<PAGE>   1
 
================================================================================
 
                       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.
 
                                        1
<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>
 
                                        2
<PAGE>   4
 
     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
 
                                        3
<PAGE>   5
 
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
 
                                        4
<PAGE>   6
 
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.
 
     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
 
                                        5
<PAGE>   7
 
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."
 
                                        6
<PAGE>   8
 
     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.
 
                                        7
<PAGE>   9
 
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.
 
     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
 
                                       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
 
     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
 
                                       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 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 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.
 
     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.
 
     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 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 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.
 
     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,
 
                                       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.
 
     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.
 
     There are various lawsuits and regulatory actions pending against the
Company arising in the normal course of business, some of which seek punitive
damages. The Company does not believe that the ultimate resolution of these
matters will have a material adverse effect on the Company's consolidated
financial position or results of operations.
 
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.
 
     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.
 
                                       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.
 
(c) Exhibits
 
     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)




                                       39

<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.