|EXHIBIT 13.1


FINANCIAL
REVIEWBuilding
Materials Holding Corporation


The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of our consolidated results of
operations for the years ended December 31, 2002, 2001, and 2000 and financial
condition as of December 31, 2002 and 2001. The comparison of the 2002 results
with 2001 and the comparison of the 2001 results with 2000 were affected by the
acquisitions that occurred during 2002 and 2001 as discussed more fully in Note
4 to our consolidated financial statements.


RESULTS OF
OPERATIONS


The
following table sets forth, for the years ended December 31, 2002, 2001 and
2000, amounts as well as the percentage relationship to net sales of certain
costs, expenses and income items (dollars in millions).
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | 2002 | 2001         | 2000
|--------------------------------- | ---- | ------------ | ----
|Net sales                         |      | $ 1,161.5    |     
|Gross profit                      |      | 329.2        |     
|Selling, general and              |     
|administrative expense            |      | 284.1        |     
|Impairment of assets              |      | 6.7          |     
|Other income                      |      | (0.7         | )   
|Income from operations            |      | 39.1         |     
|Equity in earnings of             |     
|unconsolidated companies          |      |             |     
|Interest expense                  |      | 9.8          |     
|Income tax expense                |      | 10.9         |     
|Minority interest loss            |      | (0.2         | )   
|Change in  accounting  principle, |     
|net of tax                        |      | (11.6        | )   
|Net income                        |      | $        7.0 |     

|ACQUISITIONS


On
July 1, 2002, the Company purchased a 51% interest in a newly formed
partnership, KBI Norcal, for approximately $5.8 million in cash, $0.8 million of
assumed debt (equipment leases and a working capital loan) and the issuance of
34,364 shares of BMHC common stock. The other 49% interest is owned by RJ
Norcal, LLC, a limited liability company owned by Robert Garcia and John
Volkman. KBI Norcal provides turnkey framing services in Northern California.


Under
the purchase agreement, BMHC will have the option to purchase the remaining 49%
interest in KBI Norcal from July 1, 2004 through June 30, 2008 and the
principals of RJ Norcal, LLC will have the option to require BMHC to purchase
the remaining 49% of KBI Norcal from July 1, 2006 through June 30, 2008. The
purchase price for the remaining 49% will generally be based on a multiple of
historical earnings of KBI Norcal. If the fair value of the net assets to be
acquired is less than the amount payable under the required purchase option, the
Company would record a loss. As of December 31, 2002, the purchase price would
be approximately $7.5 million and no loss was required to be reported.


KBI
Norcals operating results have been consolidated in these financial
statements effective July 1, 2002. The impact of the 49% ownership interest of
RJ Norcal, LLC is included in minority interest.


During
2002 the Company made four other acquisitions for aggregate consideration of
approximately $2.3 million.
1
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|From May 1999 through July 3, 2001, BMC Construction owned
49% of Knipp Brothers Industries, LLC, KBI Distribution, LLC and KB
Industries Limited Partnership (collectively, KBI), which primarily
operate as framing contractors in Arizona, Southern California and Nevada. On
July 3, 2001, BMC Construction purchased the remaining 51% of KBI (the KBI
Acquisition). The aggregate consideration paid for the remaining 51%
interest was $34.4 million in cash, net of cash acquired of $1.8 million.


Prior
to July 3, 2001, the Company accounted for its 49% ownership in KBI using the
equity method. KBI operating results are included in the consolidated statements
of income beginning July 3, 2001. Pro forma information for the years ended
December 31, 2001 and 2000, assuming the acquisition occurred as of the
beginning of 2000, is presented in Note 4 to the consolidated financial
statements for the year ended December 31, 2002. The pro forma information
includes only the effect of the KBI Acquisition because the effect of other
acquisitions is not material.


During
2000, the Company completed the acquisition of a millwork facility that was
consolidated into the Companys existing Carson Valley location, and the
acquisition of four warehouse distribution centers along with several sales
offices doing business as Marvin Windows Planning Centers (Marvin
Windows). The total cash consideration paid was $5.9 million.


CRITICAL
ACCOUNTING POLICIES AND ESTIMATES


The
following discussion and analysis is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of our
financial statements requires management to make estimates and assumptions that
affect the reported amounts of revenues, expenses, assets, and liabilities
during the periods reported. Estimates are used when accounting for certain
items such as revenues, allowance for returns, discounts and doubtful accounts,
employee compensation programs, depreciation and amortization periods, taxes,
inventory values, insurance programs, and valuations of investments, goodwill,
other intangible assets and long-lived assets. We base our estimates on
historical experience, where applicable, and other assumptions that we believe
are reasonable under the circumstances. Actual results may differ from our
estimates under different assumptions or conditions.


There
are certain critical estimates that we believe require more significant judgment
in the preparation of our consolidated financial statements. We consider an
accounting estimate to be critical if (i) it requires us to make assumptions
because information was not available at the time or it included matters that
were highly uncertain at the time we were making the estimate, and (ii) changes
in the estimate or different estimates that we could have selected would have a
material impact on our financial condition or results of operations.


The
table below presents information about the nature and rationale of our critical
accounting estimates:
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|              
|--------------
|AccountingArea
|Net sales     
|              

|2
|-

|                        
|------------------------
|AccountingArea          
|Accounts receivable, net

|                                  
|----------------------------------
|Property, plant and equipment, net

|                                   
|-----------------------------------
|Goodwill and other intangibles, net

|         
|---------
|Inventory
|         

|3
|-

|                 
|-----------------
|AccountingArea   
|Insurance expense
|                 

|2002 COMPARED
WITH 2001


Net
sales for 2002 were $1,161.5 million, a 6.3% increase over net sales of $1,092.9
million in 2001. The increase resulted primarily from the July 3, 2001
consolidation of KBI and the July 1, 2002 consolidation of KBI Norcal. Net sales
of wood products and other building materials decreased to $534.6 million in
2002 from $563.9 million in 2001. Sales at all facilities that operated for at
least nine months of the year in both 2001 and 2002 decreased 3.1%. The decrease
in 2002 sales of wood products and other building materials is primarily due to
deflation of commodity wood product prices as well as a shift in the marketplace
toward lower value houses typically built for first-time home buyers. Lower
value houses do not provide our building materials business with as many sales
opportunities due to the reduced cost of materials going into these houses and
because our customer base has historically focused more on higher dollar value
custom homes. Construction services and manufactured building components
accounted for $626.9 million or 54.0% of net sales in 2002, an increase from
$529.0 million or 48.4% of net sales in 2001. The year over year increase is
primarily due to a full twelve months of consolidation from KBI in 2002 as
opposed to only six months in 2001.


Gross
profit increased to $329.2 million, or 28.3% of net sales in 2002 from $307.3
million, or 28.1% of net sales, in 2001, primarily as a result of the increased
mix of higher-margin construction services and manufactured building components
such as framing, pre-hung doors, millwork, roof and floor trusses and
pre-assembled windows. The weighting of a full twelve months of activity by KBI
in 2002 contributed to this increase.


Selling,
general and administrative (SG&A) expense increased to $284.1
million, or 24.5% of net sales, in 2002 from $265.7 million, or 24.3% of net
sales, in 2001. The Company attributes most of this dollar increase to the
consolidation of KBI and the investment in KBI Norcal. Increased SG&A
expense attributable to the KBI acquisition, the KBI Norcal investment and
higher general insurance expense was partially offset by the elimination of
goodwill amortization in accordance with new accounting standards (See Note 8 to
the consolidated financial statements) and a company-wide effort to reduce
SG&A expense.


Impairment
of assets in 2002 included a charge in accordance with Statement of Financial
Accounting Standards No. 142 Goodwill and Other Intangible Assets
(SFAS 142) of $6.7 million related to the Companys Dallas/Fort
Worth and Marvin Windows operations. Impairment of assets in 2001 included the
Companys write-off of its $1.0 million investment in BuildNet, Inc.
(BuildNet) and a loss of $0.7 million resulting from the anticipated
sale of real property in Salem, Oregon (See Note 3 to the consolidated financial
statements).
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|Other
income, net in 2002 included $1.2 million of interest income related to accounts
receivable, a $0.9 million loss from the sale of real estate in three locations
and other fixed assets and $0.4 million of other miscellaneous non-operating
income. Other income, net in 2001 included $1.3 million of interest income
related to accounts receivable, a $0.9 million gain from the sale of real estate
in three locations, and $0.6 million of other miscellaneous income.


There
was no equity in earnings of unconsolidated companies in 2002, compared to $4.8
million, net of amortization of goodwill, in 2001. This change is attributed to
the consolidation of KBI, which resulted from the KBI Acquisition on July 3,
2001.


Interest
expense decreased to $9.8 million, or 0.8% of net sales in 2002 from $13.6
million, or 1.2% of net sales in 2001. The decrease was primarily due to
reductions in interest rates and average debt outstanding. Average bank debt
outstanding was $160.7 million in 2002 compared with $169.3 million in 2001.
Average interest rates on variable rate debt were approximately 4.9% for 2002
compared with 7.1% for 2001. Changes in the average debt outstanding result
primarily from the amount of financing needed during peak sales months and
borrowings required for acquisitions made in 2002 and 2001, net of principal
balance pay-downs from cash generated by operations. The decrease in the average
interest rates is primarily due to reductions in market rates.


The
provision for income taxes decreased from $13.0 million in 2001 to $10.9 million
in 2002 and the effective tax rate decreased from 38.5% to 37.1%. The reduction
in tax expense is primarily attributable to lower pre-tax income, which is
mainly due to the impairment charge recorded against goodwill (See Note 3 to the
consolidated financial statements). The reduction in the effective tax rate is
primarily attributable to investment tax and job credits claimed during 2002.


Minority
interest loss of $0.2 million in 2002 represents the 49% interest in KBI Norcal
owned by RJ Norcal, LLC.


The
change in accounting principle, net of tax, of $11.6 million in 2002 is the
result of adopting SFAS 142 (See Note 2 to the consolidated financial
statements).


2001 COMPARED
WITH 2000


Net
sales for 2001 were $1,092.9 million, a 7.8% increase over net sales of $1,014.0
million in 2000. The increase resulted primarily from the July 3, 2001
consolidation of KBI, which contributed $100.5 million of sales. Sales at
facilities that operated for at least nine months of the year in both 2000 and
2001 decreased 1.9%. This same-store sales decrease was primarily due to a
softening in permit activity in several of the markets we serve and deflation of
commodity wood product prices. Construction services and manufactured building
components accounted for $529.0 million or 48.4% of net sales in 2001, an
increase from $410.1 million or 40.4% of net sales in 2000. KBI accounted for
$100.5 million of the increase in sales of construction services and
manufactured building components.


Gross
profit increased to $307.3 million, or 28.1% of net sales in 2001 from $270.4
million, or 26.7% of net sales, in 2000, primarily as a result of the increased
mix of higher-margin construction services and manufactured building components
such as framing, pre-hung doors, millwork, roof and floor trusses and
pre-assembled windows. KBI accounted for $33.9 million of this increase.


SG&A
expense increased to $265.7 million, or 24.3% of net sales, in 2001 from $229.9
million, or 22.7% of net sales, in 2000. The July 3, 2001 consolidation of KBI
accounted for $26.3 million of the increase in SG&A expense. The increase as
a percentage of net sales was primarily due to the continued higher costs
associated with expanding sales of construction services and manufactured
building components and deflation in prices of commodity wood products.
5
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|In
2001, impairment of assets included the write-off of the Companys $1.0
million investment in BuildNet. BuildNet filed under Chapter 11 of the
Bankruptcy Code and the Company was advised that BuildNet has conducted an
orderly liquidation of its assets. Based on an analysis conducted by the Company
of the bankruptcy filings, management determined that its investment will not be
recovered. Impairment of assets in 2001 also included a loss of $0.7 million
resulting from the anticipated sale of real property in Salem, Oregon. In 2000,
impairment of assets included a charge of $1.8 million related to impaired
goodwill associated with the Companys business unit located in Grand
Junction, Colorado (See Note 3 to the consolidated financial statements).


Other
income, net in 2001 included $1.3 million of interest income related to accounts
receivable, a $0.9 million gain from the sale of real estate in three locations,
and $0.6 million of other miscellaneous income. Other income, net in 2000
included a $2.2 million gain on the sale of real estate in Beaverton, Oregon,
$1.4 million of interest income related to accounts receivable, and $0.2 million
of other miscellaneous income.


In
2001, equity in earnings of unconsolidated companies decreased to $4.8 million,
net of amortization of goodwill, compared to $8.4 million in 2000. This decrease
was primarily attributable to the inclusion of KBIs equity earnings for
only the first six months in 2001 compared to all of 2000 as a result of the
purchase of the remaining 51% of KBI on July 3, 2001.


Interest
expense decreased to $13.6 million, or 1.2% of net sales in 2001 from $17.7
million, or 1.7% of net sales in 2000. The decrease was primarily due to
reductions in interest rates and average debt outstanding. Average bank debt
outstanding was $169.3 million in 2001 compared with $179.8 million in 2000.
Average interest rates on variable rate debt were approximately 7.1% for 2001
compared with 9.3% for 2000. Changes in the average debt outstanding resulted
primarily from the amount of financing needed during peak sales months and
borrowings required for acquisitions made in 2001 and 2000, net of principal
balance pay-downs from cash generated by operations. The decrease in the average
interest rates was primarily due to reductions in market rates.


The
provision for income taxes decreased to $13.0 million in 2001 from $13.5 million
in 2000 and the effective tax rate decreased to 38.5% from 40.7%. These
reductions were primarily attributable to the goodwill asset impairment charge
recorded in 2000 that was not deductible for tax purposes.


LIQUIDITY AND
CAPITAL RESOURCES


The
Companys primary need for capital resources is to fund future growth,
capital expenditures and acquisitions, as well as to finance its working capital
needs, which have been increasing as the Company has grown in recent years.
Capital resources have primarily consisted of cash flows from operations and
incurrence of debt.


Operations


In
2002, operations provided $35.7 million in cash, compared with $63.7 million in
2001, a decrease of $28.0 million primarily due to increases in accounts
receivable and inventory, partially offset by increases in accounts payable and
accrued expenses. The increases in accounts receivable, inventory, accounts
payable and accrued expenses are primarily attributable to the operations of KBI
Norcal. In 2001, operations provided $63.7 million in cash, compared with $41.4
million in 2000, an increase of $22.3 million primarily due to reductions in
accounts receivable and inventory, partially offset by increases in prepaid
expenses.


Net
working capital was $170.5 million at the end of 2002, compared with $160.9
million at the end of 2001. The increase is primarily attributable to working
capital needs associated with the start-up of KBI Norcal. Net working capital
was $160.9 million at the end of 2001, compared with $142.1 million at the end
of 2000. The purchase of the remaining 51% of KBI on July 3, 2001 and the
resulting consolidation of KBI with the Company contributed $29.6 million of
this increase.

6
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|Capital
Investment and Acquisitions


Net
cash used in investing activities was $25.1 million and $51.9 million for the
years ended December 31, 2002 and 2001, respectively. During 2002, cash flows
used in investing activities included $20.1 million to acquire additional
property and to expand and remodel existing facilities used for construction
services, component manufacturing and materials distribution; $5.8 million to
purchase 51% of KBI Norcal; and $2.3 million for other acquisitions. These uses
were partially offset by $1.2 million of proceeds from the sale of property and
equipment and $2.8 million from the sale of business units.


Net
cash used in investing activities was $51.9 million and $30.7 million for the
years ended December 31, 2001 and 2000, respectively. During 2001, cash flows
used in investing activities included $23.8 million to acquire additional
property and to expand and remodel existing facilities used for construction
services, component manufacturing and materials distribution and $34.4 million
to purchase the remaining 51% of KBI. These uses were partially offset by $4.8
million of proceeds from the sale of property and equipment and $2.2 million
from the sale of business units.


Financing


Net
cash used in financing activities was $6.6 million in 2002, compared to $11.2
million in 2001. The primary use of cash for financing activities during the
year ended December 31, 2002 was $9.6 million of debt principal payments. This
use was partially offset by a $2.0 million increase in book overdrafts and $1.0
million of proceeds from stock options exercised.


Net
cash used in financing activities was $11.2 million in 2001, compared to $13.6
million in 2000. The primary uses of cash for financing activities during the
year ended December 31, 2001 included a $9.2 million reduction in book
overdrafts, $8.7 million of debt principal payments, and $1.7 million of
deferred financing costs. These uses were partially offset by $7.2 million of
additional borrowings under the term note and $1.0 million of proceeds from
stock options exercised.


The
Companys existing senior credit facility provided for borrowings up to
$292.3 million, which includes $102.3 million provided by the term loan, all of
which was outstanding at December 31, 2002, and $190.0 million provided by the
revolving credit facility, $51.2 million of which was outstanding at December
31, 2002. Revolver borrowings are limited by a borrowing base equal to 60% of
inventory plus 80% of trade accounts receivable. The borrowing base is
calculated monthly and was $159.4 million at December 31, 2002, resulting in
revolver availability of $98.7 million, net of $9.5 million in outstanding
letters of credit. Borrowings under the agreement bear interest at prime plus
0.50% to 1.50%, or Offshore Rate plus 2.00% to 3.00%. The agreement expires in
2004.


The
agreement related to these borrowings contains covenants providing for the
maintenance of certain financial ratios and conditions including total funded
debt to capitalization; consolidated net worth; a coverage ratio which includes
earnings before interest, taxes and amortization; a ratio of total funded debt
to earnings before interest, taxes, depreciation and amortization; and
limitations on capital expenditures, among certain other restrictions. At
December 31, 2002, the Company was in compliance with these covenants and
conditions.


The
Company filed a shelf registration with the Securities and Exchange Commission
for 2,000,000 shares of common stock on August 18, 1998. These shares may be
issued from time to time in connection with future business combinations,
mergers and/or acquisitions. As part of the KBI Norcal acquisition on July 1,
2002, the Company issued 34,364 shares of stock from this shelf registration
(See Note 4 to the consolidated financial statements). An additional 70,053
shares of stock from the shelf registration were issued as part of the
Companys investment in WBC Construction, LLC on January 16, 2003 (See Note
20 to the consolidated financial statements).
7
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|Based
on the Companys ability to generate cash flows from operations, its
borrowing capacity under the revolver and its access to equity markets, the
Company believes it will have sufficient capital to meet its anticipated
short-term and long-term needs.


DISCLOSURES OF
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS


The
following summarizes the contractual obligations of the Company as of December
31, 2002 (in thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Payments Due by Period
|--------------------------- | ----------------------
|Contractual Obligations     | Total                 
|Long-Term Debt              |                       
|Capital Lease Obligations   |                       
|Operating Leases            |                       
|Unconditional Purchase      |                       
|Obligations                 |                       
|Other Long-Term Commitments |                       
|                            |                       
|                            |                       
|Total Contractual Cash      |                       
|Obligations                 |                       
|                            |                       

|See
Notes 4 and 20 to the consolidated financial statements for a discussion of
potential put obligations associated with recent acquisitions.


DISCLOSURES OF
CERTAIN MARKET RISKS


The
Company experiences changes in interest expense when market interest rates
change. Changes in the Companys debt could also increase these risks. The
Company has managed its exposure to market interest rate changes through
periodic refinancing of its variable rate debt with fixed rate term debt
obligations. Based on debt outstanding at December 31, 2002, a 25 basis point
increase in interest rates would result in approximately $384,000 of additional
interest costs annually.


Commodity
wood products, including lumber and panel products, accounted for approximately
31% and 36% of net sales in 2002 and 2001, respectively, excluding commodity
wood products included in construction services and manufactured building
components. Prices of commodity wood products, which are subject to significant
volatility, could directly affect the Companys net sales. The Company does
not utilize any derivative financial instruments.


QUARTERLY
RESULTS AND SEASONALITY


The
Companys first and fourth quarters historically have been, and are
expected to continue to be, adversely affected by weather patterns in some of
the Companys markets, causing decreases in levels of residential
construction activity. In addition, quarterly results historically have
reflected, and are expected to continue to reflect, fluctuations from period to
period from various other factors, including general economic conditions,
commodity wood product prices, interest rates, building permit activity,
single-family housing starts, employment levels, consumer confidence, and the
availability of credit to professional builders and contractors.


The
composition and level of working capital typically changes during periods of
increasing sales as the Company carries more inventory and receivables. Working
capital levels typically increase in the second and third quarters of the year
due to higher sales during the peak residential construction season. These
increases historically have resulted in negative operating cash flows during
this peak season, which generally have been financed through the revolving
credit agreement. Collection of receivables and reduction in inventory levels
following the peak of the building and construction season have more than offset
this negative cash flow in recent years. The Company believes it will continue
to generate positive annual cash flows from operating activities.
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|NEW ACCOUNTING
STANDARDS


In
June 2001, the FASB issued Statement No. 143 (SFAS 143),
Accounting for Asset Retirement Obligations. SFAS 143 established
financial accounting and reporting standards associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. This
statement was effective for financial statements issued for fiscal years
beginning after June 15, 2002. The adoption of SFAS 143 in the first quarter of
2003 is not expected to have a material impact on the Companys financial
position, results of operations or cash flows.


On
October 3, 2001, the FASB issued Statement No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-Lived Assets.The objectives of FAS 144 were to address significant issues relating to the
implementation of FASB Statement No. 121 (SFAS 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assetsto Be Disposed Of, and to develop a single accounting
model, based on the framework established in SFAS 121, for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. SFAS
144 superseded SFAS 121, however it retained the fundamental provisions of SFAS
121 for (1) the recognition and measurement of the impairment of long-lived
assets to be held and used and (2) the measurement of long-lived assets to be
disposed of by sale. This statement was effective for fiscal years beginning
after December 15, 2001. The adoption of SFAS 144 did not have a material impact
on the Companys financial position, results of operations or cash flows.


In
June 2002, the FASB issued Statement No. 146 (SFAS 146),
Accounting for Costs Associated with Exit or Disposal Activities,
which established financial accounting and reporting standards for restructuring
costs including involuntary severance payments, contract termination and other
exit costs and relocation costs. SFAS 146 superseded EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This
statement is effective for exit or disposal activities that are initiated after
December 31, 2002.


In
December 2002, the FASB issued Statement No. 148 (SFAS 148),
Accounting for Stock-Based CompensationTransition and Disclosure,
which amended FASB Statement No. 123 (SFAS 123), Accounting for
Stock-Based Compensation. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amended the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. This statement was effective for financial statements issued for fiscal
years ending after December 15, 2002. The adoption of SFAS 148 did not have a
material impact on the Companys financial position, results of operations
or cash flows.


In
November 2002, the FASB issued FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN
45). FIN 45 requires that guarantors recognize, at the inception of the
guarantee, a liability for the fair value of the guarantee. In addition, FIN 45
clarifies the disclosures required of guarantors for certain guarantees that it
has issued. The recognition and measurement criteria of this interpretation are
to be applied prospectively to guarantees issued or modified after December 31,
2002. The Company had no guarantees at December 31, 2002 within the recognition
scope of FIN 45. Therefore, the adoption of FIN 45 in 2003 had no impact on the
Companys financial position, results of operations or cash flows.


In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46), which clarified the
application of Accounting Research Bulletin No. 51 Consolidated Financial
Statements for entities in which an equity investor has neither the
characteristics of a controlling financial interest nor sufficient equity at
risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risks among the parties involved.
Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of interests
that effectively recombines risks that were previously dispersed. In addition,
FIN 46 provides additional disclosures for enterprises that hold significant
variable interests in a variable interest entity but is not the primary
beneficiary. FIN 46 is applicable immediately to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. FIN 46 will become effective for
existing interests in variable interest entities in the first fiscal year or
interim period beginning after June 15, 2003. The adoption of FIN 46 in the
third quarter of 2003 is not expected to have a material impact on the
Companys financial position, results of operations or cash flows.
9
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|OUTLOOK


The
Companys financial performance could be negatively impacted by adverse
economic changes in the Companys geographic market areas. The residential
construction services and building materials industry has experienced
cyclicality in the past. The Companys operations are subject to
fluctuations from period to period as a reflection of changes in general
economic 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 professional builders,
contractors and homeowners. These factors may have a more significant impact on
the Company, which derives a significant percentage of its net sales from
professional builders and contractors engaged in new residential construction,
than on those building supply companies that target a broad range of retail
customers whose activities are generally more related to home repair and
remodeling. The Company expects that fluctuations from period to period will
continue in the future.


During
2001 and 2002 the Company experienced softening demand from our custom builder
customers and a tightening of margins in some of the markets we serve in our
building materials distribution business. If these trends continue into 2003 and
future years, our operating income may be materially affected as a result of
reduced sales.


The
Company has a cash equity incentive plan that is accounted for as a variable
rate plan. As a result, compensation expense will vary at each reported period
based on changes in the Companys stock price. An increase in the
Companys stock price will cause the Company to report additional
compensation expense under the plan.


Additionally,
the Companys financial performance could be negatively impacted by
inclement weather, which historically has affected residential construction
activity levels in the Companys market areas in the first and fourth
quarters. Commodity wood products, including lumber and panel products,
currently account for approximately 31% of the Companys net sales,
excluding commodity wood products included in construction services and
manufactured building components. Prices of commodity wood products, which are
subject to significant volatility, directly affect the Companys sales.
Future increases or decreases in commodity wood product prices could adversely
impact the Companys results of operations.


Certain
statements in the Financial Review and elsewhere in the Annual Report to
Shareholders may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors are discussed in detail above or in the Companys
Form 10-K for the fiscal year ended December 31, 2002. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company disclaims any obligation to
update any such factors or to announce publicly the results of any revisions to
any of the forward-looking statements contained in the Annual Report on Form
10-K except as required by law.
10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|BUILDING MATERIALS
HOLDING CORPORATION


2002 Consolidated
Financial Statements





11
|---------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF INCOME(Amounts
in thousands, except per share data)

|                                                                    | For the years ended December 31,
|------------------------------------------------------------------- | --------------------------------
|                                                                    | 2002                            
|Net sales                                                           |                                 
|Cost of sales                                                       |                                 
|                                                                    |                                 
|                                                                    |                                 
|Gross profit                                                        |                                 
|                                                                    |                                 
|Selling, general and administrative expense                         |                                 
|Impairment of assets                                                |                                 
|Other income, net                                                   |                                 
|                                                                    |                                 
|Income from operations                                              |                                 
|                                                                    |                                 
|Equity in earnings of unconsolidated companies, net of amortization |                                 
|Interest expense                                                    |                                 
|                                                                    |                                 
|Income before income taxes, minority interest, and change in        |                                 
|accounting principle                                                |                                 
|Income taxes                                                        |                                 
|                                                                    |                                 
|Income before minority interest and change in accounting principle  |                                 
|                                                                    |                                 
|Minority interest loss                                              |                                 
|                                                                    |                                 
|Income before change in accounting principle                        |                                 
|                                                                    |                                 
|Change in accounting principle, net of tax benefit of $6,286        |                                 
|                                                                    |                                 
|Net income                                                          |                                 
|                                                                    |                                 
|                                                                    |                                 
|Income before change in                                             |                                 
|accounting principle per share:                                     |                                 
|Basic                                                               |                                 
|Diluted                                                             |                                 
|                                                                    |                                 
|Change in accounting                                                |                                 
|principle, net of tax, per common share:                            |                                 
|Basic                                                               |                                 
|Diluted                                                             |                                 
|Net income per share:                                               |                                 
|Basic                                                               |                                 
|Diluted                                                             |                                 

|The accompanying notes are
an integral part of these consolidated financial statements.


12
|--------------------------------------------------------------------------------------------

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share data)

|                                                                             | At December 31,
|---------------------------------------------------------------------------- | ---------------
|                                                                             | 2002           
|ASSETS                                                                       |                
|Current assets                                                               |                
|Cash                                                                         |                
|Receivables, net                                                             |                
|Inventory                                                                    |                
|Deferred income taxes                                                        |                
|Prepaid expenses and other current assets                                    |                
|                                                                             |                
|Total current assets                                                         |                
|                                                                             |                
|Property, plant and equipment, net                                           |                
|Goodwill                                                                     |                
|Other intangibles, net                                                       |                
|Deferred loan costs                                                          |                
|Deferred income taxes                                                        |                
|Other long-term assets                                                       |                
|                                                                             |                
|Total assets                                                                 |                
|                                                                             |                
|LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS EQUITY                      |                
|Current liabilities                                                          |                
|Accounts payable and accrued expenses                                        |                
|                                                                             |                
|Total current liabilities                                                    |                
|                                                                             |                
|Long-term debt                                                               |                
|Deferred income taxes                                                        |                
|Other long-term liabilities                                                  |                
|                                                                             |                
|Total liabilities                                                            |                
|                                                                             |                
|Minority interest                                                            |                
|                                                                             |                
|Commitments and contingencies  (Note 16)                                     |                
|                                                                             |                
|Shareholders equity                                                         |                
|Common stock, $0.001 par value, 20,000,000 shares authorized; 13,135,562 and |                
|12,984,284 shares issued and outstanding, respectively                       |                
|Additional paid-in capital                                                   |                
|Retained earnings                                                            |                
|                                                                             |                
|Total shareholders equity                                                   |                
|                                                                             |                
|Total liabilities, minority interest and shareholders equity                |                
|                                                                             |                

|The accompanying notes are
an integral part of these consolidated financial statements.



13
|---------------------------------------------------------------------------------------------

## CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                                  | Common Stock | AdditionalPaid-In | Retained |         
|--------------------------------- | ------------ | ----------------- | -------- | --------
|(Amounts in thousands)            | Shares       | Amount            | Capital  | Earnings
|                                  |             
|Balance, December 31, 1999        |              | 12,680            |          | $13     
|                                  |             
|Net income                        |              |                  |          |        
|Stock options exercised and other |              | 160               |          |        
|                                  |              |                   |          |         
|                                  |             
|Balance, December 31, 2000        |              | 12,840            |          | 13      
|                                  |             
|Net income                        |              |                  |          |        
|Stock options exercised and other |              | 144               |          |        
|                                  |              |                   |          |         
|                                  |             
|Balance, December 31, 2001        |              | 12,984            |          | 13      
|                                  |             
|Net income                        |              |                  |          |        
|Stock options exercised and other |              | 152               |          |        
|Dividends on common stock         |              |                  |          |        
|                                  |              |                   |          |         
|                                  |             
|Balance, December 31, 2002        |              | 13,136            |          | $13     
|                                  |              |                   |          |         

|The accompanying notes are
an integral part of these consolidated financial statements.


14
|--------------------------------------------------------------------------------------------

CONSOLIDATED STATEMENTS OF CASH FLOWS(Amounts in thousands)

|                                                                    | For the years ended December 31,
|------------------------------------------------------------------- | --------------------------------
|Cash Flows From Operating Activities                                | 2002                            
|Net income                                                          |                                 
|Adjustments  to reconcile  net income to cash flows from  operating |                                 
|activities                                                          |                                 
|Depreciation and amortization                                       |                                 
|Deferred income taxes                                               |                                 
|Net loss/(gain) on sale of assets                                   |                                 
|Asset impairment charge                                             |                                 
|Equity in earnings of unconsolidated                                |                                 
|companies, net of amortization                                      |                                 
|Distributions received from unconsolidated companies                |                                 
|Change in accounting principle, net of tax benefit of $6,286        |                                 
|Minority interest                                                   |                                 
|Changes in assets and  liabilities,  net of effects of acquisitions |                                 
|and location sales                                                  |                                 
|Receivables, net                                                    |                                 
|Inventory                                                           |                                 
|Prepaid expenses and other current assets                           |                                 
|Accounts payable and accrued expenses                               |                                 
|Other long-term assets and liabilities                              |                                 
|Other, net                                                          |                                 
|                                                                    |                                 
|Net cash flows from operating activities                            |                                 
|                                                                    |                                 
|                                                                    |                                 
|Cash Flows From Investing Activities                                |                                 
|Purchases of property and equipment                                 |                                 
|Acquisitions of businesses                                          |                                 
|Proceeds from dispositions of property and equipment                |                                 
|Proceeds from sale of business units, net of cash sold              |                                 
|Other, net                                                          |                                 
|                                                                    |                                 
|Net cash flows from investing activities                            |                                 
|                                                                    |                                 
|                                                                    |                                 
|Cash Flows From Financing Activities                                |                                 
|Borrowing under term note                                           |                                 
|Net payments under revolving credit agreements                      |                                 
|Principal payments of term note                                     |                                 
|Principal payments of other notes payable                           |                                 
|Increase/(decrease) in book overdrafts                              |                                 
|Deferred financing costs                                            |                                 
|Stock options exercised                                             |                                 
|Other, net                                                          |                                 
|                                                                    |                                 
|Net cash flows from financing activities                            |                                 
|                                                                    |                                 
|Net change in cash                                                  |                                 
|Cash, beginning of year                                             |                                 
|                                                                    |                                 
|Cash, end of year                                                   |                                 
|                                                                    |                                 
|                                                                    |                                 
|Supplemental Disclosure of Cash Flow Information                    |                                 
|Cash paid during the year for:                                      |                                 
|Interest, net of amounts capitalized                                |                                 
|Income taxes                                                        |                                 
|Accrued but unpaid dividends                                        |                                 

|The accompanying notes are
an integral part of these consolidated financial statements.


15
|--------------------------------------------------------------------------------------------

|NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS


1. ORGANIZATIONAL
STRUCTURE, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organizational Structure
and Nature of Operations


Building
Materials Holding Corporation (BMHC) specializes in providing construction services,
manufactured components and high-quality products to professional residential builders
and contractors. BMHC operates through its wholly-owned subsidiaries, BMC West
Corporation (BMC West) and BMC Construction Inc. (BMC Construction), formerly known
as BMC Framing Inc., with more than 135 facilities organized into 60 business units
across the Western and Southern states. BMHCs products and services include building
materials, custom-manufactured building components (roof and floor trusses, wall panels
and millwork), product installation, and turnkey framing and structured shell
construction services. BMHC manages the business as one reportable segment.


Principles of
Consolidation


The
consolidated financial statements include the accounts of BMHC and its subsidiaries (the
Company). The equity method of accounting is used for investments in which the Company
has significant influence. All significant intercompany balances and transactions are
eliminated.


Reclassifications


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


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 revenues and expenses during the reporting period. Actual amounts could differ
from those estimates. Estimates are used when accounting for items such as revenue,
allowance for returns, discounts and doubtful accounts, employee compensation programs,
depreciation and amortization periods, taxes, inventory values, insurance programs, and
valuations of investments, goodwill, other intangible assets and long-lived assets.


The
Company reviews the recoverability of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The
measurement of any impairment is based primarily on the ability to recover the cost of
long-lived assets from expected future operating cash flows on an undiscounted basis.
Goodwill and intangible assets with an indefinite useful life are subject to impairment
testing at least annually. Except as disclosed in Note 3, in managements opinion, no
such impairment existed at December 31, 2002 and 2001.


Cash and Cash
Equivalents


Cash
represents amounts on deposit with high-credit-quality financial institutions and such
balances may, at times, exceed FDIC limits. The Company considers all highly liquid
investments that have a maturity of three months or less at the date of purchase to be
cash equivalents. The Company had no cash equivalents at December 31, 2002 and 2001.


Inventory


Inventory
consists principally of materials purchased for resale and is stated at the lower of
average cost or market.


Property, Plant
and Equipment


Property,
plant and equipment are recorded at cost and depreciated using the straight-line method.
The estimated useful lives are ten to thirty years for buildings and improvements, seven
to ten years for machinery and fixtures and three to ten years for handling and delivery
equipment.


Major
additions and improvements are capitalized, while maintenance and repairs that do not
extend the useful life of the property are expensed as incurred. Gains and losses from
dispositions of property, plant and equipment are included in the Companys consolidated
statements of income in other income, net.
16
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Company capitalizes interest on borrowings during the active construction period on major
capital projects. Capitalized interest is added to the cost of the underlying asset and
is amortized over the useful life of the asset.


The
Company capitalizes certain costs of computer software developed or obtained for internal
use, including interest, provided that those costs are not research and development, and
certain other criteria are met pursuant to Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. As a result, the
Company had capitalized $10,595,000, $9,460,000 and $6,182,000 of internal use software
development costs as of December 31, 2002, 2001 and 2000, respectively. These costs are
included in machinery and fixtures in Note 7 and they are amortized on a straight-line
basis over a period of three to ten years.


Goodwill and Other
Intangibles


Prior
to January 1, 2002, goodwill and other intangible assets resulting from pre-July 1, 2001
acquisitions were generally being amortized on a straight-line basis over 30 years. As of
January 1, 2002, goodwill and intangible assets with an indefinite useful life are no
longer being amortized. Instead, they are subjected to impairment testing at least
annually. Intangible assets with a finite life are being amortized over their estimated
useful lives of three to ten years. See Notes 2 and 3.


Deferred Loan Costs


Loan
costs are capitalized upon the issuance of long-term debt and amortized over the life of
the related debt using the effective interest rate method for the Companys term note and
the straight-line method for the Companys revolving credit facility. Interest expense
includes amortization of deferred loan costs of $1,536,000, $1,290,000, and $1,166,000 in
2002, 2001, and 2000, respectively.


Other Assets


Other
assets consist of cash surrender values on company-owned life insurance, executive
deferred compensation investments, deposits and trade rebates receivable from cooperative
supplier organizations.


Revenue Recognition


Revenues
are recognized for product sales when title to the goods and risk of loss passes to the
buyer, which is generally at the time of delivery (i.e. F.O.B. destination). Revenues for
services provided under turnkey construction and installation contracts are generally
recognized using the percentage-of-completion method.


Warranty Expense


The
Company has warranty obligations with respect to most manufactured products that it
sells, but the liability for the warranty obligations is not material. As a result of
third party inspection and acceptance process, the Companys warranty obligation related
to engineering, manufacturing, and installation services is immaterial. Warranty expense
was $152,000, $118,000, and $124,000 for the years ended December 31, 2002, 2001 and
2000, respectively.


Advertising


Advertising
costs are expensed when incurred. During 2002, 2001 and 2000 advertising expense was
$118,000, $616,000, and $922,000, respectively.


Shipping and
Handling


Shipping
and handling costs are included in selling, general, and administrative expense. During
2002, 2001 and 2000, shipping and handling costs were $27,505,000, $23,908,000, and
$19,681,000, respectively.
17
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Stock Compensation


At
December 31, 2002, BMHC had five stock-based employee compensation plans, which are
described more fully in Note 12. The Company accounts for those plans under the
recognition and measurement principles of APB 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 Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (SFAS) Statement
No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation
(amounts in thousands, except per share data).
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      | Year Ended December 31,
|----------------------------------------------------- | -----------------------
|                                                      | 2002                   
|Net income, as reported                               |                        
|Add:  Total stock-based employee compensation expense |                        
|determined under APB 25, net of related tax effects   |                        
|Deduct:  Total stock-based employee compensation      |                        
|expense determined under fair value based method      |                        
|for all awards, net of related tax effects            |                        
|                                                      |                        
|Pro forma net income                                  |                        
|                                                      |                        
|Earnings per share:                                   |                        
|Basic - as reported                                   |                        
|Basic - pro forma                                     |                        
|                                                      |                        
|Diluted - as reported                                 |                        
|Diluted - pro forma                                   |                        

|New Accounting
Standards


In
June 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143
(SFAS 143), Accounting for Asset Retirement Obligations. SFAS 143 established
financial accounting and reporting standards associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. This statement was effective
for financial statements issued for fiscal years beginning after June 15, 2002. The
adoption of SFAS 143 in the first quarter of 2003 is not expected to have a material
impact on the Companys financial position, results of operations or cash flows.


On
October 3, 2001, the FASB issued Statement No. 144 (SFAS 144), Accounting for the
Impairment or Disposal of Long-Lived Assets. The objectives of FAS 144 were to address
significant issues relating to the implementation of FASB Statement No. 121 (SFAS 121),
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and to develop a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired. SFAS 144 superseded SFAS 121, however it
retained the fundamental provisions of SFAS 121 for (1) the recognition and measurement
of the impairment of long-lived assets to be held and used and (2) the measurement of
long-lived assets to be disposed of by sale. This statement was effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material
impact on the Companys financial position, results of operations or cash flows.


In
June 2002, the FASB issued Statement No. 146 (SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities, which established financial accounting and
reporting standards for restructuring costs including involuntary severance payments,
contract termination and other exit costs and relocation costs. SFAS 146 superseded EITF
94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement
is effective for exit or disposal activities that are initiated after December 31, 2002.


In
December 2002, the FASB issued Statement No. 148 (SFAS 148), Accounting for
Stock-Based CompensationTransition and Disclosure, which amended FASB Statement No. 123
(SFAS 123), Accounting for Stock-Based Compensation. SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amended the disclosure
requirements of SFAS 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. This statement was effective for
financial statements issued for fiscal years ending after December 15, 2002. The adoption
of SFAS 148 did not have a material impact on the Companys financial position, results
of operations or cash flows.


In
November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45). FIN 45 requires that guarantors recognize, at the inception of the
guarantee, a liability for the fair value of the guarantee. In addition, FIN 45 clarifies
the disclosures required of guarantors for certain guarantees that it has issued. The
recognition and measurement criteria of this interpretation are to be applied
prospectively to guarantees issued or modified after December 31, 2002. The Company had
no guarantees at December 31, 2002 within the recognition scope of FIN 45. Therefore, the
adoption of FIN 45 in 2003 has no impact on the Companys financial position, results of
operations or cash flows.
18
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In
January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which clarified the application of Accounting Research
Bulletin No. 51 Consolidated Financial Statements for entities in which an equity
investor has neither the characteristics of a controlling financial interest nor
sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among the parties
involved. Variable interest entities that effectively disperse risks will not be
consolidated unless a single party holds an interest or combination of interests that
effectively recombines risks that were previously dispersed. In addition, FIN 46 provides
additional disclosures for enterprises that hold significant variable interests in a
variable interest entity but is not the primary beneficiary. FIN 46 is applicable
immediately to variable interest entities created after January 31, 2003 and to variable
interest entities in which an enterprise obtains an interest after that date. FIN 46 will
become effective for existing interests in variable interest entities in the first fiscal
year or interim period beginning after June 15, 2003. The adoption of FIN 46 in the third
quarter of 2003 is not expected to have a material impact on the Companys financial
position, results of operations or cash flows.


2. CHANGE IN
ACCOUNTING PRINCIPLE


The
Company adopted SFAS No. 142 Goodwill and Other Intangible Assets in the first quarter
of 2002. The provisions of SFAS 142 eliminate the amortization of goodwill and other
indefinite lived intangible assets on a prospective basis beginning with acquisitions
completed after June 30, 2001, or January 1, 2002 for those completed prior to June 30,
2001. This standard required the Company to complete a transitional impairment analysis
of its recorded goodwill and indefinite lived intangible assets and to record any
impairment charge as a change in accounting principle. The Company completed the
transitional impairment analysis in the first quarter of 2002, which resulted in the
following impaired amounts of goodwill as of January 1, 2002 (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Reporting Unit       | GoodwillImpairment | GoodwillImpairment,Net of Tax
|-------------------- | ------------------ | -----------------------------
|Northern Nevada      |                    | $  2,257                     
|Utah                 |                    | 1,397                        
|Spokane              |                    | 41                           
|San Antonio / Austin |                    | 2,194                        
|Royal Door           |                    | 2,975                        
|Dallas / Fort Worth  |                    | 1,403                        
|Puget Sound          |                    | 6,253                        
|Portland             |                    | 1,416                        
|                     |                    |                              
|Total                |                    | $17,936                      
|                     |                    |                              

|In the
case of each Reporting Unit (as defined by SFAS 142), fair value was estimated using the
present value of expected future cash flows. Managements estimate of future cash flows
used in the present value analysis resulted in estimated fair market value being less
than the recorded value of tangible and intangible assets for the Reporting Units listed
above. A divestiture of any individual business unit that comprises a Reporting Unit
could result in a loss. After considering the estimated fair market value of tangible
assets, including land, an impairment of recorded goodwill occurred. Possible reasons for
the impairment could include increased competition, a reduction in residential
construction within the geographic markets that these Reporting Units serve, or
management issues.


On a
prospective basis, the Company is required to test acquired goodwill and other
indefinite-lived intangible assets for impairment on an annual basis. This annual test
will take place during the fourth quarter each year. See Note 3.


3. ASSET
IMPAIRMENT CHARGES


During
the fourth quarter of 2002, the Company conducted its annual evaluation of its Reporting
Units to determine if it was necessary to record impairment charges in accordance with
SFAS 142. Based on the results of the evaluation, a goodwill impairment charge of
$6,698,000 was recorded related to the Companys Dallas/Fort Worth and Marvin Windows
Reporting Units, which are based in Texas. Subsequent to December 31, 2002, the Company
completed a management restructuring for some of its operations in Texas, which the
Company believes will lead to improved operating results.


During
the third quarter of 2001, the Company wrote off its $1,000,000 investment in BuildNet,
Inc. (BuildNet). BuildNet filed under Chapter 11 of the Bankruptcy Code and the Company
was advised that BuildNet has conducted an orderly liquidation of its assets. Based on an
analysis conducted by the Company of the bankruptcy filings, management determined that
its investment will not be recovered. During the second quarter of 2001, the Company
recognized a loss of $750,000 resulting from the anticipated sale of real property in
Salem, Oregon.
19
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|During
the fourth quarter of 2000, as a part of its normal evaluation of its portfolio of
business units, the Company completed a strategic evaluation of a business unit located
in Grand Junction, Colorado, which was reported in the Colorado Reporting Unit. As a
result of this evaluation, the Company entered into a definitive purchase and sale
agreement for the sale of the business unit. Consequently, the Company determined that
the goodwill associated with this business unit was impaired and recorded a charge of
$1,800,000. Net sales and operating profit for the business unit were $7,185,000, and
$411,000, respectively, in 2000. The sale of the business unit was completed on February
5, 2001.


4. ACQUISITIONS


Businesses
acquired are accounted for using the purchase method of accounting. Under this accounting
method, 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 net
assets acquired is recorded as goodwill. Operating results of the acquired businesses are
included in the consolidated statements of income from the date of acquisition.


On
July 1, 2002, the Company purchased a 51% interest in a newly formed partnership, KBI
Norcal, for approximately $5,834,000 in cash, $783,000 of assumed debt (equipment leases
and a working capital loan) and the issuance of 34,364 shares of BMHC common stock. The
other 49% interest is owned by RJ Norcal, LLC, a limited liability company owned by
Robert Garcia and John Volkman. KBI Norcal provides turnkey framing services in Northern
California.


Under
the purchase agreement, BMHC will have the option to purchase the remaining 49% interest
in KBI Norcal from July 1, 2004 through June 30, 2008 and the principals of RJ Norcal,
LLC have the option to require BMHC to purchase the remaining 49% of KBI Norcal from July
1, 2006 through June 30, 2008. The purchase price for the remaining 49% will generally be
based on a multiple of historical earnings. If the fair value of the net assets to be
acquired is less than the amount payable under the required purchase option, the Company
would record a loss. As of December 31, 2002, the purchase price would be approximately
$7,500,000 and no loss was required to be reported.


KBI
Norcals operating results have been included in the consolidated financial statements
since July 1, 2002. The impact of the 49% ownership interest of RJ Norcal, LLC is
included in minority interest.


In
2002 the Company made four other acquisitions for aggregate consideration of
approximately $2,257,000.


From
May 1999 through July 3, 2001, BMC Construction owned 49% of Knipp Brothers Industries,
LLC, KBI Distribution, LLC and KB Industries Limited Partnership (collectively, KBI),
which primarily operate as framing contractors in Arizona, Southern California and
Nevada. On July 3, 2001, BMC Construction purchased the remaining 51% of KBI (the KBI
Acquisition). The results of KBIs operations have been included in the consolidated
financial statements since that date. The aggregate consideration paid for the remaining
51% interest was $34,374,000 in cash, net of cash acquired of $1,831,000.


The
initial acquisition of the 49% interest in KBI was made in May 1999 for approximately
$26,100,000 in cash and $2,200,000 in various assets and was accounted for under the
equity method until July 3, 2001. Under the equity method of accounting the Company
allocated the excess of its 1999 investment over its proportionate ownership interest in
the net assets of KBI to the assets and liabilities of KBI based on their estimated fair
values at the date of the investment. The excess of this investment over the estimated
fair value of the net assets of KBI owned by the Company was considered goodwill. The
July 3, 2001 consolidation of KBI resulted in an increase in assets of approximately
$39,990,000, an increase in liabilities of approximately $7,002,000 and a decrease in
equity investments in unconsolidated companies of approximately $32,988,000. These
amounts are considered non-cash items in the consolidated statement of cash flows for the
year ended December 31, 2001.


20
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
following is a summary of the assets acquired and liabilities assumed in connection with
the acquisition at July 3, 2001 (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------

|                              | 
|----------------------------- | 
|Current assets                | 
|Property, plant and equipment | 
|Intangible assets             | 
|Goodwill                      | 
|Other long-term assets        | 
|                              | 
|Total assets acquired         | 
|                              | 
|Current liabilities           | 
|Long-term liabilities         | 
|                              | 
|Total liabilities assumed     | 
|                              | 
|Net assets acquired           | 
|                              | 

|Of the
$5,576,000 of acquired intangible assets, $4,896,000 was assigned to customer
relationships that are not subject to amortization and $680,000 was assigned to
non-compete agreements that are being amortized over the three-year life of those
agreements. In accordance with the transitional provisions of SFAS 142, the $12,650,000
of goodwill, all of which is deductible for tax purposes, and the $4,896,000 of customer
relationships will not be amortized and will be tested for impairment at least annually.


During
2000, the Company completed the acquisition of a millwork facility that was consolidated
into the Companys existing Carson Valley location, and the acquisition of four warehouse
distribution centers along with several sales offices doing business as Marvin Windows
Planning Centers. The total cash consideration given was $5,905,000.


The
following summarizes unaudited pro forma results of operations assuming the 2001
acquisition of KBI occurred as of the beginning of 2001 and 2000. The pro forma
information only includes the effect of the KBI Acquisition because the effect of other
acquisitions is not material. The pro forma data has been prepared for comparative
purposes only. It does not purport to be indicative of the results of operations that
would have resulted had the KBI Acquisition been consummated at the beginning of the
years presented, or that may occur in the future (in thousands, except per share data).
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Unaudited
|----------------------------------- | ---------
|                                    | 2001     
|Net sales                           |          
|Net income                          |          
|Net income per diluted common share |          

|5. RECEIVABLES


Receivables
consisted of the following at December 31, (in thousands):
|---------------------------------------------------------------------------------------

|                                                       | 2002 | 2001     
|------------------------------------------------------ | ---- | ---------
|Trade receivables                                      |      | $ 128,923
|Other                                                  |      | 5,856    
|Allowance for returns, discounts and doubtful accounts |      | (2,022   
|                                                       |      |          
|                                                       |      | $ 132,757
|                                                       |      |          

|Because
customers are dispersed among the Companys various markets, its credit risk to any one
customer or state economy is not significant. The Company performs ongoing credit
evaluations of its customers and provides an allowance for doubtful accounts when events
or circumstances indicate that collection is doubtful.


21
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. EQUITY INVESTMENTS


Summarized
2001 and 2000 combined financial information of the Companys equity-basis investments in
KBI follows (in thousands):
|--------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | 2001 (1) | 2000      
|---------------------------------------------- | -------- | ----------
|Income statement information:                  |          |           
|Net sales                                      |          | $ 85,753  
|Income from operations                         |          | 3,488     
|Net income/(loss)                              |          | (13,872   
|Less other members share of net (income)/loss  |          | 15,510    
|                                               |          |           
|Companys share of net income                  |          | 1,638     
|Other income allocations, net of amortization  |         
|of intangibles                                 |          | 3,179     
|                                               |          |           
|Equity in earnings of unconsolidated companies |          | $   4,817 
|                                               |          |           
|Financial position information:                |         
|Current assets                                 |          | $        
|Non-current assets                             |          |          
|Total liabilities (current)                    |          |          
|                                               |         
|Members capital                                |          |          
|Less other members share of capital            |          |          
|                                               |          |           
|Companys share of capital                     |          |          
|Goodwill                                       |          |          
|                                               |          |           
|Equity investments in unconsolidated companies |          | $        
|                                               |          |           

|(1) |  | In
July 2001, the Company purchased the remaining 51% of KBI. As a result, 2001 income
statement information reflects six months of equity method accounting. The 2001 income
statement information includes a change in control bonus of $17,215,000 paid for and
specifically allocated to the previous 51% partner.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. PROPERTY,
PLANT AND EQUIPMENT


Property,
plant and equipment consisted of the following at December 31 (in thousands):
|--------------------------------------------------------------------------------------------------------------------------

|                                | 2002 | 2001      
|------------------------------- | ---- | ----------
|Land                            |      | $   43,791
|Buildings and improvements      |      | 100,351   
|Machinery and fixtures          |      | 62,608    
|Handling and delivery equipment |      | 43,541    
|Construction in progress        |      | 8,217     
|                                |      |           
|                                |      | 258,508   
|Less accumulated depreciation   |      | (80,371   
|                                |      |           
|                                |      | $ 178,137 
|                                |      |           

|Interest
of $379,000, $541,000, and $777,000 has been capitalized during 2002, 2001 and 2000,
respectively. Depreciation expense was $16,919,000, $15,506,000, and $13,576,000 in 2002,
2001 and 2000, respectively.


The
Company periodically evaluates the commercial and strategic operation of the land and
related buildings and improvements of its facilities. In connection with these
evaluations, facilities may be consolidated, and others sold or leased. During 2002, the
Company recorded net losses from the sale of assets of $944,000 consisting primarily of
the sale of real estate in Tooele, Utah, Gardnerville, Nevada and Spokane, Washington.
During 2001, the Company recorded net gains from the sale of assets of $888,000
consisting primarily of the gain on the sale of real estate in Boise and Lewiston, Idaho,
and Grand Junction, Colorado. During 2000, the Company recorded net gains from the sale
of assets of $2,611,000 consisting primarily of the gain on the sale of real estate in
Beaverton, Oregon of approximately $2,250,000. These facilities have not been reported as
discontinued operations in the consolidated financial statements because substantially
all of the operations and cash flows will continue in the ongoing operations of the
Company or if eliminated, the revenues and operating income of the facilities are not
material individually or in the aggregate.


22
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8. GOODWILL
AND OTHER INTANGIBLE ASSETS


Intangible
assets consisted of the following (in thousands):
|------------------------------------------------------------------------------------------------------

|                              | As of December 31, 2002
|----------------------------- | -----------------------
|                              | Gross CarryingAmount   
|Amortized intangible assets   |                        
|Covenants not to compete      |                        
|Customer relationships        |                        
|Other amortized intangibles   |                        
|                              |                        
|Unamortized intangible assets |                        
|Customer relationships        |                        
|                              |                        
|                              |                        
|                              |                        

|Aggregate
amortization expense for intangible assets was $808,000, $2,538,000, and $1,903,000 for
the years ended December 31, 2002 , 2001, and 2000, respectively. Estimated amortization
expense for intangible assets is $918,000 in 2003, $610,000 in 2004, $366,000 in 2005,
$290,000 in 2006, $290,000 in 2007, and $1,296,000 thereafter.


The
changes in the carrying amount of goodwill for the year ended December 31, 2002 are as
follows (in thousands):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Balance as of January 1, 2002           |  | $ 68,339 |  
|--------------------------------------- |  | -------- | -
|Goodwill acquired during the year       |  | 9,480    |  
|Change in accounting principle (1)      |  | (17,936  | )
|Impairment losses (2)                   |  | (6,698   | )
|Contingent consideration adjustment (3) |  | (1,074   | )
|                                        |  |         
|Balance as of December 31, 2002         |  | $ 52,111 |  
|                                        |  |         

|(1) |  | See
Note 2 related to the transitional impairment analysis.
|--- |  | -----------------------------------------------------------

|(2) |  | See
Note 3 related to the fourth quarter impairment analysis.
|--- |  | -------------------------------------------------------------

|(3) |  | See
Note 10 related to the re-pricing of a non-interest bearing note payable.
|--- |  | -----------------------------------------------------------------------------

|23
|--

|The
following reflects adjustments that would be made to net income and EPS if the
non-amortization provisions of SFAS 142 were adopted as of January 1, 2000 (in thousands,
except per share data):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | For the Year Ended December 31,
|----------------------------------------- | -------------------------------
|                                          | 2002                           
|Reported net income                       |                                
|Add back: Goodwill  amortization,  net of |                                
|tax                                       |                                
|Add back: Customer relationship           |                                
|amortization, net of tax                  |                                
|                                          |                                
|Adjusted net income                       |                                
|                                          |                                
|Basic earnings per share:                 |                                
|Reported net income                       |                                
|Goodwill amortization, net of tax         |                                
|Customer  relationship amortization,      |                                
|net of tax                                |                                
|                                          |                                
|Adjusted net income                       |                                
|                                          |                                
|Diluted earnings per share:               |                                
|Reported net income                       |                                
|Goodwill amortization, net of tax         |                                
|Customer  relationship amortization,      |                                
|net of tax                                |                                
|                                          |                                
|Adjusted net income                       |                                
|                                          |                                

|9. ACCOUNTS PAYABLE
AND ACCRUED EXPENSES
|----------------------------------------

| | Accounts
payable and accrued expenses consisted of the following at December 31 (in thousands):
| | -----------------------------------------------------------------------------------------------

|                       | 2002 | 2001   
|---------------------- | ---- | -------
|Trade accounts payable |      | $41,423
|Book overdrafts        |      | 4,758  
|Accrued compensation   |      | 19,164 
|Sales tax payable      |      | 3,800  
|Other                  |      | 8,843  
|                       |      |        
|                       |      | $77,988
|                       |      |        

|10. DEBT


Debt
consisted of the following at December 31 (in thousands):
|-------------------------------------------------------------------------

|                                                           | 2002 | 2001    
|---------------------------------------------------------- | ---- | --------
|Term note                                                  |      | $102,300
|Revolving credit facility                                  |      | 51,200  
|Non-interest bearing term note, net of related discount of |     
|$1,339 and $650 at December 31, 2002 and 2001,             |     
|respectively                                               |      | 2,949   
|Capital leases                                             |      | 926     
|                                                           |      |         
|                                                           |      | $157,375
|                                                           |      |         

|During
the fourth quarter of 1999, management entered into a new senior credit facility that
included a revolving credit facility of $125,000,000 due December 2004 and a term note of
$100,000,000 due December 2004. The financing was arranged through Bank of America, NA.,
as administrative agent, and nine other banks. The facility was used to repay the
Companys 8.10% and 9.18% unsecured senior notes and other debt and was available to fund
future acquisitions. In June 2000, the Company executed the First Amendment to the senior
credit facility that added an eleventh bank and increased its credit availability by
$25,000,000. In August 2001, the Company amended and restated the senior credit facility,
increasing the term loan to $110,000,000, due December 2004 and the revolving credit line
to $190,000,000, due December 2004. Principal payments on the term loan were rescheduled,
with quarterly payments resuming on September 30, 2002. The second amendment and
restatement were arranged through Wells Fargo Bank, N.A., as administrative agent, and a
group that included twelve other banks as of January 2002. The amendments to the senior
credit facility and the revolving line of credit were not considered a refinancing or
accounted for as such.


24
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Borrowings
under the revolving credit facility bear interest at prime plus 0.50% to 1.50%, or
Offshore Rate plus 2.00% to 3.00%. A fee of 0.375% to 0.500% per annum is charged on the
unused portion. Revolver borrowings are limited by a borrowing base equal to 60% of
inventory plus 80% of trade accounts receivable. The borrowing base is calculated monthly
and was $159,387,000 at December 31, 2002, resulting in revolver availability of
$98,697,000, net of $9,490,000 in outstanding letters of credit. The interest rate on
revolver borrowings was 3.94% and 4.87% as of December 31, 2002 and 2001, respectively.
The term note bears interest at prime plus 0.50% to 1.50%, or Offshore Rate plus 2.00% to
3.00%. At December 31, 2002 there was $102,300,000 outstanding under this term note. The
interest rate on the term note was 3.44% and 5.31% as of December 31, 2002 and 2001,
respectively.


The
term loan and revolving credit facility are both collateralized by the following assets:
all accounts, chattel paper, deposit accounts, documents, equipment, general intangibles,
pledged collateral, inventory, books, letter of credit proceeds and deeds of trust on
certain real property.


The
agreements related to the above borrowings contain covenants providing for the
maintenance of certain financial ratios and conditions including total funded debt to
capitalization; consolidated net worth; a coverage ratio which includes earnings before
interest, taxes and amortization; a ratio of total funded debt to earnings before
interest, taxes, depreciation and amortization; and limitations on capital expenditures,
among certain other restrictions. At December 31, 2002, the Company was in compliance
with these covenants and conditions.


In
connection with a 1999 acquisition, the Company issued a $5,000,000 non-interest bearing
five-year term note to the previous owner as partial consideration for the purchase.
Under the terms of the note, principal payments are due beginning 2004; however,
accelerated payments may be due based on the operating results of the acquired business
during each year prior to 2004. Due to the uncertain timing of the payout of this term
note, the note represents a form of contingent consideration paid for the acquired
business. The Company recorded a discount of $1,460,000 against the note in 1999 based on
a 15% effective interest rate and estimates of the operating results of the acquired
business. During the first quarter of 2002, the Company adjusted its estimates related to
the timing of the payout of the term note, which resulted in recording an additional
discount of $1,074,000. The Company has made payments of $156,000 for the year ended
December 31, 2002 under the terms of the note.


The
scheduled principal payments of debt are $18,187,000 in 2003, $136,463,000 in 2004,
$294,000 in 2005 and $2,431,000 in 2006.


Management
intends to refinance the $18,187,000 of principal payments due in 2003 through the unused
portion of the revolving credit facility. As a result, this amount has been classified as
long-term.


As of
December 31, 2002 and 2001, the Company had $9,490,000 and $6,908,000, respectively, in
letters of credit to guarantee performance or payments to third parties. These letters of
credit reduce borrowing availability under the revolving credit facility.


11. PREFERRED
STOCK


BMHC
has 2,000,000 shares of preferred stock authorized but not currently issued.


12. STOCK
PURCHASE AND INCENTIVE PLANS


ShareholdersRights
Plan


BMHC
adopted a Shareholders Rights Plan that expires in 2007. Under the plan, if a person
acquires 15% or more of the Companys stock or makes a tender or other offer to do so
without the approval of the Board of Directors, shareholders would have the right to
purchase stock of BMHC or the acquiring company at a significant discount. The Board of
Directors of BMHC has the right to redeem the rights for a nominal amount, to extend the
period before shareholders may exercise the rights or to take other actions permitted by
the plan. The rights trade with BMHCs stock but do not give shareholders any voting
rights. The rights plan is intended to encourage any person seeking to acquire BMHC to
negotiate with the Board of Directors.

25
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Cash Equity Plan


On
April 1, 1999, BMHC adopted a Cash Equity Plan to provide incentives for key management
employees. The awards vest after three years from the date of grant and expire after five
years. Each unit under an award allows for an exchange for cash in the amount of the fair
market value of BMHCs common stock at the date of exercise. The number of units
available for grant, including those units outstanding and unexercised, cannot exceed two
percent of BMHCs common shares outstanding at any given time. This plan is accounted for
as a variable plan. As a result, compensation expense will vary at each reported period
based on changes in the Companys stock price. During 2002, 2001 and 2000, the Company
awarded 15,250, 97,000, and 100,435 units, respectively, and recognized compensation
expense of $1,487,000, $1,004,000, and $340,000, respectively. At December 31, 2002,
204,420 units remained outstanding and unexercised. Accelerated vesting may occur if
there is a change of control of the Company, as defined in the Cash Equity Plan.


Employee Stock
Purchase Plan


On
October 1, 2000, BMHC adopted a non-compensatory Employee Stock Purchase Plan (ESPP).
Under the ESPP, eligible employees may elect each year to have up to 10% of their annual
qualified compensation withheld to purchase the Companys common stock. The purchase
price of the stock is 85% of the market price of BMHCs common stock on the last day of
each month. The purchase period is one month, commencing on the effective date of the
ESPP, and continues consecutively after the termination of the preceding purchase period.
There were 200,000 shares of common stock authorized for purchase under the ESPP. As of
December 31, 2002, there were 140,045 shares available for future purchase under the ESPP.


Stock and Stock
Option Plans


The
Company has five stock and stock option plans: the 1991 Senior Management and Field
Management Plan, the 1992 Non-Qualified Stock Option Plan, the 1993 Employee Stock Option
Plan, the 1993 Second Amended and Restated Non-Employee Stock Plan and the 2000 Stock
Incentive Plan (the Stock Option Plans). As of December 31, 2002, there were 1,654,433
shares of common stock reserved for issuance under the plans.


The
1991 Senior Management and Field Management Plan provided for the granting of options to
purchase shares of BMHCs common stock at exercise prices below fair market value. At
December 31, 2002, there were no options remaining for future grants under the 1991 plan.
Options vest over four years from the date of grant and expire at the end of ten years if
unexercised.


The
1992 Non-Qualified Stock Option Plan and the 1993 Employee Stock Option Plan provided for
the granting of options, at the discretion of the Board of Directors, to purchase shares
of BMHCs common stock. At December 31, 2002, there were no options remaining for future
grants under the 1992 and 1993 plans. The exercise price is equal to the fair market
value of BMHCs common stock on the date the options were granted. Options vest over five
years from the date of grant and expire at the end of ten years if unexercised.


On
February 18, 2000, BMHC amended the 1993 Amended and Restated Non-Employee Stock Option
Plan to the 1993 Second Amended and Restated Stock Plan. As a result, the Company grants
awards of BMHCs common stock rather than stock option awards under this plan. This plan
is available only to non-employee directors, and awards vest immediately upon grant.
During 2002, 2001 and 2000, the Company granted 19,200, 18,200 and 16,800 shares,
respectively, of stock under this plan and recognized compensation expense of $288,000,
$177,400 and $176,400, respectively. At December 31, 2002, 34,300 shares remain in the
plan for future issuance. The options that remain outstanding from grants under the
pre-amended plan are exercisable after one year following the date of grant and expire at
the end of ten years if unexercised.


On
February 18, 2000 BMHC adopted the 2000 Stock Incentive Plan, which provides for the
granting of sales or bonuses of stock, restricted stock, stock options, stock purchase
warrants, other rights to acquire stock, securities convertible into or redeemable for
stock, stock appreciation rights, and dividend equivalents. The number of shares of
common stock issued and issuable pursuant to all awards granted under this plan shall not
exceed 600,000, with annual increases commencing in 2001 as defined in the plan. During
2002 there were 221,000 non-statutory options granted under the plan at a price equal to
the fair market value of the Companys common stock on the date of grant. These grants
vest at an annual rate of 25% commencing on December 31, 2002. At December 31, 2002 there
were 50,750 shares remaining in the plan for future issuance. All options outstanding
under the plan expire at the end of ten years if unexercised.


During
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. The exercise price was equal
to the fair market value of BMHCs common stock on the date the options were granted.
These options vested in February 2002 and expire 10 years from the date of grant, or
2007, and are included in the tables below.


26
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|A
summary of the activity of the Stock Option Plans for the years ended December 31, 2002,
2001 and 2000, is presented in the table below:
|------------------------------------------------------------------------------------------------------------------------------------------

|                                        | 2002   | 2001               | 2000  
|--------------------------------------- | ------ | ------------------ | ------
|                                        | Shares | Wtd. Avg.Ex. Price | Shares
|Balance at beginning of the year        |        | 1,413,868          |       
|Options granted                         |        | 221,000            |       
|Options exercised                       |        | (97,694            | )     
|Options forfeited                       |        | (21,991            | )     
|                                        |        |                    |       
|Balance at end of the year              |        | 1,515,183          |       
|                                        |        |                    |       
|Exercisable at end of the year          |        | 1,017,683          |       
|Weighted  average fair value of options |       
|granted at fair value                   |        | $9.31              |       
|Weighted  average fair value of options |       
|granted below fair value                |        | $                 |       

|The
following table summarizes information about stock options outstanding at December 31,
2002:
|------------------------------------------------------------------------------------------------

|                 | Options Outstanding | Options Exercisable
|---------------- | ------------------- | -------------------
|
|$1.21 to $  6.85 |                     | 74,000             
|$8.67 to $17.00  |                     | 1,354,403          
|$19.50 to $29.75 |                     | 86,780             
|                 |                     |                    
|$1.21 to $29.75  |                     | 1,515,183          
|                 |                     |                    

|The
fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for grants in
2002, 2001 and 2000: risk-free interest rates of 5.0%, 5.1%, and 6.0%, respectively;
estimated lives of approximately 9 years, 9 years, and 8 years, respectively; and
expected stock price volatility of 55.1%, 55.0%, and 52.8%, respectively.


27
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
following table summarizes equity compensation plan information as of December 31, 2002:
|--------------------------------------------------------------------------------------------

|Plan category                 | 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 (1)
|----------------------------- | ------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------
|Equity compensation plans     |                                                                                             |                                                                             |                                                                                                 
|approved by security holders  |                                                                                             | 1,465,183                                                                   |                                                                                                 
|Equity compensation plans not |                                                                                            
|approved by security holders  |                                                                                             | 50,000                                                                      | (3)                                                                                             
|                              |                                                                                             |                                                                             |                                                                                                 
|Total                         |                                                                                             | 1,515,183                                                                   |                                                                                                 
|                              |                                                                                             |                                                                             |                                                                                                 

|(1) |  | Excludes
securities reflected in the second column.
|--- |  | ---------------------------------------------------

|(2) |  | This
number includes 34,300 from the 1993 Amended and Restated Non-Employee Stock Option Plan
and 50,750 from the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan allows for
an increase of 100,000 shares each year not to exceed 1,100,000 for the plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The
exercise price was equal to the fair market value of BMHCs common stock on the date the
options were granted. These options vested in February 2002 and expire 10 years from the
date of grant, or 2007.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. INCOME
TAXES


Income
taxes for the years ended December 31, 2002, 2001 and 2000 consisted of the following (in
thousands):
|-------------------------------------------------------------------------------------------------------------------------------

|                      | 2002 | 2001     | 2000
|--------------------- | ---- | -------- | ----
|Current income taxes  |      |          |     
|Federal               |      | $ 12,420 |     
|State                 |      | 1,142    |     
|                      |      |          |     
|                      |      | 13,562   |     
|                      |      |          |     
|Deferred income taxes |     
|Federal               |      | (2,446   | )   
|State                 |      | (245     | )   
|                      |      |          |     
|                      |      | (2,691   | )   
|                      |      |          |     
|                      |      | $ 10,871 |     
|                      |      |          |     

|The
above table does not include a deferred tax benefit of $6,286 associated with the change
in accounting principle. See Note 2.


The
tax benefit associated with non-statutory stock options exercised by employees under the
Companys stock plans reduced taxes payable by approximately $187,000, $257,000, and
$344,000 for 2002, 2001, and 2000, respectively. These benefits were credited to
additional paid-in capital.


A
reconciliation of the statutory federal income tax rate to the rate as provided in the
consolidated statements of income follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | 2002 | 2001 | 2000
|-------------------- | ---- | ---- | ----
|Statutory rate       |      | 35.0 | %   
|State income taxes   |      | 1.6  |     
|State tax credits    |      | (1.4 | )   
|Non-deductible items |      | 1.4  |     
|Other                |      | 0.5  |     
|                     |      |      |     
|                     |      | 37.1 | %   
|                     |      |      |     

|Deferred
income taxes are provided to reflect temporary differences between the financial and tax
bases of assets and liabilities using presently enacted tax rates and laws.


28
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
components of deferred income taxes included in the Companys year-end balance sheets
were as follows (in thousands):
|-------------------------------------------------------------------------------------------------------------------------

|                                                       | 2002 | 2001     
|------------------------------------------------------ | ---- | ---------
|Deferred tax assets                                    |      |          
|Inventory, tax basis in excess of book basis           |      | $   2,446
|Reserves not yet deductible for tax                    |      | 5,723    
|Intangible, tax basis in excess of book basis          |      | 5,077    
|Other                                                  |      | 2,544    
|                                                       |      |          
|Total deferred tax assets                              |      | 15,790   
|                                                       |      |          
|Deferred tax liabilities                               |     
|Book basis in excess of tax basis of  acquired assets  |      | 493      
|Tax in excess of book depreciation                     |      | 8,302    
|Intangible, book basis in excess of tax basis          |      |         
|Deferred costs deducted for taxes                      |      | 1,164    
|                                                       |      |          
|Total deferred tax liabilities                         |      | 9,959    
|                                                       |      |          
|                                                       |      | $   5,831
|                                                       |      |          
|Classified as                                          |     
|Deferred income tax benefit (current  assets)          |      | $   5,302
|Deferred income taxes (long-term  asset/(liabilities)) |      | 529      
|                                                       |      |          
|                                                       |      | $   5,831
|                                                       |      |          

|At
December 31, 2002, the Company reported a deferred tax asset. Management believes that
its deferred tax asset will be realized from taxable income in future periods. Therefore,
the Company has not recorded a valuation allowance to offset the deferred tax asset.


14. NET INCOME
PER COMMON SHARE


Net
income per common share was determined as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                       | 2002 | 2001   | 2000
|---------------------------------------------------------------------- | ---- | ------ | ----
|Net income available to common shareholders                            |      | $7,015 | (1) 
|                                                                       |      |        |     
|                                                                       |      |        |     
|Weighted average shares outstanding used to determine basic net        |     
|income per common share                                                |      | 13,086 |     
|Net effect of dilutive stock options (2)                               |      | 177    |     
|                                                                       |      |        |     
|Average shares used to determine diluted net   income per common share |      | 13,263 |     
|                                                                       |      |        |     
|Net income per common share:                                           |     
|Basic                                                                  |      | $0.54  | (1) 
|Diluted                                                                |      | $0.53  | (1) 

|(1) |  | After
a loss from change in accounting principle of $11,650, net of tax, or $0.88 per diluted
share.
|--- |  | ----------------------------------------------------------------------------------------------------

|(2) |  | Stock
options of 416,529, 558,938, and 1,247,232 were not included in the computation, because
to do so would have been anti-dilutive for the years ended December 31, 2002, 2001, and
2000, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. RETIREMENT PLANS


BMHC
has a savings and retirement plan for its salaried and certain of its hourly employees
whereby the eligible employees may contribute a percentage of their earnings to a trust,
i.e. a 401(k) plan. The Company also makes contributions to the trust based on a
percentage of the contributions made by the participating employees. The Companys
contributions are charged against operations and were $2,711,000, $3,005,000, and
$3,050,000 in 2002, 2001, and 2000, respectively.


29
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|BMHC
has a supplemental retirement plan for selected key management employees and directors.
The contributions are based on the Company achieving certain operating earnings levels.
Pursuant to this plan, the Company charged operations for $1,510,000 in 2002, $1,503,000
in 2001, and $1,309,000 in 2000. BMHC has purchased company-owned life insurance in order
to have a funding mechanism for this plan. Retirement payments will be paid to the
participants or their beneficiary over a 15-year period subsequent to retirement or death.


Effective
with the 2002 year, directors were no longer covered by the supplemental retirement plan
and their existing benefits were transferred to a deferred account with a present value
of an equivalent form of cash or stock compensation. Future compensation for directors
will be limited to quarterly cash retainers and annual stock grants.


BMHC
does not provide any other postretirement benefits for its employees.


16.
COMMITMENTS AND CONTINGENCIES


Operating Leases


The
Company leases real property, vehicles and office equipment under operating leases.
Rental expense was $9,651,000 in 2002, $8,317,000 in 2001, and $7,028,000 in 2000.
Certain of the leases are non-cancelable and have minimum lease payment requirements of
$5,775,000 in 2003, $4,564,000 in 2004, $3,517,000 in 2005, $3,145,000 in 2006,
$2,234,000 in 2007, and $3,362,000 thereafter.


Legal
Proceedings


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


17. FINANCIAL
INSTRUMENTS


The
book values compared with the fair values of financial instruments at December 31, were
as follows (in thousands):
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   | 2002      | 2001     
|------------------ | --------- | ---------
|                   | BookValue | FairValue
|Long-term debt:    |           |          
|Variable rate debt |           | $153,500 
|Fixed rate debt    |           | 3,875    
|                   |           |          
|                   |           | $157,375 
|                   |           |          

|The
book values of cash and cash equivalents, accounts receivable, accounts payable and
variable interest rate long-term debt approximated fair value due to either the
short-term maturities or current variable interest rates of these instruments.


The
fair value of fixed rate debt has been estimated based upon the discounted cash flows
using the Companys incremental rate of borrowing for similar debt.


18. BUSINESS
SEGMENT AND PRODUCTS


The
Companys chief operating decision makers consist of senior managers who work together to
allocate resources to and assess the performance of each of the Companys individual
locations that comprise a business unit. Management believes its locations and business
units have similar operating and economic characteristics and have aggregated its
operations into a single reporting segment, which is the supply and distribution of
lumber, building materials and services to new housing builders and contractors,
commercial and industrial contractors, and repair and remodel contractors.


30
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
Companys locations principally derive revenues from construction services and
manufactured components (framing, millwork, roof and floor trusses, pre-hung doors,
windows, moldings and installation), commodity wood products (lumber, plywood and
oriented strand board), building materials (roofing, siding, insulation and steel
products), and other products (paint, hardware, tools, electrical and plumbing). Net
sales by product for the years ended December 31, 2002, 2001 and 2000 were as follows (in
thousands):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2002 | 2001        | 2000
|------------------------- | ---- | ----------- | ----
|Net sales                 |      |             |     
|Construction services and |     
|manufactured components   |      | $   626,888 |     
|Wood products             |      | 361,890     |     
|Building materials        |      | 103,528     |     
|Other                     |      | 69,188      |     
|                          |      |             |     
|Total revenues            |      | $1,161,494  |     
|                          |      |             |     

|19. RESULTS OF QUARTERLY
OPERATIONS (UNAUDITED)


Operating
results by quarter for 2002 and 2001 were as follows (dollars in thousands, except per
share data):
|---------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | First (2) | Second (3)   | Third (4) | Fourth (5) 
|---------------------------------------------- | --------- | ------------ | --------- | -----------
|2002                                           |           |              |           |            
|Net sales                                      |           | $ 247,135    |           | $300,528   
|Gross profit                                   |           | 71,227       |           | 85,500     
|Income from operations                         |           | 3,539        |           | 14,276     
|Income before change in accounting principle   |           | 618          |           | 7,291      
|Net income/(loss)                              |           | (11,032      | )         | 7,291      
|Income per diluted  common share before change |          
|in accounting principle (1)                    |           | $       0.05 |           | $      0.55
|Net income/(loss) per diluted common share (1) |           | $     (0.84  | )         | $      0.55
|Common stock prices:                           |          
|High                                           |           | $   18.360   |           | $  17.720  
|Low                                            |           | 10.850       |           | 14.000     
|2001                                           |          
|Net sales                                      |           | $ 223,149    |           | $268,416   
|Gross profit                                   |           | 63,667       |           | 73,795     
|Income from operations                         |           | 5,497        |           | 11,581     
|Net income                                     |           | 2,175        |           | 7,065      
|Net income per diluted common share (1)        |           | $       0.17 |           | $      0.54
|Common stock prices:                           |          
|High                                           |           | $     9.938  |           | $  15.210  
|Low                                            |           | 8.250        |           | 8.690      

|(1) |  | Net
income per share calculations are based on the average common shares outstanding for each
period presented. Accordingly, the total of the per share figures for the quarters may
not equal the per share figure reported for the year.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The
first quarter of 2002 includes a $11,650,000 loss, net of tax, from change in accounting
principle.
|--- |  | -------------------------------------------------------------------------------------------------------

|(3) |  | The
second quarter of 2001 includes the $750,000 loss from the anticipated sale of real
property in Salem, Oregon.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(4) |  | The
third quarter of 2001 includes the $1,000,000 write-off of the Companys investment in
BuildNet. See Note 3 for more details.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The
fourth quarter of 2002 includes the $6,698,000 charge for the impairment of goodwill and
intangible assets.
|--- |  | ---------------------------------------------------------------------------------------------------------------

|31
|--

|20. SUBSEQUENT
EVENT


Effective
January 1, 2003, the Company purchased a 60% interest in a newly formed limited liability
company, WBC Construction, LLC (WBC), for approximately $22,698,000 in cash, $851,000
of assumed debt and the issuance of 70,053 shares of BMHC common stock. The other 40%
interest is owned by Willard Brothers Construction, Inc. and its owners, A. Bruce Willard
and Danny L. Willard. WBC contracts with residential production builders in Florida to
construct the slab and structured shell for homes.


Under
the purchase agreement, BMHC will have the option to purchase the remaining 40% interest
in WBC from January 16, 2006 through January 16, 2009 and the principals of Willard
Brothers Construction, Inc. have the option to require BMHC to purchase the remaining 40%
of WBC from January 16, 2007 through January 16, 2009. The purchase price for the
remaining 40% will generally be based on a multiple of historical earnings. If the fair
value of the net assets to be acquired is less than the amount payable under the required
purchase option, the Company would record a loss.


The
Company will account for WBCs operating results under the equity method of accounting
because the minority owners have certain approval and other rights that preclude
consolidation.


32
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|To the Board of Directors and
ShareholdersBuilding Materials Holding Corporation


In our opinion, the accompanying
consolidated balance sheets and the related consolidated statements of income,
shareholdersequity and cash flows present fairly, in all material respects, the
financial position of Building Materials Holding Corporation and its subsidiaries (the
Company) at December 31, 2002 and 2001 and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2002,
in conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which 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.


As explained in Note 2, effective
January 1, 2002, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 Goodwill and Other Intangible Assets.


/s/ PricewaterhouseCoopers LLP


San Francisco, CaliforniaMarch 6,
2003

33
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------