SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant þ
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o	Definitive Additional Materials
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BEVERLY ENTERPRISES, INC.

 

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PRELIMINARY COPY

SUBJECT TO COMPLETION

                    , 2005

Dear Fellow BEI Stockholder:

      It is our pleasure to invite you to attend the 2005 Annual Meeting of stockholders of Beverly Enterprises, Inc., to be held at our corporate headquarters at One Thousand Beverly Way, Fort Smith, Arkansas at 10:00 a.m. local time on April 21, 2005.

      We urge you to participate in this Annual Meeting by completing and returning the enclosed white proxy card as promptly as possible. This Annual Meeting is of particular importance to all BEI stockholders because:

      For the reasons more fully described in the accompanying Proxy Statement, your Board strongly recommends that you protect your investment in BEI by voting:

      Please, sign, date and return the white proxy card in the accompanying postage paid envelope. Whether or not you plan to attend the Annual Meeting, we hope that you will vote as promptly as possible.

      Your Board urges you NOT to sign or return any [COLOR] proxy card sent to you by the Appaloosa/ Formation Capital group for any reason, even as a protest against their activities. If you have previously returned a [COLOR] proxy card, you may change any vote you may have cast in favor of the Appaloosa/ Formation Capital proposals and vote in favor of the election of the BEI nominees, by signing and returning the enclosed white proxy card in the accompanying envelope. Any signed [COLOR] proxy card you return – even if it reflects votes “AGAINST” Appaloosa/ Formation Capital proposals – will cancel any votes reflected on any white proxy card you may have previously returned. The properly executed proxy card you submit with the latest date will be the one honored. We urge you to disregard any [COLOR] proxy card sent to you.

      On behalf of everyone at BEI, we thank you for your continued support. We remain committed to acting in your best interests. If you have any questions or need any assistance in voting your shares, please feel free to call our proxy solicitor, Innisfree M&A Incorporated at (800)           -                     (toll-free) or (212)           -                     (collect).

      If your shares are registered in the name of a broker, only your broker can execute a proxy and vote your shares and only after receiving your specific instructions. Please sign, date and promptly mail the voting instruction card in the envelope provided by your broker. Remember, your shares cannot be voted unless you return a signed and executed voting instruction card to your broker. If you have any questions or need further assistance in voting, please contact the firm assisting us in the solicitation of proxies:

Innisfree M&A Incorporated

Call (800)           -                     (toll-free in the United States)

or (212)           -                     (collect)

The Proxy Statement is dated March      , 2005 and is first being mailed to stockholders

on or about March      , 2005.

Beverly Enterprises, Inc.

One Thousand Beverly Way

Fort Smith, Arkansas 72919

(479) 201-2000

NOTICE OF 2005 ANNUAL MEETING OF STOCKHOLDERS

Table of Contents

PROXY STATEMENT FOR

BEVERLY ENTERPRISES, INC. (“BEI”)

2005 ANNUAL STOCKHOLDERS MEETING

Answers to Frequently Asked Questions

      ¹ The references to BEI’s website address in this Proxy Statement are not intended to function as a hyperlink, and the information contained on BEI’s website is not a part of this Proxy Statement.

Background

       On December 16, 2004, Arnold M. Whitman, the Chief Executive Officer of Formation Capital, called William R. Floyd, our Chairman, President and Chief Executive Officer, and expressed an interest in a possible transaction involving BEI.

      On December 27, 2004, Mr. Floyd received a letter, dated December 22, 2004, from Formation Capital expressing an interest by Formation Capital, Appaloosa Management L.P. and Franklin Mutual Advisers, LLC in acquiring BEI for $11.50 per share. The letter also suggested that this group would be prepared to discuss a transaction involving the purchase of our real estate assets and nursing facilities operations, leaving BEI with its ancillary service businesses. In its letter, Formation Capital indicated that this group owned approximately 4.5% of our outstanding common stock.

      Mr. Floyd promptly forwarded this letter to the entire Board and convened a Board meeting on December 30, 2004 to discuss the letter. Following that meeting, we retained Latham & Watkins LLP and Lehman Brothers Inc. as our legal and financial advisors, respectively, to assist your Board in fully evaluating the December 22 letter. Subsequently, we also retained J.P. Morgan Securities Inc. as a financial advisor.

      On January 5, 2005, and in subsequent telephone conversations, Mr. Floyd advised Mr. Whitman that — consistent with its fiduciary obligations and acting in good faith — the BEI Board would meet to carefully consider the Appaloosa/ Formation Capital group’s expression of interest in an acquisition of BEI at a special meeting in late January.

      Mr. Whitman called Mr. Floyd during the week of January 10, 2005. During this conversation, Mr. Floyd informed Mr. Whitman that the BEI Board would be meeting the following week and Mr. Whitman told Mr. Floyd that he might like to provide further information for the BEI Board to consider with respect to the transactions described in Formation Capital’s December 22 letter. Mr. Floyd urged Mr. Whitman to provide that information quickly so the Board would have sufficient time to carefully review the information in connection with its evaluation of the December 22 letter.

      Our Board met again on January 21, 2005 to consider the Appaloosa/ Formation Capital group’s December 22 letter. Mr. Floyd did not receive any additional information from the Appaloosa/ Formation Capital group prior to his departure for the meeting.

      When Mr. Floyd returned from the Board meeting on the afternoon of January 21, 2005, he received a second letter from Mr. Whitman dated January 19, 2005. This second letter proposed a different, more complex structure for the acquisition of BEI in which BEI would spin-off its ancillary service businesses to its stockholders after which the Appaloosa/ Formation Capital group would acquire the remainder of BEI for $9.00 per share.

      This second letter necessitated an entirely new round of reviews by your Board and its outside legal and financial advisors to evaluate the changed nature of the Appaloosa/ Formation Capital group’s expression of interest. On January 24, 2004, Mr. Floyd sent Mr. Whitman a letter informing him that your Board would meet again to consider this second letter and that he expected to respond by February 4, 2005.

      Both of Mr. Whitman’s letters professed a desire for a friendly transaction and specifically requested that we treat their indications of interest confidentially, a request that BEI honored. However, on January 24, 2005, Appaloosa, Formation Capital, Franklin and Northbrook NBV, LLC filed a Schedule 13D with the SEC explaining that they had acquired over 8% of our common stock and disclosing their December 22 and January 19 letters and their intent to gain control of BEI.

      Importantly, their filing was triggered by the Appaloosa/ Formation Capital group’s accumulation of more than 5% of our shares in the open market. In fact, based upon the buying history described in their Schedule 13D, they knew on January 14 that they would be forced to make public disclosure of their proposals no later than January 24. Mr. Whitman’s January 19 letter, nonetheless, continued to express a desire to keep the Appaloosa/ Formation Capital group’s indications of interest confidential.

      On January 25, 2005, in light of the rapid accumulation of our shares by the Appaloosa/ Formation Capital group, our Board adopted a Share Purchase Rights Plan to protect our stockholders from the obvious threat of additional stock accumulations.

      On January 27, 2005, we received a letter from a lawyer for the Appaloosa/ Formation Capital group indicating that they might propose a slate of directors for election at the Annual Meeting.

      Our Board met again on the evening of February 2, 2005 to consider the transactions described in Mr. Whitman’s January 19 letter. On February 3, 2005, Mr. Floyd faxed Mr. Whitman a letter informing him that the BEI Board had — after consultation with its independent financial and legal advisors — unanimously concluded that the transactions described in his December 22 and January 19 letters are not in the best interests of BEI or our stockholders.

      In making this decision, your Board took into account, among other things:

      Formation Capital’s nomination of an opposition slate of directors, as well as its proposal of a number of additional matters for approval by the BEI stockholders at the Annual Meeting, is designed solely to further the Appaloosa/ Formation Capital group’s attempt to take over BEI.

      Your Board has unanimously concluded that the transactions proposed by the Appaloosa/ Formation Capital group are not in the best interests of BEI or our stockholders. Accordingly, your Board unanimously recommends you vote:

Proposals on Which You May Vote

      All of the eight current directors of BEI have been nominated for re-election. Detailed information on each BEI nominee is provided beginning on page 14. Each director is elected annually and serves a one-year term until the next Annual Meeting or until his or her successor is elected and qualified. Except as otherwise specified on your white proxy card, proxies will be voted for the election of all BEI nominees.

      If for any reason any of the BEI director nominees should become unavailable for election (an event that the Board does not anticipate), the proxy will be voted for the election of such substitute nominee as may be designated by the Board.

      Your Board unanimously recommends a vote “FOR” the election of each BEI nominee as a director.

      The Audit and Compliance Committee has appointed, and the Board has ratified the appointment of, Ernst & Young LLP as our independent registered public accounting firm for 2005. Ernst & Young LLP has unrestricted access to the Audit and Compliance Committee to discuss audit findings and other financial matters. Representatives of Ernst & Young LLP will attend the Annual Meeting and will be available to answer appropriate questions. They may also make a statement if they desire to do so.

      Ernst & Young LLP fees for the 2004 annual audit and the 2003 annual audit were $1,684,000 and $1,292,000, respectively, including fees associated with Sarbanes-Oxley 404 attestation procedures, reviews of BEI’s quarterly reports on Form 10-Q and consents on registration statements filed with the SEC in 2003 and 2004.

      Ernst & Young LLP fees for audit-related services in 2004 and 2003 were $1,158,000 and $668,000, respectively. Audit-related services generally include employee benefit plan audits, statutory and affiliate audits, agreed-upon compliance attestation procedures under BEI’s Corporate Integrity Agreement with the Office of Inspector General, due diligence procedures performed in connection with acquisitions or potential acquisitions, and consultations on accounting and financial reporting matters.

      Ernst & Young LLP fees for tax services in 2004 and 2003 were $290,000 and $30,000, respectively. Tax services rendered to BEI primarily include tax return compilation reviews, state tax planning assistance and consultations on tax matters.

      There were no other Ernst & Young LLP fees incurred in 2004 and 2003.

      The Audit and Compliance Committee has determined that the provision of these services is compatible with maintaining Ernst & Young LLP’s independence.

      The Audit and Compliance Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. The Audit and Compliance Committee is

provided sufficient detail regarding each service to be pre-approved to enable it to determine whether providing such service might impair the independence of the independent registered public accounting firm. Pre-approval is provided periodically as determined necessary and any pre-approval is detailed as to the particular service or category of services and generally subject to a budget or fee range, but only for purposes of authorizing payment. Interpretations as to whether a particular service to be provided falls within the definition of a service that has already been pre-approved shall be made by the Audit and Compliance Committee or its delegate. Management and the independent registered public accounting firm are required to report periodically to the Audit and Compliance Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval. The Audit and Compliance Committee may also pre-approve particular services on a case-by-case basis. The Audit and Compliance Committee has delegated pre-approval authority to the Chairperson of the Committee, and the Chairperson must report, for informational purposes only, any pre-approval decisions to the Audit and Compliance Committee at its next scheduled meeting.

      The Audit and Compliance Committee has the sole responsibility for selecting BEI’s independent registered public accounting firm, and stockholder ratification is not required. However, the selection is being submitted for ratification by the stockholders solely for the purpose of soliciting the stockholders’ opinion of the Audit and Compliance Committee’s selection of the independent registered public accounting firm. While it is the Audit and Compliance Committee’s present intention to take the opinion of the stockholders into consideration in its future deliberations with respect to the selection of an independent registered public accounting firm, it may decide not to do so. In any event, the Audit and Compliance Committee may engage or terminate the engagement of Ernst & Young LLP or any other accounting firm as BEI’s independent registered public accounting firm as it determines is necessary or appropriate in its sole discretion, regardless of the outcome of the stockholders’ vote on Item 2 or any other vote of the stockholders taken at any time or in any other manner.

      Your Board unanimously recommends a vote “FOR” the ratification of Ernst & Young LLP’s appointment as our independent registered public accounting firm for 2005.

BEI Nominees for the Board of Directors

       The following table sets forth, as of the Record Date, certain information regarding the BEI directors, each of whom has been nominated for re-election by the Nominating and Compensation Committee:

      Mr. Floyd joined us in April 2000 as President and Chief Operating Officer. Mr. Floyd was appointed Chief Executive Officer in February 2001 and Chairman of the Board in December 2001. From 1996 to 1998, Mr. Floyd was Chief Executive Officer of Choice Hotels International, Inc., and from 1995 to 1996, he was Chief Operating Officer of Taco Bell Corporation.

      Dr. Dreher has been the Kelting Dean and a professor at The University of Iowa College of Nursing since 1997. Dr. Dreher also serves as Academic Director for Clinical Practice in the Department of Nursing and Patient Services at The University of Iowa Hospital and Clinics and is a member of the board of Wellmark Health Plan of Iowa. From 2000 to 2001, Dr. Dreher was an advisory board member for the Pfizer Fellowship Program in Nursing Research.

      Mr. Fowler has been the Vice Chairman of Deutsche Bank Securities, Inc. since November 2004 and a Visiting Professor at the University of South Dakota School of Business since January 2004. During 2004, Mr. Fowler was Managing Director of Baycrest Capital, LLC, a private equity investment and advisory firm, and Managing Director of Bio-Strategic Directors, LLC. From 2001 to 2003, Mr. Fowler was President and a director of Large Scale Biology Corporation. From 1998 to 2001, Mr. Fowler was a Managing Director in JPMorgan & Co.’s Healthcare Group and from 1992 to 1998, he was Managing Director and Head of Salomon Brothers Inc.’s Healthcare Group. Mr. Fowler is also a director of Project Reach Youth.

      Dr. Howe, III has been the President and Chief Executive Officer of Project Hope since 2001. From 1985 to 2001, Dr. Howe, III was President of The University of Texas Health Center at San Antonio. Dr. Howe, III is also a director of Southwest Foundation for Biomedical Research and BB&T Corporation.

      Mr. McLane has been a Director of Healthaxis Inc. since August 2000, its Chief Executive Officer since February 2001, and its Chairman since August 2001. From 1997 until early 2000, Mr. McLane was President, Chief Operating Officer and Director of NovaCare, Inc. Mr. McLane previously served as Executive Vice President of Aetna, Inc. and as Chief Executive Officer of Aetna Health Plans. Mr. McLane is also a director of Outward Bound USA and the Philadelphia Outward Bound Center.

      Mr. Sabel has been the Chairman of the Board and Chief Executive Officer of Hanger Orthopedic Group, Inc. since August 1995. Mr. Sabel has held various positions with Hanger Orthopedic Group, Inc. since 1987, including President, Chief Operating Officer and Vice President, Corporate Development. Mr. Sabel has previously served as a director of American Orthotic and Prosthetic Association, Nursefinders, Inc. and Mid Atlantic Medical Services, Inc.

      Mr. Seeley has been a Director of the Applied Investment Management Program at the University of Arizona Department of Finance since June 2000. From 1997 to 2000, Mr. Seeley was Vice Chairman and Chief Financial Officer of True North Communications. Mr. Seeley currently serves on the Board of Trustees of William Blair Funds.

      Dr. Seymann has been the President and Chief Executive Officer of M One, Inc., a management, risk and governance consulting firm for financial institutions, since January 1991. Dr. Seymann has been a director of Provide Commerce, Inc., Maximus, Inc. and Eos International, Inc. Dr. Seymann is also the founder and a director of The Arizona Foundation for Women, Inc., a not-for-profit corporation.

Independent Directors

      The Board of Directors is composed of a majority of independent directors who satisfy the independence standards set forth in the current listing standards of The New York Stock Exchange, Inc. (the “NYSE”). Each of Messrs. Fowler, McLane, Sabel and Seeley, as well as Drs. Howe, Dreher and Seymann, satisfy these independence standards.

Board of Directors — Committees During 2004

       The Board of Directors has the following standing committees: Audit and Compliance Committee, Nominating and Compensation Committee, Quality Committee and Finance Committee. Each of these committees is composed entirely of independent directors in accordance with current NYSE listing standards. Furthermore, each member of our Audit and Compliance Committee satisfies the requirements of Section 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the financial literacy and sophistication requirements of the NYSE for membership on the Audit and Compliance Committee. At least one member of the Audit and Compliance Committee is an audit committee financial expert (as defined by the SEC). The membership of each of these standing committees during 2004 was as follows:

Committee Functions

Board of Directors Meetings and Attendance at Board and Committee Meetings and Annual Meetings of Stockholders

      Each director attended at least 75% of all meetings of the Board and any committees on which the director served. Directors are encouraged to attend the Annual Meeting of stockholders of BEI. All of the nine then-sitting directors attended the 2004 Annual Meeting except Dr. Seymann.

      Each of the Audit and Compliance Committee and the Nominating and Compensation Committee meet at regularly scheduled executive sessions without management. The Chairperson of each of these committees presides over these sessions. In addition, the non-management directors meet at regularly scheduled executive sessions. The presiding director at those executive sessions is selected by a majority of the non-management directors and alternates from meeting to meeting.

Compensation Committee Interlocks and Insider Participation

      During 2004, John D. Fowler, Jr., James W. McLane, Ivan R. Sabel, and Marilyn R. Seymann, Ph.D. served as members of the Nominating and Compensation Committee of the Board of Directors. John P. Howe, III, M.D., also served on the Compensation Committee until May 20, 2004. None of these persons is or has been an officer or employee of BEI or any of its subsidiaries. In addition, during 2004, none of BEI’s

executive officers served on the board of directors or compensation committee (or committee performing similar functions) of any other company that had one or more executives serving on BEI’s Board of Directors or Nominating and Compensation Committee.

Board of Directors — Compensation

How was the Board compensated in 2004?

Executive Officers

       The following table sets forth certain information regarding BEI’s executive officers as of the Record Date:

      The executive officers named above were appointed by the Board of Directors to serve in such capacities until their respective successors have been duly appointed and qualified, or until their earlier death, resignation or removal from office. Biographical information for Mr. Floyd is set forth under “BEI Nominees for the Board of Directors.”

      Mr. Babb joined BEI in April 2000 as Executive Vice President, General Counsel and Secretary. Mr. Babb was appointed head of Government Relations in January 2001 and Chief Administrative and Legal Officer in October 2002. Mr. Babb was Senior Vice President — Merchandise Business Unit for Burlington Northern Santa Fe Corporation from 1997 to 1999.

      Mr. Devereaux joined BEI in August 1998 as Senior Vice President — Operations for the Specialty Services Division of the Nursing Facilities segment. Mr. Devereaux was appointed President of the companies within the Nursing Facilities segment in January 2001 and Executive Vice President and Chief Operating Officer in July 2001.

      Mr. Freimark joined BEI in January 2002 as Executive Vice President and Chief Financial Officer. Mr. Freimark was appointed head of Information Technology in October 2002. From May 2001 to January 4, 2002, Mr. Freimark was Senior Executive Vice President and Chief Financial Officer of OfficeMax, Inc. From March 1997 to May 2001, Mr. Freimark was with The Grand Union Company where he held positions as Executive Vice President, Chief Financial Officer and President and Chief Executive Officer.

      Ms. Susienka joined BEI in June 1998 as President — Aegis Therapies and was appointed President — Home Care Services in March 2002. Ms. Susienka was appointed Executive Vice President in December 2003, Group President for Therapy, Homecare and Hospice Services in August 2004 and Chief Operating Officer — Aegis and AseraCare in December 2004. Ms. Susienka serves on the board of directors for the National Association for the Support of Long Term Care.

      Ms. Acosta joined BEI in October 1996 as Vice President — Risk Management. Ms. Acosta was appointed Senior Vice President — Professional Services in January 2001 and Senior Vice President — Quality of Life Programs in October 2003. Ms. Acosta also serves as on the board of directors of the Arkansas/ Oklahoma Alzheimer’s Association and as a member of the Arkansas Medical School Community Advisory Board.

      Ms. Daniels joined BEI in May 1988 as Audit Coordinator. Ms. Daniels was appointed Vice President, Controller and Chief Accounting Officer in October 1996 and Senior Vice President in December 1999.

      Mr. Deans joined BEI in November 2003 as Senior Vice President — Human Resources. From September 1999 to November 2003, Mr. Deans was Chief Human Resources Officer at Jones Lang LaSalle. From February 1998 to June 1999, Mr. Deans was Vice President — Human Resources of Alliant Foodservice, Inc.

      Mr. Griffith joined BEI in November 1995 as Senior Vice President — Investor Relations and Corporate Communications.

      Ms. Kolling joined BEI in February 1989 as a rehabilitation consultant. Ms. Kolling was appointed Vice President — Rehabilitation in 1994, Vice President — PPS in 1998 and Vice President — Medicare Programs in 2000. Ms. Kolling was appointed Senior Vice President — Compliance in October 2002.

      Ms. Ludington joined BEI in 1999 as Regional Director of Professional Services. Ms. Ludington was appointed Senior Vice President — Professional Services in May 2004.

      Dr. Paul joined BEI in March 2004 as Senior Vice President and Chief Medical Officer. From 1999 to 2004, Dr. Paul served as director of the Quality Measurement and Health Assessment Group for the Centers for Medicaid & Medicare Services at the Department of Health and Human Services.

      Dr. Price joined BEI in August 2002 as Senior Vice President — Sales and Business Development. Prior to that, Dr. Price worked with BEI on a consulting basis for 18 months. Before becoming a consultant, from 1999 to 2000, Dr. Price was Vice President — Strategic Relations and Business Development for SelfCare, Inc.

      Mr. Roussos joined BEI in August 2001 as a management designee of our former Matrix segment. Mr. Roussos was appointed President of Matrix in February 2002, President of Ceres Purchasing Solutions in October 2002 and President of AseraCare in July 2004. From 2000 to 2001, Mr. Roussos was Division General Manager of American Homestar Corporation, and from 1996 to 2000, Mr. Roussos was General Manager of Fleetwood Enterprises, Inc.

      Ms. Schram joined BEI in December 1998 as Group Vice President. Ms. Schram was appointed Vice President — Northeast Division of AEGIS Therapies in March 2001 and President of Aegis Therapies in July 2004. From 1993 to 1998, Ms. Schram was an Area Vice President for NovaCare and from 1988 to 1993, Ms. Schram was Executive Director of Rehabilitation Services for Divine Savior Hospital in Portage, WI.

      Mr. Skelly joined BEI in April 2002 as Senior Vice President and Treasurer. From September 2001 to March 2002, Mr. Skelly was Senior Vice President and Treasurer of OfficeMax, Inc. From June 1997 to August 2001, Mr. Skelly held various positions with The Grand Union Company, including Acting Chief Financial Officer and Treasurer.

      Ms. Washburn joined BEI in her position as Senior Vice President and Chief Marketing Officer in January 2005. From 2001 until January 2005, Ms. Washburn served as President of Brand-Built International, a consulting firm specializing in business development and brand positioning. From 1997 until 2001, Ms. Washburn was Managing Director and Chief Marketing Officer of Broadview International, a global investment bank and venture capital firm. She also has held senior-level marketing positions at Price Waterhouse and Citibank, N.A.

Security Ownership of Certain

Beneficial Owners and Management

Principal Stockholders

      The following table sets forth, as of the Record Date, the amount of BEI common stock beneficially owned by each stockholder known by BEI to beneficially own more than five percent of the common stock of BEI.

Directors and Executive Officers

      The following table sets forth, as of the Record Date, the amount of BEI common stock beneficially owned by each director, each executive officer named in the Summary Compensation Table on page 31 (each, a “named executive officer”) and all directors and executive officers as a group.

Audit and Compliance Committee Report

       This Audit and Compliance Committee Report is a preliminary draft of the report to be set forth in the definitive proxy statement of BEI. In addition, this Audit and Compliance Committee Report is not deemed to be “soliciting material” or “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act, and shall not be deemed incorporated by reference into any of the filings previously made or made in the future by BEI under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”) (except to the extent BEI specifically incorporates this information into a document that is filed).

      The Audit and Compliance Committee was established in accordance with Section 3(a)(58) of the Exchange Act. The Audit and Compliance Committee currently consists of four independent non-employee directors who satisfy the requirements of Section 10A-3 of the Exchange Act and the current listing standards of the NYSE. On February 11, 2004, the Board adopted a restated written charter for the Audit and Compliance Committee, a copy of which can be found on BEI’s website at http://www.beverlycorp.com.

      The Audit and Compliance Committee oversees BEI’s financial reporting process on behalf of the Board. In fulfilling its oversight responsibilities, the Audit and Compliance Committee selects, appoints, retains and oversees BEI’s independent registered public accounting firm and reviews and discusses the audited financial statements included in BEI’s Annual Report on Form 10-K with management, including the reasonableness of significant judgments and the clarity of disclosures in the financial statements. Management has primary responsibility for the financial statements and reporting process, including internal control over financial reporting.

      BEI’s independent registered public accounting firm is responsible for performing an audit of BEI’s financial statements and expressing an opinion on the conformity of the audited financial statements with generally accepted accounting principles. The Audit and Compliance Committee’s responsibility is to monitor and review the processes. It is not the Audit and Compliance Committee’s duty nor its responsibility to conduct auditing or accounting reviews or procedures. In this context, the Audit and Compliance Committee has reviewed and discussed the audited financial statements for the year ended December 31, 2004 with management and the independent registered public accounting firm. The Audit and Compliance Committee has discussed with the independent registered public accounting firm their judgments as to BEI’s accounting principles, including the acceptability and quality of those principles, and such other matters as are required to be discussed under generally accepted accounting standards Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended by Statement on Auditing Standards No. 90 (Audit Committee Communications) and Statement on Auditing Standards No. 89 (Audit Adjustments), each as currently in effect. In addition, it has received the written disclosures and the letter from the independent registered public accounting firm required by Independence Standards Board No. 1 (Independence Discussions with Audit Committees), as currently in effect, and discussed their independence from BEI and its management and considered whether the independent registered public accounting firm’ provision of non-audit services to BEI is compatible with the registered public accounting firm’ independence.

      The Audit and Compliance Committee discussed with the independent registered public accounting firm the overall scope of their respective audits. The Audit and Compliance Committee meets with the independent registered public accounting firm, without management present, to discuss the results of their examinations, their evaluations of BEI’s internal control over financial reporting and the overall quality of BEI’s financial reporting. In the performance of their oversight function, the members of the Audit and Compliance Committee necessarily relied upon the information, opinions, reports and statements presented to them by management and by the independent registered public accounting firm. The Audit and Compliance Committee held 9 meetings during 2004.

      In reliance on the reviews and discussions referred to above, the Audit and Compliance Committee recommended to the Board, and the Board has approved, that the audited financial statements as of and for the year ended December 31, 2004 be included in BEI’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the SEC.

      The Audit and Compliance Committee also oversees BEI’s compliance and reporting to the Office of Inspector General of the Department of Health and Human Services (“OIG”) under the Corporate Integrity Agreement entered into by BEI and the OIG in February 2000.

Nominating and Compensation

Committee Report

on 2004 Executive Compensation

       This Nominating and Compensation Committee Report is not deemed to be “soliciting material” or “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act, and shall not be deemed incorporated by reference into any of the filings previously made or made in the future by BEI under the Exchange Act or the Securities Act (except to the extent BEI specifically incorporates this information into a document that is filed).

      The Nominating and Compensation Committee of the Board currently consists of four independent non-employee directors who satisfy the current independence standards of the NYSE. Our objective is to develop executive compensation policies that are directly aligned with BEI’s strategic goals and tie pay to performance and to stockholder value creation. We are responsible for reviewing, recommending and approving corporate goals and objectives relevant to the Chief Executive Officer’s and other senior executive officers’ compensation, and determining and approving the CEO’s compensation. We also approve the design of BEI’s broad-based compensation programs, evaluate their effectiveness and authorize new plans and strategies, as appropriate.

Compensation Practices

      To accomplish these objectives, on October 10, 2001, we adopted the following compensation philosophy, which we believe continues to be appropriate:

      We rely on information from a number of sources to assist us in implementing this philosophy. We work with an executive compensation consulting firm selected by us that provides guidance on industry practices and assists in valuing various forms of compensation. We evaluate competitive compensation practices and amounts by considering data assembled by the compensation consultant. The information provided to us for this purpose looks at companies in the service industry and the healthcare services industry with comparable revenues, number of employees and market capitalization. Finally, we receive input from BEI’s CEO regarding the elements of compensation and the overall compensation he recommends for other executive officers.

      Executive compensation at BEI consists of four primary elements: base salary, annual incentive compensation potential, long-term compensation in the form of stock-based vehicles and retirement benefits. The type and amounts of compensation, the scope and terms of the compensation plans and the retirement benefits are the result of a substantial evaluation and analysis by the Committee. The consulting firm retained by the Committee provided an analysis of BEI’s compensation structure in comparison to that of competitive companies. The Committee utilized that analysis in conjunction with its compensation philosophy to develop BEI’s current compensation structure.

Base Salary

      We regularly review the base salary of BEI’s corporate officers. In addition to considering the median salaries for comparable positions at the other companies reflected in competitive market information, we also consider the level and scope of responsibility, experience and performance of individual officers, as well as relative salary levels among BEI officers. However, we do not assign a specific weight to each of these factors.

Annual Incentive Compensation

      On February 2, 2005, we evaluated performance-based compensation available under the Beverly Enterprises, Inc. Annual Incentive Plan, dated effective January 1, 1998, for corporate and subsidiary management. The financial performance measurement used was earnings before interest, taxes, depreciation and amortization (“EBITDA”), excluding the effect of certain actions taken during 2004.

      Each executive officer participating in the Annual Incentive Plan, including those listed in the Summary Compensation Table, has a target and maximum annual incentive opportunity expressed as a percentage of annual base salary. Target opportunities for executive officers for 2004 ranged from 45% to 125% of annual base salary, which amount is weighted based upon the performance of BEI in excess of the target opportunity thresholds. Except for the executive officers listed below in the Summary Compensation Table, the target opportunities for participants may be increased or decreased by the Committee based upon the business and financial performance of BEI. Subsidiary management incentive plan distributions were reviewed and adjusted if applicable due to revisions to final business unit scorecard results.

Long-Term Incentive Compensation

      We strongly believe that stock-based compensation creates a direct link between the long-term financial interests of BEI’s executives and BEI’s stockholders. Prior to last year, we granted stock options to eligible employees. We have changed our view on this approach in favor of grants of restricted stock to eligible employees. Last year we evaluated BEI’s ability to provide performance-based compensation under the 1997 Plan. We decided to implement a 2004 long-term incentive program under the 1997 Plan, pursuant to which BEI grants restricted stock to employees selected by the Committee that vest at the end of three years from the date of grant. In addition, BEI grants performance units and/or performance-based cash bonuses to employees selected by the Committee that vest at the end of three years to the extent certain EBITDA, EBITDA margin and share appreciation goals are obtained.

      In determining the size and other terms of stock grants, we review information on competitive practices and valuations provided by our compensation consultants. Generally, performance-based stock awards are made during the first half of a year.

      In 2004, BEI granted 558,602 shares of restricted stock to the executive officers as a group, and 396,368 shares of restricted stock to BEI’s other employees as a group. Further details about restricted stock awards granted to the named executive officers during 2004 are shown on the Executive Summary Compensation Table below.

Response to Tax Laws Limiting Deductions for Compensation

      Section 162(m) of the Internal Revenue Code generally sets a $1,000,000 per person limit on a company’s ability to deduct compensation paid to its five most highly paid executive officers. Section 162(m) provides an exemption to this limit for compensation that qualifies under the Code as “performance-based compensation.” The Nominating and Compensation Committee has determined that it generally should seek to retain full tax deductibility for our incentive compensation programs. Therefore, we have designed BEI’s annual and long-term compensation programs so that compensation earned under those plans can meet the definition of “performance-based compensation.” However, in order to maintain flexibility in motivating and compensating BEI’s executive officers, in some circumstances it may provide for or pay compensation that may not satisfy 162(m) and, therefore, may not be deductible, in whole or in part, by BEI.

Retirement Benefits

      SERP. In addition to maintaining standard broad-based employee retirement benefit plans, we adopted a supplemental executive retirement plan (the “SERP”) on February 19, 1998. Participants were selected based on management’s recommendations. The SERP was amended and restated, effective as of April 1, 2000. Generally, this program provides for an annual retirement income benefit equal to the product of (a) 3.33%, multiplied by (b) the participant’s final average base compensation and (c) the participant’s years (including partial years) of credited service. The benefit is payable for a maximum of fifteen years upon retirement at age 65 with 15 years of service after age 50. For purposes of calculating participants’ retirement benefits, only their base annual salary up to $1,000,000 per year is taken into account; incentive compensation, bonuses and base annual salary in excess of $1,000,000 are disregarded. Benefits are reduced for retirement before age 65 or for less than 15 years of service. Participants may elect to receive their benefits in the form of a single lump sum payment.

      The SERP was modified in December 2001 with respect to Mr. Floyd to provide him an enhanced retirement benefit equal to 50% of his final average compensation regardless of his years of service. For purposes of calculating Mr. Floyd’s final average compensation, only his base annual salary up to $1,000,000 per year is taken into account; incentive compensation, bonuses and base annual salary in excess of $1,000,000 are disregarded. Mr. Floyd’s benefit is now fully vested. In addition, the 5% discount per year for retirement prior to age 65 was waived for Mr. Floyd, and his benefits could be paid over 15 years regardless of how many years of service he has at retirement. (See “Executive Compensation — Defined Benefit Plan”).

      As discussed further under “Retirement Benefits — Executive Deferred Compensation Plan” below, the SERP was frozen for participants under age 56 and closed to new participants effective as of January 1, 2003.

      Enhanced Supplemental Executive Retirement Plan. Effective as of January 1, 2004, we adopted the Enhanced Supplemental Executive Retirement Plan (“Enhanced SERP”) for a designated group of BEI’s senior executive employees. The Nominating and Compensation Committee is responsible for selecting the participants for the Enhanced SERP. The Enhanced SERP is a nonqualified, unsecured deferred compensation plan, informally funded through a so-called “rabbi trust.” Each year BEI, in its discretion, may make a contribution on each participant’s behalf equal to a percentage of his or her salary and incentive compensation for the year. Prior to any change in control, we will set the contribution percentage each year for each participant in our sole discretion. Following any change in control, contributions will equal at least the amount made on each participant’s behalf immediately prior to the change in control. If a participant dies, becomes disabled or is terminated without cause within two years following a change in control, contributions will continue to be made on the participant’s behalf based on the participant’s compensation and the Enhanced SERP contributions that were made immediately prior to the participant’s death, disability or termination. Such contributions will continue until the earlier of the time the participant attains (or would have attained) age 60 or would have completed ten years of plan participation. If a participant is involuntarily terminated without cause prior to a change in control and prior to the time the participant attains age 60 or completes 10 years of plan participation, BEI, in its sole discretion, may continue making contributions on the terminated participant’s behalf up to the amount and for the period of time that contributions would have been made had the participant died or become disabled.

      BEI’s contributions will be credited with deemed investment earnings or losses based on a participant’s investment elections from the investment funds offered under the Enhanced SERP. In addition, if BEI does not credit contributions to a participant’s account by December 31 of the year for which the contributions are to be made, interest will accrue at the rate of 6.5% per annum on the delinquent contributions until they are made to the plan. A deferred credit contribution must be made by December 31 of the following year. Participants will vest in their Enhanced SERP benefits upon the earlier of attaining age 60, completing 10 years of plan participation, death, total and permanent disability, a change in control or involuntary termination of employment without cause. Distributions of participants’ benefits will be made once they attain age 60 or complete ten years of plan participation (whichever is earlier), and terminate employment. Distributions will be made in cash in either a single lump sum or annual installment payments over a five, ten or fifteen year period as elected by the participant. However, distributions due to death, disability or

termination of employment without cause within two years of a change in control will be made only in a lump sum and only after the participant would have attained age 60 or completed ten years of plan participation but for such death, disability or termination following a change in control.

      Executive Deferred Compensation Plan. Effective as of December 31, 2002, the Board adopted an Executive Deferred Compensation Plan (the “EDC Plan”) for a designated group of management or highly compensated employees. Certain employees with base annual salary of at least $90,000 and total annual compensation (salary plus target bonus) of at least $100,000 are eligible for selection by the Nominating and Compensation Committee for participation in the EDC Plan. The EDC Plan is a nonqualified, unsecured deferred compensation plan, informally funded through a so-called “rabbi trust.” Eligible employees can elect to defer up to 75% of their base salary and 100% of their bonus or incentive compensation each year. In addition, BEI may make matching contributions to make up for matching contributions to the tax-qualified SavingsPlus Plan that participants were ineligible for due to various legal limits and/or their participation in the EDC Plan. Additional discretionary contributions are also possible. In addition, due to the freezing of the SERP for participants under age 56 (as well as for any new participants), in January 2003 BEI made an initial contribution to the EDC Plan for two affected participants with vested SERP benefits, and will make ongoing, future age-weighted EDC Plan contributions for other former SERP participants, in exchange for such participants waiving their rights under the SERP. Earnings and losses on all participant and BEI contributions will be credited with deemed investment earnings based on participant investment elections from among 20 variable investment fund options currently offered under the EDC Plan.

      Participants are always vested in their own compensation deferrals. BEI contributions generally vest after five years of combined EDC Plan and SERP participation. Vesting is accelerated upon a change in control of BEI. Participants can elect in-service withdrawals at a specified future date, in either a single lump-sum or, for withdrawals of $25,000 or more, in annual installments over two to five years. Non-scheduled withdrawals can also be made, but the participant will forfeit 10% of the requested withdrawal and be suspended from the EDC Plan for the remainder of the then current year and the next following year. These penalties will not apply if the withdrawal is on account of a severe financial hardship. Upon termination of employment, participants can elect to receive either a lump sum payout or, if they have a least five years of combined EDC Plan and SERP service and a distribution of at least $25,000, annual installments for up to 15 years. All distributions will be in cash.

      Retention Enhancement Program. In March 2004, BEI established the Retention Enhancement Program (“REP”), as part of the EDC Plan, to provide enhanced retirement, death and disability benefits to Mr. Floyd to supplement his SERP benefits, which are described above, and to provide an additional incentive for him to remain with BEI until he attains age 65. Pursuant to the REP, BEI will make contributions each year to an account established for Mr. Floyd under the EDC Plan. The Nominating and Compensation Committee will determine the amount of those contributions each year, but it is currently intended that when the total contributions and earnings on the contributions are added to Mr. Floyd’s SERP benefits, this will provide him with a combined retirement benefit equal to 40% of his total final compensation (which includes base salary and bonuses and is not capped at $1,000,000 like his SERP benefits). Like the EDC Plan, earnings and losses will be credited to the REP contributions made on Mr. Floyd’s behalf based on his investment elections from the funds offered under the EDC Plan. Mr. Floyd will vest in his REP benefits when the first of the following events occurs: (i) he attains age 65, provided that he is still employed by BEI; (ii) he dies or becomes disabled; or (iii) BEI undergoes a change in control. If Mr. Floyd is terminated without cause prior to the date he otherwise fully vests in his REP benefits, he will vest in the balance of his REP account at that time, and the Nominating and Compensation Committee, in its discretion, may continue making contributions to Mr. Floyd’s REP account until he attains age 65. Mr. Floyd will have the option of taking his REP benefits in either a single lump sum payment or in annual installment payments over a period of two to fifteen years.

Compensation for the Chief Executive Officer

      The Committee applied the policies mentioned above in determining the compensation for Mr. Floyd, BEI’s Chief Executive Officer, for 2004. At December 31, 2004, Mr. Floyd’s annual base salary was $900,000, which reflects an increase over the prior year of $62,187. This increase was recommended by the independent

compensation consultant, and made his salary more aligned with the market. Prior to the increase, Mr. Floyd had not received a salary increase since December 2001 when he became Chairman of BEI.

      For 2004, Mr. Floyd received a bonus of $1,344,375 under the 2004 Annual Incentive Plan (“AIP”). The 2004 AIP established annual incentive compensation opportunities for Mr. Floyd and other participants based on performance against targeted goals for EBITDA and improvement in quality of care. Thus, Mr. Floyd’s bonus for 2004 was determined based on three factors. The first was the amount by which actual EBITDA exceeded the planned EBITDA for BEI as approved by the Board. The second factor was an evaluation by the Nominating and Compensation Committee of BEI’s performance in relation to its quality of care improvement goals for 2004. The last factor was a set of strategic priorities in revenue growth, EBITDA margin, balance sheet measures and measures around succession planning which were evaluated by the Nominating and Compensation Committee. The first factor was weighted at 60%, and the second and third factors were each weighted at 20%.

      As part of a long-term incentive program instituted under the 1997 Plan in 2004, the Nominating and Compensation Committee awarded Mr. Floyd 214,822 shares of restricted BEI common stock as well as performance units and performance cash equal to an amount ranging from a minimum of $1,675,634 to maximum of $7,037,659, depending on BEI’s performance in achieving targets with respect to EBITDA, EBITDA margin improvements and improvements in the market price for BEI’s common stock. If none of the targets are met, neither the performance units nor the performance cash will vest under the award. If the targets are met, the long-term incentive award will vest, subject to Board approval, three years from the date of grant.

Executive Compensation

SUMMARY COMPENSATION TABLE

      The following table sets forth summary information concerning certain compensation awarded, paid to, or earned by BEI’s President and Chief Executive Officer and each of its other four most highly compensated executive officers for all services rendered in all capacities to BEI for the years ended December 31, 2004, 2003 and 2002:

RESTRICTED STOCK

       The following table sets forth the restricted BEI common stock holdings of the named executive officers at December 31, 2004, including the shares awarded during 2004, based on the closing price of BEI common stock on the NYSE on that date:

AGGREGATED OPTION EXERCISES IN 2004 AND

FISCAL YEAR-END OPTION VALUES

      The following table sets forth certain information concerning the value of unexercised options to purchase BEI common stock held by the named executive officers at December 31, 2004. There were no options exercised by the named executive officers during 2004.

LONG-TERM INCENTIVE PLANS — AWARDS IN LAST FISCAL YEAR

DEFINED BENEFIT PLAN

      Mr. Floyd receives an additional defined benefit type retirement benefit pursuant to the SERP. Under the SERP, Mr. Floyd is eligible for an annual retirement benefit upon his retirement, death or disability equal to 50% of his final average annual compensation over the last three full years before his retirement, death or disability. This benefit is not dependent on his years of service, and is not reduced for Social Security or any other amount. For purposes of determining Mr. Floyd’s final average annual compensation, only amounts that are part of his annual base salary listed in the Summary Compensation Table and that do not exceed $1,000,000 will be taken into account. Mr. Floyd’s bonuses, incentive payments, employee benefits, tax gross-up payments and other special payments and fees are not taken into account. Mr. Floyd became 100% vested in his SERP benefits on October 16, 2004. Mr. Floyd’s annual SERP retirement benefits are payable for 15 years following his retirement, death, or disability. Mr. Floyd also has the option of taking his SERP benefits in a single discounted lump sum payment when he retires. The discount rate used to determine the lump sum payment will equal the average Moody’s Aa corporate bond return for the month of November immediately before the lump sum payment of Mr. Floyd’s SERP benefits. Mr. Floyd’s current estimated annual retirement benefit under the SERP if he retires on or after October 16, 2005 is $442,599.93.

Stock Performance Graph

       This Stock Performance Graph is not deemed to be “soliciting material” or “filed” with the SEC, is not subject to the liabilities of Section 18 of the Exchange Act, and shall not be deemed incorporated by reference into any of the filings previously made or made in the future by BEI under the Exchange Act or the Securities Act (except to the extent BEI specifically incorporates this information into a document that is filed).

      The following graph shows a five-year comparison of cumulative total returns for BEI, the S&P Midcap 400 Index and the S & P Health Care Facilities Index. The stock price performance shown on the graph below is not necessarily indicative of future price performance.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*

AMONG BEVERLY ENTERPRISES, INC., THE S & P 500 INDEX

AND THE S & P HEALTH CARE FACILITIES INDEX

Equity Compensation Plan Information

(AS OF DECEMBER 31, 2004)

Employment Contracts, Termination of

Employment and Change in Control Agreements

       BEI has current employment agreements with each of Messrs. Babb, Floyd and Freimark and Ms. Susienka. The term of each agreement continues until such time as BEI gives notice to the executive, at which time the termination date of the employment agreement becomes three years from the date of such notice.

      Each of the agreements provides for an initial base rate of salary that may be increased by the Nominating and Compensation Committee. Mr. Floyd’s agreement provides that in no event shall his base salary and benefits be reduced unless the salaries and benefits of all executive-level officers are reduced proportionately. The agreements for each of Messrs. Floyd, Babb and Freimark, as amended effective December 1, 2004, provide that BEI shall maintain life insurance coverage for the remainder of the executive’s life, in the amount of the executive’s initial base salary, under the Executive Split Dollar Life Insurance Plan. The Executive Split Dollar Life Insurance Plan was amended in May 2004 to meet the requirements of the Sarbanes-Oxley Act of 2002.

      The employment agreements generally provide for participation in all benefit plans, participation in the Annual Incentive Plan and severance benefits upon termination of employment in connection with a change in control, as defined therein, or under certain other circumstances. Generally, a “Change in Control” will be deemed to have occurred in any of the following circumstances:

      Generally, the employment agreements provide a severance benefit on termination after a Change in Control of BEI equal to up to three years of base salary and target bonus, vesting of all stock-based compensation, continuation of medical, dental and disability coverage for three years and a relocation reimbursement. Absent a Change in Control, if a termination of employment is initiated by BEI without cause or by the executive for good reason, the severance benefits consist of up to two years of base salary and target bonus, a continuation of medical, dental and disability coverage for two years and the same relocation reimbursement.

Section 16(A) Beneficial Ownership Reporting Compliance

       Section 16(a) of the Exchange Act and regulations of the SEC require that the executive officers, directors and persons who beneficially own more than 10% of the common stock of BEI file initial reports of ownership and reports of changes in ownership with the SEC and furnish BEI with copies of all Section 16(a) forms they file. BEI offers assistance with the preparation and filing of these reports.

      Based solely on a review of the copies of the reports and written representations received from certain executive officers and directors, we believe that during 2004 our executive officers and directors complied with all applicable filing requirements with the exception that each of the following directors and executive officers had one late transaction reported on one delinquent Form 4 as a result of BEI’s delay in communicating BEI’s restricted stock grants: all current executive officers (except Ms. Washburn), all current directors, former executive officer Blaise J. Mercadante and former directors James Greene and Edith Holiday. Moreover, Patrice K. Acosta, David R. Devereaux, James M. Griffith and Cindy H. Susienka each had one additional late transaction reported on a delinquent Form 4 due to BEI’s over-funding of their respective employee stock purchase plans in August of 2002, which was recently discovered. The over-funding resulted in shares being sold by BEI in 2004 in order to return the over-funded amounts to BEI, which was not timely communicated to such persons.

Certain Transactions with Management and Others

       Mr. Freimark, the Chief Financial and Information Officer, was indebted to his former employer. As part of his employment agreement with BEI, BEI loaned Mr. Freimark $194,092.47 on December 31, 2001 (prior to the enactment of the Sarbanes-Oxley Act of 2002) which was used to pay off the loan from his former employer. Such amount is the maximum principal amount of the loan. The interest rate varies based upon the federal short-term rate as published by the IRS. The outstanding balance of the note plus accrued interest as of March 7, 2005 was approximately $48,765.28.

Other Matters

       In a letter dated February 4, 2005, Arnold M. Whitman, the Chief Executive Officer of Formation Capital notified us that he intends to nominate six individuals for election as directors at the Annual Meeting and to bring the following proposals before the Annual Meeting for consideration by BEI’s stockholders:

      The Appaloosa/ Formation Capital group has included Mr. Whitman’s February  4, 2005 letter to us in a filing with the SEC made on that day under cover of a Schedule 13D. His letter contains information regarding the proposed Appaloosa/ Formation Capital nominees. BEI is not responsible for the accuracy or completeness of any information provided by Mr. Whitman or the Appaloosa/ Formation Capital group in any letters to us or our Board of Directors or in any oral or written communications, solicitations or proxy materials made or disseminated by Mr. Whitman or the Appaloosa/ Formation Capital group or filed by them with the SEC. The nomination by Formation Capital of six individuals for election as directors at the Annual Meeting and each of the proposals listed above are intended solely to help the Appaloosa/ Formation Capital group take control of our Board as part of their efforts to acquire BEI.

      Article III, Section 2 of our By-Laws authorizes our Board of Directors to fix the specific number of directors constituting the full Board. Our Board of Directors has already set the size of our Board at eight directors. However, approval of Formation Capital’s proposal to amend our By-Laws to fix the number of directors constituting the entire Board at eight would prevent us from increasing the size of our Board in the event one or more of the Appaloosa/ Formation Capital group’s nominees are elected at the Annual Meeting. It would also preclude us from decreasing the size of the Board when the Board believes it appropriate to do so. Accordingly, your Board recommends that you vote “AGAINST” Proposal 3.

      With respect to Proposal 4, we note that BEI has not amended its By-Laws since May 29, 1997. Our By-Laws, as currently in effect, were filed with the SEC as an exhibit to a Registration Statement on Form S-1 we filed with the SEC on June 4, 1997. The proposal would, therefore, not result in any change to the provisions of our By-Laws currently in effect. However, your Board believes that, as a matter of sound corporate governance, it should have the ability to amend the By-Laws prior to the Annual Meeting should circumstances arise that in the good faith judgment of the Board make it in the best interests of BEI to do so. In addition, your Board believes that its authority to amend the By-Laws cannot be restricted in this manner. Accordingly, your Board recommends that you vote “AGAINST” Proposal 4.

      Article II, Section 7 of our By-Laws provides that the Chairman of the Board (or in the absence of the Chairman, certain other officers of BEI) shall preside over the Annual Meeting. The Chairman of the meeting has the responsibility to ensure an orderly Annual Meeting. As in prior years, the Chairman will determine the sequence in which proposals properly brought before the Annual Meeting will be considered and voted on by stockholders ensuring that the Annual Meeting proceeds in an orderly fashion. In that regard, the order in which proposals properly presented at the Annual Meeting will be submitted for a vote by stockholders has not yet been determined. We do not believe that this authority of the Chairman can be restricted by a proposal presented at our Annual Meeting. Further, the Board does not think it appropriate or desirable that the order of our Annual Meeting be irrevocably fixed regardless of intervening events that might make it desirable in the Chairman’s judgment to alter the order of the meeting. Accordingly, your Board recommends that you vote “AGAINST” Proposal 5.

      YOUR BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE “AGAINST” ITEMS 3-5 ON THE ENCLOSED WHITE PROXY CARD.

      We urge you NOT to sign or return any [COLOR] proxy card sent to you by the Appaloosa/ Formation Capital group for any reason, even as a protest against their activities. The best way to support your Board is by voting:

      The Board knows of no other business to be presented at the Annual Meeting, but if other matters do properly come before the Annual Meeting, it is intended that the persons named in the proxy will vote on said matters in accordance with their best judgment.

Solicitation of Proxies

       Proxies may be solicited by mail, advertisement, telephone or other methods and in person. Solicitations may be made by directors, officers, investor relations personnel and other employees of BEI, none of whom will receive additional compensation for such solicitations.

      BEI has retained Innisfree M&A Incorporated to provide solicitation and advisory services in connection with the proxy solicitation, for which Innisfree is to receive a fee not to exceed $350,000, together with reimbursement for its reasonable out-of-pocket expenses and for payments made to brokers and other nominees for their expenses in forwarding soliciting material. Innisfree will distribute proxy materials to beneficial owners and solicit proxies by personal interview, mail, telephone and telegram, and will request brokerage houses and other custodians, nominees and fiduciaries to forward soliciting material to the beneficial owners of BEI common stock. BEI has also agreed to indemnify Innisfree against certain liabilities and expenses. It is anticipated that Innisfree will employ approximately 50 persons to solicit stockholders for the Annual Meeting.

      BEI retained Lehman Brothers Inc., referred to as Lehman Brothers, and J.P. Morgan Securities Inc., referred to as JPMorgan, as its financial advisors to provide certain financial advisory and investment banking services, including those in connection with the proposals received from the Appaloosa/ Formation Capital group, and related matters. Neither Lehman Brothers nor JPMorgan was retained by BEI to solicit proxies for the Annual Meeting. Neither Lehman Brothers nor JPMorgan admits that it and any of its respective directors, officers, employees, affiliates or controlling persons is a “participant,” as defined in Schedule 14A promulgated under the Exchange Act, in the solicitation of proxies for the Annual Meeting, or that Schedule 14A requires the disclosure of certain information concerning them. However, Lehman Brothers, JPMorgan and certain of their respective directors, officers, employees, affiliates or controlling persons may assist BEI in its solicitation as part of its broader engagement, although none of Lehman Brothers, JPMorgan and their respective directors, officers, employees, affiliates or controlling persons will receive any fee for, or in connection with, any solicitation activities apart from the fees Lehman Brothers and JPMorgan are otherwise entitled to receive under their respective engagements. In addition, BEI has agreed to reimburse Lehman Brothers and JPMorgan for their reasonable out-of-pocket expenses and to indemnify Lehman Brothers, JPMorgan and certain related persons against certain liabilities relating to or arising out of their engagements.

      Costs incidental to these solicitations of proxies will be borne by BEI and include expenditures for printing, postage, legal, accounting, financial advisers, public relations, soliciting, advertising and related expenses and are expected to be approximately $          in addition to the fees of Innisfree, Lehman Brothers and JPMorgan described above (excluding the amount normally expended by BEI for the solicitation of proxies at its Annual Meetings and costs represented by salaries and wages of regular employees and officers). Total costs incurred to date for, in furtherance of, or in connection with these solicitations of proxies are approximately $          .

      Certain information about the directors and executive officers of BEI and certain employees and other representatives of BEI who may also solicit proxies is set forth in Schedule I to this Proxy Statement. Schedule I also sets forth certain information relating to shares of BEI common stock owned by such parties and certain transactions between any of them and BEI. Schedule II sets forth certain information with respect to Lehman Brothers and JPMorgan.

      All expenses of solicitation of proxies will be borne by BEI.

March      , 2005

Fort Smith, Arkansas

SCHEDULE I

Information Concerning the Directors, Executive Officers and Certain

Other Officers of BEI Who May Be Deemed Participants in BEI’s
Solicitation of Proxies

Name, Principal Business Address and Office or Other Employment of Participants

      Set forth below is the name, business address and the present principal occupation or employment, and the name, principal business and address of any corporation or other organization in which their employment is carried on, of the (i) directors/nominees, (ii) named executive officers and (iii) certain other employees of BEI (collectively, the “BEI Participants”) who may assist in soliciting proxies from BEI’s stockholders.

Directors/Nominees

      The present principal occupation or employment of BEI’s directors is set forth under “BEI Nominees for the Board of Directors” in the Proxy Statement. The names and principal business addresses of the directors are set forth below.

Named Executive Officers

      The names and principal occupations of BEI’s named executive officers are set forth under “Executive Officers” in this Proxy Statement. The principal business address of each such person is BEI, One Thousand Beverly Way, Fort Smith, Arkansas 72919.

Other Employees

      The name and principal occupations of BEI’s other employees who may be deemed participants are set forth below. The principal business address of each such person is BEI, One Thousand Beverly Way, Fort Smith, Arkansas 72919.

Information Regarding Ownership of BEI’s Securities By Participants

      The number of shares of BEI common stock and other BEI securities held, directly or indirectly, by directors and named executive officers of BEI is set forth on pages 22 and 23 of this Proxy Statement. The number of shares of BEI common stock and other BEI securities held, directly or indirectly, by the remaining BEI Participants as of the Record Date is set forth below. No BEI Participant is the record holder of shares that such person does not beneficially own.

General Compensation

      See “Executive Compensation” and “Employment Contracts, Termination of Employment and Change in Control Agreements” for information regarding the general compensation and benefits provided to BEI’s named executive officers.

      James M. Griffith has a severance agreement with BEI, dated as of August  26, 1997. The severance agreement provides benefits on a termination after a Change in Control of BEI that include three years of base salary as well as three years of target bonus or annual bonus in the year before the Change of Control (whichever is higher), vesting of all stock-based compensation, continuation of medical, dental and disability coverage for three years and a relocation reimbursement. Absent a Change in Control, if a termination of employment is initiated by BEI without cause or by Mr. Griffith for good reason (as defined in the severance agreement), the severance benefits consist of one year of base salary and one year of target or annual bonus (whichever is higher), a continuation of medical, dental and disability coverage for one year and the same relocation reimbursement. See “Employment Contracts, Termination of Employment and Change in Control Agreements” for the definition of a “Change in Control.”

      Richard D. Skelly, Jr. does not have an employment or severance agreement with BEI, but the terms of his offer letter of employment provide for two years base salary and target bonus upon a Change of Control and one year of base salary and target bonus if a termination of employment is initiated by BEI without cause or by Mr. Skelly for good reason.

Long-Term Incentive Plans — Awards in Last Fiscal Year

      For a discussion of awards in the last fiscal year to the named executive officers under BEI’s Long-Term Incentive Plan, see “Executive Compensation — Long-Term Incentive Plans — Awards in Last Fiscal Year.” The following table presents awards in the last fiscal year to other BEI participants under BEI’s Long-Term Incentive Plan.

Long-Term Incentive Plans

     The following table sets forth certain amounts of cash and common stock that BEI is required to pay the BEI participants in connection with BEI’s Long-Term Incentive Plan for the three-year period ended December 31, 2003.

Long-Term Incentive Plans — Total Cash Pay-Outs in 2005 and 2006

Under Non-Stock Price Based Plans

Purchases and Sales of BEI Securities

      The following table sets forth all purchases and sales of BEI’s securities by BEI Participants during the past two years. Unless otherwise indicated, all transactions were in the public market and none of the purchase price or market value of those shares is represented by funds borrowed or otherwise obtained for the purpose of acquiring and holding such securities. To the extent that any part of the purchase price or market value of those shares is represented by funds borrowed or otherwise obtained for the purpose of acquiring and holding such securities, the amount of the indebtedness as of the latest practicable date is set forth below. If those funds were borrowed or obtained otherwise than pursuant to a margin account or bank loan in the ordinary course of business of a bank, broker or dealer, a brief description of the transaction and the names of the parties are set forth below.