $2,800,000 decrease in bad debt reserves primarily due to improved
collections on our patient accounts receivable.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

Such decreases were partially offset by the following:

- $29,200,000 of additional wages and related expenses primarily due to
an increase in our weighted average wage rate; and

- $3,300,000 due to an increase in other contracted services.

Excluding the $44,400,000 pre-tax charge related to increasing reserves for
patient care liability costs, our provision for insurance and related items
increased approximately $6,300,000 for the third quarter of 2001, as compared to
the same period in 2000, primarily due to an increase in our patient care
liability costs.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased to $23,369,000 for the
third quarter of 2001, as compared to $24,457,000 for the same period in 2000
primarily due to the discontinuation of depreciation and amortization of our
Florida nursing home assets, partially offset by the acceleration of
depreciation and amortization expense during the third quarter of 2001 of
certain leases that expire during the fourth quarter of 2001, which we do not
plan to renew.

NINE MONTHS 2001 COMPARED TO NINE MONTHS 2000

RESULTS OF OPERATIONS

We reported a net loss for the nine months ended September 30, 2001 of
$34,633,000, compared to a net loss of $7,688,000 for the same period in 2000.
Net loss for 2001 included pre-tax charges totaling approximately $115,500,000,
including $75,700,000 for asset impairments ($75,100,000 related to the Florida
facilities), $19,300,000 for workforce reductions and other reorganization costs
and $20,500,000 for Florida exit costs and other unusual items. Net loss for the
nine months ended September 30, 2000 included pre-tax charges totaling
approximately $49,000,000 primarily related to increasing reserves for patient
care liability costs. See "Third Quarter 2001 Compared to Third Quarter of 2000
- Results of Operations."

During the first quarter of 2001, a formal plan was initiated by management
to pursue the sale of our nursing home operations in Florida, which include the
Florida facilities, as well as one additional nursing facility (56 beds) which
was sold during the third quarter of 2001 and certain other assets which will be
sold in separate transactions. The decision to sell these properties was made
due to the excessive patient care liability costs that we have been incurring in
recent periods in the state of Florida. Accordingly, the property and equipment,
identifiable intangibles and operating supplies of our Florida nursing home
operations at March 31, 2001 were considered assets to be disposed of, as that
term is defined in 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"). Management estimated the fair value less
selling costs of such assets based upon verbal and non-binding purchase prices
from potential buyers and determined that an impairment write-down was necessary
as of March 31, 2001. The pre-tax charge recorded during the first quarter of
2001 related to this write-down was approximately $68,900,000. As a result of
the agreement we entered into with FC Properties, formerly known as NMC of
Florida, LLC, we recorded an additional impairment write-down of approximately
$6,200,000 during the second quarter of 2001. In addition, we recorded a pre-tax
charge during the first quarter of 2001 of approximately $17,200,000 for certain
costs to exit the Florida facilities. These costs relate to severance
agreements, termination payments on certain contracts and various other items.
These pre-tax charges have been included in the condensed consolidated statement
of operations caption "Asset impairments, workforce reductions and other unusual
items." At September 30, 2001, the Florida assets held for sale totaled
approximately $116,400,000 and are classified as current assets in the condensed
consolidated balance sheet, as we expect to close the sale of these facilities
by the end of 2001 or during the first quarter of 2002.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

accordance with SFAS No. 121, we do not have to record depreciation and
amortization expense on the Florida assets during the period these assets are
being held for sale, since these assets are now recorded at their estimated net
realizable value. The amount of depreciation and amortization expense that we
did not have to record during the three-month and nine-month periods ended
September 30, 2001 on the Florida assets was approximately $2,500,000 and
$5,100,000, respectively.

In January 2001, we implemented a new three-year strategic plan and
reorganized our business. As a result of this reorganization, we recorded a
pre-tax charge of approximately $18,300,000 during the first quarter of 2001 and
an additional $1,000,000 during the second quarter of 2001. Approximately
$18,400,000 of these pre-tax charges related to severance and other employment
agreements for 141 associates, including:

- $14,100,000 of cash expenses, which was substantially paid during the
nine months ended September 30, 2001;

- non-cash expenses of $3,700,000 related to the issuance of shares
under the Stock Grant Plan; and

- non-cash expenses of $600,000 related to other long-term incentive
agreements.

In January 2001, we filed a registration statement under Form S-8 with the
Securities and Exchange Commission registering 1,174,500 shares of our Common
Stock. These shares were previously repurchased by the Company and held in
treasury. Such shares are expected to be issued under the Beverly Enterprises,
Inc. Stock Grant Plan (the "Stock Grant Plan"). Shares of Common Stock will be
issued under the Stock Grant Plan to holders of restricted shares who, by virtue
of the terms of their employment contracts, severance agreements or other
similar arrangements, have a claim to the immediate vesting of their restricted
stock. In conjunction with the reorganization in the first quarter of 2001 (as
discussed above), 545,542 shares of Common Stock under the Stock Grant Plan were
issued to various officers who made such claims, and the shares of restricted
stock held by such officers were cancelled. We incurred a pre-tax charge of
approximately $3,700,000 related to the issuance of shares under the Stock Grant
Plan, which was included in the workforce reductions and other reorganization
costs (as discussed above).

Also during the first quarter of 2001, we restructured the lease agreement
related to 10 nursing facilities in the state of Indiana. In addition, we
terminated the lease on one nursing facility (223 beds) leased from the same
landlord. We recorded a pre-tax charge of approximately $3,300,000 related to
the termination of this lease, including the write-off of the net book value of
this property.

NET OPERATING REVENUES

We reported net operating revenues of $2,030,321,000 during the nine months
ended September 30, 2001 compared to $1,966,625,000 for the same period in 2000.
Approximately 92% of our total net operating revenues for the nine months ended
September 30, 2001 and 2000 were derived from services provided by our nursing
facilities segment. The increase in net operating revenues of approximately
$63,700,000 for the nine months ended September 30, 2001, as compared to the
same period in 2000, consists of the following:

- an increase of $128,400,000 due to facilities which we operated during
each of the nine months ended September 30, 2001 and 2000 ("same
facility operations");

- an increase of $26,900,000 due to acquisitions and openings of
newly-constructed facilities; and

- a decrease of $91,600,000 due to dispositions.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

The increase in net operating revenues of $128,400,000 from same facility
operations for the nine months ended September 30, 2001, as compared to the same
period in 2000, was primarily due to the following:

- $146,400,000 due to an increase in Medicaid, Medicare and private
rates; and

- $8,000,000 due to an increase in our rehabilitation therapy business'
external contracts.

Such increases were partially offset by decreases of:

- $20,400,000 due to a decline in same facility occupancy to 87.0% for
the nine months ended September 30, 2001, as compared to 87.4% for the
same period in 2000; and

- $6,000,000 due to one less calendar day during the nine months ended
September 30, 2001, as compared to the same period in 2000.

OPERATING AND ADMINISTRATIVE EXPENSES

We reported operating and administrative expenses of $1,850,969,000 during
the nine months ended September 30, 2001 compared to $1,838,696,000 for the same
period in 2000. The increase of approximately $12,300,000 consists of the
following:

- an increase of $67,900,000 due to same facility operations;

- an increase of $27,500,000 due to acquisitions and openings of
newly-constructed facilities; and

- a decrease of $83,100,000 due to dispositions.

The increase in operating and administrative expenses of $67,900,000 from
same facility operations for the nine months ended September 30, 2001, as
compared to the same period in 2000, was due primarily to the following:

- $80,900,000 of additional wages and related expenses primarily due to
an increase in our weighted average wage rate; and

- $8,600,000 due to an increase in other contracted services.

Such increases were partially offset by the following:

- $16,900,000 decrease in our provision for insurance and related items
primarily due to the pre-tax charge recorded in the third quarter of
2000 of approximately $44,400,000 related to increasing reserves for
patient care liability costs; and

- $8,200,000 decrease in bad debt reserves primarily due to improved
collections on our patient accounts receivable.

Excluding the $44,400,000 pre-tax charge related to increasing reserves for
patient care liability costs, our provision for insurance and related items
increased approximately $27,500,000 for the nine months ended September 30,
2001, as compared to the same period in 2000, primarily due to an increase in
our patient care liability costs.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense decreased to $69,983,000 for the nine
months ended September 30, 2001, as compared to $75,171,000 for the same period
in 2000 primarily due to the discontinuation of depreciation and amortization of
our Florida nursing home assets.

NEW ACCOUNTING STANDARDS

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

combinations initiated prior to July 1, 2001. In addition, SFAS No. 141 further
clarifies the criteria to recognize intangible assets separately from goodwill.
We do not expect there to be any impact on our consolidated financial position,
results of operations or cash flows as a result of adopting SFAS No. 141.

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets ("SFAS No. 144"), which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes SFAS No. 121 and
the accounting and reporting provisions of Accounting Principles Board Opinion
No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for segments of a business to be disposed of.
SFAS No. 144 will be effective for us beginning in the first quarter of 2002. We
have not completed our review of SFAS No. 144 but do not expect there to be a
material effect on our consolidated financial position or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001, we had approximately $71,000,000 in cash and cash
equivalents, approximately $210,300,000 of net working capital and approximately
$118,600,000 of unused commitments under our $150,000,000 revolving credit
facility.

Net cash provided by operating activities for the nine months ended
September 30, 2001 was approximately $145,000,000. This amount was up
approximately $109,900,000 from the nine months ended September 30, 2000
primarily due to the following:

- a reduction in patient accounts receivable during the nine months
ended September 30, 2001 compared to the nine months ended September
30, 2000 primarily due to improved collections, as well as an increase
in Medicare periodic interim payments;

- proceeds received during the first quarter of 2001 of $28,900,000
related to a refund of certain workers compensation premiums and a
settlement on certain insurance policies; and

- the $25,000,000 civil and $5,000,000 criminal settlement payments made
during the first quarter of 2000, which negatively impacted operating
cash flows for the nine months ended September 30, 2000.

BEVERLY ENTERPRISES, INC.

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

SEPTEMBER 30, 2001

(UNAUDITED)

Net cash used for investing and financing activities were approximately
$57,600,000 and $42,300,000, respectively, for the nine months ended September
30, 2001. We received cash proceeds of approximately $202,600,000 from the
issuance of long-term debt and approximately $11,900,000 from the dispositions
of facilities and other assets. Such cash proceeds, along with cash generated
from operations, were primarily used to repay approximately $74,700,000 of
long-term debt, to fund capital expenditures totaling approximately $56,400,000
and to repay Revolver borrowings.

At September 30, 2001, we leased 11 nursing facilities (6 of which are in
Florida), one assisted living center and our corporate headquarters under an
off-balance sheet financing arrangement subject to operating leases with the
creditor. We have the option to purchase the facilities at the end of the
initial lease terms at fair market value. Such financing arrangement was entered
into for the construction of these facilities and currently has $113,500,000 of
outstanding commitments ($43,600,000 of which are related to the Florida
facilities).

We currently anticipate that cash flows from operations and borrowings
under our banking arrangements will be adequate to repay our debts due within
one year of approximately $63,800,000, to make normal recurring capital
additions and improvements of approximately $100,000,000, to make selective
acquisitions, including the purchase of previously leased facilities, to
construct new facilities, and to meet working capital requirements for the
twelve months ending September 30, 2002. If cash flows from operations or
availability under our existing banking arrangements fall below expectations, we
may be required to delay capital expenditures, dispose of certain assets, issue
additional debt securities, or consider other alternatives to improve liquidity.

PART II

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION

SEPTEMBER 30, 2001

(UNAUDITED)

ITEM 1. LEGAL PROCEEDINGS

On February 3, 2000, we entered into a series of agreements with the U.S.
Department of Justice and the Office of Inspector General (the "OIG") of the
Department of Health and Human Services. These agreements settled the federal
government's investigations of the Company relating to our allocation to the
Medicare program of certain nursing labor costs in our skilled nursing
facilities from 1990 to 1998 (the "Allocation Investigations").

The agreements consist of:

- a Plea Agreement;

- a Civil Settlement Agreement;

- a Corporate Integrity Agreement; and

- an agreement concerning the disposition of 10 nursing facilities.

Under the Plea Agreement, one of our subsidiaries pled guilty to one count
of mail fraud and 10 counts of making false statements to Medicare and paid a
criminal fine of $5,000,000 during the first quarter of 2000.

Under the Civil Settlement Agreement, we paid the federal government
$25,000,000 during the first quarter of 2000 and are reimbursing the federal
government an additional $145,000,000 through withholdings from our biweekly
Medicare periodic interim payments in equal installments through the first
quarter of 2008. In addition, we agreed to resubmit certain Medicare filings to
reflect reduced labor costs allocated to the Medicare program.

Under the Corporate Integrity Agreement, we are required to monitor, on an
ongoing basis, our compliance with the requirements of the federal healthcare
programs. This agreement addresses our obligations to ensure that we comply with
the requirements for participation in the federal healthcare programs. It also
includes our functional and training obligations, audit and review requirements,
recordkeeping and reporting requirements, as well as penalties for
breach/noncompliance of the agreement. We believe that we are in substantial
compliance with the requirements of the Corporate Integrity Agreement.

In accordance with our agreement to dispose of 10 nursing facilities, we
disposed of seven of the facilities during 2000 and three of the facilities
during the nine months ended September 30, 2001.

On July 6, 1999, an amended complaint was filed by the plaintiffs in a
previously disclosed purported class action lawsuit pending against the Company
and certain of our officers in the United States District Court for the Eastern
District of Arkansas (the "Class Action"). Plaintiffs filed a second amended
complaint on September 9, 1999 which asserted claims under Section 10(b)
(including Rule 10b-5 promulgated thereunder) and under Section 20 of the
Securities Exchange Act of 1934 arising from practices that were the subject of
the Allocation Investigations. The defendants filed a motion to dismiss that
complaint on October 8, 1999. Oral argument on this motion was held on April 6,
2000. By order and judgement dated October 17, 2001, defendants' motion to
dismiss was granted, and the complaint was dismissed with prejudice. Plaintiffs
have until November 17, 2001 to appeal this decision. Due to the preliminary
state of the Class Action and the fact the second amended complaint does not
allege damages with any specificity, we are unable at this time to assess the
probable outcome of the Class Action or the materiality of the risk of loss. We
believe that we acted lawfully with respect to plaintiff investors and will
vigorously defend the Class Action. However, we can give no assurances of the
ultimate impact on our consolidated financial position, results of operations or
cash flows as a result of these proceedings.

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

In addition, since July 29, 1999, eight derivative lawsuits have been filed in
the federal and state courts of Arkansas, California and Delaware, as well as
the federal district court in Arkansas, (collectively, the "Derivative
Actions"), including:

- Norman M. Lyons v. David R. Banks, et al., Case No. OT99-4041, was
filed in the Chancery Court of Pulaski County, Arkansas (4th Division)
on or about July 29, 1999, and the parties filed an Agreed Motion to
Stay the proceedings on January 17, 2000;

- Alfred Badger, Jr. v. David R. Banks, et al., Case No. OT99-4353, was
filed in the Chancery Court of Pulaski County, Arkansas (1st Division)
on or about August 17, 1999 and voluntarily dismissed on November 30,
1999;

- James L. Laurita v. David R. Banks, et al., Case No. 17348NC, was
filed in the Delaware Chancery Court on or about August 2, 1999;

- Kenneth Abbey v. David R. Banks, et al., Case No. 17352NC, was filed
in the Delaware Chancery Court on or about August 4, 1999;

- Alan Friedman v. David R. Banks, et al., Case No. 17355NC, was filed
in the Delaware Chancery Court on or about August 9, 1999;

- Elles Trading Company v. David R. Banks, et al., was filed in the
Superior Court for San Francisco County, California on or about August
4, 1999 and removed to federal district court;

- Kushner v. David R. Banks, et al., Case No. LR-C-98-646, was filed in
the United States District Court for the Eastern District of Arkansas
(Western Division) on September 30, 1999; and

- Richardson v. David R. Banks, et al., Case No. LR-C-99-826, was filed
in the United States District Court for the Eastern District of
Arkansas (Western Division) on November 4, 1999.

The Laurita, Abbey and Friedman actions were subsequently consolidated by
order of the Delaware Chancery Court. On or about October 1, 1999, the
defendants moved to dismiss the Laurita, Abbey and Friedman actions. The parties
have agreed to stay the consolidated action pending the outcome of the motion to
dismiss in the Class Action. The plaintiffs in the Elles Trading Company action
filed a notice of voluntary dismissal on February 3, 2000. The Kushner and
Richardson actions were ordered to be consolidated as In Re Beverly Enterprises,
Inc. Derivative Litigation and by agreed motion, Plaintiffs filed an amended,
consolidated complaint on April 21, 2000. Defendants filed a motion to dismiss
the consolidated derivative complaint and a motion to strike portions thereof on
July 21, 2000. The parties have agreed to stay the consolidated action pending
the outcome of the motion to dismiss in the Class Action.

The Derivative Actions each name the Company's directors as defendants, as
well as the Company as a nominal defendant. The Badger and Lyons actions also
name as defendants certain of the Company's officers. The Derivative Actions
each allege breach of fiduciary duties to the Company and its stockholders
arising primarily out of the Company's alleged exposure to loss due to the Class
Action and the Allocation Investigations. The Lyons, Badger and Richardson
actions also assert claims for abuse of control and constructive fraud arising
from the same allegations and the Richardson action also claims unjust
enrichment.

Due to the preliminary state of the Derivative Actions and the fact the
complaints do not allege damages with any specificity, we are unable at this
time to assess the probable outcome of the Derivative Actions or the materiality
of the risk of loss. We believe that we acted lawfully with respect to the
allegations of the Derivative Actions and will vigorously defend the Derivative
Actions. However, we can give no assurances of the ultimate impact on our
consolidated financial position, results of operations or cash flows as a result
of these proceedings.

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

BEVERLY ENTERPRISES, INC.

OTHER INFORMATION (CONTINUED)

SEPTEMBER 30, 2001

(UNAUDITED)

ITEM 5. OTHER INFORMATION

During August 2001, our Board of Directors elected John P. Howe, III, M.D.
as a director. Dr. Howe is President and Chief Executive Officer of Project HOPE
(Health Opportunities for People Everywhere), a not-for-profit organization
dedicated to improving the health standards of communities around the world by
providing health education, health policy research and humanitarian assistance.
Dr. Howe previously served as President of the University of Texas Health
Science Center at San Antonio. He currently serves on the Board of Regents at
Texas Lutheran University, the Board of Trustees at Southwest Research
Institute, the Board of Trustees at Southwest Foundation for Biomedical Research
and the Visiting Committee at Harvard Medical School.

ITEM 6(a). EXHIBITS

None.

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

We filed a Current Report on Form 8-K, dated September 13, 2001, which
reported under Item 5 that we issued a press release announcing the extension of
the exchange offer for our $200 million Senior Notes.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

BEVERLY ENTERPRISES, INC.
Registrant

Dated: November 14, 2001 By:/s/ PAMELA H. DANIELS
-------------------------------
Pamela H. Daniels
Senior Vice President, Controller
and Chief Accounting Officer