UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





**FORM
10-K**





x**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES** **EXCHANGE ACT OF
1934.**





For the
fiscal year ended December 31, 2004





**OR**





o**TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES** **EXCHANGE ACT OF
1934.**


****


For the
transition period from ________ to _______





Commission
file number 0-19335.














*www.bmhc.com*





**Building
Materials Holding Corporation**





**Delaware**
    
    **91-1834269**(State
      of incorporation)
    
    (IRS
      Employer Identification No.)


****


**Four
Embarcadero Center, Suite 3250, San Francisco, CA
94111**


**(415)
627-9100**





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


**None**





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


**Common
Stock ($.001 par value)**





Indicate
by check mark whether the 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 the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.





Yes þ 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.  ̈





Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act).




Yes þ No  ̈


The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2004 was $164,825,176. The market value computation excludes
4,714,487 shares of common stock held by affiliates such as directors, officers
and holders of more than 5% of the registrant’s shares outstanding as of June
30, 2004.

The number of shares outstanding of the registrant’s common stock as
of March 28, 2005 was 14,028,775.

**Documents Incorporated by Reference**

(1)
    Portions of
      the Proxy Statement to be delivered to shareholders in connection with the
      Annual Meeting of Shareholders on May 3, 2005, are incorporated by
      reference into Part III of this Form 10-K.


Building
Materials Holding Corporation





**FORM
10-K**





For the
Fiscal Year Ended December 31, 2004





INDEX











**PART
      I**Item
      1.
    Business
    2Item
      2.
    Properties
    11Item
      3.
    Legal
      Proceedings
    11Item
      4.
    Submission
      of Matters to a Vote of Security Holders
    11**PART
      II**Item
      5.
    Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
    12Item
      6.
    Selected
      Financial Data
    13Item
      7.
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
    13Item
      7A.
    Quantitative
      and Qualitative Disclosures About Market Risk
    26Item
      8.
    Financial
      Statements and Supplementary Data
    27Item
      9.
    Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
    54Item
      9A.
    Controls
      and Procedures
    54Item
      9B.
    Other
      Information
    55**PART
      III**Item
      10.
    Directors
      and Executive Officers of the Registrant
    56Item
      11.
    Executive
      Compensation
    58Item
      12.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    58Item
      13.
    Certain
      Relationships and Related Transactions
    58Item
      14.
    Principal
      Accountant Fees and Services
    58**PART
      IV**Item
      15.
    Exhibits
      and Financial Statement Schedules
    59Signatures
    62


1


**Introduction
- Risk Factors and Forward-Looking Statements**





*There
are a number of business risks and uncertainties that affect our operations and
therefore could cause future results to differ from past financial performance
or expected results. Information regarding these risks and uncertainties is
contained in Item 1 of this Form 10-K under the caption Risk
Factors.*





*Certain
statements in this Form 10-K including those related to expectations about
homebuilding activity in our markets, demographic trends supporting homebuilding
and anticipated sales and operating income are forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. Statements
that are not historical or current facts, including statements about our
expectations, anticipated financial results and future business prospects are
forward-looking statements. While these statements represent our current
judgment on what the future may hold and we believe these judgments are
reasonable, these statements involve risks and uncertainties that are important
factors that could cause our actual results to differ materially from those in
forward-looking statements. These factors include, but are not limited to the
risks and uncertainties cited in the above paragraph. Undue reliance should not
be placed on such forward-looking statements, as such statements speak only as
of the date of the filing of the 2004 Annual Report on Form 10-K. We undertake
no obligation to update forward-looking statements.*





**PART
I**





**ITEM
1. Business**





**General
Overview**





Building
Materials Holding Corporation is one of the largest residential building
products and construction services companies in the United States with annual
sales in excess of $2 billion. We compete in the homebuilding industry through
two subsidiaries, BMC West Corporation (BMC West) and BMC Construction Inc. (BMC
Construction). With locations in the western and southern states, **BMC
West** distributes building products and manufactures building components
for professional builders and contractors.**BMC Construction**
provides construction services to high-volume production homebuilders in key
growth markets in western, southern and east coast states.





Founded
in 1987, BMHC trades on the NASDAQ and is headquartered in San Francisco,
California.





We timely
provide through our website www.bmhc.com ,
periodic and current reports after they are filed with the Securities and
Exchange Commission.





**Industry
Overview**





The
homebuilding industry is driven by demand for new homes. Housing demand is
influenced by many factors including mortgage interest rates, consumer
confidence, economic climate, job formation, financing options, household
formation, size and age of the population and migration patterns. The National
Association of Home Builders reported single-family housing starts at a historic
high of 1.6 million in 2004 and is projecting annual housing starts of 1.5
million in 2005 and 2006.





The
composition of our segment of the homebuilding industry of supplying building
materials and construction services is characterized by a large number of small,
privately owned businesses. These include businesses that provide building
materials distribution, truss manufacturing, millwork fabrication and
construction services such as framing, roofing, plumbing, mechanical and
electrical. While a significant amount of consolidation has occurred, the
industry remains fragmented, particularly for construction services. 
Participants range from small single-crew firms to large integrated, multi-crew
operations.




2


Construction
service entities are typically family run, relationship-based operations, with
limited access to working capital, sophisticated management and control systems,
or large-scale purchasing advantages.




High-volume
production homebuilders are servicing a larger share of new residential
construction. These builders generally outsource framing and other construction
services. Our ability to distribute building products and provide integrated
construction services is a competitive advantage to builders seeking
full-service providers. Many businesses lack the advantages we offer such as
sufficient working capital, insurance, management control systems and purchasing
expertise.





**Acquisition
Strategy**





Our
acquisition strategy is focused on increasing our offerings of value added
construction services and manufactured building components including trusses,
millwork and wall panels. The fragmented nature of the existing construction
services market presents numerous acquisition opportunities. We clearly define
and thoroughly analyze new target markets. In attractive markets, acquisitions
are evaluated based on their anticipated performance, management depth, cultural
fit, industry reputation and long-term potential customer base. We typically
enter a market by partnering with an existing construction services provider and
move rapidly to vertically integrate our products and services to capture market
share. We assign experienced due diligence teams to review each potential
acquisition target once we have agreed in principle to the general terms of the
acquisition.





At BMC
Construction, the following significant acquisitions were completed over the
past three years:





·
    RCI
      Construction, LLC - a company providing framing services in the greater
      Chicago area (January 2005 - 51% interest)


·
    KBI
      Norcal - a framing services business in northern California (July 2002 -
      51% interest; July 2004 - the remaining 49%)


·
    WBC
      Mid-Atlantic, LLC - a company providing framing services in Delaware, the
      District of Columbia, Maryland and Virginia (October 2003 - 67.33%
      interest)


·
    WBC
      Construction, LLC - a company providing foundation and shell construction
      services in Florida (January 2003 - 60%
interest)





At BMC
West, we have also completed several smaller acquisitions. In selected markets,
local construction services acquisitions have been and may continue to be used
to expand our distribution channels for value added products.





Over the
past two years, our acquisition and expansion strategy has significantly changed
our sales mix as follows:





**2004**
    
    
    2003
    
    
    2002Building
      Products
    
    
    **57**
    **%**
    
    
    65
    %
    
    
    75
    %Construction
      Services
    
    
    **43**
    
    
    
    35
    
    
    
    25**100**
    **%**
    
    
    100
    %
    
    
    100
    %








3





**Products
and Services**





Both of
our business segments customize their respective product and service mix to meet
customer needs in their respective markets.





**BMC
West** markets
and sells building products, manufactures building components and provides
construction services. Products include dimension lumber, panel products and
building materials purchased from other manufacturers as well as manufactured
building components including millwork, trusses and wall panels. Construction
services include framing and installation of miscellaneous building products.
Building products and construction services are sold principally to custom and
professional homebuilders.





**BMC
Construction** provides
framing and other construction services to high-volume production homebuilders.
These services include managing labor, materials and construction
schedules.





**Our
Customers**





We build
relationships with professional builders engaged in new residential
construction. Builders are generally repeat customers, with high-volume
purchasing needs that require custom engineering, manufacturing, construction
services, materials procurement, on-time job-site delivery and trade credit.
These types of services are not typically offered by consumer-oriented
retailers. Therefore we generally do not compete with Home Depot or Lowe’s,
which typically sell to consumers in small quantities and offer limited
services.





Several
factors which influence and help maintain favorable business relationships
include the following:





·
    dependability,
      scope and quality of services


·
    quality
      and availability of products


·
    reliable
      delivery and timely production schedules


·
    availability
      of trade credit


·
    competitive
      pricing


·
    flexibility
      in transaction processing


·
    ability
      to provide integrated services including framing, truss and millwork
      manufacturing and installation





**BMC
West** delivers
building products to construction sites according to customer specifications and
schedules. **BMC Construction** customers
are high-volume production homebuilders. Our integrated approach to providing
construction services allows builders to focus on other aspects of their
business, including land development and new home sales.





Our
largest customer accounted for 5.6% of consolidated sales in 2004, while the top
five customers represented less than 19% of consolidated sales. At BMC West and
BMC Construction, the top five customers accounted for approximately 10% and 42%
of each business segment’s total sales, respectively.





Our
customers generally enter into contracts for building products and construction
services on an as-needed basis. Consequently, order backlogs are not
significant.





4





**Focus
on Service**





Our focus
on service is a key factor that distinguishes us from competitors. We have
developed a variety of specialty services to help customers complete residential
construction projects. We employ experienced, service-oriented employees. Our
product knowledge and installation skills enable customers to rely on our
expertise for design and product recommendations. Our dedication to providing
superior customer service to builders allows our employees to develop consistent
relationships and generate a large volume of repeat and referral
business.





**Competition**





Our
products and services compete with similar offerings in the markets we serve.
The markets in each of our business segments are fragmented, highly competitive,
and our competitors vary in size, management expertise and integration
capabilities.





**BMC
West** competes
with local, regional and national building materials chains. Builders generally
select suppliers based on competitive pricing, product availability, reliable
delivery, service, trade credit and knowledgeable personnel. Our relatively
large size permits us to attract experienced and professional sales and service
personnel. Also, we offer training programs to enhance product and service
knowledge. By working closely with our customers and supported by our management
information systems, our business units maintain appropriate inventory and
staffing levels and are well positioned to deliver quality building products. We
service our customers based on a regional business model which integrates
building products, manufactured building components and construction services
from our various locations. This allows us to be a full-service provider to many
of our customers and provides us with a competitive advantage.





**BMC
Construction** provides
construction services to high-volume production homebuilders and competes with
independent framing contractors, building materials distribution companies and
smaller contractors. Independent framing contractors range in size from
single-crew operations to large well-managed organizations spanning multiple
markets. Several of the larger homebuilders continue to perform framing and
other construction services in-house. We compare favorably to competitors
because of the quality and reliability of our integrated service and product
offerings, capital resources and reputation.





**Sales
and Marketing**





Our
operations are located in attractive markets for new home construction. We
service homebuilders in Washington, Oregon, Montana, Idaho, California, Nevada,
Colorado, Utah, Arizona, Texas, Illinois, Florida, Maryland, Virginia, Delaware
and the District of Columbia. The relative economic strength in our markets as
well as historical population and migration trends have generally supported
growth in residential construction in these areas. According to the National
Association of Home Builders, housing starts have favored the southern and
western states, accounting for approximately 70% of the annual starts in the
United States over the past three years.





BMC West
attracts customers through their quality reputation, field sales
representatives, referrals, advertisements in trade journals and local
promotional events. BMC Construction relies on the value and solid reputation of
their integrated construction services model to secure national and regional
relationships with high-volume production homebuilders.


5




**Business
Segments**





The
following information is presented for our BMC West and BMC Construction
business segments.





Sales to
external customers by products and services (thousands):





**2004**
    
    2003
    
    2002**BMC
      West**Building
      products
    
    **$**
    **1,177,894**
    
    $
    917,019
    
    $
    868,431Construction
      services
    
    
    **159,430**
    
    
    89,885
    
    
    73,399**$**
    **1,337,324**
    
    $
    1,006,904
    
    $
    941,830**BMC
      Construction**Building
      products
    
    **$**
    **8,769**
    
    $
    —
    
    $
    —Construction
      services
    
    
    **744,932**
    
    
    408,167
    
    
    219,664**$**
    **753,701**
    
    $
    408,167
    
    $
    219,664**Total**
    
    **$**
    **2,091,025**
    
    $
    1,415,071
    
    $
    1,161,494





Selected
financial information is as follows (thousands):





Sales
    
    Income (1)
      (Loss)
      Before
      Taxesand
    
    Equity in
      NetIncome
    
    DepreciationTotal
    
    Inter-Segment
    
    Trade
    
    MinorityInterests
    
    (Loss) ofAffiliates
    
    andAmortization
    
    Capital (2)Expenditures
    
    Assets**Year
      Ended December 31, 2004**BMC
      West
    
    **$**
    **1,338,470**
    
    **$**
    **(1,146**
    **)**
    **$**
    **1,337,324**
    
    **$**
    **96,083**
    
    $
    **—**
    
    **$**
    **14,599**
    
    **$**
    **17,036**
    
    **$**
    **409,160**BMC
      Construction
    
    
    **753,956**
    
    
    **(255**
    **)**
    
    **753,701**
    
    
    **59,689**
    
    
    **—**
    
    
    **8,216**
    
    
    **14,382**
    
    
    **268,498**Corporate
      and Other
    
    
    —
    
    
    **—**
    
    
    **—**
    
    
    **(47,664**
    **)**
    
    **—**
    
    
    **497**
    
    
    —
    
    
    **65,386****2,092,426**
    
    
    **(1,401**
    **)**
    
    **2,091,025**
    
    
    **108,108**
    
    
    —
    
    
    **23,312**
    
    
    **31,418**
    
    
    **743,044**Interest
      Expense
    
    
    —
    
    
    —
    
    
    —
    
    
    **(13,560**
    **)**
    
    —
    
    
    —
    
    
    —
    
    
    —**$**
    **2,092,426**
    
    **$**
    **(1,401**
    **)**
    **$**
    **2,091,025**
    
    **$**
    **94,548**
    
    $
    —
    
    **$**
    **23,312**
    
    **$**
    **31,418**
    
    **$**
    **743,044****Year
      Ended December 31, 2003**BMC
      West
    
    $
    1,007,373
    
    $
    (469
    )
    $
    1,006,904
    
    $
    54,826
    
    $
    —
    
    $
    15,315
    
    $
    12,121
    
    $
    390,764BMC
      Construction
    
    
    408,929
    
    
    (762
    )
    
    408,167
    
    
    18,954
    
    
    1,431
    
    
    4,410
    
    
    5,555
    
    
    187,479Corporate
      and Other
    
    
    —
    
    
    —
    
    
    —
    
    
    (33,351
    )
    
    —
    
    
    1,060
    
    
    —
    
    
    25,9561,416,302
    
    
    (1,231
    )
    
    1,415,071
    
    
    40,429
    
    
    1,431
    
    
    20,785
    
    
    17,676
    
    
    604,199Interest
      Expense
    
    
    —
    
    
    —
    
    
    —
    
    
    (9,279
    )
    
    —
    
    
    —
    
    
    —
    
    
    —$
    1,416,302
    
    $
    (1,231
    )
    $
    1,415,071
    
    $
    31,150
    
    $
    1,431
    
    $
    20,785
    
    $
    17,676
    
    $
    604,199**Year
      Ended December 31, 2002**BMC
      West
    
    $
    941,845
    
    $
    (15
    )
    $
    941,830
    
    $
    48,146
    
    $
    —
    
    $
    15,184
    
    $
    17,898
    
    $
    371,717BMC
      Construction
    
    
    220,472
    
    
    (808
    )
    
    219,664
    
    
    20,677
    
    
    —
    
    
    2,545
    
    
    4,303
    
    
    120,997Corporate
      and Other
    
    
    —
    
    
    —
    
    
    —
    
    
    (29,702
    )
    
    —
    
    
    1,536
    
    
    —
    
    
    10,3601,162,317
    
    
    (823
    )
    
    1,161,494
    
    
    39,121
    
    
    —
    
    
    19,265
    
    
    22,201
    
    
    503,074Interest
      Expense
    
    
    —
    
    
    —
    
    
    —
    
    
    (9,812
    )
    
    —
    
    
    —
    
    
    —
    
    
    —$
    1,162,317
    
    $
    (823
    )
    $
    1,161,494
    
    $
    29,309
    
    $
    —
    
    $
    19,265
    
    $
    22,201
    
    $
    503,074








6





(1)
    During
      2004, impairments of $1.3 million for the carrying amount of certain
      properties held for
      sale and $1.0 million in the carrying amount of goodwill resulting from a
      change in business strategy were recognized for BMC West. As a result of
      changes in a specific market, an impairment of $0.8 million in the
      carrying amount of customer relationships was recognized for BMC
      Construction in 2003. During 2002, changing market conditions resulted in
      a $6.7 million impairment of goodwill for BMC
  West.


(2)
    Property and equipment from acquisitions are included as capital
      expenditures.




**Operating
Strategy**





Our
business segments, BMC West and BMC Construction are comprised of locations that
are separately managed business units. Each market-region manager has
substantial autonomy and responsibility to address customer needs in their
markets. A vendor’s reputation is often determined locally, where service,
product suitability and knowledgeable customer service are critical. Managers
are responsible for optimizing business activities in their markets, including
the efficient use of sales personnel, assessing and maintaining inventory and
labor forces, identifying potential customers and developing appropriate service
and product offerings. A portion of a manager’s compensation is based on
earnings and return on capital employed.





We focus
on improving efficiency and productivity at all business units while giving
special attention and support to units that are not meeting strategic
objectives. When a business unit fails to meet performance criteria,
alternatives include adjusting the mix of products and services, restructuring
management, consolidation or liquidation.





**Purchasing**





We
purchase building products from numerous manufacturers and suppliers. In 2004,
our largest supplier accounted for approximately 9.4% of purchases. We believe
the loss of any single supplier would not have a material adverse effect on our
financial position, results of operations or cash flows.





In order
to meet market specific needs and maintain appropriate inventory levels,
purchasing decisions are made at the business unit level. These purchases are
made under company-wide guidelines. In addition, we participate in volume rebate
programs with our suppliers.





On
average, commodity wood product prices were higher in 2004 compared to the prior
year. Prices of commodity wood products, which are subject to significant
volatility, adversely impact operating income when prices rapidly rise or fall
within a relatively short period of time. Our information systems allow business
unit mangers to closely monitor sales and inventory on a regular basis. With
this supply and demand information, we generally avoid overstocking commodity
wood products. As a result, we turn our commodity wood product inventory on
average 10 to 11 times per year. Such rapid inventory turnover limits our
potential exposure to inventory loss from commodity price fluctuations.





**Management
Information Systems**





Operational,
financial and other related information for BMC West are processed and
maintained at our administrative service center in Boise, Idaho. BMC
Construction business units operate independently and their financial results
are transmitted to our administrative service center.






7





Our
network infrastructure allows for the accumulation, processing and distribution
of information using industry standard resources and programs. Subsidiary
information systems connect to the administrative service center through a
high-speed wide area network. At BMC West, these systems provide real-time
pricing, inventory assessment and margin analysis. This allows personnel to
offer a high level of customer service, while giving management the ability to
access and use timely information to monitor operations. These systems enable us
to analyze sales trends, improve inventory turnover, enhance profit margins and
monitor receivables, customer credit and employee productivity. BMC
Construction’s operational, financial and other related information are
maintained at each respective entity comprising this business
segment.





As a
safeguard to protect our critical data centers, our systems are backed-up daily
on tapes which are secured offsite. In the event of partial or complete loss of
our data centers, systems can be restored within one to two days.





**Safety
and Risk Management**





Due to
the growth in construction services in recent years, the number of our employees
engaged in construction trades has increased. The construction services industry
incurs a higher number of accidents and subsequent costs associated with
workers’ compensation claims than typically experienced at building materials
distribution facilities. We continue to target improved workplace training and
safety to mitigate increases in insurance costs.





**Risk
Factors**





There are
a number of business risks and uncertainties that affect our operations and
therefore could cause future results to differ from past performance or expected
results. These risks or uncertainties may include, but are not limited to the
following:




*The industry in which we operate is dependent upon the
demand for homebuilding which is influenced by changes in the overall condition
of the U.S. economy, including job formation, interest rates and consumer
confidence as well as other important factors.*


The
building products and construction services industry is highly dependent on new
home construction, which is also influenced by economic changes nationally and
locally in our specific markets. The building materials and construction
services industry has also historically experienced cyclicality. Our financial
performance is subject to fluctuations due to dependence on demand for
homebuilding, changes in general economic and local market conditions, commodity
wood product prices, building permit activity, interest rates, single-family
housing starts, employment levels, availability and cost of labor, consumer
confidence, the impact on the economy of geopolitical events and the
availability of credit to builders and homeowners. Because we rely on sales to
homebuilders engaged in new home construction, these factors may have a more
significant impact on our results than those of building supply companies that
target a broad range of retail customers whose activities are generally home
repair and remodeling.





***Our
operating results are affected by fluctuations in our costs and availability of
sourcing channels for commodity wood products and building
materials.***


Prices of
commodity wood products are historically volatile and directly affect our sales
and operating income. Prices of building products are subject to fluctuations
arising from changes in domestic and international supply and demand, labor
costs, competition and market speculation. Changes in commodity
wood product prices may affect sales as well






8







We may
also experience limitations or shortages from our suppliers to acquire
sufficient building products to meet market demand. Generally, our products are
obtainable from various sources and in sufficient quantities. However, the loss
or substantial decrease in the availability of building products from our
suppliers could adversely impact our financial condition and results of
operations.


******


***Changes
in the business models of our customers may affect our ability to provide
building products and services required by our
customers.***


As the
business models of our customers evolve, our current building products and
construction services mix may not adequately fulfill their needs. We may
encounter significant decreases in sales and income as a result of not timely
assessing shifts in customer expectations, preferences and demands.





***Our
business is subject to intense competition.***


We
experience competition across all markets for our building products and
construction services. These competitive pressures may lead to decreases in
sales, price reductions and increases in operating costs. Loss of significant
market share due to competition could result in the closure of
facilities.





In
serving high-volume production homebuilders primarily through BMC Construction,
we compete with national, regional and local construction service providers. In
serving other types of homebuilders through BMC West, we compete primarily with
local, regional and national building materials providers.





***Future
integration of acquired businesses may not result in anticipated cost savings
and revenue synergies being fully realized or it may take longer to realize than
expected.***


The
management and acquisition of new businesses involves substantial risks
including: significant expenses to integrate the business; depletion of
management resources; departure of key personnel from the acquired business;
cultural fit with our existing personnel; integration of different accounting
and reporting systems; exposure to unforeseen liabilities; the reliability of
construction estimates; the impairment of goodwill; and the uncertainty that an
acquired business will achieve anticipated revenues and earnings.





***Our
growth is dependent upon our ability to identify suitable acquisition
candidates.***


Our
growth over the past several years has been largely due to acquisitions and we
intend to continue this strategy. Failure to identify and acquire suitable
acquisition candidates could have a material adverse effect on our growth. In
particular, the number of suitable acquisition candidates with the size and
scale of operations to adequately satisfy our requirements may be
limited.





***Our
success is dependent upon the availability of and ability to attract, train and
retain qualified individuals.***


Competition
for employees is especially intense in both construction services and building
products distribution. In markets with strong housing demand, we may experience
shortages in qualified labor which may limit our ability to take advantage of
additional contracts with builders. We have been successful in recruiting and
retaining qualified employees, but we cannot guarantee that we will
continue to be successful in the future.




9





***Unanticipated
weather conditions including natural catastrophic events such as earthquakes,
fire, flood, hurricanes, tornados, etc., may cause our business and operating
results to fluctuate each quarter.***


Our first
and fourth quarters historically have been, and are expected to continue to be,
adversely affected by weather conditions in some of our markets, causing
decreases in homebuilding. In addition, quarterly results historically have
reflected, and are expected to continue to reflect, fluctuations from natural
catastrophes.





***Implementation
of cost structures that align with revenue growth may have an adverse impact on
our income from operations.***


As we
acquire new businesses and expand existing operations, we may experience losses
in income from operations from inefficiencies in our cost structures.
Management’s evaluation of fixed and variable expenses appropriate for shifts in
sales volume may not timely occur, leading to higher costs and lower returns on
sales.





***Actual
and perceived vulnerabilities as a result of terrorist activities and armed
conflict may reduce our sales and income from
operations.***


Instability
in the economy and financial markets as a result of terrorism or war may result
in a decrease in homebuilding in our markets and reduce our sales and income
from operations. Terrorist attacks may directly impact our ability to keep
operations and services functioning properly and could have a material adverse
effect on our business.





***Numerous
other matters of a local and regional scale, including those of a political,
economic, business, competitive or regulatory nature may have an adverse impact
on our business.***


There
exists many factors which shape the homebuilding industry. In addition to the
factors previously cited, there are other matters of a local and regional scale,
including those of a political, economic, business, competitive or regulatory
nature which may have a material adverse effect on our business.





**Employees**





Our
success is highly dependent on the quality of our employees. Because we face
competition in attracting and retaining qualified employees, we maintain
competitive compensation and benefit programs to attract, motivate and retain
top-performers. We also provide extensive product knowledge, customer service
and other training programs to assure employee and customer
satisfaction.





We employ
approximately 12,000 people. Unions represent approximately 765 or less than 7%
of these employees. We have not experienced any strikes or other work
interruptions and have maintained generally favorable relations with our
employees.


****
 ****
 10
 ****
 **ITEM
2. Properties**





Our
leased headquarters and administrative service center are located in San
Francisco, California and Boise, Idaho respectively. Principal properties
include distribution centers for building products, millwork fabrication and
distribution sites, truss manufacturing plants, sales and administrative
offices. Properties are located in growing metropolitan areas and emerging
housing markets. By business segment, properties are approximately 67% owned and
33% leased for BMC West, while substantially all of the properties for BMC
Construction are leased. Our properties provide adequate capacity to meet the
needs of our customers and are in good operating condition. Locations operate
under the trade names BMHC, BMC West and BMC Construction, as well as other
brand names or trademarks. Principal properties by business segment are as
follows:





**BMC
      West**
    
    
    **BMC
      Construction**Location
    Number
      of
      Properties
    
    Location
    Number
      of
      PropertiesArizona
    1
    
    Arizona
    7California
    7
    
    California
    5Colorado
    17
    
    Florida
    8Idaho
    9
    
    Illinois
    1Montana
    6
    
    Maryland
    1Nevada
    3
    
    Nevada
    3Oklahoma
    1
    
    Virginia
    1Oregon
    2Texas
    18Utah
    6Washington
    5








**ITEM
3. Legal Proceedings**





We are
involved in litigation and other legal matters arising in the normal course of
business. In the opinion of management, the recovery or liability, if any, under
any of these matters will not have a material effect on the consolidated
financial position, liquidity or results of operations.








**ITEM
4. Submission of Matters to a Vote of Security Holders**





There
were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year.





11


**PART
II**





**ITEM
5. Market for Registrant's Common Equity and Related Stockholder
Matters**





Our
common stock is traded on the NASDAQ under the symbol BMHC. The high and low
share prices as well as cash dividends for each period were as follows:





**2004**
    
    2003**High**
    
    **Low**
    
    **Cash
      Dividends**
      **Declared**
    
    High
    
    Low
    
    Cash
      Dividends
      DeclaredFirst
      quarter
    
    
    
    ****$**18.33**
    
    ********
    ********$**14.90**
    
    ********
    ********$**0.06**
    
    
    $15.75
    
    
    $12.68
    
    
    $0.05Second
      quarter
    
    
    ****
    ****$**19.28**
    
    ****
    **$15.70**
    
    ****
    ****$**0.06**
    
    
    $15.35
    
    
    $12.16
    
    
    $0.05Third
      quarter
    
    
    ****
    ****$**27.65**
    
    ****
    **$16.97**
    
    ****
    ****$**0.08**
    
    
    $15.71
    
    
    $11.75
    
    
    $0.05Fourth
      quarter
    
    
    
    **$38.94**
    
    ****
    **$25.62**
    
    
    **$0.08**
    
    
    $15.53
    
    
    $12.75
    
    
    $0.06





Quarterly
cash dividends were increased to $0.08 per share in the third quarter of 2004.
The quarterly cash dividend was initiated at $0.05 per share in the fourth
quarter of 2002 and increased to $0.06 per share in the fourth quarter of 2003.
These dividends are paid at the discretion of the Board of Directors. The
continuation of these payments, the amount and the form in which the dividends
are paid (cash or shares) depend on many factors, including financial condition
and results of operations.





As of
March 10, 2005, there were approximately 6,486 shareholders of record and the
closing price of our stock was $45.53.





**Securities
Authorized for Issuance under Equity Compensation Plans**





A summary
of information pertaining to equity compensation plans as of December 31, 2004
was as follows:





Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
    
    Weighted-Average
      Exercise Price of Outstanding Options, Warrants and Rights
    
    Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation PlansEquity
      compensation plans approved
      by
      security holders
    
    
    1,402,398
    
    
    $13.36
    
    
    907,700Equity
      compensation plans not approved
      by
      security holders
    
    
    50,000(1)
    
    
    $12.50
    
    
    —Total
    
    
    1,452,398
    
    
    $13.33
    
    
    907,700





(1)
    In
      February 1997, the Board of Directors authorized issuance of these options
      as an additional incentive to attract a member of senior management. The
      exercise price was equal to the fair market value of the shares on the
      date the options were granted. These options vested in February 2002 and
      expire 10 years from the date of grant.





12





**ITEM
6. Selected Financial Data**





The
following selected financial data should be read in conjunction with Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of
Operations as well as Item 8 - Financial Statements and Supplementary Data.
These resources provide further information to understand the comparability of
selected financial data.





**Selected
Financial Data**


(thousands,
except share data)




**Year Ended December 31****2004**
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000SalesBuilding
      products
    
    **$**
    **1,186,663**
    
    
    $
    917,019
    
    
    $
    868,431
    
    
    $
    945,504
    
    
    $
    1,013,968Construction
      services
    
    ****
    **904,362**
    
    
    
    498,052
    
    
    
    293,063
    
    
    
    147,363
    
    
    
    —Total
      sales
    
    **$**
    **2,091,025**
    
    
    $
    1,415,071
    
    
    $
    1,161,494
    
    
    $
    1,092,867
    
    
    $
    1,013,968Income
      from operations
    
    ****$****
    **108,108**
    
    
    $
    40,429
    
    
    $
    39,121
    
    
    $
    42,629
    
    
    $
    42,536Net
      income
    
    **$**
    **53,910**
    **(1)**
    
    $
    19,929
    (2)
    
    $
    7,015
    (3)
    
    $
    20,844
    (4)
    
    $
    19,712
    (5)Net
      income per share:Basic
    
    **$**
    **4.00**
    
    
    $
    1.50
    
    
    $
    0.54
    
    
    $
    1.61
    
    
    $
    1.55Diluted
    
    **$**
    **3.87**
    
    
    $
    1.48
    
    
    $
    0.53
    
    
    $
    1.60
    
    
    $
    1.54Cash
      dividends declared per share(6)
    
    **$**
    **0.28**
    
    
    $
    0.21
    
    
    $
    0.05
    
    
    $
    —
    
    
    $
    —Working
      capital
    
    **$**
    **270,437**
    
    
    $
    216,898
    
    
    $
    170,492
    
    
    $
    160,904
    
    
    $
    142,075Total
      assets
    
    **$**
    **743,044**
    
    
    $
    604,199
    
    
    $
    503,074
    
    
    $
    485,742
    
    
    $
    459,634Long-term
      debt, net of current portion
    
    **$**
    **206,419**
    
    
    $
    186,773
    
    
    $
    157,375
    
    
    $
    167,417
    
    
    $
    165,006Shareholders’
      equity
    
    **$**
    **327,678**
    
    
    $
    271,010
    
    
    $
    251,300
    
    
    $
    242,894
    
    
    $
    220,555





(1)
    
    An
      impairment of $0.8 million net of tax for certain properties and an
      impairment of $0.6 million net of tax for goodwill as a result of a change
      in business strategy were recognized in BMC West. Also, includes $3.8
      million net of tax for a reduction of expenses for lower than expected
      insurance costs.(2)
    
    Changes
      in certain market conditions resulted in an impairment of $0.5 million net
      of tax for customer relationships in BMC Construction.(3)
    
    Changes
      in certain market conditions resulted in an impairment of $4.1 million net
      of tax for goodwill in BMC West. Also, the transitional impairment
      analysis of goodwill resulted in an impairment of $11.7 million net of tax
      in BMC West.(4)
    
    An
      impairment of $0.6 million net of tax for an investment and $0.5 million
      net of tax for an impairment of certain properties were recognized in
      BMC West.(5)
    
    Changes
      in certain market conditions resulted in an impairment of $1.1 million net
      of tax for goodwill in BMC West.(6)
    
    Quarterly
      cash dividends were increased to $0.08 per share in the third quarter of
      2004. The quarterly cash dividend was initiated at $0.05 per share in the
      fourth quarter of 2002 and increased to $0.06 per share in the fourth
      quarter of 2003.











**ITEM
7. Management's Discussion and Analysis of Financial Condition and Results** **of
Operations**





The
following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes that appear in Item 8 of Form 10-K as
well as the caption under this item entitled Business Risks and Forward-Looking
Statements.







13


****


**OVERVIEW**





**Homebuilding
Industry**





New home
construction in the United States remained strong in 2004, with housing starts
at historically high levels. Single-family housing starts were at 1.6 million, a
7.4% increase over 2003. Low mortgage rates, consumer confidence and a favorable
economic environment shape the current housing industry. From a long-term
perspective, demographic trends from the U.S. Census Bureau indicate continued
strength in homebuilding.





**Our
Focus**





Our
segment of the homebuilding industry of providing building materials and
construction services is evolving to satisfy the needs of builders and
contractors seeking full-service providers. In particular, high-volume
production homebuilders are seeking quality, reliable and cost effective
construction services solutions. Our growth strategy focuses on increasing
construction services through acquisitions and expanding products and services
at existing operations to satisfy the needs of builders and
contractors.





We
compete in the homebuilding industry through two business segments: **BMC
West** and **BMC
Construction** . With
locations in the western and southern states, BMC West distributes building
products and manufactures building components for professional builders and
contractors. BMC Construction provides construction services to high-volume
production homebuilders through operations in key growth markets in western,
southern and east coast states. These two business segments are subsidiaries of
our holding company - Building Materials Holding Corporation.





**Acquisition
History**





Over the
past three years, BMC Construction completed several purchases to enter new
markets and expand construction service offerings at existing operations.
Significant acquisitions include:





·
    RCI
      Construction, LLC - a company providing framing services in the greater
      Chicago area (January 2005 - 51% interest)


·
    KBI
      Norcal - a framing services business in northern California (July 2002 -
      51% interest; July 2004 - the remaining 49%)


·
    WBC
      Mid-Atlantic, LLC - a company providing framing services in Delaware, the
      District of Columbia, Maryland and Virginia (October 2003 - 67.33%
      interest)


·
    WBC
      Construction, LLC - a company providing foundation and shell construction
      services in Florida (January 2003 - 60%
interest)





BMC West
has also completed acquisitions and continues to pursue initiatives to expand
truss manufacturing, millwork fabrication and construction services at existing
operations.





**Risks
and Uncertainties**





Housing
demand, subject to the influences of interest rates, consumer confidence, the
general economic environment, job growth, demographic trends as well as numerous
other local factors, remains a key component upon which our success depends.
Additionally, commodity wood product prices which are subject to significant
volatility, were substantially higher in 2004 relative to the prior year,
augmenting sales and operating income. Despite these factors, we anticipate
strong homebuilding activity in




14


****


We
measure our operating performance and financial condition based on several
factors including:
  ·
    Sales
 ·
    Income
      from operations
 ·
    Management
      of working capital and assets
 ·
    Return
      on investment
 
 We
evaluate our results of operations including and excluding charges for
impairments as well as recent acquisitions not present in comparable periods. We
believe these measures enhance an understanding of our operating results for the
respective reporting periods.
 
 The
discussion of our results of operations and financial condition provides
information that will assist in understanding our financial statements, changes
in key items in those financial statements and the primary factors that
accounted for those changes. The discussion of our consolidated financial
results is followed by a more detailed review of our business
segments.





**RESULTS
OF OPERATIONS**





The
following table sets forth the amounts and percentage relationship to sales of
certain costs, expenses and income items (millions):





**Year
      Ended December 31****2004**
    
    
    2003
    
    
    2002**Sales**Building
      products
    
    **$******************************
    ******************************1,186.7**
    
    
    **56.8**
    **%**
    
    $
    917.0
    
    
    64.8
    %
    
    $
    868.4
    
    
    74.8
    %Construction
      services
    
    
    **904.3**
    
    
    **43.2**
    
    
    
    498.1
    
    
    35.2
    
    
    
    293.1
    
    
    25.2Total
      sales
    
    
    **2,091.0**
    
    
    **100.0**
    
    
    
    1,415.1
    
    
    100.0
    
    
    
    1,161.5
    
    
    100.0**Costs
      and operating expenses**Cost
      of goods soldBuilding
      products
    
    
    **897.7**
    
    
    **75.7**
    
    
    
    688.4
    
    
    75.1
    
    
    
    640.5
    
    
    73.8Construction
      services
    
    
    **768.4**
    
    
    **85.0**
    
    
    
    436.9
    
    
    87.7
    
    
    
    242.6
    
    
    82.8Total
      cost of goods sold
    
    
    **1,666.1**
    
    
    **79.7**
    
    
    
    1,125.3
    
    
    79.5
    
    
    
    883.1
    
    
    76.0Impairment
      of assets
    
    
    **2.3**
    
    
    **0.1**
    
    
    
    0.8
    
    
    0.1
    
    
    
    6.7
    
    
    0.6Selling,
      general andadministrative
      expenses
    
    
    **317.0**
    
    
    **15.2**
    
    
    
    250.3
    
    
    17.6
    
    
    
    233.3
    
    
    20.1Other
      income, net
    
    
    **(2.5**
    **)**
    ****
    **(0.1**
    **)**
    
    
    (1.7
    )
    
    (0.1
    )
    
    
    (0.7
    )
    
    (0.1
    )**Income
      from operations**
    
    
    **108.1**
    
    
    **5.1**
    
    
    
    40.4
    
    
    2.9
    
    
    
    39.1
    
    
    3.4Interest
      expense
    
    
    **13.6**
    
    
    **0.6**
    
    
    
    9.3
    
    
    0.7
    
    
    
    9.8
    
    
    0.8Income
      taxes
    
    
    **35.2**
    
    
    **1.7**
    
    
    
    11.4
    
    
    0.8
    
    
    
    10.9
    
    
    1.0Minority
      interests (income) loss, net
    
    
    **(5.4**
    **)**
    ****
    **(0.2**
    **)**
    
    
    (1.2
    )
    
    (0.1
    )
    
    
    0.2
    
    
    0.0Equity
      earnings, net of tax of $0.9
    
    
    —
    
    
    **—**
    
    
    
    1.4
    
    
    0.1
    
    
    
    —
    
    
    —Income
      before change inaccounting
      principle
    
    
    **53.9**
    
    
    **2.6**
    
    
    
    19.9
    
    
    1.4
    
    
    
    18.6
    
    
    1.6Change
      in accounting principle,
      net
      of tax benefit of $6.3
    
    
    —
    
    
    —
    
    
    
    —
    
    
    —
    
    
    
    (11.6
    )
    
    (1.0
    )**Net
      income**
    
    **$******************************
    ******************************53.9**
    
    
    **2.6**
    **%**
    
    $
    19.9
    
    
    1.4
    %
    
    $
    7.0
    
    
    0.6
    %


****


****


15


****


**2004
COMPARED WITH 2003**





***Consolidated
Financial Results***


Selected
financial results are as follows (millions):





**2004**
    
    2003**Sales****Building
      products**
    
    **$**
    **1,186.7**
    
    $
    917.0**Construction
      services**
    
    
    **904.3**
    
    
    498.1**$**
    **2,091.0**
    
    $
    1,415.1**Income
      from operations**
    
    **$**
    **108.1**
    
    $
    40.4





Sales
exceeded $2 billion in 2004, an increase of 48% over the prior year. Existing
operations accounted for 67% or $455 million of the increase and acquisitions of
construction services businesses not present in comparable periods represented
the remaining $221 million. Construction services continue to increase as a
result of our strategy to offer more services to homebuilders.





Income
from operations increased to $108.1 million from $40.4 million in the prior
year. Gross margins were 20.3% and approximately the same as the prior year of
20.5%. Margins for building products were 0.6% lower, while margins for
construction services improved 2.7%. Other operating expenses were 15.2% of
sales compared to 17.7% in the prior year as a result of leveraging these costs
against higher sales at BMC West and maintaining these costs as a percent of
sales at BMC Construction and Corporate.





***BMC
West***


Selected
financial results are as follows (millions):





****
    **2004**
    
    2003**Sales**
    
    
    **$**
    **1,337.3**
    
    $
    1,006.9**Income
      from operations**
    
    
    **$**
    **96.1**
    
    $
    54.8





Sales of
$1.3 billion were 33% higher than the prior year. The increase was due to both
growth in sales at existing business units and the impact of higher commodity
wood product prices relative to the prior year. In addition to the benefit of
commodity prices, higher sales were due to strong housing demand as building
permits in our markets were up 13.6% compared to the prior year.





Income
from operations was $96.1 million, up from $54.8 million in the prior year.
Despite rising commodity wood product prices, gross margins remained at
approximately 24%, reflective of our effective management of inventory.
Operating expenses were up $29 million or 15% compared to the prior year
primarily due to variable compensation expenses. However, these operating
expenses were leveraged against higher sales as they decreased 2.5% to 16.5% of
sales compared to the prior year.





******


16


**


***BMC
Construction***








**2004**
    
    
    2003**Sales**
    
    **$**
    **753.7**
    
    $
    408.2**Less:
      Acquisitions**
    
    
    **(184.6**
    **)**
    
    —**$**
    **569.1**
    
    $
    408.2**Income
      from operations**
    
    **$**
    **59.7**
    
    $
    19.0**Less:
      Acquisitions (income) loss**
    
    ****
    **(5.6**
    **)**
    
    —**$**
    **54.1**
    
    $
    19.0





Sales of
$753.7 million increased 85% over the prior year. Acquisitions of construction
services businesses not present in comparable periods accounted for $184.6
million or 53% of the increase with the remaining $160.9 million from existing
operations. Higher sales were due to robust housing development in Las Vegas,
Phoenix and northern California as well as contract increases from rising labor
and material costs.





Income
from operations was $59.7 million, up significantly from $19.0 million in the
prior year. Gross margins were a driving factor, improving 3.3% over prior year.
The improvement was primarily due to the increased value assigned to our
construction services in strong housing markets as well as integration
efficiencies from recent acquisitions. Although operating expenses were $24
million higher than a year ago, these expenses were 6.8% of sales and consistent
with the prior year.





***Corporate***


Selected
financial results are as follows (millions):






****
    **2004**
    
    
    2003**Operating
      expenses**
    
    **$**
    **47.7**
    
    $
    33.4





Corporate
operating expenses include administrative costs to support operations at our BMC
West and BMC Construction business segments. Although $14.3 million higher in
2004 due to compensation expenses from improved operating performance, these
expenses remained essentially the same at 2.3% of consolidated sales in both
years.


****


**2003
COMPARED WITH 2002**





***Consolidated
Financial Results***


Selected
financial results are as follows (millions):




****
    
    2003
    
    2002**Sales****Building
      products**
    
    $
    917.0
    
    $
    868.4**Construction
      services**
    
    
    498.1
    
    
    293.1$
    1,415.1
    
    $
    1,161.5**Income
      from operations**
    
    $
    40.4
    
    $
    39.1**Addback:
      Impairment of assets**
    
    
    0.8
    
    
    6.7$
    41.2
    
    $
    45.8





Sales of
$1.4 billion were 22% higher than the prior year. Acquisitions of construction
services businesses not present in comparable periods accounted for $151 million
or 60% of the increase, with existing operations representing the remaining $103
million.




17




rior to
impairments of intangible assets in 2003 and goodwill in the prior year, income
from operations decreased to $41.2 million from $45.8 million in the prior year.
Due to volatility in commodity wood product prices and competitive pressures at
our construction services businesses, gross margins declined to 20.5% compared
to 24.0% in 2002. Offsetting the decline in margins, operating expenses were
2.4% lower or 17.7% of sales compared to the prior year.




***BMC
West***


Selected
financial results are as follows (millions):




2003
    
    
    2002**Sales**
    
    $
    1,006.9
    
    $
    941.8**Income
      from operations**
    
    $
    54.8
    
    $
    48.1**Addback:
      Goodwill impairment**
    
    
    —
    
    
    6.7$
    54.8
    
    $
    54.8





Sales
increased 7% to $1.0 billion for the year. The increase was due to higher
commodity wood product prices relative to prior year. Excluding the impact of
commodity prices, sales at existing business units were the same for both years.
To enhance sales growth, we pursued opportunities at our existing facilities to
complement the distribution of building products, manufactured building
components and construction services.





Income
from operations was $54.8 million and consistent with operating income before
the goodwill impairment in the prior year. Due to an environment of rapidly
changing commodity wood product prices, gross margins were 1.6% lower to 24.2%
compared to the prior year. Operating expenses were slightly higher in 2003.
However, these expenses partially offset the decline in margins as they improved
1% to 19% of sales relative to prior year.


******


***BMC
Construction***


Selected
financial results are as follows (millions):






2003
    
    
    2002**Sales**
    
    $
    408.2
    
    $
    219.7**Less:
      Acquisitions**
    
    
    (149.1
    )
    
    —$
    259.1
    
    $
    219.7**Income
      from operations**
    
    $
    19.0
    
    $
    20.7**Less:
      Acquisitions (income) loss**
    
    
    1.0
    
    
    —$
    20.0
    
    $
    20.7





Sales
increased 86% to $408.2 million for the year. The increase of $149.1 million or
79% was due to acquisitions not present in the same period a year ago and the
remaining $39.4 million was due to existing operations.





Acquisitions
included a 67% interest in WBC Mid-Atlantic in October of 2003 and a 60%
interest in WBC Construction in January of 2003. WBC Mid-Atlantic provides
framing services to high-volume production homebuilders in Delaware, the
District of Columbia, Maryland and Virginia. WBC Construction provides
foundation and shell construction services to high-volume production
homebuilders in Florida.






18




Income
from operations was $19.0 million for the year. Gross margins decreased 4.8% to
11.4% as a result of competitive pressures and the integration of recent
acquisitions. Operating expenses were $12 million higher than the prior year.
However, these operating expenses were 6.6% of sales and consistent with the
prior year.





***Corporate***


Selected
financial results are as follows (millions):




2003
    
    
    2002**Operating
      expenses**
    
    $
    33.4
    
    $
    29.7





Corporate
operating expenses include administrative costs to support operations at our BMC
West and BMC Construction business segments. These expenses were $3.7 million
higher due to changes in workers’ compensation costs and expenses associated
with completing debt financing. However, these expenses at 2.4% of consolidated
sales were lower compared to 2.6% in the prior year.





**LIQUIDITY
AND CAPITAL RESOURCES**





Our
primary need for capital resources is to fund working capital and acquisitions
as well as finance capital expenditures. Capital resources have primarily
consisted of cash flows from operations and additional debt.





***Operations***


Net cash
provided from operating activities was $33.7 million, up significantly from
$12.5 million in 2003. Strong home construction and our strategy to provide
additional construction services resulted in higher net income which provided
$34.0 million of additional cash flow over the prior year. Changes in working
capital requirements used $16.8 million of this cash flow.





Net cash
provided from operating activities in 2003 was $12.5 million, down $23.2 million
from $35.7 million in 2002. Net income was $19.9 million and consistent with
$18.7 million in 2002 prior to the impairment of goodwill. However, working
capital requirements were $23.2 million more than the prior year due to
acquisitions as well as strong sales performance and increased inventories in
order to take advantage of falling commodity wood product prices in December
2003.





***Capital
Investment and Acquisitions***


Net cash
used in investing activities was $58.0 million compared to $30.5 million in
2003. Cash use included $27.7 million for property and equipment, $22.7 million
for the acquisition of four businesses and $19.0 million invested in marketable
securities at our captive insurance subsidiary.





Net cash
used in investing activities in 2003 was $30.5 million compared to $25.1 million
in 2002. Cash use included $15.9 million for property and equipment and $30.3
million for our interests in WBC Mid-Atlantic and WBC Construction. The cash use
was partially offset by proceeds of $10.1 million from the disposition of assets
and $6.6 million from the sale of a facility in Great Falls, Montana. Cash used
for purchase of property and equipment net of sales proceeds was lower than the
prior year due to an objective to limit these expenditures in 2003.




******


19


******


***Financing***


Net cash
provided by financing activities was $24.3 million, compared to $28.3 million in
2003. The primary sources of cash were $20.8 million of net borrowings from
the revolving credit facility and an increase in book overdrafts and stock
options exercised net of tax benefit.  Cash from the net borrowings of the
revolver, book overdrafts and stock options exercised were used to make payments
on the term note, other notes and dividends.


Net cash
provided by financing activities was $28.3 million in 2003, compared to $6.6
million in 2002. The primary sources of cash were $9.2 million of net borrowings
from the revolving credit facility and a $22.1 million increase in borrowings
from a term note.





***Revolving
Credit Facility***


In August
2003, we entered into a $175 million revolving credit facility with a group of
lenders. In July 2004 and pursuant to the agreement, the borrowing capacity of
the revolving credit facility was increased by $50 million. Borrowings under the
revolving credit facility are limited to 60% of inventory plus 80% of eligible
receivables. The borrowing base is calculated monthly and limited to $225
million. The revolving credit facility matures in August 2008.





The
revolving credit facility consists of both LIBOR and Prime based borrowings. The
revolving credit facility was amended in May 2004 to reduce interest rates
by 0.25% and in March 2005 to reduce interest rates by another
0.50%.  Interest rates are subject to quarterly adjustment based on
operating performance and range from LIBOR plus 0.75% to 2.00%, or Prime plus
0.0% to 0.75%.





As of
December 31, 2004, the borrowing base was limited to the maximum of $225
million, $81.2 million of which was outstanding. At year end, the availability
under the revolving credit facility was $102.6 million, net of $41.2 million in
outstanding letters of credit.





***Term
Note***


In August
2003, we entered into a $125 million term note with a group of lenders. The term
note matures in August 2010 and is payable in quarterly installments for the
first six years in amounts equal to 1% of the initial principal amount per year
and equal quarterly installments for the remaining principal balance during year
seven.





As of
December 31, 2004, $123.1 million was outstanding under the term note. The term
note was amended in May 2004 to reduce the interest rate by
0.50% and in March 2005 to reduce the interest rate by another
0.75%.  The interest rates for the term note are LIBOR plus 2.00% or Prime
plus 1.25%.


***Other***


Other
long-term debt consists of a term note, equipment notes and capital leases for
equipment and software. Interest rates are various and dates of maturity are
through November 2009.





***Hedging
Activities***


Derivative
and hedging activities are recorded on the balance sheet at their fair
values.  In June 2004, we entered into interest rate swap contracts that
effectively convert a portion of the floating rate borrowings of the term note
to a fixed interest rate through June 2009, thus reducing the impact of
increases in interest rates on future interest expense. Approximately 81% of the
outstanding floating rate borrowings of the term note as of December 31, 2004
have been hedged through the designation of interest rate







20




swap
contracts accounted for as cash flow hedges. As a result, the interest rate on
$100 million of the $123.1 million floating rate borrowings outstanding at
December 31, 2004 was fixed at an average rate of 7.14%. However, in March 2005
the term note was amended to reduce the interest rate by 0.75% and these
floating rate borrowings are currently fixed at an average rate of 6.39%.
After giving effect to the interest rate swap contracts, total borrowings are
50% fixed and 50% floating.





The fair
value of derivative instruments is based on pricing models using current market
rates. The fair value of the interest rate swap contracts was a long-term
liability of $2.2 million as of December 31, 2004. The effective portion was
recorded as accumulated other comprehensive loss, net, a separate component of
shareholders’ equity, and is subsequently reclassified into earnings in the same
financial statement line item, interest expense, in the same period during which
the hedged transaction is recognized in earnings. A corresponding deferred tax
asset of $0.9 million was also recorded in accumulated other comprehensive loss,
net for the income tax benefit related to the estimated liability of the
interest rate swap contracts. The ineffective portion of the change in the value
of the interest rate swap contracts is immediately recognized as a component of
interest expense. There was no hedge ineffectiveness for the period ended
December 31, 2004. Management may choose not to swap floating debt to a fixed
rate or may terminate a previously executed swap if the floating rate positions
are more beneficial.





The
revolving credit facility and term note are collateralized by all tangible and
intangible property, except assets of the captive insurance subsidiary. The
revolving credit facility and term note contain covenants and conditions
requiring the maintenance of certain financial ratios. At December 31, 2004, we
were in compliance with these covenants and conditions.





The
scheduled principal payments of debt are $3.4 million in 2005, $3.8 million in
2006, $1.6 million in 2007, $82.8 million in 2008, $59.5 million in 2009 and
$58.7 million thereafter.





***Equity***


In the
third quarter of 1998, a shelf registration was filed with the Securities and
Exchange Commission to register two million common shares. We may issue these
shares in connection with future business combinations, mergers or acquisitions.
Shares issued from this registration for a portion of the purchase price for
acquisitions include common shares of 15,059 for WBC Mid-Atlantic, 70,053 for
WBC Construction and 34,364 for KBI Norcal (see Note 4 of Item 8 - Financial
Statements and Supplementary Data).





Based on
our historical ability to generate cash flows from operations, borrowing
capacity under the revolving credit facility and access to debt and equity
markets, management believes it will have sufficient capital to meet anticipated
needs.





**OFF-BALANCE
SHEET ARRANGEMENTS**





As part
of our on-going business, we do not participate in transactions that generate
relationships with unconsolidated entities or financial partnerships often
referred to as structured finance or special purpose entities which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As of December 31, 2004, we
are not involved in any transactions with unconsolidated
entities.


****


****


21


****


**DISCLOSURES
OF CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS**





Contractual
obligations as of December 31, 2004 (millions):





Payments
      Due by Period**Contractual
      Obligations**
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    After
      5 Years
    
    TotalLong-term
      debt
    
    $
    3.1
    
    $
    3.6
    
    $
    1.4
    
    $
    82.7
    
    $
    59.5
    
    $
    58.7
    
    $
    209.0Capital
      lease obligations
    
    
    0.3
    
    
    0.2
    
    
    0.2
    
    
    0.1
    
    
    —
    
    
    —
    
    
    0.8Operating
      leases
    
    
    11.2
    
    
    9.6
    
    
    7.8
    
    
    5.7
    
    
    4.1
    
    
    2.2
    
    
    40.6Unconditional
      purchase obligations
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Other
      long-term commitments
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —$
    14.6
    
    $
    13.4
    
    $
    9.4
    
    $
    88.5
    
    $
    63.6
    
    $
    60.9
    
    $
    250.4Interest
      rate swap contractsNotional
      principal amount of interest rate exchangeagreements
      maturingVariable
      to fixed
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    $
    100.0
    
    
    —
    
    $
    100.0Average
      pay rate
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    4.39
    %
    
    —
    
    
    4.39
    %Average
      receive rate
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1.72
    %
    
    —
    
    
    1.72
    %





Acceleration
of our revolving credit facility and term note may occur if certain financial
conditions or warranties and representations are not met. The revolving credit
facility and term note are collateralized by all tangible and intangible
property, except assets of the captive insurance subsidiary. The revolving
credit facility and term note contain covenants and conditions requiring the
maintenance of certain financial ratios. At December 31, 2004, we were in
compliance with these covenants and conditions.





We have
potential put and call obligations associated with our interests in RCI
Construction, WBC Mid-Atlantic and WBC Construction. Under the purchase
agreements, we have the right to purchase the remaining portions during certain
periods or if certain conditions are met. Likewise, the other owners have the
option to require us to purchase the remaining portions during certain dates.
The purchase price for the remaining portions will be based generally on a
multiple of historical earnings.





As part
of our revolving credit facility, we have $41.2 million in letters of credit
outstanding principally for the deductible portion of workers’ compensation,
automobile liability and general liability claims. These obligations are not
required to be recorded on our balance sheet and renew automatically on their
various anniversary dates or until released by their respective
beneficiaries.





**QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**





Prices of
commodity wood products, which are subject to significant volatility, may
adversely impact operating income when prices rapidly rise or fall within a
relatively short period of time. We do not use derivative financial instruments
to hedge commodity wood product prices.




Changes
in interest expense occur when market interest rates change. Changes in the
carrying amount of debt could also increase these interest rate risks. Interest
rate swap




****


22


****


contracts
are currently utilized to hedge interest rate risks. Approximately 81% of the
outstanding floating rate borrowings of the term note as of December 31, 2004
have been hedged through the designation of interest rate swap contracts
accounted for as cash flow hedges. After giving effect to the interest rate swap
contracts, total borrowings are 50% fixed and 50% floating. Based on debt
outstanding as of December 31, 2004, a 0.25% increase in interest rates would
result in approximately $0.3 million of additional interest expense
annually.

**CRITICAL ACCOUNTING ESTIMATES**





Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses. These
estimates and assumptions include critical accounting estimates which are
defined by the Securities and Exchange Commission as those that are the most
important to the portrayal of our financial condition, results of operations or
cash flows. These estimates require management’s subjective and complex
judgments often as a result of the need to estimate matters that are inherently
uncertain. We review the development, selection and disclosure of these
estimates with our Audit Committee. Management believes the estimates utilized
are reasonable under the circumstances, however actual results could differ from
these estimates and may require adjustment in future periods. Our critical
accounting estimates are:





***Revenue
Recognition for Construction Services***


The
percentage-of-completion method is used to recognize revenue for construction
services. Periodic estimates of our progress towards completion are made based
on a comparison of labor costs incurred to date with total estimated contract
costs for labor, or based on units-of-delivery. These percentage-of-completion
methods require the use of various estimates, including among others, the extent
of progress towards completion, contract revenues and contract completion costs.
Contract revenues and contract costs to be recognized are dependent on the
accuracy of estimates, including quantities of materials, labor productivity and
other cost estimates. We have a history of making reasonable estimates of the
extent of progress towards completion, contract revenues and contract completion
costs. However, due to uncertainties inherent in the estimation process, it is
possible that actual completion costs may vary from estimates. Revisions of
contract revenues and cost estimates as well as provisions for estimated losses
on uncompleted contracts are reflected in the period such revisions are
determined.





***Estimated
Losses on Uncompleted Contracts and Changes in Contract
Estimates***


Estimated
losses on uncompleted contracts and changes in contract estimates are reflected
in the period such revisions are determined. These reserves are established by
assessing estimated costs to complete, change orders and claims for uncompleted
contracts.





At
December 31, 2004, the reserve for these estimated losses was less than $0.1
million for BMC West and BMC Construction. These reserves are established by
assessing estimated costs to complete, change orders and claims. Assumptions for
estimated costs to complete include material prices, labor costs, labor
productivity and contract claims. Such estimates are inherently uncertain
and therefore it is possible that actual completion costs may vary from
these estimates. We have a history of making reasonable estimates of the extent
of progress towards completion, contract revenue and contract completion
costs.


23


******




However,
due to uncertainties inherent in the estimation process, it is possible that
actual completion costs may vary from estimates. Revisions of estimated losses
on uncompleted contracts are reflected in the period such revisions are
determined.


**


***Goodwill***


Goodwill
represents the excess of purchase price over the fair values of net tangible and
identifiable intangible assets of acquired businesses. An annual assessment for
impairment is completed in the fourth quarter and whenever events and
circumstances indicate the carrying amount may not be recoverable. An impairment
is recognized if the carrying amount is more than the estimated future operating
cash flows as measured by fair value techniques.





At
December 31, 2004, goodwill was $20.1 million for BMC West and $60.2 million for
BMC Construction. Our fourth quarter assessment concluded with an impairment of
$1.0 million related to goodwill for a change in business strategy at BMC West
and no impairment for goodwill at BMC Construction. The impairment assessment
includes determining the estimated fair value of reporting units based on
discounting the future operating cash flows using a discount rate reflecting our
estimated average cost of funds. Future operating cash flows are derived from
our budget information, which includes assumptions of future volumes, pricing of
commodity products and labor costs. Prices for commodity products are inherently
volatile. Likewise, labor costs are subject to change. If our estimates of
projected future cash flows were too high by 4%, there
would be no impact on the carrying amount of our goodwill.





Due to
the variables associated with prices of commodity products and the effects of
changes in circumstances, both the precision and reliability of the estimates of
future operating cash flows are subject to uncertainty. As additional
information becomes known, we may change our estimates.





***Insurance
Deductible Reserves***


The
estimated cost of automobile liability, general liability and workers’
compensation claims is determined by actuarial methods. Claims in excess of
insurance deductibles are insured with third-party insurance carriers. Reserves
for claims are recognized based on the estimated costs of these claims as
limited by deductibles of the applicable insurance policies. An annual
assessment of the reserves for these claims is completed in the fourth quarter
and whenever events and circumstances indicate a change in the related reserves
is required. The annual assessment is conducted by an independent
actuary.





At
December 31, 2004, the reserve for automobile liability, general liability and
workers’ compensation claims was $26.6 million. The 2004 fourth quarter
assessment conducted by our independent actuaries concluded with a $3.8 million
net of tax reduction to these reserve balances. The actuarial assessment
includes determining the estimated cost of claims. The reserve for these claims
is susceptible to change based on the estimated cost of the claims. Actual loss
experience substantially different than the actuarial assumptions may occur.
Future reserves are subject to the nature and frequency of claims, medical cost
inflation and changes in the insurance deductibles of the applicable insurance
policies.




24


**RECENT
ACCOUNTING PRINCIPLES**





In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standards No. 123, *Share-Based
Payment* , and
superseded Accounting Principles Board Opinion No. 25, *Accounting
for Stock Issued to Employees* . This
statement requires the recognition and measurement of liabilities incurred to
employees in share-based payment transactions at fair value. Compensation cost
and the related tax effects are recognized as the requisite service is rendered.
Compensation cost is based on the fair value of those shares on the grant date.
This statement is effective for the third quarter of 2005 and will be
retroactively applied to the beginning of 2005.




*Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51* . In
December 2003, FASB issued a revision to FIN 46 (FIN 46R). FIN 46R requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from others. FIN 46R also requires disclosure of
significant interests in these entities if not consolidated. We adopted the
revised provisions of FIN 46R in the first quarter of 2004. This adoption had no
impact on consolidated financial position, results of operations or cash
flows.





**BUSINESS
RISKS AND FORWARD-LOOKING STATEMENTS**





There are
a number of business risks and uncertainties that affect our operations and
therefore could cause future results to differ from past performance or expected
results. Additional information regarding business risks and uncertainties is
contained in Item 1 of our Form 10-K for the period ended December 31,
2004. These risks and uncertainties may include, but are not limited
to:





·
    demand
      for homebuilding which is influenced by changes in the overall condition
      of the U.S. economy, including job formation, interest rates and consumer
      confidence as well as other important
factors,


·
    fluctuations
      in our costs and availability of sourcing channels for commodity wood
      products and building materials,


·
    changes
      in the business models of our customers,


·
    intense
      competition,


·
    future
      integration of acquired businesses may not result in anticipated cost
      savings and revenue synergies being fully realized or it may take longer
      to realize than expected,


·
    our
      ability to identify suitable acquisition
candidates,


·
    availability
      of and ability to attract, train and retain qualified
      individuals,


·
    unanticipated
      weather conditions including natural catastrophic events such as
      earthquakes, fire, flood, hurricanes, tornadoes,
etc.,


·
    implementation
      of cost structures that align with revenue
growth,


·
    actual
      and perceived vulnerabilities as a result of terrorist activities and
      armed conflict,


·
    numerous
      other matters of a local and regional scale, including those of a
      political, economic, business, competitive or regulatory
      nature.








25




Certain
statements in the Annual Report to Shareholders including those related to
expectations about homebuilding activity in our markets, demographic trends
supporting homebuilding and anticipated sales and operating income are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements that are not historical or current
facts, including statements about our expectations, anticipated financial
results and future business prospects are forward-looking statements. While
these statements represent our current judgment on what the future may hold and
we believe these judgments are reasonable, these statements involve risks and
uncertainties that are important factors that could cause our actual results to
differ materially from those in forward-looking statements. These factors
include, but are not limited to the risks and uncertainties cited in the above
paragraph. Undue reliance should not be placed on such forward-looking
statements, as such statements speak only as of the date of the filing of the
2004 Annual Report on Form 10-K. We undertake no obligation to update
forward-looking statements.


**ITEM
7A. Quantitative and Qualitative Disclosures About Market
Risk**





Prices of
commodity wood products, which are subject to significant volatility, may
adversely impact operating income when prices rapidly rise or fall within a
relatively short period of time. We do not use derivative financial instruments
to hedge commodity wood product prices.





Changes
in interest expense occur when market interest rates change. Changes in the
carrying amount of debt could also increase interest rate risks. Interest rate
swap contracts are currently utilized to hedge interest rate risks.
Approximately 81% of the outstanding floating rate borrowings of the term note
as of December 31, 2004 have been hedged through the designation of interest
rate swap contracts accounted for as cash flow hedges. After giving effect to
the interest rate swap contracts, total borrowings are 50% fixed and 50%
floating. Based on debt outstanding as of December 31, 2004, a 0.25% increase in
interest rates would result in approximately $0.3 million of additional interest
expense annually.







26





**ITEM
8. Financial Statements and Supplementary Data**





**Building
Materials Holding Corporation**


**Consolidated
Statements of Income**


**(thousands,
except per share data)**





**Year Ended December 31****2004**
    ****
    **2003**
    ****
    **2002****Sales**Building
      products
    
    **$**
    **1,186,663**
    
    $
    917,019
    
    $
    868,431Construction
      services
    
    
    **904,362**
    
    
    498,052
    
    
    293,063**Total
      sales**
    
    
    **2,091,025**
    
    
    1,415,071
    
    
    1,161,494**Costs
      and operating expenses**Cost
      of goods soldBuilding
      products
    
    
    **897,725**
    
    
    688,354
    
    
    640,520Construction
      services
    
    
    **768,407**
    
    
    436,908
    
    
    242,557Impairment
      of assets
    
    
    **2,274**
    
    
    829
    
    
    6,698Selling,
      general and administrative expenses
    
    
    **317,002**
    
    
    250,319
    
    
    233,328Other
      income, net
    
    
    **(2,491**
    **)**
    
    (1,768
    )
    
    (730
    )Total
      costs and operating expenses
    
    
    **1,982,917**
    
    
    1,374,642
    
    
    1,122,373******Income
      from operations**
    
    
    **108,108**
    
    
    40,429
    
    
    39,121Interest
      expense
    
    
    **13,560**
    
    
    9,279
    
    
    9,812Income
      before income taxes, minority interests and  equity
      earnings
    
    
    **94,548**
    
    
    31,150
    
    
    29,309Income
      taxes
    
    
    **35,198**
    
    
    11,402
    
    
    10,871Minority
      interests (income) loss, net
    
    
    **(5,440**
    **)**
    
    (1,250
    )
    
    227Equity
      earnings, net of tax of $918
    
    
    **—**
    
    
    1,431
    
    
    —Income
      before change in accounting principle
    
    
    **53,910**
    
    
    19,929
    
    
    18,665Change
      in accounting principle, net of tax benefitof
      $6,286
    
    
    —
    
    
    —
    
    
    11,650**Net
      income**
    
    **$**
    **53,910**
    
    $
    19,929
    
    $
    7,015Income
      before change in accounting principle per share:Basic
    
    **$**
    **4.00**
    
    $
    1.50
    
    $
    1.43Diluted
    
    **$**
    **3.87**
    
    $
    1.48
    
    $
    1.41Change
      in accounting principle, net of tax, per share:Basic
    
    **$**
    —
    
    $
    —
    
    $
    (0.89
    )Diluted
    
    **$**
    —
    
    $
    —
    
    $
    (0.88
    )**Net
      income per share:**Basic
    
    **$**
    **4.00**
    
    $
    1.50
    
    $
    0.54Diluted
    
    **$**
    **3.87**
    
    $
    1.48
    
    $
    0.53The
      accompanying notes are an integral part of these consolidated financial
      statements.


****


27


****


****


**Building
Materials Holding Corporation**


**Consolidated
Balance Sheets**


**(thousands,
except share data)**





****
    
    **December
      31****2004**
    
    **2003****ASSETS**
    
    
    ********Cash
      and cash equivalents
    
    **$**************
    **************19,496**
    
    $
    19,506Marketable
      securities
    
    
    **2,216**
    
    
    —Receivables,
      net
    
    
    ******238,071**
    
    
    187,790Inventory
    
    
    ******153,391**
    
    
    111,146Unbilled
      receivables
    
    
    ******17,196**
    
    
    8,625Deferred
      income taxes
    
    
    ******11,913**
    
    
    8,629Prepaid
      expenses and other current assets
    
    
    ******7,317**
    
    
    5,243****Total
      current assets
    
    
    ******449,600**
    
    
    340,939****Property
      and equipment, net
    
    
    ******164,311**
    
    
    165,400Marketable
      securities
    
    
    **16,760**
    
    
    —Deferred
      loan costs
    
    
    **2,084**
    
    
    2,406Other
      long-term assets
    
    
    ******16,281**
    
    
    10,692Other
      intangibles, net
    
    
    ******13,692**
    
    
    12,017Goodwill
    
    
    ******80,316**
    
    
    72,745****Total
      assets
    
    **$**************
    **************743,044**
    
    $
    604,199****
    
    
    ******LIABILITIES,
      MINORITY INTERESTS AND SHAREHOLDERS’ EQUITY**
    
    
    ****Accounts
      payable and accrued expenses
    
    **$**************
    **************164,485**
    
    $
    109,067Billings
      in excess of costs and estimated earnings
    
    
    ******11,274**
    
    
    12,069Current
      portion of long-term debt
    
    
    ******3,404**
    
    
    2,905****Total
      current liabilities
    
    
    ******179,163**
    
    
    124,041****Deferred
      income taxes
    
    
    ******297**
    
    
    5,354Long-term
      debt
    
    
    ******206,419**
    
    
    186,773Other
      long-term liabilities
    
    
    ******23,162**
    
    
    13,276****Total
      liabilities
    
    
    ******409,041**
    
    
    329,444****Minority
      interests
    
    
    ******6,325**
    
    
    3,745Commitments
      and contingent liabilities
    
    
    **—**
    
    
    —****Shareholders’
      equity
    
    
    ****Common
      stock, $0.001 par value, 20,000,000 shares authorized;
      13,852,683
      and 13,333,711 shares issued and outstanding, respectively
    
    
    ******14**
    
    
    13Additional
      paid-in capital
    
    
    ******124,594**
    
    
    115,282Unearned
      compensation
    
    
    **(1,383**
    **)**
    
    —Retained
      earnings
    
    
    ******205,812**
    
    
    155,715Accumulated
      other comprehensive loss, net
    
    
    **(1,359**
    **)**
    
    —****Total
      shareholders’ equity
    
    
    ******327,678**
    
    
    271,010****Total
      liabilities, minority interests and shareholders’ equity
    
    **$**************
    **************743,044**
    
    $
    604,199The
      accompanying notes are an integral part of these consolidated financial
      statements.




28


****


**Building
Materials Holding Corporation**


**Consolidated
Statements of Shareholders’ Equity**


**(thousands)**


Accumulated
      Other
      Comprehensive
      Income (Loss)Net
      UnrealizedAdditional
    
    
    
    
    
    
    
    
    Gain
      (Loss) FromCommon
      Shares
    
    Paid-In
    
    
    Unearned
    
    
    Retained
    
    
    Hedging
    
    
    MarketableShares
    
    
    Amount
    
    
    Capital
    
    
    Compensation
    
    
    Earnings
    
    
    Derivatives
    
    
    Securities
    
    
    Total**Balance
      at December 31, 2001**
    
    **12,984**
    
    **$******
    ******13**
    
    **$******
    ******110,661**
    
    **$******
    —
    
    **$******
    ******132,220**
    
    **$******
    —
    
    **$******
    —
    
    **$******
    ******242,894**Net
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,015
    
    
    
    
    
    
    
    
    7,015Share
      options exercised
    
    99
    
    
    
    
    
    1,074
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,074Tax
      benefit for share options exercised
    
    
    
    
    
    
    
    186
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    186Shares
      issued from Director Stock Plan
    
    19
    
    
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Shares
      issued for acquisitions
    
    34
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Cash
      dividend on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    (657
    )
    
    
    
    
    
    
    
    (657
    )**Balance
      at December 31, 2002**
    
    **13,136**
    
    
    **13**
    
    
    **112,709**
    
    
    —
    
    
    **138,578**
    
    
    —
    
    
    —
    
    
    **251,300**Net
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,929
    
    
    
    
    
    
    
    
    19,929Share
      options exercised
    
    88
    
    
    
    
    
    913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    913Tax
      benefit for share options exercised
    
    
    
    
    
    
    
    141
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141Shares
      issued from Director Stock Plan
    
    25
    
    
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319Shares
      issued for acquisitions
    
    85
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200Cash
      dividend on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,792
    )
    
    
    
    
    
    
    
    (2,792
    )**Balance
      at December 31, 2003**
    
    **13,334**
    
    
    **13**
    
    
    **115,282**
    
    
    **—**
    
    
    **155,715**
    
    
    —
    
    
    —
    
    
    **271,010**Net
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    **53,910**
    
    
    
    
    
    
    
    
    **53,910**Unrealized
      loss from interest rate swap contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **(2,215**
    **)**
    
    
    
    
    **(2,215**
    **)**Tax
      benefit for unrealized loss from interest rate swap
      contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **853**
    
    
    
    
    
    **853**Unrealized
      gain from marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **5**
    
    
    **5**Taxes
      for unrealized gain from marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **(2**
    **)**
    
    **(2**
    **)**Comprehensive
      income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **52,551**Share
      options exercised
    
    **412**
    
    
    **1**
    
    
    **5,008**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **5,009**Tax
      benefit for share options exercised
    
    
    
    
    
    
    
    **2,041**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **2,041**Shares
      issued from Employee Plan
    
    **15**
    
    
    
    
    
    **356**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **356**Shares
      issued from Director Stock Plan
    
    **17**
    
    
    
    
    
    **285**
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    **285**Issuance
      of restricted shares
    
    **75**
    
    
    
    
    
    **1,622**
    
    
    **(1,622**
    **)**
    
    
    
    
    
    
    
    
    
    
    **—**Earned
      compensation expense
    
    
    
    
    
    
    
    
    
    
    **239**
    
    
    
    
    
    
    
    
    
    
    
    **239**Cash
      dividend on common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    **(3,813**
    **)**
    
    
    
    
    
    
    
    **(3,813**
    **)****Balance
      at December 31, 2004**
    
    **13,853**
    
    **$******
    ******14**
    
    **$**
    **124,594**
    
    **$******
    ******(1,383**
    ******)**
    **$******
    ******205,812**
    
    **$******
    ******(1,362**
    ******)**
    **$******
    ******3**
    
    **$******
    ******327,678**The
      accompanying notes are an integral part of these consolidated financial
      statements.





29


**Building
Materials Holding Corporation**


**Consolidated
Statements of Cash Flows**


**(thousands)**





**Year Ended December 31****Operating Activities**
    
    **2004**
    ****
    ****
    **2003**
    ****
    ****
    **2002**Net
      income
    **$**
    **53,910**
    
    $
    19,929
    
    $
    7,015Items
      in net income not using (providing) cash:
    
    ****Change
      in accounting principle, net of tax benefit of $6,286
    
    **—**
    
    
    —
    
    
    11,650Equity
      earnings, net of amortization and before taxes of $918
    
    **—**
    
    
    (2,349
    )
    
    —Minority
      interests, net
    
    **5,440**
    
    
    1,059
    
    
    (227
    )Depreciation
      and amortization
    
    **23,312**
    
    
    20,785
    
    
    19,265Impairment
      of assets
    
    **2,274**
    
    
    829
    
    
    6,698Loss
      (gain) on sale of assets, net
    
    **334**
    
    
    (1,161
    )
    
    944Deferred
      financing costs
    
    **—**
    
    
    660
    
    
    —Deferred
      income taxes
    
    **(7,490**
    **)**
    
    2,556
    
    
    (2,691
    )Changes
      in assets and liabilities, net of effects of acquisitions andsales
      of business units:
    
    ****Receivables,
      net
    
    **(45,687**
    **)**
    
    (35,076
    )
    
    (20,324
    )Inventory
    
    **(40,258**
    **)**
    
    (25,929
    )
    
    (3,989
    )Unbilled
      receivables
    
    **(8,571**
    **)**
    
    (473
    )
    
    (3,920
    )Prepaid
      expenses and other current assets
    
    **(1,900**
    **)**
    
    2,304
    
    
    3,346Accounts
      payable and accrued expenses
    
    **45,022**
    
    
    21,093
    
    
    11,703Billings
      in excess of costs and estimated earnings
    
    **(795**
    **)**
    
    5,579
    
    
    3,927Other
      long-term assets and liabilities
    
    **6,128**
    
    
    3,633
    
    
    3,317Other,
      net
    
    **1,958**
    ****
    
    (960
    )
    
    (988
    )Cash
      flows provided by operating activities
    
    **33,677**
    
    
    12,479
    
    
    35,726******Investing
      Activities**
    
    ****Purchases
      of property and equipment
    
    **(27,652**
    **)**
    
    (15,887
    )
    
    (20,050
    )Acquisitions
      and investments in businesses, net of cash acquired
    
    **(22,738**
    **)**
    
    (30,269
    )
    
    (8,091
    )Proceeds
      from dispositions of property and equipment
    
    **12,278**
    
    
    10,065
    
    
    1,155Proceeds
      from sales of business units, net of cash sold
    
    **—**
    
    
    6,591
    
    
    2,750Purchase
      of marketable securities
    
    **(19,026**
    **)**
    
    —
    
    
    —Other,
      net
    
    **(871**
    **)**
    
    (961
    )
    
    (826
    )Cash
      flows used by investing activities
    
    **(58,009**
    **)**
    
    (30,461
    )
    
    (25,062
    )******Financing
      Activities**Net
      borrowings (repayments) under revolving credit facility
    
    **20,800**
    
    
    9,200
    
    
    (1,900
    )Principal
      payments on term note
    
    **(1,250**
    **)**
    
    (9,425
    )
    
    (7,700
    )Borrowings
      under term note
    
    **—**
    
    
    31,500
    
    
    —Net
      borrowings (repayments) on other notes payable
    
    **(932**
    **)**
    
    (410
    )
    
    (786
    )Increase
      in book overdrafts
    
    **5,411**
    ****
    
    554
    
    
    2,024Deferred
      financing costs
    
    **(175**
    **)**
    
    (1,394
    )
    
    —Stock
      options exercised
    
    **5,008**
    
    
    895
    
    
    1,043Dividends
      paid
    
    **(3,505**
    **)**
    
    (2,649
    )
    
    —Other,
      net
    
    **(1,035**
    **)**
    
    —
    
    
    690Cash
      flows provided by financing activities
    
    **24,322**
    
    
    28,271
    
    
    (6,629
    )******Increase
      (Decrease) in Cash and Cash Equivalents**
    
    **(10**
    **)**
    
    10,289
    
    
    4,035Cash,
      beginning of year
    
    **19,506**
    
    
    9,217
    
    
    5,182Cash,
      end of year
    **$**
    **19,496**
    
    $
    19,506
    
    $
    9,217******Supplemental
      Disclosure of Cash Flow Information**Accrued
      but unpaid dividends
    **$**
    **1,108**
    
    $
    800
    
    $
    657Cash
      paid for interest
    **$**
    **12,902**
    
    $
    9,327
    
    $
    10,349Cash
      paid for income taxes
    **$**
    **37,777**
    
    $
    7,795
    
    $
    12,672The
      accompanying notes are an integral part of these consolidated financial
      statements.


30


******


***Notes
to Consolidated Financial Statements***





***1.***  ***Summary
of Significant Accounting Policies***





***Nature
of Operations***


Building
Materials Holding Corporation (BMHC) provides building products and
construction services to professional homebuilders and contractors throughout
the United States. We operate through two separately managed and reportable
business segments: BMC West and BMC Construction. BMC West markets and sells
building products, manufactures building components (millwork, floor and roof
trusses and wall panels) and provides construction services to builders and
contractors. BMC Construction provides framing and other construction services
to high-volume production homebuilders.





***Principles
of Consolidation***


The
consolidated financial statements include the accounts of BMHC and its
subsidiaries. The equity method of accounting is used for investments in which
we have significant influence. All significant intercompany balances and
transactions are eliminated.





***Use
of Estimates***


The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of sales and expenses during the
reporting period. Actual amounts may differ materially from those estimates. The
following critical accounting estimates require our subjective and complex
judgment often as a result of the need to estimate matters that are inherently
uncertain:





***·***  ***Revenue
Recognition for Construction Services***


The
percentage-of-completion method is used to recognize revenue for construction
services. Periodic estimates of our progress towards completion
are made based on a comparison of labor costs incurred to date with total
estimated contract costs for labor, or based on units-of-delivery. These
percentage-of-completion methods require the use of various estimates, including
among others, the extent of progress towards completion, contract revenues and
contract completion costs. Contract revenues and contract costs to be recognized
are dependent on the accuracy of estimates, including quantities of materials,
labor productivity and other cost estimates. We have a history of making
reasonable estimates of the extent of progress towards completion, contract
revenues and contract completion costs. However, due to uncertainties inherent
in the estimation process, it is possible that actual completion costs may vary
from estimates. Revisions of contract revenues and cost estimates as well as
provisions for estimated losses on uncompleted contracts are reflected in the
period such revisions are determined.





***·***  ***Estimated
Losses on Uncompleted Contracts and Changes in Contract*** ***Estimates*** Estimated
losses on uncompleted contracts and changes in contract estimates are reflected
in the period such revisions are determined. These reserves are established by
assessing estimated costs to complete, change orders and claims for uncompleted
contracts.




***·***  ***Goodwill***


Goodwill
represents the excess of purchase price over the fair values of net tangible and
identifiable intangible assets of acquired businesses. An annual assessment for
impairment is completed in the fourth quarter and whenever events and
circumstances ******


31


******




**


***·***  ***Insurance
Deductible Reserves***


The
estimated cost of automobile liability, general liability and workers’
compensation claims is determined by actuarial methods. Claims in excess of
insurance deductibles are insured with third-party insurance carriers. Reserves
for claims are recognized based on the estimated costs of these claims as
limited by the deductibles of the applicable insurance policies. An annual
assessment of the reserves for these claims is completed in the fourth quarter
and whenever events and circumstances indicate a change in the related reserves
is required. The annual assessment is conducted by an independent actuary. 
The 2004 fourth quarter assessment conducted by our independent actuaries
concluded with a $3.8 million net of tax reduction to these reserve
balances.





***Cash
and Cash Equivalents***


Cash
equivalents consist of short term investments that have a maturity of three
months or less at the date of purchase. Cash and cash equivalents totaled $19.5
million at December 31, 2004 and 2003.





***Inventory
Valuation***


Inventory
consists principally of building materials purchased for resale and is valued at
the lower of average cost or market. We participate in vendor volume rebate
programs under which rebates are earned as a result of attaining certain
purchase levels. Volume rebates are accrued as earned. These volume rebates are
recorded as a reduction in inventory and recognized in cost of goods sold when
the related product is sold.





***Unbilled
Receivables and Billings in Excess of Costs and Estimated
Earnings***


Percentage-of-completion
methods result in recognizing costs incurred and estimated revenues on
uncompleted contracts.  Unbilled receivables represent revenues recognized
for construction services performed, however not yet billed.  Billings in
excess of costs and estimated earnings represent billings made in excess of
estimated revenues recognized.  These billings are deferred until the
actual progress towards completion indicates recognition is appropriate. 
Costs include equipment costs, direct labor and material costs related to
contract performance.





***Long-lived
Assets***


Long-lived
assets such as property, equipment and intangibles with useful lives are
evaluated for impairment whenever events or changes in circumstances indicate
the carrying amount may not be recoverable. An impairment is recognized if the
carrying amount exceeds its fair value and when the carrying amount is not
recoverable based on the estimated future operating cash flows on an
undiscounted basis.





***Revenue
Recognition***


Revenues
for building products are recognized when title to the goods and risk of loss
pass to the buyer, which is at the time of delivery. The
percentage-of-completion method is used to recognize revenue for construction
services.





***Shipping
and Handling***


Shipping
and handling costs for manufactured building components and construction
services are included as a component of cost of sales. Shipping and handling
costs for building products are included as a component of selling, general and
administrative expenses and were $55.7 million in 2004, $46.7 million in 2003
and $45.1 million in 2002.







32




***Share-based
Compensation***


Previously,
there were five share-based employee compensation plans. No further grants will
be made under these plans, however grants will be made under the 2004 Incentive
and Performance Plan. The previous plans and the current plan are more fully
described in Note 11. These plans are accounted for under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related interpretations. The following table illustrates the effect on net
income and earnings per share if the fair value recognition provisions of
Statement of Financial Accounting Standards No. 123, *Accounting
for Stock-Based Compensation* , were
applied to share-based employee compensation (thousands, except per share
data):




**Year Ended December 31****2004**
    
    
    2003
    
    
    2002Net
      income, as reported
    
    **$**
    **53,910**
    
    $
    19,929
    
    $
    7,015Add:
      Share-based employee compensation expense determined under APB 25, net of
      related tax effects
    
    
    **738**
    
    
    446
    
    
    1,117Deduct:
      Share-based employee compensation expense determined under fair value
      method for all awards, net of related tax effects
    
    
    **(3,739**
    **)**
    
    (1,664
    )
    
    (2,331
    )Pro
      forma net income
    
    **$**
    **50,909**
    
    $
    18,711
    
    $
    5,801Earnings
      per share:Basic
      - as reported
    
    **$**
    **4.00**
    
    $
    1.50
    
    $
    0.54Basic
      - pro forma
    
    **$**
    **3.77**
    
    $
    1.41
    
    $
    0.44Diluted
      - as reported
    
    **$**
    **3.87**
    
    $
    1.48
    
    $
    0.53Diluted
      - pro forma
    
    **$**
    **3.66**
    
    $
    1.39
    
    $
    0.44





***Change
in Accounting Principle***


Statement
of Financial Accounting Standards No. 142, *Goodwill
and Other Intangible Assets* , was
adopted in the first quarter of 2002. This statement eliminated the amortization
of goodwill and other indefinite lived intangible assets and requires an
impairment analysis of these assets on an annual basis or whenever events and
circumstances indicate the carrying amount may not be recoverable. The
transitional impairment analysis resulted in an impairment of goodwill in the
BMC West business segment of $11.7 million, net of tax.





***Recent
Accounting Principles***


In
December 2004, the Financial Accounting Standards Board (FASB) revised Statement
of Financial Accounting Standards No. 123, *Share-Based
Payment* , and
superseded Accounting Principles Board Opinion No. 25, *Accounting
for Stock Issued to Employees* . This
statement requires the recognition and measurement of liabilities incurred to
employees in share-based payment transactions at fair value. Compensation cost
and the related tax effects are recognized as the requisite service is rendered.
Compensation cost is based on the fair value of those shares on the grant date.
This statement is effective for the third quarter of 2005 and will be
retroactively applied to the beginning of 2005.





In
January 2003, FASB issued Interpretation No. 46 (FIN 46), *Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51* . In
December 2003, FASB issued a revision to FIN 46 (FIN 46R). FIN 46R requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from others. FIN 46R also requires disclosure of
significant interests in these entities if not consolidated. We adopted the
revised






33








***Reclassifications***


Certain
reclassifications, none of which affected previously reported consolidated
results of operations, cash flows or shareholders’ equity, have been made to
amounts reported in prior periods to conform to the current year presentation.








***2.***  ***Net
Income Per Share***


Net
income per share was determined using the following information (thousands,
except per share data):




**Year Ended December 31****2004**
    
    
    2003
    
    
    2002Net
      income
    
    **$**
    **53,910**
    
    $
    19,929
    
    $
    7,015Weighted
      average shares used todetermine
      basic net income per share
    
    
    **13,494**
    
    
    13,279
    
    
    13,086Net
      effect of dilutive stock options andrestricted
      stock(1)
    
    
    **429**
    
    
    162
    
    
    177Weighted
      average shares used todetermine
      diluted net income per share
    
    
    **13,923**
    
    
    13,441
    
    
    13,263Net
      income per share:Basic
    
    **$**
    **4.00**
    
    $
    1.50
    
    $
    0.54Diluted
    
    **$**
    **3.87**
    
    $
    1.48
    
    $
    0.53Cash
      dividends declared per share
    
    **$**
    **0.08**
    
    $
    0.06
    
    $
    0.05





(1)
    There
      were no options excluded from the computation of diluted income per share
      for 2004.  Options to purchase shares of 325,525 for 2003 and 416,529
      for 2002 were not dilutive and therefore excluded in the computations of
      diluted income per share. Options categorized as not dilutive were defined
      on the basis of the exercise price being greater than the average market
      value of the common shares in the periods presented.








***3.***  ***Impairment
of Assets***


Long-lived
assets such as property, equipment and intangibles are evaluated for impairment
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. An impairment for these assets is recognized if the carrying
amount is more than the estimated future operating cash flows on an undiscounted
basis. Similarly, goodwill is evaluated for impairment in the fourth quarter and
whenever events and circumstances indicate the carrying amount may not be
recoverable. An impairment is recognized if the carrying amount is more than the
estimated future operating cash flows as measured by fair value
techniques.





During
2004, impairments of $1.3 million for the carrying amount of certain properties
held for sale and $1.0 million in the carrying amount of goodwill resulting from
a change in business strategy were recognized for BMC West. As a result of
changes in a specific market, an impairment of $0.8 million in the carrying
amount of customer relationships was recognized for BMC Construction in 2003.
During 2002, changing market conditions resulted in a $6.7 million impairment of
goodwill for BMC West.





34




***4.***  ***Acquisitions,
Minority Interests and Equity Earnings***


Acquisitions
are accounted for under the purchase method of accounting.  The purchase
price is allocated to the assets acquired, including intangible assets, and
liabilities assumed based on their estimated fair values at the date of
acquisition.  Any excess of the purchase price over the estimated fair
value of the identifiable assets and liabilities acquired is recorded as
goodwill.  Operating results of acquired businesses are included in the
consolidated statements of income from the date of acquisition.





***Minority
Interests and Equity Earnings***


Minority
interest reflects the other owners’ proportionate share in the assets and
liabilities of business ventures as of the date of purchase, adjusted by the
proportionate share of post-acquisition income or loss. As the operating results
of entities with minority interest are consolidated, minority interest (income)
loss, net represents the income or loss attributable to the other owners.





·  ***WBC
Mid-Atlantic***


In
October 2003, we acquired a 67.33% interest in a newly formed construction
business, WBC Mid-Atlantic, LLC (WBC Mid-Atlantic), for $5.1 million in cash and
the issuance of 15,059 common shares. The remaining 32.67% interest is owned by
ANM Carpentry, Inc. and is recognized as minority interest. WBC Mid-Atlantic
provides framing services to high-volume production homebuilders in Delaware,
the District of Columbia, Maryland and Virginia.





·  ***WBC
Construction***


In
January 2003, we acquired a 60% interest in a newly formed construction
business, WBC Construction, LLC (WBC Construction), for $22.9 million in cash
and the issuance of 70,053 common shares. The remaining 40% interest is owned by
Willard Brothers Construction, Inc. and its principal members. WBC Construction
provides foundation and shell construction services to high-volume production
homebuilders in Florida.





When
purchased, the investment in WBC Construction was accounted for using the equity
method of accounting because the minority owners had certain approval and other
rights that precluded consolidation. On August 11, 2003, the operating agreement
was amended to eliminate certain approval and other rights of the minority
interest shareholders. As a result, the equity method of accounting was ceased
and the results of WBC Construction’s operations have been included in the
consolidated financial statements effective August 12, 2003. The 40% ownership
interest is recognized as minority interest. The consolidation of WBC
Construction resulted in an increase in assets of $41.2 million, an increase in
liabilities of $12.7 million, an increase in minority interest of $2.3 million
and a decrease in equity investments in an unconsolidated company of $26.2
million.







35





While
accounted for under the equity method prior to August 12, 2003, the condensed
income statement for WBC Construction was as follows (thousands):




**Year-to-date****period
      ended****August 11, 2003**Sales
    
    $
    97,717Income
      from operations
    
    $
    10,418Net
      income
    
    $
    4,511Proportionate
      share of net income
    
    $
    2,706Amortization
      of intangibles
    
    
    (357
    )Equity
      earnings before taxes
    
    $
    2,349





·  ***KBI
Norcal***


In July
2002, we acquired a 51% interest in a newly formed partnership, KBI Norcal, for
approximately $5.8 million in cash, $0.8 million of assumed debt and the
issuance of 34,364 common shares. The remaining 49% interest was owned by RJ
Norcal, LLC and recognized as minority interest. KBI Norcal provides framing
services in northern California.





As a
majority-owned subsidiary, the financial information for KBI Norcal was
previously consolidated. In July 2004, BMC Construction acquired the remaining
49% of KBI Norcal for $14.0 million in cash. Assets acquired included
intangibles of $4.7 million and goodwill of $6.5 million.





***Other
Acquisitions***


The
following acquisitions were completed during 2004:





In
September 2004, our majority-owned subsidiary WBC Construction acquired a 51%
interest in a truss facility (A-1 Building Components, LLC) in Boynton Beach,
Florida for $2.4 million in cash. Assets acquired included accounts receivable
of $2.8 million, inventory of $1.2 million, property and equipment of $1.4
million, other long-term assets of $0.2 million, intangibles of $0.7 million,
goodwill of $0.9 million and liabilities of $4.8 million.





In March
2004, BMC Construction acquired a distribution facility in Tucson, Arizona for
$4.1 million in cash. In October 2004, BMC Construction acquired a window
installation business in Napa, California for $1.7 million in cash. Assets
acquired in these acquisitions included accounts receivable of $1.8 million,
inventory of $0.8 million, property and equipment of $2.3 million, intangibles
of $0.3 million, goodwill of $0.9 million and liabilities of $0.3 million.





In June
2004, BMC West acquired a framing business in Denver, Colorado for $0.8 million
cash. Assets acquired included prepaid expenses of $0.1 million, property and
equipment of $0.1 million, other long-term assets of $0.3 million, intangibles
of $0.1 million and goodwill of $0.2 million.





Had these
acquisitions taken place as of the beginning of 2003, pro forma results of
operations would not have been significantly different from reported
amounts.




***·***  ***RCI
Construction***


In
January 2005, we acquired a 51% interest in a newly formed construction
business, RCI Construction, LLC (RCI Construction), for $4.4 million in cash.
The remaining 49% is owned by Residential Carpentry, Inc. and will be recognized
as minority interest. RCI




36




Construction
provides framing services to high-volume production builders in the greater
Chicago area. Consistent with the acquisition date of January 2005, operating
results will be consolidated in 2005.




We have
potential call and put obligations associated with our interests in RCI
Construction, WBC Mid-Atlantic and WBC Construction.  Under the purchase
agreements, we have the right to purchase the remaining portions during certain
periods or if certain conditions are met.  Likewise, the other owners have
the option to require us to purchase the remaining portions during certain
periods.  The purchase price for the remaining portions will be based
generally on a multiple of historical earnings.  The following table
summarizes these potential call and put obligations:
 
 **Call
      Options**
    
    **Put
      Options**RCI
      Construction
    January
      2008 through January 2012
    
    January
      2008 through January 2012WBC
      Mid-Atlantic
    Prior
      to October 2010
    
    October
      2008 through September 2010WBC
      Construction
    January
      2006 through January 2009
    
    January
      2007 through January 2009






***5.***  ***Receivables***





Receivables
consist of the following (thousands):





**2004**
    
    2003Trade
      receivables
    
    **$**
    **232,125**
    
    $
    182,736Other
    
    
    **10,313**
    
    
    7,479Allowance
      for returns, discounts and doubtful accounts
    
    
    **(4,367**
    **)**
    
    (2,425
    )**$**
    **238,071**
    
    $
    187,790





Customers
are dispersed among various markets, therefore credit risk to any one customer
or state economy is not significant. We perform credit evaluations of our
customers and provide an allowance for doubtful accounts when events or
circumstances indicate that collection is doubtful. Account balances are
written-off after all means of collection have been exhausted and the potential
for recovery is remote.





Pursuant
to credit applications with customers, interest income is assessed and collected
on accounts receivable. The interest rate varies from 1% to 2% per month.
Interest income was recognized as a component of other income, net and was $1.8
million in 2004, $1.1 million in 2003 and $1.2 million in 2002.








***6.***  ***Marketable
Securities***





Investments
in marketable securities consist of debt securities held by our captive
insurance subsidiary and are considered available-for-sale and recorded at fair
values. Unrealized gains and losses are recorded as a component of accumulated
other comprehensive loss, net, a component of shareholders’ equity. At December
31, 2004, marketable securities that mature in less than a year were $2.2
million and long-term marketable securities of $16.8 million have maturities of
one to five years. There were no significant unrealized losses.


37


***7.***  ***Property
and Equipment***
 
 Property
and equipment are recorded at cost. Cost includes expenditures for major
improvements and replacements that extend useful life. Certain costs of software
are capitalized provided those costs are not research and development and
certain other criteria are
 
 ·  ten to
thirty years for buildings and improvements,
 ·  seven to
ten years for machinery and fixtures,
 ·  three to
ten years for handling and delivery equipment and
 ·  three to
ten years for software development costs.


Property
and equipment consist of the following (thousands):





**2004**
    
    2003Land
    
    **$******
    ******37,036**
    
    $
    39,311Buildings
      and improvements
    
    
    **104,667**
    
    
    99,135Machinery
      and fixtures
    
    
    **60,109**
    
    
    55,209Handling
      and delivery equipment
    
    
    **50,780**
    
    
    46,519Software
      development costs
    
    
    **11,216**
    
    
    10,762Construction
      in progress
    
    
    **4,956**
    
    
    4,632**268,764**
    
    
    255,568Less
      accumulated depreciation
    
    
    **(104,453**
    **)**
    
    (90,168
    )**$******
    ******164,311**
    
    $
    165,400





In order
to improve financial returns, we periodically evaluate our investments in
property and equipment. As a result, property and equipment may be consolidated,
leased or sold. We recognized a net loss of $0.3 million in 2004, net gain of
$1.2 million in 2003 and net loss of $0.9 million in 2002 from the sales of
property and equipment.






***8.***  ***Intangible
Assets and Goodwill***





Intangible
assets represent the values assigned to customer relationships, covenants not to
compete and trade names. Intangible assets are amortized on a straight-line
basis over their expected useful lives. Customer relationships are amortized
over two to seventeen years and covenants not to compete over three to five
years. Trade names are amortized over three years.  Intangible amortization
expense was $4.2 million in 2004, $1.7 million in 2003 and $0.8 million in 2002.
Intangible assets consist of the following (thousands):




**December 31, 2004****Gross**
      **Carrying Amount**
    ****
    ****
    **Accumulated**
      **Amortization**
    ****
    ****
    **Net Carrying**
      **Amount**Customer
      relationships
    
    **$**
    **17,134**
    
    **$**********************
    **(5,116**
    **)**
    **$******************************
    ******************************12,018**Covenants
      not to compete
    
    
    **2,919**
    
    
    **(1,426**
    **)**
    
    ******1,493**Trade
      names
    
    
    **204**
    
    
    **(23**
    **)**
    
    **181**Other
    
    
    **500**
    
    
    **(500**
    **)**
    
    ******—****$**
    **20,757**
    
    **$**********************
    **(7,065**
    ************************)
    **$******************************
    ******************************13,692**






38


**December 31, 2003****Gross**
      **Carrying Amount**
    ****
    ****
    **Accumulated**
      **Amortization**
    ****
    ****
    **Net Carrying**
      **Amount**Customer
      relationships
    
    $
    12,600
    
    $
    (1,793
    )
    $
    10,807Covenants
      not to compete
    
    
    2,320
    
    
    (1,121
    )
    
    1,199Other
    
    
    500
    
    
    (489
    )
    
    11$
    15,420
    
    $
    (3,403
    )
    $
    12,017


There are
no intangible assets with indefinite useful lives. Estimated amortization
expense for intangible assets is $2.7 million for 2005, $2.7 million for 2006,
$2.1 million for 2007, $1.4 million for 2008, $1.2 million for 2009 and $3.6
million thereafter.
 
 Goodwill
represents the excess of the purchase price over the fair value of net tangible
and identifiable intangible assets of acquired businesses. An annual assessment
for impairment is completed in the fourth quarter and whenever events and
circumstances indicate the carrying amount may not be recoverable. An impairment
is recognized at the reporting unit if the carrying amount is more than the
estimated future operating cash flows as measured by fair value techniques.


Changes
in the carrying amount of goodwill by business segment were as follows
(thousands):




**BMC West**
    ****
    ****
    **BMC Construction**
    ****
    ****
    **Total**Balance
      at December 31, 2002
    
    $
    20,312
    
    $
    31,799
    
    $
    52,111Goodwill
      acquired
    
    
    1,558
    
    
    19,979
    
    
    21,537Purchase
      price adjustments
    
    
    89
    
    
    137
    
    
    226Contingent
      consideration adjustment
    
    
    (213
    )
    
    —
    
    
    (213
    )Goodwill
      divested during the year
    
    
    (916
    )
    
    —
    
    
    (916
    )Balance
      at December 31, 2003
    
    $
    20,830
    
    $
    51,915
    
    $
    72,745Goodwill
      acquired
    
    
    234
    
    
    8,249
    
    
    8,483Purchase
      price adjustment
    
    
    —
    
    
    89
    
    
    89Impairment
    
    
    (1,001
    )
    
    —
    
    
    (1,001
    )**Balance
      at December 31, 2004**
    
    **$**
    **20,063**
    
    **$******
    ******60,253**
    
    **$******
    ******80,316**





***9.***  ***Accounts
Payable and Accrued Expenses***





Accounts
payable and accrued expenses consist of the following (thousands):




**2004**
    ****
    ****
    2003Accounts
      payable
    
    **$**
    **66,868**
    
    $
    51,735Accrued
      compensation
    
    
    **34,078**
    
    
    18,241Insurance
      deductible reserves
    
    
    **26,639**
    
    
    15,074Accrued
      liabilities
    
    
    **19,818**
    
    
    12,921Sales
      tax payable
    
    
    **6,359**
    
    
    5,784Book
      overdrafts
    
    
    **10,723**
    
    
    5,312**$**
    **164,485**
    
    $
    109,067






39




***10.***  ***Debt***





Long-term
debt consists of the following (thousands):





**As
      of December 31, 2004**
    ****
    **StatedInterest
      Rate**
    ****
    **Notional
      Amountof InterestRate Swaps**
    ****
    **Effective
      Interest Rate******
    ****
    **Balance**
    ****
    ****
    ****
    **Averagefor
      Year**
    ****
    **As
      of****December
      31**Revolving
      credit facility
    **$**
    **81,200**
    
    **LIBOR
      plus 1.75% or Prime plus 0.50%**
    ****
    **$**
    **—**
    ****
    **4.88%**
    ****
    **5.25%**Term
      note
    ****
    **123,125**
    
    **LIBOR
      plus 2.75% or Prime plus 2.00%**
    ****
    ****
    **100,000**
    ****
    **5.65%**
    ****
    **6.80%**Other
    ****
    **5,498**
    
    **Various**
    ****
    ****
    **—**
    ****
    **—**
    ****
    **—******
    **209,823**
    
    ****
    ****
    **$**
    **100,000**
    ****
    
    ****
    ********Less:  Current
      portion
    ****
    **3,404****$**
    **206,419**





**As
      of December 31, 2003**
    ****
    **Stated
      Interest Rate**
    ****
    **Notional
      Amountof InterestRate Swaps**
    ****
    **Effective
      Interest Rate******
    ****
    **Balance**
    ****
    ****
    ****
    **Averagefor
      Year**
    ****
    **As
      of****December 31**Revolving
      credit facility
    $
    60,400
    
    LIBOR
      plus 2.50% or Prime plus 1.75%
    
    $
    —
    
    4.69%
    
    5.17%Term
      note
    
    124,375
    
    LIBOR
      plus 3.25% or Prime plus 2.50%
    
    
    —
    
    3.96%
    
    4.44%Other
    
    4,903
    
    Various
    
    
    —
    
    —
    
    —189,678
    
    
    
    $
    —Less:  Current
      portion
    
    2,905$
    186,773








***Revolving
Credit Facility***


In August
2003, we entered into a $175 million revolving credit facility with a group of
lenders. In July 2004 and pursuant to the agreement, the borrowing capacity of
the revolving credit facility was increased by $50 million. Borrowings under the
revolving credit facility are limited to 60% of inventory plus 80% of eligible
receivables. The borrowing base is calculated monthly and limited to $225
million. The revolving credit facility matures in August 2008.





The
revolving credit facility consists of both LIBOR and Prime based borrowings. The
revolving credit facility was amended in May 2004 to reduce interest rates
by 0.25% and in March 2005 to reduce interest rates by another
0.50%.  Interest rates are subject to quarterly adjustment based on
operating performance and range from LIBOR plus 0.75% to 2.00%, or Prime plus
0.0% to 0.75%.




40




As of
December 31, 2004, the borrowing base was limited to the maximum of $225
million, $81.2 million of which was outstanding. At year end, the availability
under the revolving credit facility was $102.6 million, net of $41.2 million in
outstanding letters of credit.





***Term
Note***


In August
2003, we entered into a $125 million term note with a group of lenders. The term
note matures in August 2010 and is payable in quarterly installments for the
first six years in amounts equal to 1% of the initial principal amount per year
and equal quarterly installments for the remaining principal balance during year
seven. The term note was amended in May 2004 to reduce the interest rate by
0.50% and in March 2005 to reduce the interest rate by another
0.75%.  The interest rates for the term note are LIBOR plus 2.00% or Prime
plus 1.25%.


***Other***


Other
long-term debt consists of a term note, equipment notes and capital leases for
equipment and software. Interest rates are various and dates of maturity are
through November 2009.





***Hedging
Activities***


Derivative
and hedging activities are recorded on the balance sheet at their fair
values.  In June 2004, we entered into interest rate swap contracts that
effectively convert a portion of the floating rate borrowings of the term note
to a fixed interest rate through June 2009, thus reducing the impact of
increases in interest rates on future interest expense. Approximately 81% of the
outstanding floating rate borrowings of the term note as of December 31, 2004
have been hedged through the designation of interest rate swap contracts
accounted for as cash flow hedges. As a result, the interest rate on $100
million of the $123.1 million floating rate borrowings outstanding at December
31, 2004 was fixed at an average rate of 7.14%. However, in March 2005 the term
note was amended to reduce the interest rate by 0.75% and these floating rate
borrowings are currently fixed at an average rate of 6.39%. After giving
effect to the interest rate swap contracts, total borrowings are 50% fixed and
50% floating.





The fair
value of derivative instruments is based on pricing models using current market
rates. The fair value of the interest rate swap contracts was a long-term
liability of $2.2 million as of December 31, 2004. The effective portion was
recorded as accumulated other comprehensive loss, net, a separate component of
shareholders’ equity, and is subsequently reclassified into earnings in the same
financial statement line item, interest expense, in the same period during which
the hedged transaction is recognized in earnings. A corresponding deferred tax
asset of $0.9 million was also recorded in accumulated other comprehensive loss,
net for the income tax benefit related to the estimated liability of the
interest rate swap contracts. The ineffective portion of the change in the value
of the interest rate swap contracts is immediately recognized as a component of
interest expense. There was no hedge ineffectiveness for the period ended
December 31, 2004. Management may choose not to swap floating debt to a fixed
rate or may terminate a previously executed swap if the floating rate positions
are more beneficial.





The
revolving credit facility and term note are collateralized by all tangible and
intangible property, except assets of the captive insurance subsidiary. The
revolving credit facility and term note contain covenants and conditions
requiring the maintenance of certain financial ratios. At December 31, 2004, we
were in compliance with these covenants and conditions.








41





Scheduled
maturities of long-term debt are as follows (thousands):

2005
    
    $
    3,4042006
    
    
    3,8052007
    
    
    1,6162008
    
    
    82,7562009
    
    
    59,492Thereafter
    
    
    58,750$
    209,823





As of
December 31, 2004 and 2003 there were $41.2 million and $26.5 million
respectively, of letters of credit outstanding that guaranteed performance or
payment to third parties. These letters of credit reduce borrowing availability
under the revolving credit facility.








***11.***  ***Shareholders’
Equity***





***Preferred
Shares***


We are
authorized to issue 2 million preferred shares, however none of these shares are
issued.





***Common
Shares***


We are
authorized to issue 20 million shares, of which 13,852,683 shares were issued
and outstanding at December 31, 2004. The cash dividend was increased to $0.08
per share in the third quarter of 2004. The cash dividend was initiated at $0.05
per share in the fourth quarter of 2002 and increased to $0.06 per share in the
fourth quarter of 2003. Of the unissued shares, 995,349
shares were reserved for the following:





**Unissued
      Shares**Employee
      Stock Purchase Plan
    
    
    87,6492004
      Incentive and Performance Plan
    
    
    907,700





***Shareholders’
Rights Plan***


In
September 1997, our Board of Directors adopted a shareholder rights plan. If a
person acquires 15% or more of our common shares or makes a tender offer or
other offer to do so without the approval of the Board of Directors, our
shareholders would have the right to purchase our common shares or the shares of
the acquiring company at a significant discount. The Board of Directors has the
right to redeem these rights for a nominal amount, to extend the period before
the rights may be exercised or to take other actions as defined. The plan is
intended to encourage any person seeking to acquire us to negotiate with the
Board of Directors. The plan expires in September 2007.




***Cash
Equity Plan***


In April
1999, our Board of Directors adopted the Cash Equity Plan. Employees are
eligible to receive awards of common shares at the discretion of the
Compensation Committee of the Board of Directors. Awards are common share
equivalent units which may be exchanged for the market value of those shares.
The number of units available for grant, including those units outstanding and
unexercised, cannot exceed two percent of the common shares outstanding at any
given time. The awards vest after three years from the date of grant and expire
after five years. No units were awarded in 2004 or 2003, however 15,250 units
were awarded to employees in 2002. Compensation expense is recognized based on
changes in the market value of the common shares. The related compensation
expense for this plan was $0.8 million in 2004, $0.3 million in 2003 and $1.5
million in 2002. At December 31, 2004, units of 17,197 remain outstanding and
unexercised. No further grants or awards will be made under this plan.






42




***Share
Option Plans and Share Plans***
Previously
we granted options and issued common shares under the following
shareholder-approved option plans:

·1991
Senior Management and Field Management Plan
·1992
Non-Qualified Stock Option Plan
·1993
Employee Stock Option Plan
·1993
Second Amended and Restated Non-Employee Director Stock Plan
·2000
Stock Incentive Plan





In
February 1997, as an additional incentive to attract a member of senior
management, the Board of Directors authorized and issued an award of 50,000
options.





These
plans provided options to employees and directors to purchase shares below
market prices or options for exercise prices based on the fair value of the
shares on the date of the grant. These options vested over one, four or five
years from the date of grant and expire at the end of ten years if
unexercised.





In
February 2004, we granted 103,500 options to employees from the 2000 Stock
Incentive Plan. These options vest ratably over four years from the date of
grant and expire after ten years if unexercised. These options were awarded at
their fair value on the date of grant, therefore no compensation expense was
recognized. No further grants will be made under these plans, however grants
will be made under the 2004 Incentive and Performance Plan.





***Employee
Stock Purchase Plan***


In
September 2000, our Board of Directors adopted the Employee Stock Purchase Plan
which was approved by our shareholders in May 2001. The plan permits eligible
employees to purchase common shares through payroll deductions of up to 10% of
an employee’s compensation limited to $25,000 each year. The purchase price of
the shares is 85% of the market price on the last day of each month. There were
200,000 common shares authorized under this plan and there were 87,649 shares
available for future purchase as of December 31, 2004.





***2004
Incentive and Performance Plan***


In
February 2004, our Board of Directors adopted the 2004 Incentive and Performance
Plan which was approved by our shareholders in May 2004. A total of 1.2 million
shares are reserved for issuance under the plan. Employees and non-employee
directors are eligible to receive awards at the discretion of the Compensation
Committee. The following types of awards may be granted under this plan:
options, appreciation rights, restricted shares, other share-based awards and
non-discretionary awards.





In May
2004, we granted 201,000 options to employees. These options vest ratably over
three years from the date of grant and expire after seven years if unexercised.
These options were awarded with exercise prices above their fair value on the
date of grant, therefore no compensation expense was recognized.





In July
2004, we issued 16,800 shares to non-employee directors and recognized
compensation expense of $0.3 million.





In August
2004, we issued 74,500 restricted shares to employees. The weighted-average fair
value of the restricted shares granted was $21.78 and $1.6 million of unearned
compensation was reflected as a component of shareholders’ equity. These shares
vest in May and August of 2007, however if specific performance criteria are
met, some or all of the restricted shares may vest earlier. Compensation expense
is recognized over the vesting period. Compensation expense of $0.2 million was
recognized in 2004. Restricted shares are not included in the





43










The
following table summarizes options outstanding and changes:




**2004**
    
    
    2003
    
    
    2002**Shares**
    ****
    
    ****
    **Weighted**
      **Average**
      **Exercise**
      **Price**
    ****
    ****
    **Shares**
    ****
    
    ****
    **Weighted**
      **Average**
      **Exercise**
      **Price**
    ****
    ****
    **Shares**
    ****
    
    ****
    **Weighted**
      **Average**
      **Exercise**
      **Price**Balance
      at beginning of the year
    
    
    **1,521,177**
    
    
    ********
    ********$**12.20**
    
    
    1,515,183
    
    
    
    $11.96
    
    
    1,413,868
    
    
    
    $11.58Options
      granted
    
    
    **304,500**
    
    
    ********
    ********$**16.83**
    
    
    185,750
    
    
    
    $13.92
    
    
    221,000
    
    
    
    $14.00Options
      exercised
    
    
    **(412,364**
    **)**
    
    ********
    ********$**12.15**
    
    
    (88,547
    )
    
    
    $10.10
    
    
    (97,694
    )
    
    
    $10.57Options
      forfeited
    
    
    **(35,415**
    **)**
    
    ********
    ********$**26.56**
    
    
    (91,209
    )
    
    
    $13.79
    
    
    (21,991
    )
    
    
    $14.59Balance
      at end of the year
    
    
    **1,377,898**
    
    
    ********
    ********$**12.87**
    
    
    1,521,177
    
    
    
    $12.20
    
    
    1,515,183
    
    
    
    $11.96Exercisable
      at end of the year
    
    
    **956,650**
    
    
    ********
    ********$**11.53**
    
    
    1,158,540
    
    
    
    $12.22
    
    
    1,017,683
    
    
    
    $12.52Weighted
      average fair value of options granted at fair
    value
    
    ********
    ********$**9.64**
    
    
    
    
    
    
    $8.87
    
    
    
    
    
    
    $9.31Weighted
      average fair value of options grantedabove
      fair value
    
    
    ********$**10.31**
    
    
    
    
    
    
    $—
    
    
    
    
    
    
    $—





The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:





·
    Risk-free
      interest rates of 4.6% in 2004, 3.9% in 2003 and 5.0% in
    2002,


·
    Estimated
      lives of approximately 7.5 years for 2004 and 9 years for 2003 and 2002
      and


·
    Expected
      share price volatility of 54.3% in 2004, 55.0% in 2003 and 55.1% in
      2002.





The
following table summarizes information regarding options outstanding at December
31, 2004:





**Options
      Outstanding**
    
    **Options
      Exercisable****Range
      of Exercise Prices**
    
    **Options**
      **Outstanding**
    
    **Weighted**
      **Average**
      **Contractual**
      **Life
      (Years)**
    
    
    **Weighted**
      **Average**
      **Exercise
      Price**
    
    **Options**
      **Exercisable**
    
    
    **Weighted**
      **Average**
      **Exercise
      Price**$6.85
      to $12.00
    
    535,050
    
    5.4
    
    
    $9.69
    
    535,050
    
    
    $9.69$12.38 to $14.00
    
    502,158
    
    6.1
    
    
    $13.54
    
    359,534
    
    
    $13.38$14.25 to $19.50
    
    340,690
    
    8.5
    
    
    $16.88
    
    62,066
    
    
    $16.66$6.85 to $19.50
    
    1,377,898
    
    6.4
    
    
    $12.87
    
    956,650
    
    
    $11.53





The
following table summarizes equity compensation information as of December 31,
2004:




****
    
    
    **Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights**
    
    
    **Weighted
      Average Exercise Price of Outstanding Options, Warrants and
      Rights**
    
    
    **Number
      of Securities Remaining Available for Future Issuance Under Equity
      Compensation Plans**Equity
      compensation plans approved by security holders
    
    
    1,402,398
    
    
    $13.36
    
    
    907,700Equity
      compensation plans not approved by security holders
    
    
    50,000(1)
    
    
    $12.50
    
    
    —Total
    
    
    1,452,398
    
    
    $13.33
    
    
    907,700





(1)
    In
      February 1997, the Board of Directors authorized issuance of these options
      as an additional incentive to attract a member of senior management. The
      exercise price was equal to the fair market value of the shares on the
      date the options were granted. These options vested in February 2002 and
      expire 10 years from the date of
grant.


44








***12.***  ***Income
Taxes***





The asset
and liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are recognized for tax credits and for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded to reduce the carrying amounts of deferred tax assets unless it is more
likely than not that such assets will be realized.





Income
taxes consist of the following (thousands):




Current income taxes
    
    
    **2004**
    
    
    2003
    
    
    2002Federal
    
    **$**
    **37,185**
    
    $
    8,258
    
    $
    12,420State
    
    
    **5,503**
    
    
    588
    
    
    1,142**42,688**
    
    
    8,846
    
    
    13,562Deferred
      income taxesFederal
    
    
    **(6,809**
    **)**
    
    2,240
    
    
    (2,446
    )State
    
    
    **(681**
    )
    
    316
    
    
    (245
    )**(7,490**
    **)**
    
    2,556
    
    
    (2,691
    )**$**
    **35,198**
    
    $
    11,402
    
    $
    10,871





For the
year ended December 31, 2003, income tax expense of $0.9 million associated with
equity in earnings of an unconsolidated company was not included in the table
above. For the year ended December 31, 2002, a deferred tax benefit of $6.3
million was recognized and classified as a change in accounting principle for
the transitional impairment as a result of adopting Statement of Financial
Accounting Standards No. 142, *Goodwill
and Other Intangible Assets* .





The tax
benefit associated with non-statutory options exercised by employees under the
various share plans reduced taxes payable by approximately $2.0 million in 2004,
$0.1 million in 2003 and $0.2 million in 2002. These tax benefits are recognized
in additional paid-in-capital, a component of shareholders’ equity.





A
reconciliation of the differences between the U.S. statutory federal income tax
rate and the actual tax rate as provided in the consolidated statements of
income is as follows:





**2004**
    
    2003
    
    2002Statutory
      rate
    
    
    **35.0**
    **%**
    
    35.0
    %
    
    35.0
    %State
      income taxes, net of federal benefit
    
    
    **3.3**
    
    
    1.7
    
    
    1.6Non-deductible
      items
    
    
    **—**
    
    
    1.3
    
    
    1.7Minority
      interest income
    
    
    **(2.3**
    **)**
    
    (1.4
    )
    
    —Other
    
    
    **1.2**
    
    
    —
    
    
    (1.2
    )**37.2**
    %
    
    36.6
    %
    
    37.1
    %





45





Deferred
income taxes are provided using the liability method to reflect temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities using presently enacted tax rates and laws. The
components of deferred income taxes included in the consolidated balance sheets
were as follows (thousands):


Deferred
      tax assets:
    
    
    **2004**
    
    
    2003Inventory
    
    **$**************
    **************3,440**
    
    $
    3,044Other
      intangibles, net
    
    
    **2,279**
    
    
    2,650Accrued
      expenses
    
    
    **10,425**
    
    
    7,227Accrued
      compensation
    
    
    **8,407**
    
    
    4,443Other
    
    
    **1,657**
    
    
    401**26,208**
    
    
    17,765Deferred
      tax liabilities:Property
      and equipment
    
    
    **367**
    
    
    262Depreciation
    
    
    **12,273**
    
    
    12,517Deferred
      costs
    
    
    **1,952**
    
    
    1,711**14,592**
    
    
    14,490Net
      deferred tax assets
    
    **$**************
    **************11,616**
    
    $
    3,275Classified
      in the balance sheet as:Deferred
      income tax benefit (current assets)
    
    **$**************
    **************11,913**
    
    $
    8,629Deferred
      income taxes (long-term liability)
    
    
    **(297**
    **)**
    
    (5,354
    )**$**************
    **************11,616**
    
    $
    3,275





Deferred
tax assets are reduced by a valuation allowance when it is more likely than not
that some portion of the deferred tax asset will not be realized. Management
believes that it is more likely than not that our future operating results
coupled with the existing deferred tax liabilities will generate sufficient
taxable income to realize the deferred tax assets, therefore no valuation
allowance was recorded in any of the periods presented.








***13.***  ***Retirement
Plans***





We
provide a savings and retirement plan for salaried and certain hourly employees
whereby eligible employees may contribute a percentage of their earnings to a
trust. Matching contributions of $3.3 million for 2004, $2.8 million for 2003
and $2.7 million for 2002 were made to the trust based on a percentage of the
contributions made by the participating employees.





Additionally,
there is a supplemental retirement plan for eligible managers and directors.
Contributions are based on achieving certain operating performance.
Contributions were $3.6 million in 2004, $1.7 million in 2003 and $1.5 million
in 2002. The plan’s investments are principally company-owned life insurance
policies. Payments are made to the participants or their beneficiaries over a 15
year period.








***14.***  ***Financial
Instruments***





The
estimated fair values of cash and cash equivalents, receivables, inventory and
short-term borrowings are the same as their carrying amounts. After giving
effect to the interest rates swap contracts, the interest for our debt is 50%
fixed and 50% variable. The estimated market value of our debt, based on current
interest rates for similar obligations with like maturities at December 31,
2004, was approximately $2.2 million more than the amount of debt reported in
the consolidated balance sheet.






46




Changes
in interest rates expose us to financial market risk. We currently utilize
interest rate swap contracts to hedge interest exposure on our term note. The
interest rate swap contracts effectively convert $100 million of the term note
to a fixed interest rate of 6.39% through June 2009. Changes in the fair value
of the interest rate swap contracts are recorded as accumulated other
comprehensive loss, net, a separate component of shareholders’ equity, and are
subsequently reclassified into interest expense as interest expense is
recognized on the term note.





Derivative
financial instruments are not utilized to hedge other risks or for speculative
or trading purposes.








***15.***  ***Commitments
and Contingencies***





***Operating
Leases***


We lease
certain real property, vehicles and office equipment under operating leases.
Rental expense for these leases was $11.4 million in 2004, $9.9 million in 2003
and $9.7 million in 2002. Certain of these leases are non-cancelable and have
minimum lease payment requirements of $11.2 million in 2005, $9.6 million in
2006, $7.8 million in 2007, $5.7 million in 2008, $4.1 million in 2009 and $2.2
million thereafter.





***Legal
Proceedings***


We are
involved in litigation and other legal matters arising in the normal course of
business. In the opinion of management, the recovery or liability, if any, under
any of these matters will not have a material effect on the consolidated
financial position, results of operations or cash flows.





***16.***  ***Segment
Information***





The
consolidated financial statements include operations from two reportable
segments: BMC West and BMC Construction. These segments represent businesses
that are managed separately. Each of these businesses requires distinct
operating and marketing strategies. Management reviews financial performance
based on these operating segments.





BMC West
markets and sells building products, manufactures building components and
provides construction services. Products include structural lumber and building
materials purchased from other manufacturers and manufactured building
components including millwork, trusses and wall panels. Construction services
include framing and installation of miscellaneous building products. Building
products and construction services are sold principally to builders and
contractors.




BMC
Construction provides framing and other construction services to high-volume
production homebuilders. Framing and other construction services include
managing labor, materials and construction schedules.
 The
financial performance for these reporting segments is based on income from
operations before interest expense, income taxes, minority interests and equity
earnings. The segments follow the accounting principles described in the Summary
of Significant Accounting Policies. Sales between segments are recognized at
market prices and no single customer accounts for more than 10% of
sales.




47


Selected
financial information by segment is as follows (thousands):


Income (1)
      (Loss)
      Before
      Taxesand
      Minority
      Interests
    
    
    Equity in
      Net Income
      (Loss) of
      Affiliates
    
    Depreciation
      and
      Amortization
    
    Capital (2)
      Expenditures
    
    AssetsSalesTotal
    
    Inter-
      Segment
    
    
    Trade**Year
      Ended December 31, 2004**BMC
      West
    
    **$**
    **1,338,470**
    
    **$**
    **(1,146**
    **)**
    
    **$**
    **1,337,324**
    
    **$**
    **96,083**
    
    
    $
    —
    
    **$**
    **14,599**
    
    **$**
    **17,036**
    
    **$**
    **409,160**BMC
      Construction
    
    
    **753,956**
    
    
    **(255**
    **)**
    
    
    **753,701**
    
    
    **59,689**
    
    
    
    —
    
    
    **8,216**
    
    
    **14,382**
    
    
    **268,498**Corporate
      and Other
    
    
    **—**
    
    
    **—**
    
    
    
    **—**
    
    
    **(47,664**
    **)**
    
    
    —
    
    
    **497**
    
    
    —
    
    
    **65,386****2,092,426**
    
    
    **(1,401**
    **)**
    
    
    **2,091,025**
    
    
    **108,108**
    
    
    
    —
    
    
    **23,312**
    
    
    **31,418**
    
    
    **743,044**Interest
      Expense
    
    
    —
    
    
    **—**
    
    
    
    —
    
    
    **(13,560**
    **)**
    
    
    —
    
    
    —
    
    
    —
    
    
    —**$**
    **2,092,426**
    
    **$**
    **(1,401**
    **)**
    
    **$**
    **2,091,025**
    
    **$**
    **94,548**
    
    
    $
    —
    
    **$**
    **23,312**
    
    **$**
    **31,418**
    
    **$**
    **743,044****Year
      Ended December 31, 2003**BMC
      West
    
    $
    1,007,373
    
    $
    (469
    )
    
    $
    1,006,904
    
    $
    54,826
    
    
    $
    —
    
    $
    15,315
    
    $
    12,121
    
    $
    390,764BMC
      Construction
    
    
    408,929
    
    
    (762
    )
    
    
    408,167
    
    
    18,954
    
    
    
    1,431
    
    
    4,410
    
    
    5,555
    
    
    187,479Corporate
      and Other
    
    
    —
    
    
    —
    
    
    
    —
    
    
    (33,351
    )
    
    
    —
    
    
    1,060
    
    
    —
    
    
    25,9561,416,302
    
    
    (1,231
    )
    
    
    1,415,071
    
    
    40,429
    
    
    
    1,431
    
    
    20,785
    
    
    17,676
    
    
    604,199Interest
      Expense
    
    
    —
    
    
    —
    
    
    
    —
    
    
    (9,279
    )
    
    
    —
    
    
    —
    
    
    —
    
    
    —$
    1,416,302
    
    $
    (1,231
    )
    
    $
    1,415,071
    
    $
    31,150
    
    
    $
    1,431
    
    $
    20,785
    
    $
    17,676
    
    $
    604,199**Year
      Ended December 31, 2002**BMC
      West
    
    $
    941,845
    
    $
    (15
    )
    
    $
    941,830
    
    $
    48,146
    
    
    $
    —
    
    $
    15,184
    
    $
    17,898
    
    $
    371,717BMC
      Construction
    
    
    220,472
    
    
    (808
    )
    
    
    219,664
    
    
    20,677
    
    
    
    —
    
    
    2,545
    
    
    4,303
    
    
    120,997Corporate
      and Other
    
    
    —
    
    
    —
    
    
    
    —
    
    
    (29,702
    )
    
    
    —
    
    
    1,536
    
    
    —
    
    
    10,3601,162,317
    
    
    (823
    )
    
    
    1,161,494
    
    
    39,121
    
    
    
    —
    
    
    19,265
    
    
    22,201
    
    
    503,074Interest
      Expense
    
    
    —
    
    
    —
    
    
    
    —
    
    
    (9,812
    )
    
    
    —
    
    
    —
    
    
    —
    
    
    —$
    1,162,317
    
    $
    (823
    )
    
    $
    1,161,494
    
    $
    29,309
    
    
    $
    —
    
    $
    19,265
    
    $
    22,201
    
    $
    503,074





(1)  See Note
3 for an explanation of asset impairments affecting our
segments.


(2)  Property
and equipment from acquisitions are included as capital
expenditures.








48


******


***17.***  ***Quarterly
Results of Operations (unaudited)***





Operating
results by quarter for 2004 and 2003 were as follows (thousands, except per
share data):




**2004**
    ****
    **First**
    ****
    ****
    **Second**
    ****
    ****
    **Third**
    ****
    ****
    **Fourth****Sales**
    **$**
    **416,843**
    ****
    **$**
    **543,393**
    ****
    **$**
    **591,480**
    ****
    **$**
    **539,309**
    ******Income
      from operations**
    **$**
    **10,651**
    ****
    **$**
    **26,473**
    ****
    **$**
    **35,080**
    ****
    **$**
    **35,904**
    ******Net
      income**
    **$**
    **4,188**
    **(1)**
    **$**
    **12,580**
    ****
    **$**
    **18,096**
    ****
    **$**
    **19,046**
    **(2)(3)******
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******Net
      income per diluted common share**
    **$**
    **0.31**
    ****
    **$**
    **0.92**
    ****
    **$**
    **1.29**
    ****
    **$**
    **1.34**
    ******Common
      share prices:**
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ****
    ******High**
    **$**
    **18.33**
    ****
    **$**
    **19.28**
    ****
    **$**
    **27.65**
    ****
    **$**
    **38.94**
    ******Low**
    **$**
    **14.90**
    ****
    **$**
    **15.70**
    ****
    **$**
    **16.97**
    ****
    **$**
    **25.62**
    ****2003Sales
    $
    276,392
    
    $
    322,266
    
    $
    396,325
    
    $
    420,088Income
      from operations
    $
    2,171
    
    $
    10,319
    
    $
    15,554
    
    $
    12,385Net
      income
    $
    586
    
    $
    5,649
    
    $
    7,916
    
    $
    5,778
    (4)Net
      income per diluted common share
    $
    0.04
    
    $
    0.42
    
    $
    0.59
    
    $
    0.43Common
      share prices:High
    $
    15.75
    
    $
    15.35
    
    $
    15.71
    
    $
    15.53Low
    $
    12.68
    
    $
    12.16
    
    $
    11.75
    
    $
    12.75





(1)  Includes
an impairment of $0.8 million net of tax for certain properties of BMC
West.


(2)  Includes
an impairment of $0.6 million net of tax for goodwill of BMC
West.


(3)  Includes
a $3.8 million net of tax for a reduction of expenses for lower than expected
insurance costs.


(4)  Includes
an impairment of $0.5 million net of tax for intangible assets of BMC
Construction.







49


****


**Report
of Independent Registered Public Accounting Firm**

The Board of Directors and ShareholdersBuilding Materials
Holding Corporation:
We have audited the accompanying consolidated balance sheet of Building
Materials Holding Corporation and subsidiaries as of December 31, 2004, and the
related consolidated statements of income, shareholders’ equity, and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 audit provides a
reasonable basis for our opinion.
In our
opinion, the 2004 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Building Materials
Holding Corporation and subsidiaries as of December 31, 2004, and the results of
their operations and their cash flows for the year then ended, in conformity
with U.S. generally accepted accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Building Materials Holding
Corporation’s internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated March 24, 2005 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.


/s/ KPMG
      LLPSan
      Francisco, California
      March
      24, 2005


****


****


50





Report of Independent Registered Public Accounting
Firm
 
  The Board
of Directors and ShareholdersBuilding Materials Holding
Corporation:
  We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
  
 51
   
  
 /s/ KPMG
      LLPSan
      Francisco, California
      March
      24, 2005
 ****


****


****


52


****


**Report
of Independent Registered Public Accounting Firm**





To the
Board of Directors and Shareholders of


Building
Materials Holding Corporation:





In our
opinion, the consolidated balance sheet as of December 31, 2003 and the related
consolidated statements of income, shareholders’ equity and cash flows for each
of the two years in the period ended December 31, 2003 listed in the
accompanying index appearing under Item 15(a) (1) present fairly, in all
material respects, the financial position, results of operations and cash flows
of Building Materials Holding Corporation and its subsidiaries at December 31,
2003, and for each of the two years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule for each
of the two years in the period ended December 31, 2003 listed in the
accompanying index appearing under Item 15(a)(2) present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.





/s/ PricewaterhouseCoopers
      LLPSan Francisco,
      California
      March 12, 2004





53





**ITEM
9. Changes in and Disagreements with Accountants on Accounting and Financial** **Disclosure**







For
information regarding our change in independent accountants from
PricewaterhouseCoopers LLP, please refer to our Form 8-K/A filed with the United
States Securities and Exchange Commission on March 18, 2004.





We have
had no disagreements with our independent accountants regarding any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure.








**ITEM
9A. Controls and Procedures**





**Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures**


As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of the Chief Executive Officer and
Chief Financial Officer, of the design and operation of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934. This evaluation was conducted to determine whether the
disclosure controls and procedures were effective and timely in bringing
material information to the attention of senior management. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring material
information required to be disclosed in reports filed under the Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and is accumulated and
communicated to our Chief Executive Officer and Chief Financial Officer to allow
timely decisions regarding required disclosure.




**Changes
in Internal Control**
 Our
disclosure controls and procedures and internal controls over financial
reporting are routinely evaluated and tested for effectiveness. These
evaluations are discussed with management and the Audit Committee. As a result
of these evaluations, revisions and corrective actions are made to ensure the
continuing effectiveness of our disclosure controls and procedures and internal
controls over financial reporting.
 
 There
were no changes in the design or operation of our internal controls over
financial reporting that occurred during the fourth quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
 
 **Management’s
Report on Internal Control Over Financial Reporting**
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f) and 15(d)-15(f). Under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Our evaluation of internal control over financial reporting did not
include the internal control of our 30.6% controlling interest in A-1 Building
Components, LLC which was acquired in September 2004. Assets of $9.3 million and
building product sales of $7.1 million for this operation were included in our
consolidated financial statements as of and for the year ended December 31,
2004. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004.


54




Our
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 has been audited by KPMG LLP, an independent registered
public accounting firm. Their report expresses an unqualified opinion on our
assessment of the effectiveness of our internal control over financial reporting
as of December 31, 2004 and is included in Item 8 under the heading Report
of Independent Registered Public Accounting Firm On Internal Control Over
Financial Reporting.





**Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting**





Refer to
report of independent registered public accounting firm presented in Item 8 -
Financial Statements and Supplementary Data (page 51).





**ITEM
9B. Other Information**




****


55


****


**PART
III**





**ITEM
10. Directors and Executive Officers of the Registrant**





**Directors**


The
directors and nominees for director are presented under the caption Election of
Board of Directors in our Proxy Statement and is incorporated herein by
reference. Our Proxy Statement will be filed within 120 days of our year end of
December 31, 2004.





**Executive
Officers**


The
executive officers are as follows:




**Name**
    **Age**
    **Position
      and Business Experience**Robert
      E. Mellor
    61
    Chairman
      of the Board, President and Chief Executive Officer
      Mr.
      Mellor became Chairman of the Board of Directors of BMHC in 2002 and has
      been President and Chief Executive Officer since joining the Company in
      1997. He was previously Of Counsel with the law firm of Gibson, Dunn &
      Crutcher LLP from 1990 to 1997. Mr. Mellor also serves as a director for
      Coeur d’Alene Mines Corporation, The Ryland Group, Inc. and Monroe Muffler
      Brake, Inc.William
      M. Smartt
    62
    Senior
      Vice President and Chief Financial Officer
      Mr.
      Smartt joined the company as Senior Vice President and Chief Financial
      Officer in April 2004. He previously served from 1992 to 2001 as Executive
      Vice President, Chief Financial and Administrative Officer of DHL Express,
      a leader in international air express service.Robert
      L. Becci
    64
    Vice
      President and Controller
      Mr.
      Becci has served as Vice President and Controller since the Company’s
      inception in 1987.Ellis
      C. Goebel
    63
    Senior
      Vice President - Business Development and Investor
      Relations
      Mr.
      Goebel began serving in 2004 as Senior Vice President - Business
      Development and Investor Relations. He previously served as Senior Vice
      President - Finance of BMHC from 1997 to 2003. From 1987 to 1997, he
      served as Vice President and Treasurer of the Company.Mark
      R. Kailer
    51
    Vice
      President and Treasurer
      Mr.
      Kailer has been Vice President and Treasurer since 2003. He joined the
      company in 2000 as Assistant Treasurer. He was previously Senior Manager
      of Treasury Services at Circle International Group, a publicly-traded
      global logistics company based in San Francisco, from 1997 to
      2000.Jeffrey
      F. Lucchesi
    51
    Senior
      Vice President, Chief Information Officer
      Mr.
      Lucchesi joined the company in August of 2004 as Senior Vice President and
      Chief Information Officer. He previously served from 2000 to 2004 as
      Senior Vice President of Worldwide Operations for Corio, Inc., an
      enterprise application service provider. Mr. Lucchesi also served from
      1994 to 2000 as VP and Chief Information Officer for DHL Express, a leader
      in international air express services.
   56
  Michael
      D. Mahre
    45
    Senior
      Vice President - Corporate Development, Chief Executive Officer - BMC
      Construction
      Mr.
      Mahre was elected a Senior Vice President in 2003. He was elected Vice
      President of Corporate Development in 2001 and Chief Executive Officer of
      BMC Construction in 2002. He joined the Company in 1999 as Director of
      Financial Planning and Analysis. Mr. Mahre was a principal of The Cambria
      Group, a private equity investment firm, from 1997 to
  1999.Steven
      H. Pearson
    57
    Senior
      Vice President - Human Resources
      Mr.
      Pearson has been Senior Vice President of Human Resources since 2001. From
      1987 through 2001 he served as Vice President of Human
      Resources.Paul
      S. Street
    56
    Senior
      Vice President, Chief Administrative Officer, General Counsel and
      Corporate Secretary
      Mr.
      Street joined the Company in 1999 as Senior Vice President, General
      Counsel and Corporate Secretary and has been Chief Administrative Officer
      since 2001. He previously served as our outside General Counsel &
      Secretary while a partner of the law firm of Moffatt, Thomas, Barrett,
      Rock & Fields.Stanley
      M. Wilson
    60
    Senior
      Vice President, President and Chief Executive Officer - BMC
      West
      Mr.
      Wilson was elected President and CEO of BMC West in 2004 and was appointed
      a Senior Vice President in 2003. He was elected Vice President in 2000 and
      was General Manager of the Pacific Division of BMC West from 1993 to
      2003.





**Audit
Committee Financial Expert**


The Audit
Committee of the Board of Directors consists of Alec F. Beck, Sara L. Beckman,
H. James Brown, James K. Jennings, Jr. and Peter S. O’Neill. Each member is
independent as defined under the NASDAQ rules. The Board of Directors has
determined that each Audit Committee member has sufficient knowledge in
financial accounting matters to serve on the Audit Committee. James K. Jennings,
Jr. is an audit committee financial expert, as defined by the rules of the
Securities and Exchange Commission.





**Code
of Ethics**


We have
adopted a Code of Ethics for our chief executive officer, chief financial
officer and controller and other officers. In addition, we have adopted a Code
of Business Conduct that applies to all employees and officers and we adopted
Corporate Governance Guidelines that applies to our directors. These codes and
guidelines require directors, employees and officers to act with honesty and
integrity, avoiding actual or apparent conflicts of interest, and as we become
aware of such issues, prompt action will be taken. Copies are available free of
charge on our website at www.bmhc.com , by
accessing Investor Information and then Corporate Governance.








57







**ITEM
11. Executive Compensation**





Information
concerning compensation of our executive officers for the year ended December
31, 2004, is presented under the captions Executive Compensation and Other
Information, Compensation Committee Report on Executive Compensation, and
Performance Graph of the Proxy Statement and is incorporated herein by
reference.








**ITEM
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters**





Information
concerning the security ownership of certain beneficial owners, directors and
executive officers, as of December 31, 2004, is set forth under the caption
Security Ownership of Certain Beneficial Owners and Management of the Proxy
Statement and is incorporated herein by reference. The information under the
heading Securities Authorized for Issuance under Equity Compensation Plans in
Item 5 of this Form 10-K is also incorporated herein by reference.








**ITEM
13. Certain Relationships and Related Transactions**





Information
concerning certain relationships and related transactions during 2004 is set
forth under the caption Certain Relationships and Other Transactions of the
Proxy Statement and is incorporated herein by reference.





**ITEM
14. Principal Accountant Fees and Services**





Information
concerning principal accountant fees and services during 2004 is set forth under
the caption Fees Paid to Independent Accountants of the Proxy Statement and is
incorporated herein by reference.





58





**PART
IV**




**ITEM
15. Exhibits and Financial Statement Schedules**




(a)
    The
      following documents are filed as part of this Annual Report on Form
      10-K:1.
    All
      Financial Statements as presented under Item 8 - Financial Statements
      and Supplementary Data:• Consolidated
      Statements of Income for the years ended December 31, 2004, 2003 and
      2002• Consolidated
      Balance Sheets as of December 31, 2004 and 2003• Consolidated
      Statements of Shareholders’ Equity for the years ended December 31, 2004,
      2003 and 2002• Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002• Notes
      to Consolidated Financial Statements• Reports
      of Independent Registered Public Accounting Firm2.
    Financial
      Statement Schedules:• Report
      of Independent Registered Public Accounting Firm (page 60)
      • Schedule
      I - Valuation and Qualifying Accounts for the years ended December 31,
      2004, 2003 and 2002 (page 61)Schedules
      other than those listed are omitted because they are not applicable or the
      required information is presented in the financial statements or
      notes.3.
    Exhibits:A
      list of the exhibits required to be filed as part of this report is set
      forth in the
      Exhibit
      Index and is incorporated herein by
reference.




59





**Report
of Independent Registered Public Accounting Firm**
 
 
 The Board
of Directors and Shareholders
 Building
Materials Holding Corporation:
 
 Under
date of March 24, 2005, we reported on the consolidated balance sheet of
Building Materials Holding Corporation and subsidiaries as of December 31, 2004,
and the related consolidated statements of income, shareholders’ equity, and
cash flows for the year then ended, which report and consolidated financial
statements are included in this annual report on Form 10-K.  In connection
with our audit of the aforementioned consolidated financial statements, we also
audited the related consolidated financial statement schedule for the year ended
December 31, 2004 listed in Item 15(a)(2) of this Form 10-K.  This
financial statement schedule is the responsibility of the Company’s management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audit.
 
 In our
opinion, the 2004 financial statement schedule referred to above, when
considered in relation to the 2004 basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
 
 /s/ KPMG
      LLPSan
      Francisco, California
      March
      24, 2005


60
 **Schedule
I**
 **Valuation
and Qualifying Accounts**
 *(thousands)*
 
 
 **Deductions
to Accounts Receivable: Allowance for Returns, Discounts and Doubtful
Accounts**
 
 Description
    
    Balance
      at Beginning
      of
      Year
    
    Additions
      Charged to Costs andExpenses
    
    Additions
      Charged to OtherAccounts
    
    Deductions(1)
    
    Balance
      atEnd
      of YearYear
      Ended December 31, 2004
    
    $
    2,425
    
    $
    2,804
    
    $
    —
    
    $
    862
    
    $
    4,367Year
      Ended December 31, 2003
    
    $
    2,022
    
    $
    1,818
    
    $
    —
    
    $
    1,415
    
    $
    2,425Year
      Ended December 31, 2002
    
    $
    1,966
    
    $
    2,347
    
    $
    —
    
    $
    2,291
    
    $
    2,022
 
 
 (1) Represents write-offs of uncollectible receivables, net of
recoveries.


61








**SIGNATURES**





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









Building
      Materials Holding Corporation****Date: 
      March 28, 2005
    
    /s/ Robert
      E. MellorRobert E. MellorChairman of the Board, President and
      Chief Executive Officer (Principal Executive Officer)





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







Signature
    
    
    Title
    
    
    Date/s/
      Robert E. Mellor
    
    Chairman
      of the Board, President and Chief Executive Officer
      (Principal
      Executive Officer)
    March
      28, 2005Robert
      E. Mellor/s/
      William M. Smartt
    
    Senior
      Vice President and Chief Financial Officer
      (Principal
      Financial Officer)
    March
      28, 2005William
      M. Smartt/s/
      Robert L. Becci
    
    Vice
      President and Controller(Principal
      Accounting Officer)
    March
      28, 2005Robert
      L. Becci/s/
      Alec F. Beck
    
    Director
    March
      28, 2005Alec
      F. Beck/s/
      Sara L. Beckman
    
    Director
    March
      28, 2005Sara
      L. Beckman/s/
      H. James Brown
    
    Director
    March
      28, 2005H.
      James Brown/s/
      Donald S. Hendrickson
    
    Director
    March
      28, 2005Donald
      S. Hendrickson/s/
      James K. Jennings, Jr.
    
    Director
    March
      28, 2005James
      K. Jennings, Jr./s/
      R. Scott Morrison, Jr.
    
    Director
    March
      28, 2005R.
      Scott Morrison, Jr./s/
      Peter S. O’Neill
    
    Director
    March
      28, 2005Peter
      S. O’Neill/s/
      Richard G. Reiten
    
    Director
    March
      28, 2005Richard
      G. Reiten







62




**Exhibit
Index Filed with the Annual Report on Form 10-K**


**For
the Year Ended December 31, 2004**





ExhibitNumber
    
    Description3.5
    
    Amended
      Certificate of Incorporation, filed with the Delaware Secretary of State
      on September 23, 1997 (f)3.6.1
    
    Amended
      and Restated By-laws of the Registrant (j)4.2
    
    Form
      of Note (c)4.7
    
    Rights
      Agreement, dated September 19, 1997, as amended November 5, 1998 by and
      between the Registrant and American Stock Transfer and Trust Company
      (f)10.4*
    
    1990
      Bonus Plan of the Company (a)10.7.1
    
    Amended
      Form of Indemnity Agreement between the Company and its officers and
      directors (l)10.13*
    
    Supplemental
      Retirement Plan dated January 1, 1993 (d)10.19*
    
    Amended
      and Restated 1992 Non-Qualified Stock Plan
  (e)10.20*
    
    Amended
      and Restated 1993 Employee Stock Option Plan (e)10.21*
    
    Amended
      and Restated 1993 Non-Employee Director Stock Option Plan
      (e)10.34
    
    Asset
      Purchase Agreement dated as of October 13, 1999, between BMCW, LLC and
      Rowland Manufacturing Corporation dba Royal Door Company, Inc.
      (g)10.35
    
    Promissory
      Note between BMCW, LLC Rowland Manufacturing Corporation dba Royal Door
      Company, Inc. (g)10.36
    
    Credit
      Agreement dated August 13, 2003 among Building Materials Holding
      Corporation, BMC West Corporation and Other Subsidiary Guarantors, Wells
      Fargo Bank, National Association, as Administrative Agent, Co-Lead
      Arranger and Letter of Credit Issuer, General Electric Capital
      Corporation, as Co-Lead Arranger, and the other financial institutions
      party hereto (m)10.37*
    
    Amended
      and Restated Severance Plan for Certain Key Executive Officers, Senior
      Management and Key Employees of the Company and its subsidiaries as
      Adopted by the Board of Directors on February 17, 2000
      (g)10.38*
    
    Building
      Materials Holding Corporation 2000 Stock Incentive Plan
      (h)10.39*
    
    Building
      Materials Holding Corporation Employee Stock Purchase Plan
      (i)10.40*
    
    Employment
      Agreement by and between Robert E. Mellor and the Company as of June 1,
      2002 (l)10.41*
    
    First
      Amendment to Employment Agreement between Robert E. Mellor and the Company
      as of February 23, 2004 (m)
   63
   ExhibitNumber
    
    Description10.42
    
    First
      Amendment dated May 20, 2004 to the Credit Agreement dated August 13, 2003
      among Building Materials Holding Corporation, BMC West Corporation and
      Other Subsidiary Guarantors, Wells Fargo Bank, National Association, as
      Administrative Agent, Co-Lead Arranger and Letter of Credit Issuer,
      General Electric Capital Corporation, as Co-Lead Arranger, and the other
      financial institutions party hereto10.43*
    
    Building
      Materials Holding Corporation 2004 Incentive and Performance Plan
      (n)10.44
    
    Second
      Amendment dated March 17, 2005 to the Credit Agreement dated August 13,
      2003 among Building Materials Holding Corporation, BMC West Corporation
      and Other Subsidiary Guarantors, Wells Fargo Bank, National Association,
      as Administrative Agent, Co-Lead Arranger and Letter of Credit Issuer,
      General Electric Capital Corporation, as Co-Lead Arranger, and the other
      financial institutions party hereto11.0
    
    Statement
      regarding computation of earnings per share21.1
    
    Subsidiaries
      of Building Materials Holding Corporation23.1
    
    Consent
      of KPMG LLP23.2
    
    Consent
      of PricewaterhouseCoopers LLP31.1
    
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange
      Act31.2
    
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange
      Act32.1
    
    Section
      1350 Certifications of Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002
  (a)Filed as an Exhibit to our Registration Statement on Form S-1 filed
      with the Securities and Exchange Commission on June 6, 1991 (Registration
      No. 33-41040) (the "Registration Statement") and incorporated herein by
      reference(b)
      Filed as an Exhibit to Amendment No. 2 to our Registration Statement,
      filed with the Securities and Exchange Commission on August 2, 1991 and
      incorporated herein by reference(c)
      Filed as an Exhibit to Amendment No.1 to our Registration Statement on
      Form S-1, filed with the Securities and Exchange Commission on October 20,
      1992 (Registration No. 33-52432), and incorporated herein by
      reference
 (d)
      Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal
      year ended December 31, 1994, filed with the Securities and Exchange
      Commission on March 30, 1995, and incorporated herein by
    reference
 64
 (e)
      Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal
      year ended December 31, 1996, filed with the Securities and ExchangeCommission
      on March 28, 1997 and incorporated herein by reference(f)
      Filed as an Exhibit to our Form 8-K12G3, filed with the Securities and
      Exchange Commission on September 23, 1997 and incorporated herein by
      reference(g)
      Filed as an Exhibit to the our Annual Report on Form 10-K for the fiscal
      year ended December 31, 1999, filed with the Securities and Exchange
      Commission on March 31, 2000 and incorporated herein by
  reference(h)
      Filed as an Exhibit to our Registration Statement on Form S-8, filed with
      the Securities and Exchange Commission on August 22, 2000 and incorporated
      herein by reference(i)
      Filed as an Exhibit to our Registration Statement on Form S-8, filed with
      the Securities and Exchange Commission on October 2, 2000 and incorporated
      herein by reference(j)
      Filed as an Exhibit to our Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2001, filed with the Securities and Exchange
      Commissionon
      November 14, 2001 and incorporated herein by reference(k)
      Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2001, filed with the Securities and Exchange Commission
      on March 27, 2002 and incorporated herein by reference(l)
      Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2002, filed with the Securities and Exchange Commission
      on March 26, 2003 and incorporated herein by reference(m)
      Filed as an Exhibit to our Annual Report on Form 10-K for the fiscal year
      ended December 31, 2003, filed with the Securities and Exchange Commission
      on March 15, 2004 and incorporated herein by reference(n)
      Filed as an Exhibit to our Registration Statement on Form S-8 filed with
      the Securities and Exchange Commission on July 8, 2004 and
      incorporated herein by reference* Management contract or
      compensatory plan







65