<PAGE>
 
                                                                    EXHIBIT 13.1

                     SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data for the five years ended December 31,
1996 are derived from the Company's audited consolidated financial statements.
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto.
<TABLE>
<CAPTION>
 
                                                      Year Ended December 31,
                                -----------------------------------------------------------------
                                  1992         1993         1994        1995 /(1)/        1996
                                -------      --------    ---------     -------------    ---------
                                              (in thousands, except per share data)
<S>                             <C>          <C>         <C>           <C>              <C> 
INCOME STATEMENT DATA:
Net sales                       $ 61,169     $ 80,257    $ 99,279      $ 182,519        $ 267,344
Cost of sales                     50,619       67,087      83,625        155,877          226,765
                                --------     --------    --------      ---------        ---------

Gross profit                      10,550       13,170      15,654         26,642           40,579
Commission income                  1,234        1,274       1,066          2,610            5,497
                                --------     --------    --------      ---------        ---------
 
                                  11,784       14,444      16,720         29,252           46,076
Selling, general and                                     
 administrative expenses           9,491       10,550      11,941         20,889           29,723
                                --------     --------    --------      ---------        ---------
Operating income                   2,293        3,894       4,779          8,363           16,353
Interest income                        -           83         346            355              151
Interest expense                    (334)        (425)       (627)        (1,692)           2,209
Other income                           -            -         800              -                -
                                --------     --------    --------      ---------        ---------

Income before income tax           
 provision                         1,959        3,552       5,298          7,026           14,295
Income tax provision                   -            -          51             45            1,307
                                --------     --------    --------      ---------        --------- 

Net income                      $  1,959     $  3,552    $  5,247      $   6,981        $  12,988
                                ========     ========    ========      =========        =========

PRO FORMA INFORMATION /(2)/:
Historical income before                      
 income taxes                   $  1,959     $  3,552    $ 5,298       $   7,026        $  14,295
Income tax expense adjustments       764        1,385      2,066           2,740            5,432
                                --------     --------    --------      ---------        --------- 

Pro forma net income            $  1,195     $  2,167    $ 3,232       $   4,286        $   8,863
                                ========     ========    ========      =========        =========

Pro forma earnings per share       $0.24        $0.44      $0.65           $0.87            $1.60
                                ========     ========    ========      =========        =========

Weighted average shares            
 outstanding                       4,946        4,946      4,946           4,946            5,531 
 


                                                         December 31,
                                -----------------------------------------------------------------
                                  1992         1993         1994        1995 /(1)/        1996
                                -------      --------    ---------     -------------    --------- 
BALANCE SHEET DATA                                         (in thousands)
Working capital                 $ 4,531      $  4,050    $  4,496      $     18,926     $  23,959
Total assets                     10,898        15,052      17,485            54,851        55,004
Total debt                        1,815         5,547       6,385            31,263         9,831
Stockholders' equity              5,060         3,537       5,512             8,738        33,651
 
</TABLE>

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

(1)  The Company acquired Service Supply on June 30, 1995. The acquisition was
     accounted for as a purchase and accordingly, the operating results of
     Service Supply have been included in the operating results of the Company
     since June 30, 1995. See "Management's Discussion and Analysis of Financial
     Condition and Results of Operations - Acquisition of Service Supply."

(2)  Prior to the initial public offering, the Company had elected to be treated
     as an S corporation under the provisons of Subchapter S of the Internal
     Revenue Code. As an S corporation, the Company was not subject to federal
     and certain state income taxes. The pro forma data give effect to the
     income taxes that would have been recorded had the Company been taxed as a
     C corporation.
<PAGE>
 
                                                                    EXHIBIT 13.1
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

GENERAL

     From 1991 through 1996, the Company experienced significant growth in sales
and earnings. This growth was the result of internal expansion, including the
opening of new distribution centers, as well as the acquisition of distribution
and manufacturing facilities from Service Supply Systems, Inc. ("Service
Supply") in June 1995. From 1991 through 1996, the Company opened seven new
distribution centers. Through the acquisition of Service Supply, the Company
acquired five distribution and three manufacturing facilities, bringing the
number of its distribution and manufacturing facilities to 17 and three,
respectively. The Company will seek to continue to grow through the acquisition
and opening of distribution and manufacturing facilities and through the
expansion of the product lines offered by the Company.

     The Company recognizes revenues from product sales at the time of shipment
(or the time of product receipt, in the case of direct shipments from suppliers
to customers). In some cases the Company sells on a commission basis.
Commissions are recognized when earned and represent amounts earned in selling,
warehousing and delivering products for certain manufacturers of building
products with which the Company has distribution agreements. Commission
arrangements do not require inventory investments or receivable financing, and
therefore are significantly less expensive to the Company than traditional
sales. To the extent the volume of items warehoused and shipped under commission
arrangements increases faster or slower than the volume of items related to
traditional sales, changes in net sales may not be representative of actual
shipment volume increases or decreases.

ACQUISITION OF SERVICE SUPPLY

     In June 1995, the Company acquired Service Supply for a purchase price of
approximately $17.7 million. The entire purchase price was paid in cash. The
fair value of assets acquired was approximately $32.4 million and the amount of
liabilities assumed was approximately $14.7 million. There was no material
affiliation between Service Supply and Kevco prior to such acquisition. The
acquisition of Service Supply enabled Kevco to achieve its primary strategic
objective at that time of becoming a national distributor of building products
to the manufactured housing and recreational vehicle ("RV") industries and
significantly enhanced the Company's competitive position. Service Supply's
operations are located primarily in the southeastern United States, the only
region of the country not served by the Company at the time of the acquisition.
The Company benefits from Service Supply's product mix, which is weighted toward
plumbing products, but also includes a variety of other building products. In
particular, through its acquisition of Service Supply's wood products
subsidiary, the Company has become a wood products manufacturer for the
manufactured housing industry in the southeastern and southwestern United
States. The Company's wood products business is conducted through its
subsidiary, Sunbelt Wood Components, Inc. ("Sunbelt").

     Since completing the Service Supply acquisition, the Company has primarily
focused on integrating and enhancing the performance of the acquired operations
and has achieved net sales growth of 10.6% from $241.8 million in 1995 (on a
combined basis as if the acquisition had occurred on January 1, 1995) to $267.3
million in 1996. Gross profit, as a percent of sales, on such a combined basis,
increased from 14.1% to 15.2% during the same time periods, primarily as a
result of purchasing opportunities available to the Company following the
completion of the acquisition of Service Supply.

     Because of the Service Supply acquisition, the Company's historical results
of operations and period-to-period comparisons of such results and certain
financial data may not be meaningful or indicative of future results.
<PAGE>
 
RESULTS OF OPERATIONS
     
     The following table sets forth, for the periods indicated, certain
Statements of Income data as a percentage of Kevco's net sales.

<TABLE>
<CAPTION>
 
 
                                         Year Ended December 31,
                                       --------------------------
                                         1994     1995     1996
                                       --------  -------  -------
<S>                                    <C>       <C>      <C>
Net sales............................    100.0%   100.0%   100.0%
Cost of sales........................     84.2     85.4     84.8
                                         -----    -----    -----
Gross profit.........................     15.8     14.6     15.2
Commission income....................      1.1      1.4      2.0
                                         -----    -----    -----
                                          16.9     16.0     17.2
Selling, general and administrative..     12.0     11.4     11.1
                                         -----    -----    -----
Operating income.....................      4.9      4.6      6.1
Other income.........................      0.8      0.0      0.0
Interest income......................      0.3      0.2      0.1
Interest expense.....................     (0.6)    (0.9)    (0.8)
                                         -----    -----    -----
   Income before income taxes........      5.4%     3.9%     5.4%
                                         =====    =====    =====
 
</TABLE>



Comparison of Years Ended December 31, 1996 and 1995

     Net sales increased by $84.8 million, or 46.5%, to $267.3 million in 1996
from $182.5 million in 1995. The increase in net sales was primarily
attributable to the inclusion of a full year of sales from the Service Supply
acquisition in 1996 compared to six months of sales from the Service Supply
acquisition in 1995. However, net sales, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1995, increased from
$241.8 million in 1995 to $267.3 million in 1996, an increase of 10.5%. The
increase in net sales on such a combined basis primarily resulted from an
increase in the volume and variety of products sold. Management believes the
increase in the volume and variety of products sold was primarily the result of
the establishment of national plumbing products accounts with several customers,
sales of Kevco product lines to existing Service Supply customers (as well as
sales of Service Supply product lines to existing Kevco customers) and improved
customer demand. The increase in net sales, on such a combined basis, was in
excess of the 6.8% increase in reported manufactured home shipments in 1996
compared to 1995 (approximately 363,000 homes reported shipped in 1996 compared
to approximately 340,000 homes reported shipped in 1995). Sales to the
manufactured housing industry represented approximately 90% of the Company's net
sales in 1996.

     Gross profit increased by $14.0 million, or 52.6%, to $40.6 million in 1996
from $26.6 million in 1995. This increase in gross profit was primarily
attributable to the inclusion of a full year of gross profit from the Service
Supply acquisition in 1996 compared to six months gross profit from the Service
Supply acquisition in 1995. Gross profit, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1995, increased from
$34.0 million in 1995 to $40.6 million in 1996, an increase of 19.4%. This
increase in gross profit on such a combined basis resulted primarily from an
overall increase in the volume of net sales. Actual gross profit, as a percent
of actual net sales, increased to 15.2% in 1996 from 14.6% in 1995. This
increase was primarily the result of improving margins associated with Service
Supply's sales. Gross profit, as a percent of net sales, on a combined basis as
if the acquisition of Service Supply had occurred on January 1, 1995, increased
from 14.1% in 1995 to 15.2% in 1996. Management believes that both the increase
in actual gross profit, as a percent of net sales, and the increase in gross
profit, as a percent of net sales, on a combined basis are a direct result of
the Company's ability to take advantage of purchasing opportunities following
the acquisition of Service Supply.
<PAGE>
 
     Commission income increased by $2.9 million, or 111.5%, to $5.5 million in
1996 from $2.6 million in 1995. Although a portion of the increase resulted
from the inclusion of a full year of commission income from the Service Supply
acquisition in 1996 compared to six months of commission income from the Service
Supply acquisition in 1995, the most significant factor in the increase was that
the Company entered into commission-based distribution arrangements with two
manufacturers of component products.

     Selling, general and administrative expenses increased by $8.8 million, or
42.1%, to $29.7 million in 1996 from $20.9 million in 1995. The increase was
primarily related to the inclusion of a full year of selling, general and
administrative expenses from the Service Supply acquisition in 1996 compared to
six months of selling, general and administrative expenses in 1995 and, to a
lesser extent, the increased expenses related to the overall net sales increase.
Selling, general and administrative expenses, as a percent of net sales,
decreased to 11.1% in 1996 from 11.4% in 1995, reflecting the reduction of
redundant overhead and warehousing costs associated with Service Supply and,
generally, the Company's ability to increase sales without a proportionate
increase in related operating expenses.

     Net income increased by $6.0 million, or 85.7%, to $13.0 million in 1996
from $7.0 million in 1995. The increase was primarily a result of the inclusion
of a full year of gross profit from the Service Supply acquisition in 1996
compared to six months of gross profit from the Service Supply acquisition in
1995, and the remainder of the increase was attributable to the increase in net
sales without a proportionate increase in operating expenses. The increase in
net income was net of additional interest expense incurred of $0.5 million in
1996 related to the term loan associated with the acquisition of Service Supply,
outstanding for a full year period compared to six months in 1995.


Comparison of Years Ended December 31, 1995 and 1994

     Net sales increased by $83.2 million, or 83.8%, to $182.5 million in 1995
from $99.3 million in 1994. The increase in net sales was primarily attributable
to the inclusion of six months of sales from the Service Supply facilities in
1995. However, net sales, on a combined basis as if the acquisition of Service
Supply had occurred on January 1, 1994, also increased in 1995 to $241.8 million
from $200.2 million in 1994, an increase of 20.8%. The increase in net sales on
such a combined basis primarily resulted from an increase in the volume and
variety of products sold. Management believes the increase in the volume and
variety of products sold was primarily the result of the establishment of
national plumbing products accounts with several customers, sales of Kevco
product lines to existing Service Supply customers (as well as sales of Service
Supply product lines to existing Kevco customers) and improved customer demand.
The increase in net sales, on such a combined basis, was in excess of the 11.8%
increase in reported manufactured home shipments in 1995 compared to 1994
(approximately 340,000 homes reported shipped in 1995 compared to approximately
304,000 homes reported shipped in 1994). Sales to the manufactured housing
industry represented approximately 85% of the Company's net sales in 1995.

     Gross profit increased by $10.9 million, or 69.4%, to $26.6 million in
1995 from $15.7 million in 1994. This increase in gross profit was primarily
attributable to the inclusion of six months of gross profit from the Service
Supply facilities in 1995. Gross profit, on a combined basis as if the
acquisition of Service Supply had occurred on January 1, 1994, increased in 1995
to $34.0 million from $28.5 million in 1994, an increase of 19.3%. This increase
in gross profit on such a combined basis resulted primarily from an overall
increase in the volume of net sales. Actual gross profit, as a percent of actual
sales, decreased to 14.6% in 1995 from 15.8% in 1994. This decrease was
primarily the result of lower margins associated with Service Supply's sales.
Gross profit, as a percent of sales, on a combined basis as if the acquisition
of Service Supply had occurred on January 1, 1994, decreased to 14.1% in 1995
from 14.3% in 1994, a decrease which management believes was primarily the
result of competition from other suppliers attempting to increase their market
shares.

     Commission income increased by $1.5 million, or 136.4%, to $2.6 million in
1995 from $1.1 million in 1994. A significant amount of the increase resulted
from the inclusion of six months of commission income from the Service Supply
facilities in 1995. An additional significant factor in this increase was the
increase in sales volume for which the Company is compensated on a commission
basis.

     Selling, general and administrative expenses increased by $9.0 million, or
75.6%, to $20.9 million in 1995 from $11.9 million in 1994. The increase was
primarily related to the inclusion of six months of selling, general and
administrative expenses from the Service Supply facilities in 1995 and, to a
lesser extent, the increased expenses related to the overall net sales increase.
Selling, general and administrative expenses, as a percent of sales, decreased
to 11.4% in 1995 from 12.0% in 1994, reflecting the reduction of redundant
overhead and warehousing costs associated with Service Supply and, generally,
the Company's ability to increase sales without a proportionate increase in
related operating expenses.

Net income increased by $1.8 million, or 34.6%, to $7.0 million in 1995 from
$5.2 million in 1994. Excluding insurance proceeds of $0.8 million recognized as
income in 1994 related to a former officer's disability, the increase in net
income from
<PAGE>
 
1994 to 1995 would have been 59.1%. The increase was primarily a result of the
inclusion of six months of gross profit from the Service Supply facilities in
1995, and the remainder of the increase was attributable to the increase in net
sales without a proportionate increase in operating expenses. Also, the increase
in net income was net of additional interest expense incurred of $0.6 million in
1995 related to the term loan associated with the acquisition of Service Supply.

LIQUIDITY AND CAPITAL RESOURCES

     Historically, the Company's growth has been financed through cash flow from
operations, borrowings under its bank credit facilities and the expansion of
trade credit. Net cash provided by operating activities was $12.2 million in
1996, and increased to $8.4 million in 1995 from $3.1 million in 1994. The
Company's capital expenditures were $1.6 million in 1996 and $2.8 million and
$0.4 million in 1995 and 1994, respectively. The Company is obligated to make
payments on various capital leases in varying amounts, maturing through 2007.
Additionally, the Company is obligated to make payments under noncompete and
consulting agreements, related to the Service Supply acquisition on June 30,
1995, in varying amounts, maturing through 1999. See Notes 4 and 6 to the
Company's Consolidated Financial Statements.

     In connection with the Service Supply acquisition at June 30, 1995, the
Company arranged for a term loan and a revolving credit facility with a bank in
the aggregate amount of $35.0 million; the term loan comprising $15.0 million.
The purchase price of Service Supply was approximately $17.7 million, of which
$15.0 million was paid with proceeds from such term loan and the remaining $2.7
million was paid with a combination of cash on hand and proceeds from the
revolving credit facility. The fair value of assets acquired was $32.4 million
and liabilities assumed were $14.7 million. Of the $14.7 million of liabilities
assumed, $8.1 million was paid with funds borrowed under the Company's revolving
credit facility. In November 1996, the Company completed an initial public
offering of 2,415,000 shares of the Company's common stock (including an over-
allotment option of 315,000 shares exercised in December 1996) for $12.00 per
share, netting proceeds to the Company after underwriting discounts and expenses
of approximately $26.0 million. A portion of the net proceeds of the public
offering was used to permanently repay the then outstanding balance of the term
loan and the remainder to pay all of the then outstanding balance of the
revolving credit facility. Borrowings under the term loan required monthly, bi-
monthly or quarterly interest payments (depending on whether interest accrues
based on the prime rate or LIBOR) and quarterly principal payments of $0.6
million commencing on October 1, 1996 until maturity at June 30, 2001. Interest
was paid on the term loan at a blend of the bank's prime rate and LIBOR rates
based on pricing options selected by the Company plus a margin based on
operating statistics of the Company. Borrowings under the revolving credit
facility were (prior to the amendment described below) due June 30, 1998
(subject to the option of the lenders to grant one or more twelve month
extensions at Kevco's request), and require monthly, bi-monthly or quarterly
interest payments currently based on a blend of the bank's prime rate and LIBOR
rates based on pricing options selected by the Company plus a margin determined
by operating statistics of the Company (8.25% at December 31, 1996). The
borrower under the term loan was and revolving credit facility is one of the
Company's operating subsidiaries, and the obligations thereunder are guaranteed
by the Company. The term loan was and revolving credit facility is secured by
substantially all of the assets of the Company and its subsidiaries as well as
the capital stock of such subsidiaries. The related credit agreement contains
certain restrictions and conditions that include cash flow and various financial
ratio requirements, and limitations on incurrence of debt or liens, acquisitions
of property and equipment, distributions to stockholders and certain events
constituting a Change of Control (as defined in such agreement).

     In February 1997, the Company amended its credit agreement to allow for a
term loan of $30.0 million and to increase the revolving credit facility to
$35.0 million from $20.0 million. The terms remain substantially the same as
discussed above, and the term loan and credit facility mature in October 2001.
Scheduled principal repayment of the term loan is $2.0 million in 1998; $8.0
million in 1999; $10.0 million in 2000; and $10.0 million in 2001. In February
1997, the Company purchased certain assets and assumed certain liabilities of
Consolidated Forest Products, L.L.C. and acquired Bowen Supply, Inc. with cash
borrowed from the Company's credit facilities. The aggregate cash price was
approximately $33.4 million and each will be accounted for as a purchase. The
assumed debt was approximately $8.4 million and was immediately paid with
proceeds from the term loan and credit facility.

     Prior to the effective date of the initial public offering, the Company had
elected to be treated as an S corporation. As a result, the Company has made
distributions to its shareholders, including amounts equal to at least their
federal and state income tax liabilities attributable to the Company's earnings.
Distributions have generally been made on a quarterly basis as needed to satisfy
such tax liabilities, except as discussed in the paragraph below. The Company
made aggregate cash distributions to its shareholders of approximately $14.4
million, $4.7 million and $4.0 million in 1996, 1995 and 1994, respectively.
Concurrent with the consummation of the offering, the Company converted to a C
Corporation and is subject to federal and certain state income taxes. The
Company does not anticipate paying cash dividends on its common stock in the
foreseeable future and intends to retain its earnings to support operations and
finance expansion.
<PAGE>
 
     Immediately prior to the consummation of the offering, the Company declared
and made an S corporation distribution of approximately $3.7 million,
representing previously taxed but undistributed earnings through June 30, 1996.
On December 31, 1996, the Company repaid notes in the approximate aggregate 
amount of $5.2 million that were issued immediately prior to the consummation of
the offering, which notes were the final S corporation distribution and 
represented earning from July 1, 1996 to the consummation of the offering.

     The Company intends to increase the number of its manufacturing, and to a
lesser extent, distribution facilities, primarily through acquisitions.
Management believes there are currently a number of acquisition opportunities in
the manufactured housing and RV industries, and from time to time additional
opportunities will arise. Possible acquisitions will vary in size and the
Company will consider larger acquisitions that could be material to the Company.
In order to finance any such possible acquisitions, the Company may use cash
flow from operations, may attempt to borrow additional amounts under its credit
arrangements, may seek to obtain additional debt or equity financing or may use
its equity securities as consideration. The availability and attractiveness of
any outside sources of financing will depend on a number of factors, some of
which will relate to the financial condition and performance of the Company, and
some of which will be beyond the Company's control, such as prevailing interest
rates and general economic conditions. The Company's existing credit facilities
require the Company to obtain the prior consent of the lenders for acquisitions
in excess of an aggregate of $15.0 million during any previous four quarters.
There can be no assurance that the Company will be able to acquire any
manufacturing or distribution facilities, or that any such facilities acquired
will be or become profitable.

     Management believes the net proceeds from the initial public offering,
together with cash flow from operations and additional borrowings under its
revolving credit facility, will be adequate to fund the operations and current
expansion plans of the Company. However, in order to provide any additional
funds necessary for the continued pursuit of the Company's growth strategies,
the Company may incur, from time to time, additional short- and long-term bank
indebtedness and may issue, in public or private transactions, its equity and
debt securities, the availability and terms of which will depend upon market and
other conditions. There can be no assurance that such additional financing will
be available or, if available, will be on terms acceptable to the Company.

ASSET MANAGEMENT

     The Company actively manages its assets and liabilities. All corporate and
profit center managers participate in an incentive-based compensation plan that
measures the individual's effectiveness in net asset control and return on net
assets employed. Managers are rewarded for receivables collection, inventory
control and profits in relation to these and other net assets employed.

     For the year ended December 31, 1996, days sales in average receivables was
approximately 22 days, days sales in average inventory was approximately 33 days
and days sales in average payables was approximately 27 days.

INFLATION

     Generally, inflation and changing prices have had a minimal impact on
Kevco's operating results, as increases in the sales prices of products have
closely followed increases in materials costs.

FORWARD-LOOKING STATEMENTS

     Certain statements contained in this annual report which are not historical
facts are forward-looking statements that involve risks and uncertainties,
including, but not limited to, the impact of competitors' pricing, product
quality and related features; the cyclical nature and seasonality of the
manufactured housing and RV markets; the dependence of the Company on its
principal customers and key suppliers; and other risks detailed in the Company's
Securities and Exchange Commission filings, including those set forth in the
Prospectus relating to the Company's initial public offering.
<PAGE>
 
QUARTERLY RESULTS

     The following table represents certain unaudited financial information for
  the quarters indicated.

<TABLE> 
<CAPTION> 
                             1ST QUARTER  2ND QUARTER  3RD QUARTER  4TH  QUARTER
                             -----------  -----------  -----------  ------------
                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                          <C>          <C>          <C>          <C>    
YEAR ENDED DECEMBER 31,
 1996(1):
  Net sales....................  $64,234      $71,364      $69,449     $62,296
  Operating income.............    3,557        4,526        4,365       3,909
  Income before income
   taxes.......................    3,010        4,015        3,798       3,477
  Pro forma net income(2)......    1,836        2,449        2,355       2,156
  Pro forma earnings per
   share(2)(3).................     0.39         0.51         0.46        0.35

YEAR ENDED DECEMBER
 31, 1995(1):
  Net sales....................  $27,567      $28,734      $62,714     $63,504
  Operating income.............    1,198        1,056        2,826       3,283
  Income before income
   taxes.......................    1,151          943        2,173       2,759
  Pro forma net income(2)......      702          575        1,326       1,683
  Pro forma earnings per
   share(2)(3).................     0.14         0.12         0.27        0.34

YEAR ENDED DECEMBER
 31, 1994:
  Net sales....................  $22,311      $24,837      $26,399     $25,732
  Operating income.............    1,249        1,189        1,481         860
  Income before income taxes...    1,182        1,122        2,209         785
</TABLE>

(1)  The Company acquired Service Supply on June 30, 1995.  The acquisition was
     accounted for as a purchase and, accordingly, the operating results of
     Service Supply have been included in the operating results of the Company
     since June 30, 1995.

(2)  Prior to the initial public offering, the Company had elected to be treated
     as an S corporation under the provisions of Subchapter S of the Internal
     Revenue Code. As an S corporation, the Company was not subject to federal
     and certain state income taxes. The pro forma data give effect to the
     income taxes that would have been recorded had the Company been taxed as a
     C corporation.

(3)  Reflects the assumed issuance of shares of Common Stock at the initial
     public offering price of $12.00 per share, less underwriting discount, to
     generate sufficient funds to pay an S corporation distribution in an amount
     equal to undistributed earnings previously taxed at the stockholder level.

<PAGE>
 
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
                                                                               December 31,
                                                                  --------------------------------------
                                 ASSETS                                   1996                1995
                                                                  ------------------    ----------------
<S>                                                               <C>                   <C> 
Current assets:                                                  
 Cash and cash equivalents                                        $        2,078        $          977
 Trade receivables (less allowance for doubtful accounts                   
   of $100 and $160 in 1996 and 1995, respectively)                        9,458                14,769
 Inventories                                                              22,792                18,383
 Prepaid expenses and other                                                  338                   343
 Deferred income taxes                                                       195                     -
                                                                  --------------        --------------

     Total current assets                                                 34,861                34,472  
Property and equipment, net                                               10,208                 9,758
Intangible assets, net                                                     9,495                10,162
Other assets                                                                 440                   459
                                                                  --------------        -------------- 
     Total assets                                                 $       55,004        $       54,851
                                                                  ==============        ==============
                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
 Trade accounts payable                                           $        6,666        $       11,258
 Accrued liabilities                                                       3,107                 3,231
 Income taxes payable                                                        762                     -
 Current portion of long-term debt                                           367                 1,057
                                                                  --------------        --------------
    
     Total current liabilities                                            10,902                15,546
                                                     
Long-term debt, less current portion                                       9,464                30,206
Deferred compensation obligation                                             383                   361
Deferred income taxes                                                        604                     -
                                                                  --------------        --------------    

     Total liabilities                                            $       21,353        $       46,113
                                                                  --------------        --------------    

Commitments and contingencies (Note 8)

Stockholders' equity:
 Common stock, $.01 par value; 100,000 shares authorized;
  6,809 and 4,700 shares issued in 1996 and 1995, respectively                68                    47
 Additional paid-in capital                                               32,854                 3,034
 Loan to stockholder                                                           -                (3,437)
 Retained earnings                                                           729                 9,842
 Treasury stock, 306 shares at cost                                            -                  (748)
                                                                  --------------        --------------    

     Total stockholders' equity                                   $       33,651        $        8,738
                                                                  --------------        --------------    

          Total liabilities and stockholders' equity              $       55,004        $       54,851
                                                                  ==============        ==============    
</TABLE>                                                        
       The accompanying notes are an integral part of the consolidated 
                             financial statements.

<PAGE>
 
                       CONSOLIDATED STATEMENTS OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                        ----------------------------------                  
                                                          1996         1995         1994
                                                        ---------    ---------    --------   
<S>                                                     <C>          <C>
Net sales                                               $ 267,344    $ 182,519    $ 99,279
Cost of sales                                             226,765      155,877      83,625
                                                        ---------    ---------    --------   
     Gross profit                                          40,579       26,642      15,654
Commission income                                           5,497        2,610       1,066
                                                        ---------    ---------    --------   
                                                           46,076       29,252      16,720
Selling, general and administrative expenses               29,723       20,889      11,941
                                                        ---------    ---------    --------   
     Operating income                                      16,353        8,363       4,779
Interest income                                               151          355         346
Interest expense                                           (2,209)      (1,692)       (627)
Other income                                                    -            -         800
                                                        ---------    ---------    --------   
        Income before income tax provision                 14,295        7,026       5,298
Income tax provision                                        1,307           45          51
                                                        ---------    ---------    --------   

     Net income                                         $  12,988    $   6,981    $  5,247
                                                        =========    =========    ========   

Pro forma information (unaudited) (Note 1):
   Historical income before income taxes                $  14,295    $   7,026    $  5,298
   Income tax expense adjustments                           5,432        2,740       2,066
                                                        ---------    ---------    --------
   
   Pro forma net income                                 $   8,863    $   4,286    $  3,232
                                                        =========    =========    ========   

   Pro forma earnings per share                             $1.60        $0.87       $0.65
                                                        =========    =========    ========   

   Weighted average shares outstanding                      5,531        4,946       4,946
</TABLE> 

<PAGE>
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                      
                                   Common Stock        Treasury Stock      Additional   
                                 ----------------     ----------------      Paid-in        Loan to       Retained 
                                 Shares    Amount     Shares    Amount      Capital      Stockholder     Earnings      Total 
                                 ------    ------     ------    ------    -----------    -----------     --------     -------- 
<S>                              <C>       <C>        <C>       <C>       <C>            <C>             <C>         <C>
Balance at December 31, 1993       4,700   $  47         306    $ (748)   $    2,837     $    (4,937)    $  6,338     $  3,537


Net income                             -       -           -         -             -               -        5,247        5,247
Distribution to stockholders           -       -           -         -             -               -       (4,022)      (4,022)
Collections from stockholder           -       -           -         -             -             750            -          750
                                 -------   -----      ------    ------    ----------     -----------     --------     -------- 

Balance at December 31, 1994       4,700      47         306      (748)        2,837          (4,187)       7,563        5,512


Net income                             -       -           -         -             -               -        6,981        6,981
Distribution to stockholders           -       -           -         -             -               -       (4,702)      (4,702)
Collections from stockholder           -       -           -         -             -             750            -          750
Contributed capital                    -       -           -         -           197               -            -          197
                                 -------   -----      ------    ------    ----------     -----------     --------     -------- 

Balance at December 31, 1995       4,700      47         306      (748)        3,034          (3,437)       9,842        8,738


Net income                             -       -           -         -             -               -       12,988       12,988
Distribution to stockholders           -       -           -         -             -               -      (14,407)     (14,407)
Collections from stockholder           -       -           -         -             -             375            -          375
Distribution of loan to                
 stockholders                          -       -           -         -             -           3,062       (3,062)           -
Contributed capital                    -       -           -         -            86               -            -           86
Retirement of treasury stock        (306)     (3)       (306)      748          (745)              -            -            -
Contribution of S corporation                                                                             
 retained earnings with change                                                                            
 to C corporation status               -       -           -         -         4,632               -       (4,632)           -      

Issuance of stock                  2,415      24           -         -        25,847               -            -       25,871
                                 -------   -----      ------    ------    ----------     -----------     --------     -------- 

Balance at December 31, 1996       6,809   $  68           -    $    -    $   32,854     $         -     $    729     $ 33,651
                                 =======   =====      ======    ======    ==========     ===========     ========     ======== 
</TABLE> 
        The accompanying notes are an integral part of the consolidated
                             financial statements.
 
<PAGE>
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                             ------------------------------------------------------------      
                                                                 1996                    1995                     1994
                                                             ------------            ------------            ------------  
<S>                                                          <C>                     <C>                     <C> 
Cash flows from operating activities:
  Net income                                                  $  12,988               $   6,981              $   5,247
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation and amortization                               1,792                   1,041                    399
      Gain on sale of assets                                        (10)                    (16)                   (11)
      Deferred compensation obligation                               22                      28                     (7)
      Deferred income taxes                                         409                       -                      -
      Changes in assets and liabilities, 
        net of effects from purchase of 
        Service Supply Systems, Inc.:
          Trade receivables, net                                  5,311                  (2,014)                  (835)
          Inventories                                            (4,409)                 (1,127)                (1,335)
          Prepaid expenses and other                                  5                      71                     (9)
          Trade accounts payable                                 (4,592)                  3,650                   (591)
          Accrued liabilties                                       (124)                   (166)                   218
          Income taxes payable                                      762                       -                      -
                                                              ---------               ---------              ---------   
            Net cash provided by operating activities            12,154                   8,448                  3,076
                                                              ---------               ---------              ---------   
                                        
Cash flows from investing activities:
  Purchase of equipment                                          (1,586)                 (2,844)                  (432)
  Proceeds from sale of assets                                       21                     594                     11
  Decrease in other assets                                           19                     180                    (47)
  Purchase of Service Supply Systems, Inc.,
    net of cash acquired                                              -                 (17,449)                     -
  Loan origination fees                                               -                    (913)                     -
                                                              ---------               ---------              ---------   

            Net cash used by investing activities                (1,546)                (20,432)                  (468)
                                                              ---------               ---------              ---------   

Cash flows from financing activities:
  Net proceeds from initial public offering                      25,871                       -                      -
  (Payment) proceeds from line of credit                         (6,500)                 (4,587)                 2,400   
  Payments of long-term debt                                    (14,932)                 (1,900)                (1,578)
  Proceeds from lont-term debt                                        -                  30,700                      -
  Payment of acquired debt                                            -                  (8,124)                     -
  Distributions paid                                            (14,407)                 (4,702)                (4,022)
  Capital contributions                                              86                     197                      -
  Collections on loan to stockholder                                375                     750                    750
                                                              ---------               ---------              ---------   

            Net cash (used) provided by financing activities     (9,507)                 12,334                 (2,450)
                                                              ---------               ---------              ---------   

Net increase in cash and cash equivalents                         1,101                     350                    158

Beginning cash and cash equivalents                                 977                     627                    469
                                                              ---------               ---------              ---------   
 
Ending cash and cash equivalents                             $    2,078               $     977              $     627
                                                              =========               =========              =========   
</TABLE>
                                  (Continued)

<PAGE>
 


<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                -------------------------------
                                                  1996        1995       1994
                                                --------    --------    -------
<S>                                             <C>         <C>         <C> 
Supplemental cash flow information:
  Cash paid during the period for:
    Interest                                    $  2,162    $  1,471    $   604
                                                ========    ========    =======
 
    Income taxes                                $    456    $     45    $    51
                                                ========    ========    ======= 
</TABLE> 
                           
Supplemental schedule of noncash investing and financing activities:
 
The Company distributed the loan to stockholder of $3,062 to the Company's
stockholders effective June 30, 1996.
 
During 1995, the Company purchased all of the capital stock of Service Supply
Systems, Inc. for $17,700. In conjunction with the acquisition, liabilities were
assumed as follows:


    Fair value of assets acquired                           $   32,400
    Cash paid for the capital stock                             17,700
                                                            ----------

       Liabilities assumed                                  $   14,700
                                                            ==========

Of the $14,700 in liabilities assumed, $8,100 was immediately paid off with the
proceeds from long-term debt.

Noncompete obligations of $544 were incurred when the Company purchased Service
Supply Systems, Inc. and entered into two noncompete agreements which are being
amortized over the life of the agreements.



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

<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     DESCRIPTION OF OPERATIONS

     Kevco, Inc. manufactures and distributes products and materials for use by
     the manufactured housing and recreational vehicle industries.

     BASIS OF CONSOLIDATION

     The accompanying consolidated financial statements include the accounts of
     Kevco, Inc. and its wholly-owned subsidiaries (the "Company").  All
     significant intercompany transactions and accounts have been eliminated.

     CASH AND CASH EQUIVALENTS

     For purposes of reporting cash flows, cash and cash equivalents include
     cash on hand, deposits with banks and all highly liquid investments with
     original maturities of three months or less.  The carrying value of cash
     and cash equivalents approximates fair value as of December 31, 1996 and
     1995.

     INVENTORIES

     Inventories are stated at the lower of cost or market.  Inventories
     purchased for resale are valued using the last-in, first-out (LIFO) method.
     Manufactured inventories are valued using the first-in, first-out (FIFO)
     method.  Had the first-in, first-out method been used to determine
     purchased inventory cost, inventories would have increased by approximately
     $1,474,000 and $1,258,000 at December 31, 1996 and 1995, respectively.  For
     the years ended December 31, 1996 and 1995, the percentage of inventory
     valued at LIFO was 71% and 81%, respectively.

     PROPERTY AND EQUIPMENT

     Property and equipment are carried at cost less accumulated depreciation.
     Additions to and major improvements of property and equipment are
     capitalized.  Maintenance and repair costs are expensed as incurred.  When
     assets are retired or otherwise disposed of, their costs and related
     accumulated depreciation are removed from the accounts and any resulting
     gains or losses are included in the operations for the period.

<PAGE>
 
     PROPERTY AND EQUIPMENT, CONTINUED

     Depreciation is computed using the straight-line method over the estimated
     useful lives of the assets as follows:
 
           Buildings                            40 years
           Furniture and equipment         5 to 10 years
           Transportation equipment        4 to 10 years
           Leasehold improvements               10 years
 
     INTANGIBLE ASSETS

     Intangible assets are comprised of noncompete agreements, loan origination
     fees and goodwill.  Noncompete agreements are amortized on a straight-line
     basis over the terms of the related agreements (24 to 30 months).   Loan
     origination fees associated with the acquisition of the Company's term debt
     and revolving credit facility have been capitalized and are being amortized
     on a straight-line basis over five years.  The excess of acquisition cost
     of acquired businesses over the fair value of net assets acquired
     ("goodwill") is amortized, using the straight-line method, over 40 years.
     The Company reviews goodwill to assess recoverability periodically.  At
     each balance sheet date, management assesses whether there has been a
     permanent impairment in the value of goodwill by considering factors such
     as expected future operating income, current operating results, and other
     economic factors.  Management believes no impairment has occurred.

     DEFERRED COMPENSATION OBLIGATION

     The Company has entered into deferred compensation agreements with certain
     employees, whereby payments will be made upon death or retirement for a ten
     year period and such liability has been recorded at the present value of
     the anticipated future payments.
 
     REVENUE RECOGNITION

     Revenue from product sales is recognized at the time of shipment or the
     time of receipt in the case of direct shipments from vendors to customers.
     Commissions are recognized as earned.

<PAGE>
 
     INCOME TAXES

     Income taxes are provided based on earnings reported for tax return
     purposes in addition to a provision for deferred income taxes in accordance
     with SFAS No. 109, Accounting for Income Taxes.  The provision for income
     taxes includes deferred taxes determined by the change in the deferred tax
     liability (or asset) which is computed based on the differences between the
     financial statement and income tax bases of assets and liabilities, all of
     which are measured by applying enacted tax laws and rates.  Deferred tax
     expense is the result of changes in the deferred tax liability or asset.

     INTEREST RATE HEDGE

     The Company entered into an interest rate hedge agreement in conjunction
     with its primary credit facility to alter interest rate exposure on both
     the revolver and the term debt.  Amounts expected to be paid or received on
     the interest rate hedge are recognized as adjustments to interest expense.
     Any gain or loss from the termination of this hedge agreement will be
     recognized at that time.

     CONCENTRATION OF CREDIT RISK

     The Company's sales are primarily to the manufactured housing and
     recreational vehicle industries across a wide geographical area and
     generally require no advance payment from customers.  The Company had
     sales to two customers representing approximately 16% and 14% of net sales
     in 1996.

     The Company estimates future credit losses based on continual evaluation of
     customers' financial condition, historical loss experience and current
     economic conditions.  The estimated future credit losses are expensed
     through an allowance for doubtful accounts and actual credit losses are
     charged to the allowance when incurred.

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the dates of the
     financial statements and the reported amounts of revenues and expenses in
     the reporting periods.  Actual results could differ from those estimates.

<PAGE>
 
     STOCK SPLIT

     On August 29, 1996, the Company effected a .47-for-1 reverse stock split of
     its common stock.  All share and per share amounts included in the
     accompanying financial statements and notes have been restated to reflect
     the stock split.

     UNAUDITED PRO FORMA NET INCOME

     Pro forma net income represents the results of operations adjusted to
     reflect a provision for income tax on historical income before income
     taxes, which gives effect to the change in the Company's income tax status
     to a C corporation prior to the consummation of the Company's initial
     public offering.  The difference between the pro forma income tax rates
     utilized and the federal statutory rate of 35% relates primarily to state
     income taxes (5%, less effect of federal tax benefit).

     UNAUDITED PRO FORMA EARNINGS PER SHARE

     Historical net income per common share is not presented because it is not
     indicative of the ongoing entity.  Pro forma earnings per share have been
     computed by dividing pro forma net income by the weighted average number of
     shares of common stock outstanding during the period.  Pro forma earnings
     per share data has been presented to reflect the effect of the assumed
     issuance of that number of shares of common stock that would generate
     sufficient cash to pay an S corporation distribution in an amount equal to
     previously taxed but undistributed earnings.


2.   ACQUISITION:

     The Company purchased all of the capital stock of Service Supply Systems,
     Inc. ("Service Supply") on June 30, 1995 for approximately $17,700,000 and
     at that date merged Service Supply with and into the Company. The
     acquisition was accounted for as a purchase and, accordingly, the operating
     results of Service Supply have been included in the operating results of
     the Company since June 30, 1995. The acquisition cost in excess of the fair
     value of net assets of Service Supply of $7,087,000 has been accounted for
     as goodwill and will be amortized over its useful life of 40 years.

<PAGE>
 
3.   INVENTORIES:

     Inventories are comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                     Year ended 
                                                    December 31,
                                                -------------------
                                                   1996      1995
                                                ---------  --------
               <S>                              <C>        <C>  
               Raw materials                    $   4,385  $  2,314
               Work-in-process                        332       303
               Finished goods                       1,324       828
               Goods held for resale               16,751    14,938
                                                ---------  -------- 
                                                $  22,792  $ 18,383
                                                =========  ========
 
</TABLE>

4.   PROPERTY AND EQUIPMENT:

     Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                     Year ended
                                                    December 31,
                                                -------------------
                                                   1996      1995
                                                ---------  --------
               <S>                              <C>        <C>  
               Land                             $     242  $    242
               Buildings                            5,195     4,774
               Furniture and equipment              6,181     5,213
               Transportation equipment             3,277     3,232
               Leasehold improvements                 564       503
                                                ---------  --------

                                                   15,459    13,964
               Less accumulated depreciation       (5,251)   (4,206)
                                                ---------  -------- 
                                                
                  Property and equipment, net   $  10,208  $  9,758
                                                =========  ======== 
</TABLE>

     Property and equipment under capital leases consists of buildings of
     $2,231,000 and furniture and equipment of $640,000 for the years ended
     December 31, 1996 and 1995, and accumulated depreciation of $1,982,000 and
     $1,846,000 for the years ended December 31, 1996 and 1995, respectively.

<PAGE>
 
5.   INTANGIBLE ASSETS:

     Intangible assets consist of the following (in thousands):
<TABLE> 
<CAPTION>  
                                              Year ended
                                             December 31,
                                         --------------------
                                           1996        1995
                                         --------    --------
        <S>                              <C>         <C> 
        Goodwill                         $  9,113    $  9,113
        Loan origination fees                 913         913
        Noncompete agreements                 544         544
                                         --------    --------
                                           10,570      10,570
        Less accumulated amortization      (1,075)       (408)
                                         --------    --------

            Intangible assets, net       $  9,495    $ 10,162
                                         ========    ========
</TABLE>


6.   LONG-TERM DEBT:

     Long-term debt consists or the following (in thousands):

<TABLE>
<CAPTION>   
                                                           Year ended
                                                          December 31,
                                                       ------------------ 
                                                        1996       1995
                                                       -------   --------
     <S>                                               <C>       <C> 
     Revolving credit facility payable to a bank,
     due June 30, 1998, with interest payable
     monthly.  Interest is paid at the bank's prime
     rate or LIBOR rates based on pricing options
     elected by the Company plus a margin
     determined by operating statistics of the
     Company (8.25% and 7.93% at December
     31, 1996 and 1995, respectively), $11,611
     net of an outstanding letter of credit in the
     amount of $389, was available under the
     credit facility at December 31, 1996.             $ 8,000   $ 14,500
 
     Term debt payable to a bank with interest
     payable monthly and quarterly principal
     payments of $625 commencing on
     October 1, 1996 until maturity at June 30,
     2001.  Interest is paid at LIBOR rates
     based on pricing options selected by the
     Company plus a margin determined by
     operating statistics of the Company
     (7.54% at December 31, 1995).                           -     14,500
</TABLE> 

<PAGE>
 

<TABLE> 
<CAPTION> 
                                                           Year ended
                                                          December 31,
                                                       ------------------ 
                                                        1996       1995
                                                       -------   --------
                                                         (in thousands)
     <S>                                               <C>       <C>         
     Capital lease obligations to a
     related party,
     collateralized by equipment,
     maturing through
     2007, with interest rates from                              
     13.9% to 26.8%.                                   $ 1,548   $  1,681
 
 
     Obligations payable under
     noncompete and consulting agreements, 
     due in 24 to 48 months with payments 
     ranging from $3,000 to $10,833 per 
     month, maturing through 1999, interest 
     imputed at 8.50%.                                     283        582
                                                       -------   --------
 
     Totals                                              9,831     31,263
     Less current portion                                 (367)    (1,057)
                                                       -------   -------- 
                                                       $ 9,464   $ 30,206
                                                       =======   ======== 
</TABLE> 
 
     The term debt and revolving credit facility are collateralized by
     substantially all of the assets of the Company and its subsidiaries,
     including a pledge of all outstanding capital stock of such subsidiaries.
     The related credit agreement contains certain restrictions and conditions
     which include cash flow requirements, limitations on acquisitions of
     property and equipment, and restrictions on distributions to stockholders.
 
     The following are scheduled maturities of debt (in thousands):
 
<TABLE> 
<CAPTION> 

               Year Ending
              December 31,
              ------------
              <S>                                     <C> 
                 1997                                 $    367
                 1998                                    8,131
                 1999                                      127
                 2000                                      114
                 2001                                      111
              Thereafter                                   981
                                                      -------- 
                                                      $  9,831
                                                      ========
 </TABLE>

     In addition, in order to reduce interest rate risk on the credit facility,
     the Company has entered into an interest rate hedge agreement in the
     notional amount of $15.0 million, whereby the Company will receive interest
     payments should LIBOR increase above 9.00% and, conversely, will make
     interest payments should LIBOR decrease below 5.25%, the effect of which
     limits the Company's interest expense within the range of 9.00% to 5.25%
     LIBOR on $15.0 million of debt. Management intends to hold the 

<PAGE>
 
     interest rate hedge until maturity on August 28, 1998.  The Company has
     incurred no gain or loss related to this interest rate hedge for the year
     ended December 31, 1996.  The fair value of the interest rate hedge
     agreement is not considered to be material.

     The fair value of long-term debt was $10.6 and $32.0 million as of December
     31, 1996 and 1995, respectively.  The fair value of the Company's long-term
     debt was calculated by discounting future cash flows using an estimated
     fair market value interest rate.

     In February 1997, the Company and its lender amended the credit agreement
     in order to fund the acquisitions discussed in Note 13.  The term debt was
     increased to $30.0 million and the revolving credit facility increased to
     $35.0 million, each maturing in 2001.  The term debt will be payable $0 in
     1997; $2 million in 1998; $8 million in 1999; $10 million in 2000; and $10
     million in 2001.  The interest rate structure, restrictions and conditions
     are similar to the credit agreement prior to amendment.

7.   INCOME TAXES:

     Prior to November 6, 1996, the Company was treated for federal and state
     income tax purposes as an S corporation under Subchapter S of the Internal
     Revenue Code.  As a result, the Company's earnings for such period were
     taxed at the stockholder level. Effective November 6, 1996, the Company
     terminated its S corporation status and restructured to create an operating
     company with a subsidiary.  From November 6, 1996, the Company's earnings
     have been taxed as a C corporation and provisions for income taxes have
     been reflected in the consolidated financial statements.  The Company
     recorded a nonrecurring net deferred tax provision of approximately
     $353,000 associated with the recognition of a related deferred tax
     liability due to the termination of the Company's S corporation status.

     The provision for income taxes for the years ended December 31, 1996, 1995
     and 1994 consists of the following (in thousands):
<TABLE>
<CAPTION>
                                  Year ended December 31, 
                                  1996      1995      1994
                                --------  --------  -------
        <S>                     <C>       <C>       <C> 
        Federal: 
            Current             $    559  $      -  $     -
            Deferred                 352         -        -

        State:
            Current                  339        45       51
            Deferred                  57         -        -
                                --------  --------  -------
                                $  1,307  $     45  $    51
                                ========  ========  =======
</TABLE> 

<PAGE>
 
     Income taxes are provided for the tax effects of transactions reported in
     the financial statements and consist of taxes currently due plus deferred
     taxes related primarily to differences between the treatment of certain
     items for financial statement purposes and the treatment of those items for
     corporation tax purposes.  The deferred tax assets and liabilities
     represent the future tax return consequences of those differences, which
     will either be taxable or deductible when the assets and liabilities are
     recovered or settled.

     Significant components of the Company's deferred tax assets and liabilities
     at December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
        <S>                                            <C> 
        Deferred tax assets:
          Accrued liabilities                          $   205
          Allowance for doubtful accounts                   38
          Inventory capitalization                         188
          Deferred compensation                            148
          Capital leases                                   254
          Noncompete agreements                            123
                                                       ------- 
                        
                Total gross deferred tax assets            956
                                                       ------- 
        Deferred tax liabilities:
          Depreciation                                  (1,129)
          Inventory valuation                             (236)
                                                       ------- 

                Total gross deferred tax liabilities    (1,365)
                                                       -------

                     Net deferred tax liabilities      $  (409)
                                                       =======

        Current deferred income tax asset              $   195
        Noncurrent deferred income tax liability          (604)
                                                       -------

                     Net deferred tax liabilities      $  (409)
                                                       ======= 
</TABLE>

<PAGE>
 
     The differences between the consolidated provision for income taxes and
     income taxes computed using income before income taxes and the U.S. federal
     income tax rate for the years ended December 31, 1996, 1995 and 1994 are as
     follows (in thousands):
<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                      1996     1995     1994
                                                    -------  -------  -------
    <S>                                             <C>      <C>      <C> 
    Amount computed using statutory rate (35%)      $ 5,003  $ 2,459  $ 1,854
    Increase (decrease) in taxes resulting from:
      Recognition of deferred tax liability
         in connection with S corporation                             
         termination                                    353        -        -
      State income taxes                                225       45       51
      Tax effect of income not subject to
         federal tax due to corporation S status     (4,290)  (2,459)  (1,854)
      Other, net                                         16        -        -
                                                    -------  -------  -------
                                                    $ 1,307  $    45  $    51
                                                    =======  =======  ======= 
</TABLE>

8.   COMMITMENTS AND CONTINGENCIES:

     LEASES

     The Company leases various equipment and buildings under capital and
     noncancelable operating leases with an initial term in excess of one year.
     As of December 31, 1996, future minimum rental payments required under
     these capital and operating leases are summarized as follows (in
     thousands):
<TABLE>
<CAPTION>
 
 
                                       Capital          Operating
                                       Leases             Leases
                                      ---------         ---------
               <S>                    <C>               <C>     
               1997                   $     432         $  2,175
               1998                         363            1,926
               1999                         340            1,375
               2000                         340              995
               2001                         304              759
            Thereafter                    1,573              690
                                      ---------         --------

            Total                         3,352         $  7,920
                                                        ========

            Less amount representing 
             interest                    (1,804)
                                      ---------
            Present value of minimum 
             lease payments           $   1,548
                                      =========
</TABLE>

<PAGE>
 
     Rental expense for operating leases was $3,839,000, $2,640,000 and
     $1,574,000 for the years ended December 31, 1996, 1995 and 1994,
     respectively.

     EMPLOYMENT AGREEMENTS

     The Company has entered into an employment agreement with its majority
     stockholder for a five-year term renewable annually and has entered into a
     consulting agreement with a former stockholder through October 1998.

     LITIGATION

     There are claims and pending actions incident to the business operations of
     the Company. Management does not expect resolution of these matters to have
     a material adverse effect on the Company's financial position or future
     results of operations or cash flows.


 9.  RETIREMENT PLAN:

     The Company has a defined contribution retirement plan which covers
     substantially all full-time employees and is qualified under Section 401(k)
     of the Internal Revenue Code. Under the plan, employees may voluntarily
     contribute a percentage of their compensation to the plan and the Company
     may make discretionary contributions.  The Company's contributions to the
     plan for the years ended December 31, 1996, 1995 and 1994 were $100,000,
     $225,000 and $150,000, respectively.


10.  RELATED PARTY TRANSACTIONS:

     The Company leases certain buildings and data processing equipment under
     capital leases from partnerships partially owned by the majority
     stockholder of the Company. Two of the leased warehouses were financed
     through economic development and industrial revenue bonds; one series of
     which was issued by Newton, Kansas in the original principal amount of
     $575,000, and with respect to which, the Company is the sub-lessee of the
     premises and a co-guarantor, and one series of which was issued by Elkhart,
     Indiana in the original principal amount of $400,000, and with respect to
     which, the Company is the lessee of the premises and has agreed to perform
     the obligations of the lessor contained in the mortgage. Lease payments for
     the facilities and equipment were approximately $672,000 in each of the
     years ended 1996, 1995 and 1994.

<PAGE>
 
     The Company loaned its majority stockholder $5.0 in 1993, payable in
     monthly principal installments of $62,500 plus interest at 9% at December
     31, 1995, due November 1997. The Company distributed the loan to
     stockholder to the Company's stockholders effective June 30, 1996.


11.  OTHER INCOME:

     The Company received $800,000 in 1994 from a disability insurance policy on
     a former stockholder who was determined disabled and used the proceeds to
     retire a note payable to the former stockholder.


12.  STOCK-BASED COMPENSATION PLANS:

     The Company sponsors the Kevco, Inc. 1995 Stock Option Plan and the Kevco,
     Inc. 1996 Stock Option Plan (the "Plans"), which are stock-based incentive
     compensation plans. The Company applies APB Opinion 25 and related
     standards in accounting for the Plans. In 1995, the FASB issued FASB
     Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123").
     Adoption of the cost recognition provisions of SFAS 123 is optional and the
     Company has decided not to elect these provisions of SFAS 123. However,
     disclosures as if the Company adopted the cost recognition provisions of
     SFAS 123 in 1995 are required by SFAS 123 and are presented below.

     Under the Plans, the Company is authorized to issue up to 702,735 shares of
     common stock pursuant to "Awards" granted in the form of incentive stock
     options (intended to qualify under Section 422 of the Internal Revenue Code
     of 1986, as amended) and nonqualified stock options.  Awards may be granted
     to selected employees and directors of the Company.  During 1995 and 1996,
     the Company granted only nonqualified stock options under the Plans.

     NONQUALIFIED STOCK OPTIONS

     The Plans provide that the exercise price of any stock option will be
     determined by the Board of Directors on the date of grant. The stock
     options granted in 1995 or 1996 vest over periods of 10 years and 7 years,
     respectively. All options vested in November 1996, at the time of the
     initial public offering. In accordance with APB 25, the Company has not
     recognized any compensation cost for these stock options granted during
     1995 and 1996.

<PAGE>
 
     A summary of the status of the Company's stock options as of December 31,
     1995 and 1996, and the changes during the year ended on those dates is
     presented below:
<TABLE>
<CAPTION>
 
 
                                              Nonqualified Stock Options
                                      ------------------------------------------
                                              1996                  1995
                                      --------------------  --------------------
                                      Number of   Weighted  Number of   Weighted
                                      Shares of   Average   Shares of   Average
                                      Underlying  Exercise  Underlying  Exercise
                                       Options     Prices    Options     Prices
                                      ----------  --------  ----------  --------
    <S>                               <C>         <C>       <C>         <C>
    Outstanding at beginning of year      47,854    $ 5.64       -        N/A
    Granted                              393,450    $11.17     47,854    $5.64
    Exercised                               -         N/A        -        N/A
    Forfeited                             26,108    $10.42       -        N/A
    Expired                                 -         N/A        -        N/A
    Outstanding at end of year           415,196    $10.58     47,854    $5.64
    Exercisable at end of year           415,196    $10.58       -        N/A
    Weighted-average fair value of                                       
      options granted during the year     $1.84        -       $ 1.39      -
 
</TABLE>

     The fair value of each stock option granted is estimated on the date of
     grant using the minimum value method of option pricing with the following
     weighted-average assumptions for grants in 1995 and 1996, respectively:
     dividend yield of zero percent for both years; risk-free interest rates are
     different for each grant and range from 5.77% to 6.19%; and the expected
     lives of 5 and 3.5 years, respectively, for the 1995 and 1996 options. In
     determining the "minimum value," SFAS 123 does not require the volatility
     of the Company's common stock underlying the options to be calculated or
     considered because the Company was not publicly-traded when the options
     were granted.

<PAGE>
 
     The following table summarizes information about stock options outstanding
     at December 31, 1996:
<TABLE>
<CAPTION>
 
                    Options Outstanding          Options Exercisable
             ---------------------------------  ---------------------
                Number     Weighted   Weighted    Number     Weighted
              Outstanding   Average   Average   Exercisable  Average
    Exercise  at December  Remaining  Exercise  at December  Exercise
     Prices     31, 1996     Life      Price      31, 1996    Price
   --------- ------------- ---------  -------- ------------- --------
   <S>       <C>           <C>        <C>      <C>           <C>       
    $ 5.64       44,306       7.85    $ 5.64       44,306    $ 5.64
     11.17      370,890       5.66     11.17      370,890     11.17
                -------       ----    ------      -------    ------

                415,196       5.90    $10.58      415,196    $10.58
</TABLE>

     NET INCOME AND NET INCOME PER COMMON SHARE

     Had the compensation cost for the Company's stock-based compensation plans
     been determined consistent with SFAS 123, the Company's net income and net
     income per common share for 1995 and 1996 would approximate the pro forma
     amounts below (in thousands):
<TABLE>
<CAPTION>
 
                                         SFAS 123                    SFAS 123
                          As Reported    Pro Forma    As Reported    Pro Forma
                          December 31,  December 31,  December 31,  December 31,
                              1996          1996          1995          1995
                          ------------ ------------- ------------- -------------
    <S>                  <C>           <C>           <C>           <C>
    SFAS 123 charge            -             $711          -              $34
    Pro forma net income     $8,863        $8,422        $4,286        $4,265
    Pro forma net income
      per common share        $1.60         $1.52          $.87         $0.86
 
</TABLE>

     The effects of applying SFAS 123 in this pro forma disclosure are not
     indicative of future amounts. SFAS 123 does not apply to awards prior to
     1995, and the Company anticipates making awards in the future under its
     stock-based compensation plans.

<PAGE>
 
13.  SUBSEQUENT EVENTS:

     In February 1997, the Company acquired certain assets and liabilities of
     Consolidated Forest Products, L.L.C. for approximately $13,870,000.
     Consolidated Forest Products, L.L.C. is a privately held manufacturer of
     wood products based in Haleyville, Alabama.

     In February 1997, the Company acquired the common stock of Bowen Supply,
     Inc. for approximately $19,500,000.  Bowen Supply, Inc. is a privately held
     distributor of building products to the manufactured housing and
     recreational vehicle industries based in Americus, Georgia.

     The Company will account for these transactions under the purchase method.

<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Stockholders and Board of Directors
Kevco, Inc.
Fort Worth, Texas


We have audited the accompanying consolidated balance sheets of Kevco, Inc. as
of December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the two years in the
period ended December 31, 1996.  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.  The financial 
statements of Kevco, Inc. for the year ended December 31, 1994, were audited by 
other auditors, whose report, dated March 24, 1995, expressed an unqualified 
opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Kevco, Inc. as of
December 31, 1996 and 1995, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.

/s/ COOPERS & LYRBAND L.L.P.


Fort Worth, Texas
February 21, 1997