<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934. For the fiscal year period ended December 31, 1997 or ( ) Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition period from to
Commission file number 0-19335.
BUILDING MATERIALS HOLDING CORPORATION
Incorporated in the State of Delaware I.R.S. Employer Number 91-1834269
BUILDING MATERIALS HOLDING CORPORATION
One Market Plaza, Steuart Tower, Ste 2650, San Francisco, CA 94105
Telephone: (415)227-1650
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
TITLE OF CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
------
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of the close of business on
March 16, 1998 was $113,681,255.*
* Excludes 3,504,150 shares of Common Stock held by directors, officers, and
holders of more than 5% of the Company's shares outstanding at March 16,
1998. Exclusion of shares held by any person should not be construed to
indicate that such person possesses the power, direct or indirect, to direct
or cause the direction of the management or policies of the Registrant, or
that such person is controlled by or under common control with the
Registrant.
<TABLE>
<CAPTION>
Shares Outstanding
as of March 16,
Class 1998
- --------------------------------------------------- -------------------
<S> <C>
Common Stock
$.001 par value 12,333,762
</TABLE>
Documents Incorporated by reference
-----------------------------------
Listed hereunder are the documents any portions of which are incorporated by
reference and the Parts of this Form 10-K into which such portions are
incorporated:
1. The registrant's annual report for the fiscal year ended December 31,
1997, portions of which are incorporated by reference into Parts II and
IV of this Form 10-K, and
2. The registrant's definitive proxy statement dated March 31, 1998, for
use in connection with the annual meeting of shareholders to be held on
May 7, 1998, portions of which are incorporated by reference into
Part III of this Form 10-K.
<PAGE>
BUILDING MATERIALS HOLDING CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item PAGE
- ----------- -----
<C> <S> <C>
PART I
1. Business 1
2. Properties 12
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Registrant's Common Stock and Related Stockholder Matters 15
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure 17
PART III
10. Directors and Executive Officers of the Registrant 18
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
</TABLE>
<PAGE>
PART I.
Item 1. Business
Building Materials Holding Corporation ("BMHC") is a holding company
engaged, through its wholly owned subsidiary, BMC West Corporation ("BMC West"
or the "Company") in the distribution of building materials, selling primarily
to professional contractors as well as to project-oriented consumers (including
professional repair and remodel contractors hired by them). BMHC was formed to
centralize, at the holding company, responsibilities for acquisitions, financial
and administrative functions--including strategic, financial and capital
planning, corporate governance, and investor relations activities. In addition,
the holding company structure is intended to focus operational management of the
day-to-day activities. As part of this restructuring, the operating units of BMC
West have been divided into three major operating divisions, with plans to
create a fourth, with a division president having general responsibility for the
profitability of each division. This restructuring is intended to give local
management more focused responsibility and enhances the opportunity to recommend
the introduction of new products or services appropriate for a given market.
BMC West is a leading regional distributor and retailer of building
materials. In addition to distributing products from manufacturers, the Company
conducts value-added conversion activities which include fabricating pre-hung
doors, roof trusses, pre-assembled windows and pre-cutting lumber to meet
customer specifications. The Company operates 55 building materials centers
located in Arizona, California, Colorado, Idaho, Montana, Nevada, Oregon, Texas,
Utah, and Washington. Value-added activities are conducted at 49 separate
facilities, most of which are located at building materials sites.
BMC West targets primarily the professional contractor market, which is a
strategy distinct from that pursued by the high-volume, consumer-oriented home
center retailers now found throughout the United States. The Company's
professional contractor market consists of persons engaged principally in the
construction of single-family homes and, to a lesser extent, multi-family units
and light commercial and industrial construction. Professional contractors
generally are large-volume, repeat customers requiring certainty of product
availability and delivery and a number of specialized services typically not
offered by home center retailers. The Company also targets the repair and
remodel market which consists generally of project-oriented consumers and
contractors hired by them, who engage primarily in substantial projects such as
room additions, kitchen or bathroom remodeling and fence or deck installations.
BMC West develops long-term relationships with its customers by providing
them with a broad range of high-quality products and services. Each of the
Company's building materials centers tailors its product and service mix to meet
the demands of the local market. The Company's products, which include lumber,
panel products, roofing materials, pre-hung doors, roof trusses, pre-assembled
windows, cabinets, hardware, paint and tools, are used primarily for new
residential construction, light commercial construction and repair and
remodeling projects. These products are sold by experienced professionals
consisting of both field sales personnel and facility based sales and support
personnel. The Company offers its customers various services, including
assistance with project designs and materials specifications, coordination of
delivery of orders to
<PAGE>
job sites, provision of credit to pre-approved contractors and referral of
retail customers to pre-qualified contractors. Complete home packages
(delivered to the sites of the Company's builder customers according to their
construction schedules) account for a significant amount of total sales. In
each of the last three years, professional contractors accounted for
approximately 75% to 78% of net sales, and project-oriented consumers or the
contractors hired by them, accounted for approximately 21% to 24% of net
sales.
Industry Overview
The building materials distribution industry is characterized by its
substantial size, highly fragmented ownership structure and dependence on the
cyclical and seasonal home building industry.
Building materials distributors generally concentrate on serving either
project-oriented professional contractors or price-oriented retail consumers.
Contractor-oriented building materials distributors, such as BMHC, tend to focus
on contractors and project-oriented consumers and compete principally on the
basis of service, product quality and availability, on-time delivery, credit
availability and reliability, as well as price. Home center retailers, on the
other hand, target the mass consumer market, in which competition is based
principally on price, merchandising, location and cooperative advertising.
Typically, contractor-oriented distributors offer a greater range of services
and a wider variety of high quality building products than home center
retailers.
The contractor-oriented building materials distribution industry is
characterized by a large number of privately owned, small, regional distribution
companies and single-site enterprises. These businesses are typically family
run, relationship-based operations which focus on offering service, delivery and
reliability to their customers. As a result of their size, many of these
businesses do not possess sophisticated working capital management and control
systems and generally lack the purchasing expertise of a large entity, such as
BMHC. Because of these factors, the Company believes that these businesses
include a number of attractive acquisition candidates.
The building materials distribution industry is closely linked to the
economic cycles and seasonality associated with the home building industry. The
Company monitors the issuance of new housing permits as an important indicator
of its potential future sales volume. Construction expenditures are largely a
function of new residential, commercial and industrial building demand and
repair and remodeling projects undertaken. Residential construction is closely
linked to new job formation, household formation, interest rates, housing
affordability, availability of mortgage financing, regional demographics and
consumer confidence. Commercial construction is significantly affected by
vacancy and absorption rates, interest rates, long-term regional economic
outlooks and the availability of financing. Industrial construction expenditures
are linked to the industrial economic outlook, corporate profitability, interest
rates and capacity utilization. In difficult economic environments, repair and
remodeling expenditures generally represent a greater percentage of housing
construction expenditures as new housing starts decline. BMHC centers target
participants in all of these sectors, although economic conditions frequently
dictate which sector they may emphasize at a given time. A key attribute of the
contractor-oriented building materials distribution industry is that
professional contractors typically use the same building materials supplier for
all of their projects. In order to generate and maintain this loyalty, suppliers
2
<PAGE>
generally focus on providing the professional contractor with service,
quality, on-time delivery and value-added services.
Geographic Markets
BMHC believes that it's subsidiary BMC West is well positioned in some of
the most attractive markets for building materials in the United States.
Population and migration trends in the Western markets served by BMC West, as
well as the relative strength of many of the local economies it serves, have
resulted in the growth of residential housing in these markets.
Operating Strategy
BMHC's operating strategy is to focus responsibility for day-to-day
operations at the local level. The building materials centers operate as
autonomous, decentralized units capable of meeting local market needs and
offering competitive prices. Each of the centers is part of one of three
divisions of the Company which are managed by a division president.
Management of the centers report to the division president who is charged
with responsibility for the overall profitability of the division. The
division presidents have substantial autonomy in managing their respective
divisions to achieve the Company's targeted goals of profitability. Center
managers have a substantial degree of control over inventory, merchandising
and pricing, and can develop their own specific programs to meet the needs of
their particular markets.
The Company's decentralized, microcomputer based, point-of-sale information
system provides each center manager with real-time pricing, inventory
availability and margin analysis. At the same time, the Company provides
centralized purchasing management, credit and financial controls, management
information systems, and training and marketing support. The compensation of
substantially all of the employees of each unit is based, in part, on the
performance of the individual unit and the division.
The Company believes that many of its building materials centers hold a first
or second place market share among professional contractors and that the
Company, as a whole, has the largest sales volume of any distributor of
building materials serving primarily professional contractors in its market
area. The Company intends to maintain its leadership position in these
markets by continuing to provide a broad range of high-quality products and
services to the professional contractor as well as the project-oriented
consumers and professional repair and remodel contractors hired by them. The
services provided by the Company include assisting customers with project
designs and materials specifications, delivering orders to job sites,
providing credit to pre-approved contractors, and referring retail customers
to pre-qualified contractors. In addition to distributing products from
manufacturers, the Company currently conducts value-added operations at 49
facilities (most of which are located at building materials sites) in nine
states, as compared to 16 such facilities in 6 states at the end of 1991.
Value-added facilities generally are constructed or acquired at or near a
center and can service a sales area depending on the market from 35 to 100
miles in radius. The Company plans to introduce value-added products such as
pre-hung doors, roof trusses and pre-assembled windows in more of the markets
served by the Company. These products generally carry higher gross margins
and have less price volatility than commodity wood products.
3
<PAGE>
BMHC's total quality management program defines quality as providing the
best products and services at the right place at the right time. The program
provides an environment for employees to identify cost reduction and margin
improvement opportunities, empowers employees to make significant contributions
and work together as a team, and measures BMHC's performance and follow-through
on improvement efforts. Quality teams at BMHC locations seek to make specific,
measurable improvements in the Company's critical processes, including order
processing, inventory control, delivery and customer assistance. These teams
include employees from all functional areas and backgrounds. The Company
supports this program through training and the sharing of ideas among locations.
The Company focuses on improving efficiency and productivity at all
locations with special attention and support to certain of the centers that the
Company believes are under-performing. The Company seeks to anticipate changes
in its market by adjusting the inventory product mix and services for the
professional contractor and project-oriented consumer and the contractors hired
by them. Such adjustments may have some minor impact on margins as we adjust
inventories. The Company is also exploring other alternatives for under
performing centers including consolidation and liquidation of real property. The
Company also is focusing on building new locations within markets where it has a
presence.
Acquisition Strategy
BMHC seeks acquisitions of building materials centers and value-added
facilities that serve the professional contractor and the project-oriented
consumer (including professional repair and remodel contractors hired by them)
in new and existing markets in the United States. The fragmented nature of the
industry presents to BMHC opportunities to acquire other multi-center
distributors that could be acquired as new stand-alone subsidiaries. In
addition, BMHC focuses on opportunities to acquire additional centers in the
geographic areas currently served by BMHC.
The management of BMHC have substantial experience in expanding building
materials supply businesses through acquisitions. Over the past several years,
management has contacted and visited many acquisition candidates. In addition,
BMHC is contacted regularly by persons seeking to sell their business. BMHC
believes that, due to professional contractor loyalty to existing centers, the
most expedient way to enter new geographic markets is through acquisitions. BMHC
also believes that the availability of a public market for its Common Stock
provides it with additional flexibility in pursuing acquisitions.
While the Company evaluates each potential acquisition candidate on its
individual merits, its primary objective has been to acquire profitable building
materials centers that meet certain general criteria. The typical targeted
acquisition candidate is located on a 5 to 10 acre site which includes 8,000 to
15,000 square feet of indoor showroom and contractor sales space and 20,000 to
50,000 square feet of covered storage area, with reasonable access to the local
road system and proximity to regional areas of construction demand. Additional
factors include the reputation of the center among local contractors and the
quality of the center's management and sales organization.
4
<PAGE>
Typically, after the acquisition of a center, the Company enhances the
center's sales and service capabilities and may expand its product offerings,
including value-added products, in an effort to increase sales. In addition, the
Company seeks to implement its accounting and management systems into each newly
acquired center. These systems assist in the effective management of the
Company's inventories and accounts receivable, and in efforts to improve
customer service. Purchasing will be handled at the division or corporate level
based on the cost savings.
In 1997, the Company completed five acquisitions involving two building
materials centers and six value-added facilities. Total consideration given was
$52,797,000, consisting of $40,231,000 cash, a long-term note for $3,700,000,
492,036 shares of common stock valued at $6,300,000, and other assumed operating
liabilities of $2,566,000. For those acquisitions completed in the fourth
quarter of 1997, preliminary purchase price allocations have been completed.
Management expects to finalize these allocation upon closure of the
transactions. The following chart sets forth the number of building materials
centers acquired and consolidated by the Company during each of the last two
fiscal years.
<TABLE>
<CAPTION>
Year Ended Year Ended
Dec. 31, 1997 Dec. 31, 1996
----------------- -----------------
<S> <C> <C>
Beginning balance............................ 53 52
Acquisitions................................. 5 1
Other*....................................... (3) --
---- ----
Ending balance............................... 55 53
-- --
---- ----
</TABLE>
* In 1997, the Company consolidated its San Marcos and Austin, Texas centers;
its Englewood and Denver, Colorado centers; and its Reno and Sparks, Nevada,
centers.
It is the objective of BMHC and the Company to continue to acquire
complementary businesses. BMHC and the Company continue to engage in discussions
with potential acquisition candidates. There can be no assurances that BMHC or
the Company will be able to continue to identify and complete successful
acquisitions in the future.
Products
Each BMHC unit carries a core of approximately 9,000 stock keeping units
("SKUs"), plus an average of an additional 6,000 SKUs, the product mix of which
varies by location. The Company's principal products include lumber, panel
products, engineered wood products, roofing materials, pre-hung doors,
roof trusses, pre-assembled windows, cabinets, hardware, paint and tools. In
addition to distributing such products, the Company conducts value-added
activities, which include fabricating pre-hung doors, roof trusses,
pre-assembled windows and pre-cutting lumber to meet customer specifications.
The following table sets forth information regarding the percentage of net
sales represented by the specified categories of products sold at the Company's
centers during each of the last two fiscal years. While the Company believes
that the percentages included in the table generally indicate
5
<PAGE>
the mix of the Company's sales by category of product, the specific
percentages are affected year-to-year by changes in the prices of commodity
wood products, as well as changes in unit volumes sold.
<TABLE>
<CAPTION>
Category of Product 1997 1996
- -------------------------------------------------- ----- -----
<S> <C> <C>
Wood products (lumber and panel products)......... 47% 47%
Building materials (roofing, siding, engineered
wood products, insulation and steel)........... 19 20
Millwork/Value-added (pre-hung doors, trusses,
windows & moldings)............................. 24 20
Other (paint, hardware, tools, electrical and
plumbing)....................................... 10 13
---- ----
100% 100%
---- ----
---- ----
</TABLE>
The Company fabricates roof trusses used to form roof support systems and
pre-hung door units and pre-assembled window units for the residential and light
commercial building markets. Door units are purchased and pre-assembled to
contractor specifications using a variety of moldings. The door, truss and
window product lines are particularly attractive since they generally bring
higher margins, have less price volatility, and are not offered by many building
materials centers or home center retailers. The Company believes that its
ability to provide pre-hung doors, roof trusses and pre-assembled windows in a
number of locations is a competitive advantage when soliciting business from
contractors. Inventories of door units, roof trusses and pre-assembled windows
are predominantly work-in-process, as these units are usually built-to-order.
The Company's customers generally order products, including pre-hung doors,
roof trusses, and pre-assembled windows on an as-needed basis. Therefore,
virtually all product shipments in a given fiscal quarter result from orders
received in that quarter. Consequently, order backlog represents only a very
small percentage of the product sales anticipated by the Company in a given
fiscal quarter and is not indicative of the Company's actual sales for any
future fiscal period.
As a distributor of building materials and products, the Company regularly
monitors innovations in product design to meet its customers' needs. The Company
test markets products that substitute for dimensional lumber and has for a
number of years distributed alternative products such as engineered wood
products and steel studs, and has provided its builder customers information and
instruction on the use of such products.
Sales and Marketing
Each of BMHC's divisions and 55 building materials centers tailors its
product and service mix to the local market and operates as a separate profit
center. The Company reaches its professional contractor customers, mainly
through field sales representatives, advertisements in trade journals and
local promotional events. The Company's customers include a broad base of
professional contractors and project-oriented consumers (including
professional repair and remodel contractors hired by them). No single
customer accounted for more than 1% of net sales in 1997.
6
<PAGE>
Professional Contractor Market
The professional contractor market is comprised of three major customer
segments: two segments are the new housing contractors, and commercial and
industrial contractors. In 1997, the Company's sales to these professional
contractors accounted for approximately 78% of net sales (this total includes
70% to new residential contractors and 8% to commercial and industrial
contractors). Professional contractors accounted for approximately 75% to 78% of
the Company's net sales in each of the last three years. A significant amount of
this business consisted of sales of complete house packages, including framing
lumber, panel products, pre-hung doors and trim packages, roof trusses,
pre-assembled windows and other products required to construct or improve a
home.
BMHC provides a wide range of customer services to contractors to meet their
needs for credit, delivery and expert assistance. While pricing is an important
purchasing criterion for these customers, the Company believes that other
factors such as coordinated, on-time deliveries, quality and availability of
products, relationships with salespeople, credit availability and technical
support are equally important. The Company believes that its skills in these
areas are important competitive advantages.
The Company's principal channel for reaching the professional contractor
market is a sales force of approximately 250 field sales representatives
supported by approximately 235 facility-based salespeople. Field sales
representatives actively solicit business and work with the facility-based
managers to develop bids for contractor projects. The Company provides sales
training for all sales representatives, and sales management training for all
sales managers and center managers. Sales representatives are compensated
through a combination of salary and commission based on individual sales volume
and gross margin.
BMC West's center managers ensure that building materials are delivered
according to contractor specifications and schedules. Technical personnel
involved in purchasing, dispatching, invoicing and credit, support both field
sales force and center managers to enhance customer satisfaction.
Repair and Remodel Market
The third major customer segment is the repair and remodel market which
consists generally of project-oriented consumers (including professional repair
and remodel contractors hired by them). In 1997, the Company's sales to these
customers accounted for approximately 21% of net sales and for approximately 21%
to 24% of net sales in each of the last three years. The Company's sales to this
market generally carry higher margins than sales to the professional contractor
market and also carry higher costs. The volume of sales to this market varies
depending on location, with the Company actively pursuing repair and remodel
business in smaller markets.
Credit
Overall credit policy for sales to contractors is established by corporate
management, but each center has responsibility for overseeing local accounts.
The individual center managers and their staff are trained to have a thorough
understanding of state lien laws, which provide security for the
7
<PAGE>
Company's accounts receivable. The Company's credit policies, together with
daily computer monitoring of customer balances, have resulted in average bad
debt expense of approximately 0.15% of net sales during the last five years,
with no single year exceeding 0.20%. The Company believes that its bad debt
expense levels are among the lowest in the industry. Approximately 89% of the
Company's sales in 1997 were made to customers to whom the Company had
extended credit for such sales.
Management Information Systems
BMHC's financial information, operational data, and other related
statistical information are processed and maintained at BMC West's headquarters
on a network of server computers and work stations. The Company's financial
reporting and relational database system was designed and customized for BMHC by
Oracle Corporation. The flexible nature of the Company's installed network
allows for the accumulation, processing and distribution of information using
industry standard computing resources and programs. The point-of-sale
information systems used by the Company operate on IBM RS6000 computers located
at each center, and are connected to the computers at headquarters via a high
speed frame relay network. These on-line systems provide real-time pricing,
inventory availability and margin analysis. This allows each center's sales
staff to offer a high level of customer service, while giving management the
ability to access and use timely information to improve operations. Management
believes that these systems also have enabled the Company to enhance profit
margins, improve inventory turnover through identification and elimination of
low-turnover items, accelerate analysis of sales trends, and better monitor
accounts receivable, employee productivity, customer credit limits and lien
protections.
Purchasing
The Company purchases merchandise from a large number of manufacturers and
suppliers. In 1997, the Company's largest supplier accounted for approximately
7% of the Company's total purchases. The Company does not believe that the loss
of any single supplier would have a material adverse effect on the Company.
The Company purchases its inventory on a centralized basis either at the
division or corporate level in order to capitalize on economies of scale,
although a limited amount of purchasing and all ordering is controlled at
individual centers in order to respond to local needs. Purchasing is controlled
at the location level in order to maintain local product needs and inventory
turns. Although the Company seeks to time its purchases to take advantage of
price movements, BMHC has a policy not to speculate in the commodity wood
products market.
Approximately 47% of the Company's 1997 sales were attributable to commodity
wood products. Prices of commodity wood products are subject to significant
volatility and directly affect the Company's sales. During 1997, the prices
of commodity wood products purchased and sold by the Company were on average
4.1% lower than in 1996 (the Company's total price deflator for 1997 was
about 2%). The Company has established purchasing and pricing procedures to
reduce exposure to inventory write-downs. The Company's commodity buyers
monitor inventory and sales levels in each location on a regular basis. With
this supply and demand information, buyers
8
<PAGE>
generally can avoid overstocking commodity wood products. As a result, the
Company turns its commodity product inventory approximately 12 times per
year. Such rapid inventory turnover limits the Company's potential exposure
to inventory loss from commodity price fluctuations. In addition, the
Company's real-time computer network allows the Company to adjust sales
prices as purchase prices of commodity products change.
In July 1996, the Company entered into a merchandise supply agreement with
TruServe for hardline products. Under the Agreement, BMC West terminated
existing affiliations with other distributors.
Competition
BMHC operates in a highly competitive environment. Due to the nature of the
industry, BMHC's competitive environment varies by location and by market
segment.
Within the professional contractor market, the Company competes primarily
with privately owned, single-site enterprises and local and regional building
materials chains. Professional contractors generally select building
materials centers on the basis of availability of knowledgeable personnel,
on-time delivery, reliable inventory levels, availability of credit and
competitive pricing. BMHC believes it competes favorably on each of these
bases. The Company's relatively large size also permits it to attract
experienced and professional sales and service personnel and provides BMHC
the resources to offer Company-wide product and service training programs. By
working closely with its contractor customers and utilizing the Company's
real-time management information system, BMHC's centers maintain appropriate
inventory levels and are well positioned to deliver completed orders on time
to individual job sites. Large home center retailers can prompt other local
suppliers to more aggressively pursue professional contractor business.
Within the repair and remodel market, BMHC competes primarily with local
lumberyards and hardware stores and, in certain of its markets, with larger home
center chains such as Home Depot, HomeBase and Lowe's. The Company believes that
it meets the needs of project-oriented consumers and repair and remodel
contractors more effectively than such competitors by (i) providing primarily
higher quality products within each category, (ii) offering consumers and
contractors access to knowledgeable staff and (iii) developing contractor
referral programs to address the requirements of consumers on larger projects.
Employees
The success of BMHC is highly dependent on the quality of its personnel at
all levels of the Company. The Company is facing increased competition in
attracting and retaining qualified employees. As a result, the Company maintains
well rounded and competitive compensation and fringe benefit programs to
attract, motivate and retain top performing individuals. In addition, the
Company provides extensive product knowledge, customer service, supervisory and
managerial training programs to assure employee and customer satisfaction.
9
<PAGE>
At December 31, 1997, BMHC employed approximately 3,500 persons, of which
approximately 260 were represented by unions. The Company has not experienced
any strikes or other work interruptions and has maintained generally favorable
relations with its employees. The following table shows the approximate
breakdown by job function of the Company's employees:
<TABLE>
<S> <C>
Officers, corporate and unit management, and corporate and unit administrative......... 23%
Field sales force (Outside/Inside Sales)............................................... 20%
Retail operations (Cashiers/Receiving/Sales Support)................................... 7%
Delivery (Truck Drivers, Load Builders, Yard).......................................... 33%
Manufacturing (Truss, Door and Window)................................................. 17%
</TABLE>
Executive Officers as of December 31, 1997
<TABLE>
<CAPTION>
Date First
Elected as
Name Age Position or Office An Officer
- -------------------------------- --- ----------------------------------------------- -----------
<S> <C> <C> <C>
George E. McCown 62 Chairman of the Board of Directors 1987
Robert E. Mellor 54 President, Chief Executive Officer and Director 1997
Donald S. Hendrickson 67 President, Chief Executive Officer of BMC West
and Director of BMHC 1987
Robert L. Becci 57 Vice President and Controller 1990
Richard F. Blackwood 60 Senior Vice President 1987
Leroy D. Custer 53 Vice President of Marketing and Purchasing of
BMC West 1990
Ellis C. Goebel 56 Senior Vice President- Finance and Treasurer 1987
Steven H. Pearson 50 Vice President of Human Resources 1987
</TABLE>
10
<PAGE>
Mr. McCown is Chairman of the Board of Directors of the Company and has been
a director since 1987. He was cofounder and has been a Managing General Partner
of MDC Management Company, the general partner of McCown De Leeuw & Co., since
1984, and was instrumental in financing and executing the leveraged buy-out of
the Company in 1987. Mr. McCown currently serves as a director of three publicly
held companies, Nimbus CD International, Inc., Specialty Paperboard, Inc., and
Vans, Inc. Mr. McCown also serves as a director of several privately held
companies.
Mr. Mellor serves as the President and Chief Executive Officer of BMHC. Mr.
Mellor was previously Of Counsel with the law firm of Gibson, Dunn & Crutcher
LLP from 1990 through February 15, 1997. He previously served as the Executive
Vice President and Chief Administrative Officer, and as a director of Di Giorgio
Corporation from 1987 to 1990. He joined Di Giorgio Corporation in 1976.
Mr. Hendrickson has served as President, Chief Executive Officer, and a
director of BMC West since its inception in November 1987. Mr. Hendrickson
retired from his role as President and CEO of BMC West on March 1, 1998. Mr.
Hendrickson will continue to serve as a director. Mr. Hendrickson currently
serves as Director-at-Large for Western Building Materials Association.
Mr. Becci has served as the Company's Controller since its inception in 1987
and was elected Vice President in 1990.
Mr. Blackwood is currently Senior Vice President and has served as Vice
President of Operations of the Company since 1987.
Mr. Custer has served as Marketing Manager of the Company since 1988 and was
elected Vice President of Marketing and Purchasing in 1990.
Mr. Goebel was promoted to Senior Vice President, Finance & Treasurer of
Building Materials Holding Corporation in August 1997. He served as Vice
President and Treasurer of the Company since its inception in November 1987.
Mr. Pearson has served as Vice President of Human Resources of the Company
since its inception in November 1987.
11
<PAGE>
Item 2. Properties
BMHC's headquarters is in San Francisco, California and BMC West's
headquarters is in Boise, Idaho. In addition to administrative buildings, the
Company has four primary types of facilities: building materials supply centers,
pre-hung door plants, truss plants, and pre-assembled window distribution
facilities. The Company believes that its facilities are well maintained and
generally are adequate for the Company's needs for the foreseeable future. All
of the Company's material assets, including land and facilities, are owned or
leased by the Company.
<TABLE>
<CAPTION>
State and Date Owned Leased
City Acquired Acreage Acreage
--------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ARIZONA--1
Phoenix........................................................ 1994 -- 12.7
CALIFORNIA--4
Atwater........................................................ 1990 -- 2.4
Fresno......................................................... 1989 13.1 --
Merced......................................................... 1987 2.9 1.0
Modesto........................................................ 1989 14.0 --
San Francisco
Headquarters.................................................. 1997 -- --
COLORADO -12
Aspen.......................................................... 1987 4.1 --
Boulder........................................................ 1990 10.0 --
Colorado Springs............................................... 1994 3.3 --
Denver Door.................................................... 1990 -- 1.6
Denver......................................................... 1994 8.7 --
Evergreen...................................................... 1990 3.7 --
Fort Collins................................................... 1990 4.6 .5
Fort Lupton*................................................... 1994 10.5 --
Grand Junction................................................. 1994 3.5 .5
Glenwood Springs............................................... 1990 2.0 --
Greeley........................................................ 1994 11.0 --
Pueblo......................................................... 1994 10.7 --
Steamboat Springs.............................................. 1987 1.4 2.8
IDAHO--7
Boise.......................................................... 1987 23.9 --
Boise (office)................................................. 1988 -- --
Emmett......................................................... 1987 2.6 --
Idaho Falls.................................................... 1987 11.5 1.0
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
State and Date Owned Leased
City Acquired Acreage Acreage
--------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
IDAHO
Lewiston....................................................... 1990 3.8 --
Meridian*...................................................... 1987 -- 3.8
Pocatello...................................................... 1987 4.6 --
Rexburg........................................................ 1987 1.9 --
Twin Falls..................................................... 1993 0.5 --
MONTANA--1
Great Falls.................................................... 1993 9.0 --
NEVADA--3
Carson City.................................................... 1992 7.6 --
Gardnerville................................................... 1992 4.4 --
Sparks......................................................... 1997 -- 11.0
OREGON--2
Beaverton...................................................... 1987 5.6 --
Wilsonville.................................................... 1997 -- 3.1
TEXAS--13
Abilene........................................................ 1995 16.8 --
Coppell........................................................ 1997 9.4 --
El Paso........................................................ 1991 7.0 --
Fredericksburg................................................. 1993 4.0 --
Houston........................................................ 1997 7.1 --
Hurst.......................................................... 1994 5.3 2.3
Killeen........................................................ 1994 3.6 0.3
Marble Falls................................................... 1993 5.2 --
New Braunfels.................................................. 1995 23.6 5.2
North Austin................................................... 1995 18.3 3.9
Shiner......................................................... 1993 1.2 0.4
South Austin................................................... 1995 6.5 --
Temple......................................................... 1993 11.3 --
UTAH--5
Ogden.......................................................... 1987 0.5 1.2
Orem........................................................... 1987 9.9 6.0
Salt Lake...................................................... 1990 16.8 --
Tooele......................................................... 1987 1.5 0.7
West Haven..................................................... 1996 6.0 --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
State and Date Owned Leased
City Acquired Acreage Acreage
--------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
WASHINGTON--7
Issaquah....................................................... 1994 16.4 --
Kent........................................................... 1994 4.5 --
Everett........................................................ 1994 28.1 --
Bothell........................................................ 1997 -- 2.8
Spokane........................................................ 1990 5.0 --
Tacoma......................................................... 1987 8.9 --
Vancouver...................................................... 1994 -- 5.4
WYOMING
Jackson*....................................................... 1996 -- 1.0
</TABLE>
* These locations are satellites of existing locations.
BMHC AND BMC ARE TRADENAMES OF THE COMPANY. Other brand names or trademarks
appearing in this Form 10-K are the property of their respective holders.
Item 3. Legal Proceedings
The Company is involved in litigation and the other legal maters 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 effect on the Company's financial position, liquidity or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
<PAGE>
PART II
Item 5. Market for Registrant's Common STock and Related Stockholder Matters
The Common Stock of BMC West was traded on the Nasdaq National Market under
the symbol "BMCW" since the Company's initial public stock offering in August
1991. In September 1997, the Common Stock started trading under the symbol
"BMHC". The following table sets forth the range of high and low closing sales
prices on the Nasdaq National Market for the Common Stock for the periods
indicated. Such quotations represent inter-dealer prices without retail markup,
markdown or commission and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Prices:
----------------------
Fiscal 1997 High Low
- ------------------------------------------------------ ---------- ---------
<S> <C> <C>
Quarter ended March 31, 1997.......................... $ 14 5/16 $ 11 1/2
Quarter ended June 30, 1997........................... 13 7/8 10 3/4
Quarter ended September 30, 1997...................... 13 1/4 11 1/16
Quarter ended December 31, 1997....................... 13 1/2 10 1/4
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 High Low
- ------------------------------------------------------ --------- ---------
<S> <C> <C>
Quarter ended March 31, 1996.......................... $ 16 1/4 $ 13
Quarter ended June 30, 1996........................... 20 1/4 15 1/4
Quarter ended September 30, 1996...................... 17 1/8 12 3/4
Quarter ended December 31, 1996....................... 13 7/8 11 7/8
</TABLE>
The Company has not paid any dividends on its Common Stock and the Board of
Directors presently intends to continue this policy in order to retain earnings
for use in its business. The amount of dividend payments is restricted by the
Company's loan agreements. At March 16, 1998, BMHC's Common Stock was held by
approximately 5,909 shareholders of record or through nominee or street name
accounts with brokers (206 registered holders). The last sales price for BMHC's
Common Stock, as reported by Nasdaq on March 16, 1998, was $12.875.
15
<PAGE>
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company for the years indicated. It is derived from the Company's audited
consolidated financial statements, and should be read in conjunction with the
disclosures in Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below and the consolidated financial
statements and notes thereto presented on pages 9 through 22 of the Company's
1997 Annual Report. (in thousands, except per share and share figures.)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ 728,065 $ 718,024 $ 630,201 $ 547,109 $ 399,597
Cost of sales.................................. 559,655 559,408 492,028 427,951 315,693
------------ ------------ ---------- ---------- ----------
Gross profit................................... 168,410 158,616 138,173 119,158 83,904
Selling, general and administrative expense.... 145,935 131,462 116,353 91,203 65,619
Other income................................... 1,882 1,268 1,601 1,529 948
------------ ------------ ---------- ---------- ----------
Income from operations......................... 24,357 28,422 23,421 29,484 19,233
Interest expense............................... 8,666 10,496 10,746 6,486 4,554
------------ ------------ ---------- ---------- ----------
Income before income taxes
and extraordinary item........................ 15,691 17,926 12,675 22,998 14,679
Income taxes................................... 6,198 6,935 4,910 8,739 5,888
------------ ------------ ---------- ---------- ----------
Income before
extraordinary item........................... 9,493 10,991 7,765 14,259 8,791
Extraordinary item, net of tax................. -- (342) -- -- --
------------ ------------ ---------- ---------- ----------
Net income..................................... $ 9,493 $ 10,649 $ 7,765 $ 14,259 $ 8,791
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
Income per diluted common share before
extraordinary item........................... $ 0.78 $ 1.00 $ 0.79 $ 1.62 $ 1.14
Extraordinary item............................. -- (0.03) -- -- --
------------ ------------ ---------- ---------- ----------
Net income per diluted common share............ $ 0.78 $ 0.97 $ 0.79 $ 1.62 $ 1.14
------------ ------------ ---------- ---------- ----------
Weighted average number of common shares....... 12,136,879 10,998,135 9,751,547 8,798,374 7,707,986
------------ ------------ ---------- ---------- ----------
------------ ------------ ---------- ---------- ----------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
At Year End 1997 1996 1995 1994 1993
- ------------------------------------------------------- ---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital........................................ $ 118,612 $ 110,467 $ 100,196 $ 76,201 $ 60,321
Total assets........................................... 340,373 288,369 264,970 222,450 142,297
Long-term debt, net of current maturities and
redeemable preferred stock........................... 113,410 90,203 123,080 79,336 57,168
Shareholders' equity................................... 160,951 145,088 95,927 87,002 49,510
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Management's discussion and analysis of financial condition and results of
operations is presented under the caption "Financial Review" in the Company's
1997 Annual Report ("Annual Report"). The information under this caption is
incorporated herein by this reference.
To facilitate industry comparisons, the Company elected in 1994 to change
its fiscal year-end from December 28 to December 31. This change did not have a
material impact on the comparability of the Company's results of operations or
cash flows for any of the periods presented.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and related notes, together
with the report of the independent public accountants, are presented on pages 13
through 23 of the Company's Annual Report and are incorporated herein by this
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
17
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant Directors
The nominees for directors of the Company are presented on pages 3 through 4
of the Company's definitive Proxy Statement ("Proxy Statement"). This
information is incorporated herein by this reference.
The information required by this Item concerning the Company's executive
officers is set forth in Part I, Section Titled "Executive Officers", of this
report and is incorporated herein by this reference.
The information required by this Item concerning compliance with Section
16(a) of the Exchange Act is presented under the caption entitled "Certain
Relationships and Other Transactions" of the Proxy Statement.
Item 11. Executive Compensation
Information required by this Item concerning compensation of the Company's
executive officers for the year ended December 31, 1997, is presented under the
captions entitled "Executive Compensation and Other Information" of the Proxy
Statement. This information is incorporated herein by this reference.
Item 12. Security Ownership of Certain BeneficiaL Owners and Management
Information required by this Item concerning the security ownership of
certain beneficial owners, directors and executive officers, as of December 31,
1997, is set forth under the caption "Security Ownership of Certain Beneficial
Owners" of the Proxy Statement and is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
Information required by this Item concerning certain relationships and
related transactions during 1997 is set forth under the caption "Certain
Relationships and Other Transactions" of the Proxy Statement and is incorporated
herein by this reference.
18
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this annual report on Form
10-K for Building Materials Holding Corporation:
(1) The Consolidated Financial Statements, the Notes to Consolidated
Financial Statements, and the Report of Independent Public
Accountants listed below are incorporated herein by this
reference from pages 13 through 23 of the Annual Report.
- Consolidated Statements of Income for the years ended December
31, 1997, 1996 and 1995.
- Consolidated Balance Sheets as of December 31, 1997 and December
31, 1996.
- Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995.
- Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
- Notes to Consolidated Financial Statements.
- Report of Independent Public Accountants.
Page
----
(2) Financial Statement Schedules
- Report of Independent Public Accountants................. 21
II Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995.......................... 24
Schedules other than those listed are omitted because they are not applicable
or because the required information is shown in the financial statements or
notes.
(3) Exhibits.
A list of the exhibits required to be filed as part of
this report is set forth in the Index to Exhibits, which
immediately precedes such exhibits, and is incorporated herein
by this reference.
19
<PAGE>
(b) Reports on Form 8-K
On September 23, 1997, BMHC filed a Form 8-K12G3 with the
Securities and Exchange Commission describing the merger of BMC West
Corporation with Building Materials Holding Corporation to create a
holding company structure.
On September 24, 1997, BMHC's predecessor BMC West Corporation
filed a Form 8-K with the Securities and Exchange Commission also
related to the merger of BMC West Corporation with Building
Materials Holding Corporation.
On November 25, 1997, BMHC filed a Form 8-K with the Securities
and Exchange Commission to report the acquisition of Lone Star
Plywood & Door Corp.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Building Materials Holding Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Building Materials Holding
Corporation's annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 3, 1998. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Part IV, Item 14(a)(2) is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boise, Idaho
February 3, 1998
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BUILDING MATERIALS HOLDING CORPORATION
By /s/ Robert E. Mellor
---------------------
Robert E. Mellor
President, Chief Executive Officer and Director
Dated: March 17, 1998
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert E. Mellor, Ellis C. Goebel, and Robert L.
Becci, and each of them, as his true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place, and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his
substitutes or substituted, may lawfully do or cause to be done by virtue
hereof. This Form 10-K may be executed in multiple counterparts, each of which
shall be an original, but which shall together constitute but one agreement.
22
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
(i) Principal Executive Officer: (iv) Directors:
/s/ Robert E. Mellor /s/ George E. McCown
- --------------------- -------------------------
Robert E. Mellor George E. McCown
President, Chief Executive Chairman of the Board
Officer and Director of Directors
March 17, 1998 March 17, 1998
(ii) Principal Financial Officer: /s/ Robert E. Mellor
--------------------------
Robert E. Mellor
March 17, 1998
/s/ Ellis C. Goebel
- ---------------------- /s/ Alec F. Beck
Ellis C. Goebel --------------------------
Senior Vice President--Finance and Treasurer Alec F. Beck
March 17, 1998 March 17, 1998
/s/ H. James Brown
(iii) Principal Accounting Officer: --------------------------
H. James Brown
March 17, 1998
/s/ Robert L. Becci
- ------------------------ /s/ Wilbur J. Fix
Robert L. Becci --------------------------
Vice President and Controller Wilbur J. Fix
March 17, 1998 March 17, 1998
/s/ Robert V. Hansberger
---------------------------
Robert V. Hansberger
March 17, 1998
/s/ Donald S. Hendrickson
---------------------------
Donald S. Hendrickson
March 17, 1998
/s/ Guy O. Mabry
---------------------------
Guy O. Mabry
March 17, 1998
/s/ Peter S. O'Neill
---------------------------
Peter S. O'Neill
March 17, 1998
</TABLE>
23
<PAGE>
BUILDING MATERIALS HOLDING CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------------- ------------- ------------- -------------- -------------
Additions
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions End of Year
- ---------------------------------------------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Year Ended
December 31, 1997................................... $(1,231,000) $(1,657,000) $1,271,000(1) $(1,617,000)
Year Ended
December 31, 1996................................... $(1,426,000) $(1,014,000) $1,209,000(1) $(1,231,000)
Year Ended
December 31, 1995................................... $ (932,000) $(1,008,000) $ 514,000(1) $(1,426,000)
</TABLE>
(1) Represents write-offs, net of recoveries.
24
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated February 3, 1998, included and incorporated by reference in
Building Materials Holding Corporation's Form 10-K for the year ended December
31, 1997 and into Building Materials Holding Corporation's previously filed
Registration Statements File No. 33-52478 and 33-80952 on Form S-8, Registration
Statements File No. 33-52478-99 and 033-80952-99 on Form S-8A and Registration
Statement File No. 333-36387 on Form S-4.
ARTHUR ANDERSEN LLP
Boise, Idaho
March 17, 1998
25
<PAGE>
BUILDING MATERIALS HOLDING CORPORATION
INDEX TO EXHIBITS
Filed with the Annual Report
on Form 10-K for the
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description Page
- --------- ---------- --------------------------------------------------- ----
<S> <C> <C> <C>
(g) 3.5 Amended Certificate of Incorporation, filed with
the office of the Secretary of State of the State
of Delaware on September 23, 1997.
(g) 3.6 By-laws of the Registrant.
(c) 4.2 Form of Note.
(c) 4.3 Form of Indenture dated as of November 19, 1992,
between the Company and First Interstate Bank of
Washington, N.A., as Trustee.
(g) 4.4 Agreement and Plan of Merger, dated September 23,
1997 by and among the Registrant, BMC West
Corporation and BMC West Merger Corporation.
(g) 4.7 Rights Agreement, dated September 19, 1997, by and
between the Registrant and American Stock Transfer
and Trust Company.
(a) 10.4* 1990 Bonus Plan of the Company
(a) 10.5* Stock Option Plan (Senior Original Shareholders
Management Plan), effective January 1, 1991.
(a) 10.6* Stock Option Plan (Field Management Plan),
effective January 1, 1991.
(b) 10.7 Form of indemnity agreement between the Company and
its officers and directors.
(d) 10.8 Severance Plan for Certain Key Executive Officers,
Senior Management and Key Employees of the Company
and its subsidiaries as adopted by the Board of
Directors of the Company on July 20, 1993.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description Page
- --------- ---------- --------------------------------------------------- ----
<S> <C> <C> <C>
(d) 10.9 Senior Management and Key Employee Severance
Agreements between the Company and Certain
Executive Officers dated July 20, 1993.
(d) 10.10 Note Purchase Agreement between Teachers Insurance
and Annuity Association of America and the Company
dated October 25, 1993.
(d) 10.11 Form of Note.
(e) 10.12 Modification letter dated March 1, 1995, to the
Note Purchase Agreement between Teachers Insurance
and Annuity Association of America and the Company
dated October 25, 1993.
(e) 10.13* Supplemental Retirement Plan dated January 1, 1993.
(e) 10.14 Note Purchase Agreement between Teachers Insurance
and Annuity Association of America and the Company
dated March 1, 1995.
(e) 10.15 Note Purchase Agreement between Allstate Life
Insurance Company and the Company dated March 1,
1995.
(e) 10.16 Form of Notes under Note Purchase Agreement to
Allstate Life Insurance Company.
(e) 10.17 Form of Notes on Second Amended and Restated Credit
Agreement between Wells Fargo Bank, N.A., as Agent,
the Company, and Wells Fargo Bank, N.A., First
Interstate Bank of Oregon, N.A., and West One Bank,
Idaho, dated March 1, 1995.
(e) 10.18 Form of Note under Second Amended and Restated
Credit Agreement.
(f) 10.19* Amended and Restated 1992 Non-Qualified Stock Plan.
(f) 10.20* Amended and Restated 1993 Employee Stock Option
Plan.
(f) 10.21* Amended and Restated 1993 Non-Employee Director
Stock Option Plan.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Exhibit
Footnote Number Description Page
- --------- ---------- --------------------------------------------------- ----
<S> <C> <C> <C>
(g) 10.22 Agreement and Plan of Merger, dated September 23,
1997 by and among the Registrant, BMC West
Corporation and BMC West Merger Corporation.
(h) 10.23 Asset Purchase Agreement dated as of October 6,
1997, between BMC West Corporation and Lone Star
Plywood & Door Corp.
(h) 10.24 Side Letter Agreement dated as of October 10, 1997,
between counsel to BMC West Corporation and Lone
Star Plywood & Door Corp., regarding calculation to
adjustment to purchase price.
(h) 10.25 Amendment to Asset Purchase Agreement dated as of
November 11, 1997, between BMC West Corporation and
Lone Star Plywood & Door Corp.
(h) 10.26 Second Amendment to Asset Purchase Agreement dated
as of November 11, 1997, between BMC West
Corporation and Lone Star Plywood & Door Corp.
11.1 Statement regarding computation of earnings per
share.
13.1 Building Materials Holding Corporation's 1997
Annual Report. Such report, except to the extent
incorporated herein by reference, is being
furnished for the information of the Securities and
Exchange Commission only and is not to be deemed
filed as part of this Annual Report on Form 10-K.
23.1 Independent Public Accountants Consent. Reference
is made to page 25.
24.1 Power of Attorney. Reference is made to page 22.
27.1 Financial Data Schedule Fiscal year end 1997.
27.2 Financial Data Schedule Fiscal year end 1996 and
Qtrs 2, 3 of 1996--Restated for Basic Earnings per
share.
27.3 Financial Data Schedule Qtr 3 of 1997-- Restated
for Basic Earnings per share.
</TABLE>
28
<PAGE>
(a) Filed as an exhibit to the Registration Statement on Form S-1 filed with
the Commission on June 6, 1991 (Registration No. 33-41040) (the
"Registration Statement") and incorporated herein by reference.
(b) Filed as an exhibit to Amendment No. 2 to the Registration Statement,
filed with the Commission on August 2, 1991 and incorporated herein by
reference.
(c) Filed as an exhibit to Amendment No.1 to the Registration Statement on
Form S-1, filed with the Commission on October 20, 1992 (Registration
No. 33-52432), and incorporated herein by reference.
(d) Filed as an Exhibit to Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993, filed with the Commission on March
28, 1994, and incorporated herin by reference.
(e) Filed as an Exhibit to Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, filed with the Commission on March
30, 1995, and incorporated herein by reference.
(f) Filed as an Exhibit to Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996, filed with the Commission on March
28, 1997, and incorporated herein by reference.
(g) Filed as an Exhibit to BMHC's Report on Form 8-K12G3, filed with the
Commission on September 23, 1997 and incorporated herein by reference.
(h) Filed as an Exhibit to BMHC's Report on Form 8-K, filed with the
Commission on November 25, 1997 and incorporated herein by reference.
* Component of executive compensation.
29
<PAGE>
EXHIBIT 11.1
BUILDING MATERIALS HOLDING CORPORATION
Computation of Earnings Per Share
For the Year Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
COMPUTATION OF BASIC EARNINGS PER SHARE
Net income............................................................ $ 9,493,000 $ 10,649,000 $ 7,765,000
Class B preferred stock accretion..................................... (6,500) (34,000) (34,000)
------------ ------------- ------------
Net Income available to common stock.................................. $ 9,486,500 $ 10,615,000 $ 7,731,000
------------ ------------- ------------
Weighted average shares outstanding................................... 11,919,469 10,759,892 9,498,375
------------ ------------- ------------
Basic Earnings Per Share.............................................. $ 0.80 $ 0.99 $ 0.81
------------ ------------- ------------
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net Income Available to Common Stock.................................. $ 9,486,500 $ 10,615,000 $ 7,731,000
------------ ------------- ------------
Weighted average shares outstanding................................... 11,919,469 10,759,892 9,498,375
Net effect of dilutive stock options based on the treasury stock
method using average market price................................... 217,410 238,243 253,172
------------ ------------- ------------
Total shares outstanding.............................................. 12,136,879 10,998,135 9,751,547
------------ ------------- ------------
Diluted Earnings Per Share............................................ $ 0.78 $ 0.97 $ 0.79
------------ ------------- ------------
</TABLE>
<PAGE>
Exhibit 13.1
FINANCIAL REVIEW Building Materials Holding Corp.
- ------------------------------------------------------------------------------
This financial review covers management's discussion and analysis of
financial condition and operating results and should be read in conjunction with
the financial statements and the notes thereto appearing elsewhere in this
Annual Report.
RESULTS OF OPERATIONS
The following table sets forth for the years ended December 31, 1997, 1996
and 1995, the percentage relationship to net sales of certain costs, expenses
and income items.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales................................................................................ 100.0% 100.0% 100.0%
Gross profit............................................................................. 23.1 22.1 21.9
Selling, general and administrative expense.............................................. 20.0 18.3 18.5
Other income............................................................................. 0.3 0.2 0.3
Income from operations................................................................... 3.4 4.0 3.7
Interest expense......................................................................... 1.2 1.5 1.7
Income taxes............................................................................. 0.9 1.0 0.8
Net income............................................................................... 1.3 1.5 1.2
</TABLE>
1997 OPERATIONS COMPARED WITH 1996
Net sales for 1997 were $728.1 million, a 1.4% increase over net sales of
$718.0 million in 1996. Acquisitions of building materials centers and
value-added facilities contributed a 3.3% increase to net sales in 1997. This
was partially offset by lower commodity wood prices and a slight decrease in
same-store sales. Building Materials Holding Corporation's (the Company) primary
economic indicator, single-family building permit activity in its market area
for 1997, increased 0.3% compared with 1996. Same-store sales decreased 1.5% as
the result of decreases in Arizona, Colorado, Oregon, Texas and Utah, offset by
increased same-store sales in California, Montana, Nevada and Washington. Idaho
same-store sales remained flat. Overall, lower commodity wood prices decreased
sales 1.6%, or $11.6 million, when compared with 1996. After adjusting for lower
commodity wood prices, overall same-store sales decreased 0.3%.
Gross profit increased to 23.1% in 1997 from 22.1% in 1996, primarily as a
result of the increased mix of higher-margin, value-added products such as
Company manufactured pre-hung doors, millwork, roof trusses and pre-assembled
windows. These value-added products accounted for 24.2% of total sales in 1997,
an increase from 20.6% in the prior year.
Selling, general and administrative expenses, as a percentage of net sales,
increased to 20.0% in 1997 from 18.3% in 1996. This increase was due primarily
to lower prices for commodity wood products which increased SG&A as a percent of
sales, inclement weather during the first half of the year, higher costs
associated with expanding value-added sales, and costs associated with
integrating new operating units. In addition, low unemployment and a tight labor
market resulted in higher wage costs in an effort to attract and retain high
quality employees.
Interest expense decreased to $8.7 million in 1997 from $10.5 million in
1996. The decrease was due primarily to lower average outstanding debt and lower
interest rates during 1997 compared with the prior year. Average debt
outstanding was $99.0 million in 1997 compared with $111.4 million in 1996.
Average debt outstanding in 1997 decreased as a result of the equity offering in
the second quarter of 1996. The proceeds were used to retire all $20 million of
the 10% unsecured senior subordinated notes and temporarily reduce debt
outstanding under the revolving credit agreement. Average interest rates on
variable rate debt were approximately 6.9% for 1997 compared with 7.7% for 1996.
The provision for income taxes decreased to $6.2 million in 1997 from $6.9
million in 1996. The decrease in the provision for income taxes resulted from
decreased income from operations in 1997 as compared with the prior year.
As a result of the foregoing factors, income before extraordinary item
decreased $1.5 million to $9.5 million in 1997, or 1.3% of net sales, as
compared with $11.0 million, or 1.5% of net sales in the prior year.
1996 OPERATIONS COMPARED WITH 1995
Net sales for 1996 were $718.0 million, an increase of 14% or $87.8 million
from 1995. Increases in new home construction, as well as higher commodity wood
product prices, contributed to an increase of 13.7% for same-store sales. The
strongest year-over-year sales results were from the units in Texas, Utah and
Colorado, with Texas reporting 31% higher same-store sales. On an overall basis,
sales prices for the Company's products increased about 3% for the year. This
price increase was primarily due to higher prices for commodity wood products.
Gross profit increased to 22.1% in 1996 from 21.9% in 1995. This increase
reflects favorable inventory shrinkage results and the ongoing efforts of the
Company to improve margins through its increased focus on value-added products,
such as roof trusses, pre-hung doors and pre-assembled windows, and increased
sales to the project-oriented consumer (including repair and remodel contractors
hired by them), all of which traditionally have higher margins.
During 1996, selling, general and administrative expenses, as a percentage
of net sales, decreased to 18.3% from 18.5% in 1995. This decrease was due in
part to same-store sales increases and cost reductions associated with
integrating the 14 building materials centers acquired in 1994 and 1995.
9
<PAGE>
FINANCIAL REVIEW (Continued)
- ------------------------------------------------------------------------------
Interest expense decreased to $10.5 million in 1996 from $10.7 million in
1995. The decrease was due to a reduction in the Company's outstanding debt with
the proceeds of the common stock offering in the second quarter of 1996.
The provision for income taxes increased to $6.9 million in 1996 from $4.9
million in 1995. The effective income tax rate was 38.7%. The increase in the
provision for income taxes was a result of increased income from operations.
As a result of the foregoing factors, income before an extraordinary item in
1996 increased by $3.2 million or 42% to $11.0 million, or 1.5% of net sales, as
compared to $7.8 million, or 1.2% of net sales, in the prior year.
The Company retired all $20 million of the 10% unsecured senior subordinated
notes and temporarily reduced debt outstanding under the revolving credit
agreement with the net proceeds of the equity offering. In connection with this
retirement, the Company took a non-cash after-tax extraordinary charge of
$342,000 or $.03 per share to write off the related deferred loan costs and
unamortized debt discount.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary need for capital resources is to fund acquisitions and
capital expenditures, as well as to finance its working capital needs which have
been increasing as the Company has grown in recent years. Over the last three
years, the Company's capital resources have been attributable primarily to cash
flows from the Company's operations, borrowings and the sale of common stock.
OPERATIONS
In 1997, operations provided $35.3 million in cash, compared with $16.9
million in 1996. This increase was due primarily to improvements in working
capital, net of acquisitions. Net working capital was $118.6 million at the
end of 1997, compared with $110.5 million at the end of 1996. The increase in
working capital was primarily the result of five acquisitions in 1997 and
their related effects on receivables, inventories and payables. Accounts
receivable increased $14.7 million compared with the prior year, of which
$11.6 million was attributable to acquisitions. Despite acquisitions,
inventories as of year-end 1997 increased only $1.7 million or 2.3% to $78.2
million from $76.4 million in the prior year. Included in the increase in
inventory was $11.2 million resulting from acquisitions. Company wide efforts
to reduce inventories mitigated the overall net increase in inventory. In
addition, accounts payable and accrued expenses increased $10.7 million.
CAPITAL INVESTMENTS AND ACQUISITIONS
Capital expenditures, exclusive of acquisitions, were $13.3 million in
1997. The principal property and equipment expenditures in 1997 included
purchases of additional property and expansion and remodeling of existing
building materials centers.
Cash used for acquisitions totaled $40.2 million in 1997, as the Company
completed five acquisitions. These acquisitions included two building
materials centers and six value-added facilities. In 1996, the Company used
$8.4 million in cash to complete four acquisitions, including one building
materials center and three value-added facilities.
FINANCING
The Company's borrowing capacity under its revolving credit agreement is
$70 million, limited by eligible receivables and inventories. Borrowings
under the agreement bear interest at prime plus 0% to .25%, or LIBOR plus
.625% to 1.625%. The agreement expires in 2000. At year-end, the Company had
$35.3 million of unborrowed capacity under this agreement. The borrowings
under the revolver increased to $34.7 million at year-end 1997 from $14.1
million at year-end 1996 primarily due to the five acquisitions completed in
1997.
In addition, the Company had $79.9 million of fixed rate borrowings under
various credit facilities. The agreements related to these borrowings contain
covenants providing for the maintenance of certain financial ratios and
conditions including total funded debt to earnings before interest, taxes,
depreciation and amortization (EBITDA) and limitations on capital
expenditures, among certain other restrictions. The Company is in compliance
with these covenants and conditions.
In the fourth quarter of 1997, the Company filed a shelf registration
with the Securities and Exchange Commission to register 1,000,000 shares of
common stock. These shares may be issued from time to time in connection with
future business combinations, mergers and/or acquisitions. Of these
registered shares, 492,036 were used to complete two acquisitions during 1997.
Based on the Company's ability to generate cash flow 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 currently
anticipated requirements.
QUARTERLY RESULTS AND SEASONALITY
The Company's first and fourth quarters historically are adversely
affected by weather patterns in the Company's markets which result in
decreases in levels of building and construction
10
<PAGE>
Building Materials Holding Corp.
- ------------------------------------------------------------------------------
activity. In addition, quarterly results
historically have reflected, and are expected to continue to reflect,
fluctuations from period to period as a consequence of the impact of various
other factors, including general economic conditions, prices of commodity wood
products, housing starts, consumer confidence, interest rates and the
availability of credit.
The composition and level of working capital typically have changed with
the level of sales, with the Company requiring additional working capital
during periods of rapidly increasing sales as the Company carries more
inventories and receivables. Working capital levels (receivables and
inventories) typically increase in the second and third quarters of the year
due to higher sales during the peak building and construction season. These
increases historically have resulted in negative operating cash flows during
this peak season, which generally have been financed through the revolver.
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.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE
INCOME, which establishes standards for reporting and display of
comprehensive income and its components. The Company plans to adopt this
statement in the first quarter of 1998. Also issued was SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for the way public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The Company
plans to adopt this statement at year-end 1998. As these statements primarily
provide enhanced disclosure, adoption of these statements will have no
material impact on reported results of operations or financial condition.
HOLDING COMPANY
On September 23, 1997, Building Materials Holding Corporation (BMHC) was
formed to provide its predecessor and now principal subsidiary, BMC West
Corporation, with a holding company organizational structure. BMC West
Corporation's outstanding capital stock was converted, on a share for share
basis, into capital stock of BMHC. The Company's common stock is traded on
the over-the-counter market and is listed on the Nasdaq National Market under
the symbol BMHC.
BMHC was formed to centralize, at the holding company, responsibilities
for acquisitions, and for financial and administrative functions-including
strategic, financial and capital planning, corporate governance, and investor
relations activities. In addition, the holding company structure is intended
to focus management of the day-to-day operations of BMC West at the regional
divisions and local unit levels. As part of this restructuring, the operating
units of BMC West have been divided into three major operating divisions with
plans to create a fourth, with a division president having general
responsibility for the profitability of each division. This restructuring is
intended to give local management more focused responsibility and enhances
the opportunity to recommend introduction of new products or services
appropriate for a given market.
In conjunction with this organizational structure, management believes
the focus on improving operational and market performance will result in the
assessment of the market penetration and operating viability of some
facilities. This assessment will be completed during 1998 and may result in
additional facilities in select markets and consolidation or closure of some
facilities. Management is currently undertaking a thorough analysis of all
facilities. No formal plans have been determined. Changes as a result of this
analysis are not expected to materially impact the financial condition of the
Company; however, results of operations may be affected.
YEAR 2000 SYSTEM ISSUE
The Company is reviewing its financial and operating systems with respect
to the Year 2000 issue. The Company is in the process of making normal
upgrades and modifications to its significant financial and operating
systems, including both hardware and software components. These upgrades and
modifications are expected to be completed within the next 12 to 15 months to
allow time for testing. The upgrades are designed, among other things, to
address the Year 2000 issue, and are not presently expected to result in a
material incremental expense to the Company. Based on the Company's progress
to date in addressing its significant operating and financial applications,
the Company does not currently anticipate any material disruption in its
operations as a result of the Year 2000 issue.
The Company also is discussing the impact of the Year 2000 issue with its
financial service providers and major vendors and is working to seek
assurance from these companies that their systems will be Year 2000 compliant
in a timely fashion. In the event that any of the Company's financial service
providers or major vendors do not successfully achieve Year 2000 compliance,
the Company's business or operations could be adversely affected.
11
<PAGE>
FINANCIAL REVIEW (Continued)
- ------------------------------------------------------------------------------
OUTLOOK
In 1998, the Company expects general economic conditions in its market
area to remain strong. The Company's business plan contemplates that mortgage
rates will remain low but that national housing permits will be down 5% to
10% when compared to 1997. Housing start projections for the states where the
Company has locations vary widely and range from being up over 5% to being
down over 15%. Combining commodity and non-commodity products for BMHC's
product mix, prices are anticipated to be slightly down.
The building materials industry historically has been subject to
substantial cyclical variation, and adverse economic changes in the regions
served by the Company could have a material adverse effect on the Company's
financial condition. The Company's operations have reflected substantial
fluctuations from period to period as a consequence of various factors,
including general economic conditions, prices of commodity wood products,
levels of building activity and interest rates, single-family housing starts,
employment levels, consumer confidence and availability of credit to
professional contractors and homeowners. Because a substantial percentage of
the Company's net sales is attributable to professional contractors, these
factors may have a more significant impact on the Company than on companies
focused on a broad range of retail customers. In addition, although weather
patterns affect the Company's results of operations throughout the year,
adverse weather historically has reduced construction activity in the first
and fourth quarters in the Company's markets. The Company anticipates that
fluctuations from period to period will continue in the future. Historically,
approximately 50% of the Company's sales have been attributable to commodity
wood products, including lumber and panel products. Prices of commodity wood
products are subject to significant volatility and directly affect the
Company's sales. Declines in commodity wood prices in the future may have an
adverse effect on 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, 1997. 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 publicly announce 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.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME Building Materials Holding Corp.
- -----------------------------------------------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- ----------------------------------------------------------------------------- ---------- ---------- ----------
Net sales.................................................................... $ 728,065 $ 718,024 $ 630,201
Cost of sales................................................................ 559,655 559,408 492,028
---------- ---------- ----------
Gross profit................................................................. 168,410 158,616 138,173
Selling, general and administrative expense.................................. 145,935 131,462 116,353
Other income................................................................. 1,882 1,268 1,601
---------- ---------- ----------
Income from operations....................................................... 24,357 28,422 23,421
Interest expense............................................................. 8,666 10,496 10,746
---------- ---------- ----------
Income before income taxes and extraordinary item............................ 15,691 17,926 12,675
Income taxes................................................................. 6,198 6,935 4,910
---------- ---------- ----------
Income before extraordinary item............................................. 9,493 10,991 7,765
Extraordinary item, net of tax............................................... -- (342) --
---------- ---------- ----------
Net income................................................................... $ 9,493 $ 10,649 $ 7,765
---------- ---------- ----------
---------- ---------- ----------
Net income per common share:
Basic.................................................................... $ .80 $ .99 $ .81
---------- ---------- ----------
---------- ---------- ----------
Diluted................................................................. $ .78 $ .97 $ .79
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Building Materials Holding Corp.
- ------------------------------------------------------------------------------------------------------------------
At December 31,
----------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS) 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
ASSETS
Current assets
Cash................................................................................... $ 8,177 $ 7,066
Receivables, net....................................................................... 84,872 70,184
Inventories............................................................................ 78,162 76,415
Deferred income tax benefit............................................................ 2,131 1,743
Prepaid expenses....................................................................... 3,481 1,874
---------- ----------
Total current assets................................................................ 176,823 157,282
Property plant and equipment, net......................................................... 118,240 103,921
Deferred loan costs....................................................................... 1,324 1,438
Goodwill, net............................................................................. 38,193 19,679
Other..................................................................................... 5,793 6,049
---------- ----------
Total assets.............................................................................. $ 340,373 $ 288,369
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt...................................................... $ 1,150 $ 568
Current redemption requirement on Class B preferred stock.............................. -- 1,994
Accounts payable....................................................................... 43,204 33,954
Accrued compensation................................................................... 6,469 3,908
Sales tax payable...................................................................... 3,398 2,589
Other accrued expenses................................................................. 3,990 3,802
---------- ----------
Total current liabilities................................................................. 58,211 46,815
Long-term debt, net of current portion.................................................... 113,410 90,203
Deferred income taxes..................................................................... 4,722 4,368
Other long-term liabilities............................................................... 3,079 1,895
Shareholders' equity
Common stock, $.001 par value, 20,000,000 shares authorized; 12,331,088 and 11,825,106
shares outstanding at December 31, 1997 and 1996, respectively.......................... 12 12
Additional paid-in capital................................................................ 104,107 97,731
Retained earnings......................................................................... 56,832 47,345
---------- ----------
Total shareholders' equity.............................................................. 160,951 145,088
---------- ----------
Total liabilities and shareholders' equity................................................ $ 340,373 $ 288,369
---------- ----------
---------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
14
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Building Materials Holding Corp.
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Additional
---------------------- Paid-In Retained
(AMOUNTS IN THOUSANDS) Shares Amount Capital Earnings Total
- ----------------------------------------------------------- --------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994................................. 9,112 $ 9 $ 57,994 $ 28,999 $ 87,002
Net income................................................. -- -- -- 7,765 7,765
Accretion of redeemable preferred stock.................... -- -- -- (34) (34)
Accrual of stock option compensation....................... -- -- 213 -- 213
Stock issued for acquisitions.............................. 365 -- 938 -- 938
Stock options exercised.................................... 6 -- 43 -- 43
--------- --------- ---------- --------- ----------
Balance, December 31, 1995................................. 9,483 9 59,188 36,730 95,927
Net income................................................. -- -- -- 10,649 10,649
Accretion of redeemable preferred stock.................... -- -- -- (34) (34)
Net proceeds from public stock offering.................... 2,300 2 38,486 -- 38,488
Stock options exercised and other.......................... 42 1 57 -- 58
--------- --------- ---------- --------- ----------
Balance, December 31, 1996................................. 11,825 12 97,731 47,345 145,088
NET INCOME................................................. -- -- -- 9,493 9,493
ACCRETION OF REDEEMABLE PREFERRED STOCK.................... -- -- -- (6) (6)
STOCK ISSUED FOR ACQUISITIONS.............................. 492 -- 6,300 -- 6,300
STOCK OPTIONS EXERCISED AND OTHER.......................... 14 -- 76 -- 76
--------- --------- ---------- --------- ----------
BALANCE, DECEMBER 31, 1997................................. 12,331 $ 12 $ 104,107 $ 56,832 $ 160,951
--------- --------- ---------- --------- ----------
--------- --------- ---------- --------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Building Materials Holding Corp.
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December
31,
-------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
- ---------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 9,493 $ 10,649 $ 7,765
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization.................................................... 11,009 10,300 9,192
Deferred income taxes............................................................ (117) 487 (465)
Gain on sale of assets........................................................... (466) (449) (40)
Stock option compensation........................................................ 18 68 213
Extraordinary item, net of tax................................................... -- 342 --
Changes in working capital items net of effects of acquisitions and
divestitures.................................................................... 15,559 (3,312) 5,099
Changes in other long-term liabilities............................................ 1,212 313 398
Other............................................................................. (1,368) (1,474) (903)
--------- --------- ---------
Net cash provided by operating activities......................................... 35,340 16,924 21,259
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment................................................ (13,289) (14,424) (16,856)
Payments for acquisitions......................................................... (40,231) (8,426) (36,363)
Sale of property and equipment.................................................... 1,450 1,822 400
--------- --------- ---------
Net cash used in investing activities............................................. (52,070) (21,028) (52,819)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (repayments) under revolving credit agreements..................... 20,630 (12,040) (5,110)
Issuance of common stock, net of expense.......................................... -- 38,488 --
Repayment of 10% unsecured senior subordinated notes.............................. -- (20,000) --
Issuance of debt.................................................................. -- 1,685 50,000
Redemption of preferred stock..................................................... (2,000) (1,000) (1,000)
Principal payments on debt........................................................ (561) (1,712) (10,665)
Other............................................................................. (228) (255) (834)
--------- --------- ---------
Net cash provided by financing activities......................................... 17,841 5,166 32,391
--------- --------- ---------
Net increase in cash.............................................................. 1,111 1,062 831
Cash, beginning of period......................................................... 7,066 6,004 5,173
--------- --------- ---------
Cash, end of period............................................................... $ 8,177 $ 7,066 $ 6,004
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for-
Interest.......................................................................... $ 8,353 $ 10,444 $ 9,238
Income taxes...................................................................... $ 5,567 $ 8,070 $ 3,224
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Building Materials Holding Corp.
- -------------------------------------------------------------------------------
1. ORGANIZATIONAL STRUCTURE, NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATIONAL STRUCTURE AND NATURE OF OPERATIONS
On September 23, 1997, Building Materials Holding Corporation (the Company)
was formed to provide its predecessor and now principal subsidiary, BMC West
Corporation, with a holding company organizational structure that can
accommodate future growth from internal operations, acquisitions or joint
ventures, broaden the alternatives available for future financing, and generally
provide for greater administrative and operational flexibility. BMC West
Corporation's outstanding capital stock was converted, on a share for share
basis, into capital stock of Building Materials Holding Corporation. The
Company's common stock is listed on the Nasdaq National Market under the symbol
BMHC.
BMC West Corporation (BMC West), a wholly owned subsidiary of Building
Materials Holding Corporation, is a regional distributor and retailer of
building materials in the United States, selling primarily to professional
contractors, as well as to project-oriented consumers (including professional
repair and remodel contractors hired by them). The Company also conducts
value-added conversion activities which include fabricating pre-hung doors, roof
trusses and pre-assembled windows, and pre-cutting lumber to meet customer
specifications. The Company has 55 building materials centers, including
building materials centers and value-added facilities, located in Arizona,
California, Colorado, Idaho, Montana, Nevada, Oregon, Texas, Utah and
Washington.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary BMC West. All significant intercompany balances
and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual amounts could differ from those
estimates.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components in a full set of financial statements. The Company plans to
adopt this statement in the first quarter of 1998. Also issued was SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for the way public business enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The Company plans to adopt this
statement at year-end 1998. As these statements primarily provide enhanced
disclosure, adoption of these statements will have no material impact on
reported results of operations or financial position.
NET INCOME PER COMMON SHARE
Net income per common share was determined by dividing net income, after
deducting the accretion on redeemable preferred stock, by the applicable shares
outstanding.
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Income before extraordinary item...................................... $ 9,493,000 $ 10,991,000 $ 7,765,000
Extraordinary item, net of tax........................................ -- (342,000) --
Class B preferred stock accretion..................................... (6,500) (34,000) (34,000)
------------ ------------- ------------
Net income available to common shareholders........................... $ 9,486,500 $ 10,615,000 $ 7,731,000
------------ ------------- ------------
------------ ------------- ------------
Average shares outstanding used to determine basic earnings per common
share............................................................... 11,919,469 10,759,892 9,498,375
Net effect of dilutive stock options based on the treasury stock
method using average market price(1)................................ 217,410 238,243 253,172
------------ ------------- ------------
Average shares used to determine diluted earnings per common share.... 12,136,879 10,998,135 9,751,547
------------ ------------- ------------
------------ ------------- ------------
</TABLE>
- ------------------------
(1) CERTAIN STOCK OPTIONS WERE NOT INCLUDED IN THE COMPUTATION, BECAUSE TO DO SO
WOULD HAVE BEEN ANTIDILUTIVE FOR THE PERIODS PRESENTED.
In 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE, effective
December 15, 1997. Pursuant to the provisions of SFAS No. 128, prior periods
have been recalculated. In comparison with diluted earnings per share for 1996
and 1995, the accounting change had no effect on the previously reported
earnings per share.
EXTRAORDINARY ITEM
In 1996, the Company repaid $20 million of 10% unsecured senior subordinated
notes prior to maturity. In connection with this early debt retirement, the
Company wrote off $565,000 of related deferred loan costs and unamortized debt
discount. These write-offs are included in the 1996 consolidated statement of
income as an extraordinary item, net of a $223,000 tax benefit. The per share
effect for the extraordinary item, net of tax, was $.03 for both basic and
diluted earnings per share.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments that had a maturity of three months or less at the
date of purchase to be cash equivalents.
INVENTORIES
Inventories consist principally of merchandise purchased for resale and are
stated at the lower of average cost or market.
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.
Interest expense includes amortization of deferred loan costs of $315,000 in
1997, $628,000 in 1996 and $602,000 in 1995.
GOODWILL
Goodwill is amortized on a straight-line basis over 30 years. Accumulated
amortization of goodwill is $2,454,000 at December 31, 1997 and $1,605,000 at
December 31, 1996.
Annually, the Company reviews the recoverability of all long-lived assets
and related goodwill. The measurement of possible impairment is based primarily
on the ability to recover the cost of the asset from expected future operating
cash flows on an undiscounted basis. In management's opinion, no such impairment
existed at December 31, 1997.
OTHER ASSETS
The majority of other assets consist of non-compete agreements arising from
acquisitions and investments in cooperative supplier organizations. The
non-compete agreements are amortized over the life of the related agreements
(three to five years).
REVENUE RECOGNITION
Revenues are recognized when title to the goods passes to the buyer, which
is generally at the time of sale.
RECLASSIFICATIONS
To provide a more meaningful comparison with the 1997 financial statements,
certain reclassifications have been made to amounts reported in prior years,
none of which affected net income.
2. ACQUISITIONS
Businesses acquired in 1997, 1996 and 1995 were accounted for using the
purchase method of accounting. Under this accounting method, the consideration
was allocated to the assets acquired and liabilities assumed based on the
estimated fair values at date of acquisition. Any excess of the purchase price
over the estimated fair value of the net assets acquired and liabilities assumed
was recorded as goodwill. Operating results of the acquired businesses are
included in the statements of income from date of acquisition.
In 1997, the Company completed five acquisitions involving two building
materials centers and six value-added facilities. These operations are located
in Heber City, Utah; Houston and Dallas, Texas; Denver, Colorado; Vancouver and
Seattle, Washington; Sparks, Nevada; and Portland, Oregon. Total consideration
given was $52,797,000, consisting of $40,231,000 cash, a long-term note for
$3,700,000, 492,036 shares of common stock valued at $6,300,000, and other
assumed operating liabilities of $2,566,000. For those acquisitions completed in
the fourth quarter of 1997, preliminary purchase price allocations have been
completed. Management expects to finalize these allocations upon closure of the
transactions.
In 1996, the Company completed four acquisitions involving one building
materials center and three value-added facilities. These operations are located
in Ogden and Orem, Utah; and Austin and San Antonio, Texas. Total consideration
given was $10,659,000 consisting of $8,426,000 cash, notes payable of
$1,712,000, and other assumed operating liabilities of $521,000. These notes
payable were paid by the Company prior to December 31, 1996.
The following summarized unaudited pro forma results of operations assume
the acquisitions occurred as of the beginning of 1996. 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
acquisitions been consummated at the beginning of the years presented, or that
may occur in the future.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1997 1996
- ------------------------------------------------------------------------------------------ ---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 794,781 $ 833,800
Net income................................................................................ 11,011 11,978
Per diluted common share................................................................. .88 1.05
</TABLE>
3. TRADE RECEIVABLES
Receivables consisted of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Trade receivables................................................................ $ 84,105 $ 67,970 $ 64,613
Allowance for doubtful accounts.................................................. (1,617) (1,231) (1,426)
--------- --------- ---------
82,488 66,739 63,187
Other............................................................................ 2,384 3,445 2,633
--------- --------- ---------
$ 84,872 $ 70,184 $ 65,820
--------- --------- ---------
--------- --------- ---------
</TABLE>
BMC West sells building materials, primarily to professional contractors, as
well as to project-oriented consumers (including professional repair and remodel
contractors hired by them) through its 55 building materials centers, including
building materials centers and value-added facilities, located in ten western
states. No one customer exceeds 1% of net sales. Because the customers are
disbursed among BMC West's various markets, its credit risk to any one customer
or state economy is not considered significant. BMC West performs ongoing credit
evaluations of its customers and provides an allowance for doubtful accounts.
18
<PAGE>
Building Materials Holding Corp.
- ------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at December 31, (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land...................................................................................... $ 32,954 $ 29,845
Buildings and improvements................................................................ 67,368 57,467
Machinery and fixtures.................................................................... 24,921 20,951
Handling and delivery equipment........................................................... 25,661 21,457
Construction in progress.................................................................. 2,104 1,803
---------- ----------
153,008 131,523
Less accumulated depreciation............................................................. (34,768) (27,602)
---------- ----------
$ 118,240 $ 103,921
---------- ----------
---------- ----------
</TABLE>
Property plant and equipment are recorded at cost. Major additions and
improvements are capitalized while maintenance and repairs which do not increase
the useful life of the property are expensed as incurred.
The net book value of property sold or retired is removed from the asset and
related depreciation accounts and the net gain or loss is included in the
determination of net income.
The provision for depreciation is computed using the straight-line method.
The estimated useful lives are fifteen to thirty years for buildings and
improvements, seven to ten years for machinery and fixtures and three to seven
years for handling and delivery equipment.
5. LONG-TERM DEBT
Long-term debt consisted of the following at December 31, (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Revolving credit agreement borrowings........ $ 34,710 $ 14,080
8.10% unsecured senior notes................. 25,000 25,000
9.18% unsecured senior notes................. 50,000 50,000
Other........................................ 4,850 1,691
--------- ---------
114,560 90,771
Less current portion......................... 1,150 568
--------- ---------
$113,410 $ 90,203
--------- ---------
--------- ---------
</TABLE>
The Company's borrowing capacity under its revolving credit agreement is $70
million, limited by eligible receivables and inventories. Borrowings under the
agreement bear interest at prime plus 0% to .25%, or LIBOR plus .625% to 1.625%.
The agreement expires in 2000. A fee of .20% to .375% per annum is charged on
the unused portion of the loan commitment. At year-end, the Company had
$35,290,000 of unborrowed capacity under this agreement.
The 8.10% unsecured senior notes, issued in 1993, require annual
principal payments beginning in 1998 through 2000. The notes may be redeemed,
in whole or in part, at the option of the Company, at any time at the
principal amount plus accrued interest and a make-whole payment. The
make-whole payment is due only if the interest rate (as measured by agreement
with the creditor) at the date of redemption is less than 8.10%. Interest is
payable semi-annually on April 30 and October 31. In connection with the
extension of the revolving credit agreement, the collateral for the 8.10%
senior notes was eliminated in March 1995.
The 9.18% unsecured senior notes, issued in 1995, are due in 2006. The notes
require annual principal payments beginning in 2001 through 2006. The notes may
be redeemed, in whole or in part, at the option of the Company at any time, at
the principal amount plus accrued interest and a make-whole payment. The
make-whole payment is due only if the interest rate (as measured by agreement
with the creditor) at the date of redemption is less than 9.18%. Interest is
payable semi-annually on April 30 and October 31.
The scheduled principal payments of long-term debt are $9,485,000 in 1998,
$8,333,000 in 1999, $46,743,000 in 2000, $8,333,000 in 2001, $8,333,000 in 2002
and $33,333,000 thereafter. At December 31, 1997, amounts outstanding under the
8.10% unsecured senior notes in the amount of $8,333,000 were classified as
long-term based on the Company's ability and intent to refinance these
obligations on a long-term basis.
The agreements related to the above borrowings contain covenants providing
for the maintenance of certain financial ratios and conditions including total
funded debt to earnings before interest, taxes, depreciation and amortization
(EBITDA) and limitations on capital expenditures, among certain other
restrictions. The Company is in compliance with these covenants and conditions.
6. CLASS B PREFERRED STOCK
In 1987, the Company authorized and issued 50,000 shares of Class B
preferred stock with a total mandatory redemption requirement of $5,000,000 due
$1,000,000 annually through 1996 and $2,000,000 in 1997. As of December 31,
1996, 20,000 shares of Class B preferred stock were outstanding. During 1997,
these remaining shares were redeemed for $2,000,000.
Class B preferred stock had a preference in liquidation of $100 per share.
The difference between the carrying value of the preferred stock and its
redemption value was added to the preferred stock account ratably through a
charge to retained earnings.
7. INCOME TAXES
Income taxes for the years ended December 31, 1997, 1996 and 1995 consisted
of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current income taxes
Federal............................................................................ $ 5,480 $ 5,611 $ 4,648
State.............................................................................. 835 837 727
--------- --------- ---------
6,315 6,448 5,375
--------- --------- ---------
Deferred income taxes
Federal............................................................................ (102) 423 (404)
State.............................................................................. (15) 64 (61)
--------- --------- ---------
(117) 487 (465)
--------- --------- ---------
$ 6,198 $ 6,935 $ 4,910
--------- --------- ---------
--------- --------- ---------
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------------------------------
A reconciliation of the statutory Federal income tax rate to the rate
provided in the statements of income follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate.............................................................................. 35.0% 35.0% 35.0%
State income taxes.......................................................................... 3.4 3.3 3.3
Other....................................................................................... 1.1 .4 .4
--------- --------- ---------
39.5% 38.7% 38.7%
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
The components of deferred income taxes included in the Company's year-end
balance sheets were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets
Tax basis in excess of book basis of acquired assets....................................... $ 30 $ 30
Inventories, tax in excess of book basis................................................... 1,910 1,734
Reserves not yet deductible for tax........................................................ 1,483 1,175
Other...................................................................................... 2,014 2,086
--------- ---------
Total deferred tax assets.................................................................. 5,437 5,025
Less valuation allowance................................................................... (563) (563)
--------- ---------
4,874 4,462
--------- ---------
Deferred tax liabilities
Tax in excess of book depreciation......................................................... 6,356 6,062
Deferred costs deducted for taxes.......................................................... 1,109 1,025
--------- ---------
Total deferred tax liabilities............................................................. 7,465 7,087
--------- ---------
$ (2,591) $ (2,625)
--------- ---------
--------- ---------
Classified as
Deferred income tax benefit (current assets)............................................... $ 2,131 $ 1,743
Deferred income taxes (long-term liabilities).............................................. (4,722) (4,368)
--------- ---------
$ (2,591) $ (2,625)
--------- ---------
--------- ---------
</TABLE>
The valuation allowance relates to the difference in tax and book basis of
the land acquired in conjunction with the initial acquisition of the Company.
8. SHAREHOLDERS' EQUITY
PUBLIC STOCK OFFERING
In the second quarter of 1996, the Company issued 2,300,000 shares of common
stock at $18.00 per share. The proceeds from this offering, less underwriting
and other issuance costs of $38.5 million, were used principally to reduce debt.
SHAREHOLDERS' RIGHTS PLAN
Under the shareholders' rights plan adopted on September 19, 1997,
holders of common stock received a distribution of one right to purchase
common stock for each common share held. The rights will generally become
exercisable ten days after a person or group acquires 15% of the Company's
outstanding voting securities or ten business days after a person or group
commences or announces an intention to commence a tender or exchange offer
that could result in the acquisition of 15% of these securities. Ten days
after a person acquires 15% or more of the Company's outstanding voting
securities (unless this time period is extended by the Board of Directors)
each right would, subject to certain adjustments and alternatives, entitle
the rightholder to purchase common stock of the Company or the acquiring
company having a market value of twice the $33.33 exercise price of the right
(except that the acquiring person or group and other related holders would
not be able to purchase common stock of the Company on these terms). The
rights are nonvoting, expire in 2007 and may be redeemed by the Company at a
price of two-thirds of a cent per right at any time prior to the tenth day
after an individual or group acquired 15% of the Company's voting stock,
unless extended. Additional details are set forth in the Rights Plan filed
with the Securities and Exchange Commission on September 19, 1997.
STOCK OPTION PLANS
The Company has four stock option plans, the 1991 Senior Shareholders
Management and Field Management Plan, the 1992 Non-Qualified Stock Option Plan,
the 1993 Employee Stock Option Plan and the 1993 Non-Employee Stock Option Plan
(the Stock Option Plans). A total of 990,000 shares of common stock have been
reserved for potential grants under the Stock Option Plans. The Company accounts
for these plans under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Under this opinion, the only compensation cost recognized is for
options granted at an exercise price below the fair market value on the date the
option is granted.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's pro forma 1997
net income would have been reduced by $351,000 and pro forma basic and diluted
earnings per share would have been reduced pro forma by $.03. The 1996 pro forma
reductions would have been: net income, $204,000; basic and diluted earnings per
share, $.02. The 1995 pro forma reductions would have been: net income, $61,000;
basic and diluted earnings per share, $.01.
Because SFAS Statement No. 123 has not been applied to options granted prior
to January 1, 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.
The 1991 Senior Shareholders Management and Field Management Plan provides
for the granting of options to purchase shares of the Company's common stock at
exercise prices below fair market value. The difference between the exercise
price and fair market value was recognized ratably over the vesting period as
compensation expense and was $18,000 in 1997,
20
<PAGE>
Building Materials Holding Corp.
- -------------------------------------------------------------------------------
$68,000 in 1996 and $213,000 in 1995. At December 31, 1997, options to
purchase 168,967 shares of the Company's common stock remain outstanding.
The 1992 Non-Qualified Stock Option Plan and the 1993 Employee Stock Option
Plan provide for the granting of options, at the discretion of the Board of
Directors, to purchase shares of the Company's common stock. The exercise price
is equal to the fair market value of the Company's common stock on the date the
options are granted. Options vest over five years and expire at the end of ten
years if unexercised.
The 1993 Non-Employee Stock Option Plan is available only to nonemployee
directors. Options granted under this plan have an exercise price equal to the
fair market value of the Company's common stock on the date the options are
granted. The options are exercisable one year following the date of grant and
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 the Company's
common stock on the date the options were granted. These options vest pursuant
to the Company's common stock reaching certain fair market values. These options
expire ten years from the date of grant, or 2007, and are included in the tables
below.
A summary of the status of the Stock Option Plans at December 31, 1997, 1996
and 1995, and changes during the years then ended is presented in the table and
narrative below:
Beginning in 1995, 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 1997, 1996 and 1995: risk-free
interest rates of 6.0%, 6.2% and 6.8%, respectively; estimated life of 6 years
for 1997 and 5.7 years for both 1996 and 1995; and expected stock price
volatility of 38.0%, 41.2% and 44.4%, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- ----------------- --------- ----------------- --------- -----------------
Balance at beginning of the year... 603,060 $ 10.76 542,286 $ 8.96 472,482 $ 8.49
Options granted.................... 227,170 12.47 94,055 19.39 79,385 14.12
Options exercised.................. (13,946) 4.46 (24,283) 2.44 (5,837) 4.14
Options forfeited.................. (20,580) 15.35 (8,998) 15.27 (3,744) 13.21
--------- ------ --------- ------ --------- -----
795,704 $ 11.24 603,060 $ 10.76 542,286 $ 8.96
--------- ------ --------- ------ --------- -----
--------- ------ --------- ------ --------- -----
Exercisable at end of the year..... 526,285 $ 9.78 455,437 $ 8.58 403,160 $ 7.35
Weighted average fair value of
options granted (Black-
Scholes)......................... $ 5.93 $ 9.49 $ 7.30
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Number
Number Exercisable
Outstanding at Weighted-Average at
Range of December 31, Remaining Weighted-Average December 31, Weighted-Average
Exercise Prices 1997 Contractual Life Exercise Price 1997 Exercise Price
- ------------------ -------------- ---------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1.21 to $5.67 272,463 3.4 Years $ 2.90 272,462 $ 2.90
$ 8.67 to $17.00 403,926 7.7 13.59 180,735 14.56
$ 19.50 to $29.75 119,315 7.3 22.34 73,088 23.58
$ 1.21 to $29.75 795,704 6.2 $ 11.24 526,285 $ 9.78
</TABLE>
9. RETIREMENT PLANS
The Company 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 salaries 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 and a percentage of net income for the period.
The Company's contributions are charged against operations and were $1,449,000
in 1997, $1,274,000 in 1996 and $1,124,000 in 1995.
In 1993, the Company established a supplemental retirement plan for
selected key management employees and directors. The cost is based on the
Company achieving certain operating earnings levels. The Company charged
operations for $606,000 in 1997, $638,000 in 1996 and $456,000 in 1995
pursuant to this plan. In 1994, the Company 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.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- -------------------------------------------------------------------------------
The Company does not provide any other post-retirement benefits for its
employees.
10. RELATED PARTY TRANSACTIONS
The Company previously paid a management fee to MDC Management Company
(MDC), a partnership in which the Chairman of the Board of Directors serves as a
general partner. The management fees were none in 1997, $100,000 in 1996 and
$155,000 in 1995.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases real property, vehicles and office equipment under
operating leases. Rental expense was $5,180,000 in 1997, $4,162,000 in 1996 and
$3,871,000 in 1995. Certain of the leases are noncancellable and have minimum
lease payment requirements of $4,807,000 in 1998, $4,215,000 in 1999, $3,445,000
in 2000, $2,210,000 in 2001 and $1,047,000 in 2002.
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.
12. OTHER DATA
Other income consisted of the following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Interest income, primarily from outstanding accounts receivable...................... $ 1,530 $ 1,351 $ 1,251
Gain on sale of assets............................................................... 466 449 40
Other income (expense)............................................................... (114) (532) 310
--------- --------- ---------
$ 1,882 $ 1,268 $ 1,601
--------- --------- ---------
--------- --------- ---------
</TABLE>
Changes in working capital items, net of acquisitions, in the statement of
cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
(Increase) decrease in receivables................................................ $ (3,064) $ (472) $ (4,316)
(Increase) decrease in inventories................................................ 9,452 (7,103) 9,994
(Increase) decrease in prepaid expenses........................................... (1,484) (593) 229
Increase (decrease) in accounts payable and accrued expenses...................... 10,655 4,856 (808)
--------- --------- ---------
$ 15,559 $ (3,312) $ 5,099
--------- --------- ---------
--------- --------- ---------
</TABLE>
13. FINANCIAL INSTRUMENTS
The book value compared with the fair value of financial instruments at
December 31 follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
Book Fair Book Fair
Value Value Value Value
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Long-term debt:
Variable rate debt............................................... $ 34,710 $ 34,710 $ 14,080 $ 14,080
Fixed rate debt.................................................. 79,850 80,282 76,691 77,653
---------- ---------- --------- ---------
$ 114,560 $ 114,992 $ 90,771 $ 91,733
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
The book values of cash and cash equivalents, accounts receivable, accounts
payable and variable interest rate long-term debt approximated fair value due to
the short-term maturities of these instruments.
The fair value of fixed rate debt has been estimated based upon relative
changes in the Company's variable borrowing rates since the date interest rates
were determined. During the years ended December 31, 1997 and 1996, the Company
had no derivative financial instruments.
14. RESULTS OF QUARTERLY OPERATIONS (UNAUDITED)
Operating results by quarter for 1997 and 1996 are as follows (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
1997
NET SALES...................................................... $ 146,769 $ 190,616 $ 201,950 $ 188,730
GROSS PROFIT................................................... 34,290 43,487 46,437 44,196
INCOME FROM OPERATIONS......................................... 2,841 8,082 9,207 4,227
NET INCOME..................................................... 456 3,460 4,212 1,365
NET INCOME PER DILUTED COMMON SHARE(2)(3)...................... .04 .29 .35 .11
COMMON STOCK PRICES:
HIGH.......................................................... $ 14 5/16 $ 13 7/8 $ 13 1/4 $ 13 1/2
LOW........................................................... 11 1/2 10 3/4 11 1/16 10 1/4
1996
Net sales...................................................... $ 147,599 $ 193,022 $ 206,455 $ 170,948
Gross profit................................................... 33,084 42,250 44,361 38,921
Income from operations......................................... 4,195 9,407 9,870 4,950
Net income..................................................... 750 3,530(1) 4,560 1,809
Net income per diluted common share(2)(3)...................... .08 .35(1) .38 .15
Common Stock prices:
High........................................................... $ 16 1/4 $ 20 1/4 $ 17 1/8 $ 13 7/8
Low............................................................ 13 15 1/4 12 3/4 11 7/8
</TABLE>
- ------------------------
(1) AFTER AN EXTRAORDINARY LOSS OF $342,000, NET OF TAX, OR $.03 PER SHARE,
ARISING FROM THE EARLY RETIREMENT OF DEBT.
(2) PURSUANT TO THE REQUIREMENTS OF SFAS NO. 128, "EARNINGS PER SHARE", THE
COMPANY HAS RECALCULATED EARNINGS PER SHARE FOR ALL PERIODS PRESENTED.
(3) NET INCOME PER SHARE CALCULATIONS ARE BASED ON THE AVERAGE COMMON SHARES
OUT- STANDING 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.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Building Materials Holding Corp.
- -----------------------------------------------------------------------------
To the Shareholders of Building Materials Holding Corporation:
We have audited the accompanying consolidated balance sheets of Building
Materials Holding Corporation and subsidiary (a Delaware corporation) as of
December 31, 1997 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended December 31, 1997, 1996
and 1995. 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 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 financial position of Building Materials Holding
Corporation and subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boise, Idaho
February 3, 1998
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,177
<SECURITIES> 0
<RECEIVABLES> 86,489
<ALLOWANCES> 1,617
<INVENTORY> 78,162
<CURRENT-ASSETS> 176,823
<PP&E> 153,008
<DEPRECIATION> 34,768
<TOTAL-ASSETS> 340,373
<CURRENT-LIABILITIES> 58,211
<BONDS> 113,410
0
0
<COMMON> 12
<OTHER-SE> 160,939
<TOTAL-LIABILITY-AND-EQUITY> 340,373
<SALES> 728,065
<TOTAL-REVENUES> 728,065
<CGS> 559,655
<TOTAL-COSTS> 705,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,666
<INCOME-PRETAX> 0
<INCOME-TAX> 6,198
<INCOME-CONTINUING> 9,493
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,493
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.78
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<CIK> 0001046356
<NAME> BUILDING MATERIALS HOLDING CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 4,630 8,479 7,066
<SECURITIES> 0 0 0
<RECEIVABLES> 87,135 89,675 71,415
<ALLOWANCES> 2,087 2,510 1,231
<INVENTORY> 74,118 73,792 76,415
<CURRENT-ASSETS> 167,399 172,400 157,282
<PP&E> 119,100 126,685 131,523
<DEPRECIATION> 23,751 25,612 27,602
<TOTAL-ASSETS> 290,116 300,791 288,369
<CURRENT-LIABILITIES> 70,308 56,072 46,815
<BONDS> 75,000 95,375 90,203
976 985 0
0 0 0
<COMMON> 12 12 12
<OTHER-SE> 138,790 143,062 145,076
<TOTAL-LIABILITY-AND-EQUITY> 290,116 300,791 288,369
<SALES> 340,621 547,076 718,024
<TOTAL-REVENUES> 340,621 547,076 718,024
<CGS> 265,287 427,381 559,408
<TOTAL-COSTS> 328,000 524,874 690,870
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 5,967 8,297 10,496
<INCOME-PRETAX> 7,635 15,175 17,926
<INCOME-TAX> 3,013 5,993 6,935
<INCOME-CONTINUING> 4,622 9,182 10,991
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> (342) (342) (342)
<CHANGES> 0 0 0
<NET-INCOME> 4,280 8,840 10,649
<EPS-PRIMARY> 0.44 0.85 0.99
<EPS-DILUTED> 0.43 0.83 0.97
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001046356
<NAME> BUILDING MATERIALS HOLDING CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,736
<SECURITIES> 0
<RECEIVABLES> 92,882
<ALLOWANCES> 2,188
<INVENTORY> 71,507
<CURRENT-ASSETS> 171,615
<PP&E> 140,542
<DEPRECIATION> 32,449
<TOTAL-ASSETS> 309,640
<CURRENT-LIABILITIES> 55,500
<BONDS> 91,562
1,000
0
<COMMON> 12
<OTHER-SE> 156,204
<TOTAL-LIABILITY-AND-EQUITY> 309,640
<SALES> 539,335
<TOTAL-REVENUES> 539,335
<CGS> 415,121
<TOTAL-COSTS> 520,583
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,695
<INCOME-PRETAX> 13,435
<INCOME-TAX> 5,307
<INCOME-CONTINUING> 8,128
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,128
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0.67
</TABLE>
