** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-K**

 
| **ý**                                           | ** ** | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                 | ** ** | ** **                                                                                              |
| **For the fiscal year ended December 31, 2005** |
| ** **                                           | ** ** | ** **                                                                                              |
| **o**                                                | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                 | ** ** | ** **                                                                                              |
| **For the transition period from**                   | ** ** | **to**                                                                                                  | ** ** | ** ** |
|                                                      |            |                                                                                                         |  |  |  |  |

 

**CommissionFile Number:  333-122770**

 

**BoiseCascade Holdings, L.L.C.**

(Exactname of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **20-1478587**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**1111 West Jefferson StreetP.O. Box 50Boise, Idaho  83728**

 

**(208) 384-6161**

(Registrant’s telephone number, including area code)

 

**Securities registered pursuant to Section 12(b) ofthe Act:  None**

 

**Securities registered pursuant to Section 12(g) ofthe Act:  None**

 

Indicate by check mark ifregistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.     Yes o     No ý

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.Yes o     No ý

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.     Yes ý     No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

 

Indicate by check mark ifthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer:

 
| Large  accelerated filer  o |   | Accelerated filer  o |   | Non-accelerated filer  ý |
|---------------------------------------|--------|--------------------------------|--------|-----------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).      Yes o     No ý

 

As of February 28,2006, the registrant did not have any voting or non-voting equity held bynon-affiliates.

 

The registrant, a limitedliability company, has no common stock outstanding. Equity units issued andoutstanding on January 31, 2006, were as follows:

 
| **Series**                 | ** ** | **Units Outstanding as of January 31, 2006** |
|----------------------------|------------|---------------------------------------------------|
| Series A Common Units |       |                                              |   | 66,000,000 |   |   |
| Series B Common Units |       |                                              |   | 547,499,475 |   |   |
| Series C Common Units |       |                                              |   | 32,173,830 |   |   |

 

Theseunits are neither registered nor publicly traded.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

None.

 

 

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**Table of Contents**

 
|     |   | **PART I**                                                                                |   |
|----------|--------|------------------------------------------------------------------------------------------------|--------|
|     |   |                                                                                           |   |
| Item 1.  |   | Business                                                                                       | 1      |
|     |   | General Overview                                                                               | 1      |
|     |   | Corporate Structure                                                                            | 3      |
|     |   | Building Materials  Distribution                                                               | 3      |
|     |   | Wood Products                                                                                  | 4      |
|     |   | Paper                                                                                          | 7      |
|     |   | Packaging & Newsprint                                                                 | 11     |
|     |   | Environmental Issues                                                                           | 13     |
|     |   | Capital Investment                                                                             | 13     |
|     |   | Competition                                                                                    | 13     |
|     |   | Seasonality                                                                                    | 14     |
|     |   | Working Capital                                                                                | 15     |
|     |   | Acquisitions and Divestitures                                                                  | 15     |
|     |   | Employees                                                                                      | 15     |
|     |   | Identification of Executive  Officers                                                          | 15     |
|     |   |                                                                                           |   |
| Item 1A. |   | Risk Factors                                                                                   | 15     |
|     |   |                                                                                           |   |
| Item 1B. |   | Unresolved Staff Comments                                                                      | 21     |
|     |   |                                                                                           |   |
| Item 2.  |   | Properties                                                                                     | 22     |
|     |   | Building Materials Distribution                                                                | 22     |
|     |   | Wood  Products                                                                                 | 23     |
|     |   | Paper                                                                                          | 23     |
|     |   | Packaging &  Newsprint                                                                | 23     |
|     |   |                                                                                           |   |
| Item 3.  |   | Legal Proceedings                                                                              | 23     |
|     |   |                                                                                           |   |
| Item 4.  |   | Submission  of Matters to a Vote of Securityholders                                            | 23     |
|     |   |                                                                                           |   |
| Item 5.  |   | Market for  Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases | 23     |
|     |   |                                                                                           |   |
|     |   | **PART II**                                                                               |   |
|     |   | ** **                                                                                     |   |
| Item 6.  |   | Selected Financial  Data                                                                       | 24     |
|     |   |                                                                                           |   |
| Item 7.  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations    | 26     |
|     |   | Acquisition of Assets from OfficeMax                                                           | 26     |
|     |   | Effects  of the Acquisition                                                                    | 26     |
|     |   | Rescission of Corporate Status                                                                 | 29     |
|     |   | Our  Segments                                                                                  | 29     |
|     |   | Factors That Affect Our Operating Results                                                      | 30     |
|     |   | Recent  Trends                                                                                 | 31     |
|     |   | Results  of Operations                                                                         | 35     |
|     |   | Operational  Outlook                                                                           | 42     |
|     |   | Acquisitions                                                                                   | 43     |
|     |   | Divestitures                                                                                   | 43     |
|     |   | Liquidity and Capital Resources                                                                | 43     |
|     |   | Contractual  Obligations                                                                       | 49     |
|     |   | Off-Balance-Sheet Activities                                                                   | 50     |
|     |   | Guarantees                                                                                     | 50     |
|     |   | Inflationary and Seasonal Influences                                                           | 50     |
|     |   | Disclosures of Financial Market Risks                                                          | 51     |
|     |   | Financial  Instruments                                                                         | 53     |

 

ii

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|     |   | Taxes                                                                                       | 53                                                              |
|----------|--------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
|     |   | Environmental                                                                               | 54                                                              |
|     |   | Critical Accounting Estimates                                                               | 55                                                              |
|     |   | Non-GAAP  Financial Measures                                                                | 61                                                              |
|     |   |                                                                                        |                                                            |
| Item 7A. |   | Quantitative  and Qualitative Disclosures About Market Risk                                 | 63                                                              |
|     |   |                                                                                        |                                                            |
| Item 8.  |   | Consolidated  Financial Statements and Supplementary Data                                   | 64                                                              |
|     |   | Notes to Consolidated Financial Statements                                                  | 69                                                              |
|     |   | 1.                                                                                          | Summary of  Significant Accounting Policies                     | 69 |
|     |   | 2.                                                                                          | Purchase of  OfficeMax’s Forest Products and Paper Assets  | 76 |
|     |   | 3.                                                                                          | Transactions  With Related Parties                              | 77 |
|     |   | 4.                                                                                          | Other (Income)  Expense, Net                                    | 80 |
|     |   | 5.                                                                                          | Income Taxes                                                    | 80 |
|     |   | 6.                                                                                          | Leases                                                          | 83 |
|     |   | 7.                                                                                          | Receivables                                                     | 83 |
|     |   | 8.                                                                                          | Investments in  Equity Affiliate                                | 84 |
|     |   | 9.                                                                                          | Goodwill and  Intangible Assets                                 | 84 |
|     |   | 10.                                                                                         | Asset Retirement  Obligations                                   | 86 |
|     |   | 11.                                                                                         | Debt                                                            | 87 |
|     |   | 12.                                                                                         | Financial Instruments                                           | 89 |
|     |   | 13.                                                                                         | Retirement and  Benefit Plans                                   | 91 |
|     |   | 14.                                                                                         | Redeemable Equity  Units                                        | 95 |
|     |   | 15.                                                                                         | Capital                                                         | 98 |
|     |   | 16.                                                                                         | Segment Information                                             | 100 |
|     |   | 17.                                                                                         | Commitments and  Guarantees                                     | 106 |
|     |   | 18.                                                                                         | Consolidating  Guarantor and Nonguarantor Financial Information | 107 |
|     |   | 19.                                                                                         | Legal  Proceedings and Contingencies                            | 116 |
|     |   | 20.                                                                                         | Quarterly  Results of Operations (unaudited)                    | 116 |
|     |   |                                                                                        |                                                            |
|     |   | Report of Independent Registered Public Accounting  Firm                                    | 118                                                             |
|     |   |                                                                                        |                                                            |
| Item 9.  |   | Changes In  and Disagreements With Accountants on Accounting and Financial  Disclosure | 119                                                             |
|     |   |                                                                                        |                                                            |
| Item 9A. |   | Controls and  Procedures                                                                    | 119                                                             |
|     |   |                                                                                        |                                                            |
| Item 9B. |   | Other Information                                                                           | 119                                                             |
|     |   |                                                                                        |                                                            |
|     |   | **PART III**                                                                           |                                                            |
|     |   | ** **                                                                                  |                                                            |
| Item 10. |   | Directors  and Executive Officers of the Registrant                                         | 120                                                             |
|     |   |                                                                                        |                                                            |
| Item 11. |   | Executive  Compensation                                                                     | 123                                                             |
|     |   |                                                                                        |                                                            |
| Item 12. |   | Security  Ownership of Certain Beneficial Owners and Management                             | 131                                                             |
|     |   |                                                                                        |                                                            |
| Item 13. |   | Certain  Relationships and Related Transactions                                             | 133                                                             |
|     |   |                                                                                        |                                                            |
| Item 14. |   | Principal  Accounting Fees and Services                                                     | 136                                                             |
|     |   |                                                                                        |                                                            |
|     |   | **PART IV**                                                                            |                                                            |
|     |   | ** **                                                                                  |                                                            |
| Item 15. |   | Exhibits and  Financial Statement Schedules                                                 | 138                                                             |
|     |   |                                                                                        |                                                            |
|     |   | Signatures                                                                                  | 139                                                             |
|     |   |                                                                                        |                                                            |
|     |   | Index  to Exhibits                                                                          | 140                                                             |
|     |   | ** **                                                                                  |                                                            |
|     |   | Certifications                                                                              |                                                            |

 

iii

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**PART 1**

 

Wehave publicly-traded, registered debt securities, which require us to filereports with the Securities and Exchange Commission (SEC). All of our SECfilings, which include this Annual Report on Form 10-K, Quarterly Reportson Form 10-Q, Registration Statements, Current Reports on Form 8-K,and all related amendments are available free of charge via Electronic Data GatheringAnalysis and Retrieval (EDGAR) through the SEC website at www.sec.gov. We alsoprovide copies of our SEC filings at no charge upon request and make electroniccopies of our reports available through our website at www.bc.com, as soon asreasonably practicable after filing such material with, or furnished to, theSEC. Attached as exhibits to this Form 10-K you will also findcertifications of our Chief Executive Officer and Chief Financial Officerrequired under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002.

 

***ITEM 1.******                                          ******BUSINESS***

 

As used in this 2005 Annual Report on Form 10-K, theterm “Boise” means Boise Cascade Holdings, L.L.C., and its consolidatedsubsidiaries and where the context relates to periods prior to the acquisitionof OfficeMax Incorporated’s (OfficeMax) forest products and paper assets, to theirpredecessors in interest. The terms “Boise Forest Products Operations” and “predecessor”refer to the results of the forest products and paper assets of OfficeMax thatwe acquired on October 29, 2004, from OfficeMax. OfficeMax was formerly knownas Boise Cascade Corporation. We acquired the names “Boise” and “Boise Cascade”as part of the acquisition of OfficeMax’s forest products and paper assets (theAcquisition). The terms “we,” “us,” and “our” mean Boise with respect toperiods after the Acquisition and Boise Forest Products Operations with respectto periods prior to the Acquisition. See Note 2, Purchase of OfficeMax’sForest Products and Paper Assets, in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K for more information related to theacquisition.

 

The consolidated financialstatements present the financial results of Boise for the year ended December 31,2005, and the period of October 29 (inception) through December 31,2004, and the results of OfficeMax’s forest products operations for the periodof January 1 through October 28, 2004, and the year ended December 31,2003. When we refer to the 2004 results in this Form 10-K, we arereferring to the entire year, both the period owned by the predecessor companyand the period owned by Boise.

 

***General Overview***

 

We area diversified North American paper and forest products company. We areheadquartered in Boise, Idaho. We operate our business in the following five reportablesegments:  Building MaterialsDistribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other (support staff services). We present information pertainingto each of our five segments and the geographic areas in which they operate inNote 16, Segment Information, of the Notes to Consolidated FinancialStatements in “Item 8.  ConsolidatedFinancial Statements and Supplementary Data” of this Form 10-K.

 

On October 29, 2004, we acquired OfficeMax’s forestproducts and paper assets, other than its timberland operations, for anaggregate purchase price of $2.2 billion, including approximately$140 million of related fees and expenses. The purchase price is subjectto adjustment based on amounts paid by us to OfficeMax, or paid by OfficeMax tous, under the Additional Consideration Agreement that we entered into as partof the Acquisition. For information on the Additional Consideration Agreement,see “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results ofOperations—Effects of the Acquisition—Material Ongoing Agreements WithOfficeMax—Additional Consideration Agreement” of this Form 10-K.Concurrently with the Acquisition, Boise Land & Timber Holdings Corp.(Timber Holdings), an entity that is majority owned by our majority owner,Forest Products Holdings, L.L.C. (FPH), acquired from OfficeMax its timberlandoperations. For more information about the Acquisition, see Note 2,Purchase of OfficeMax’s Forest Products and Paper Assets, of the Notes toConsolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K.

 

Historically,OfficeMax conducted the businesses acquired by Boise in three reportablesegments:  Boise Building Solutions (whichincluded both the building products manufacturing and building materialsdistribution businesses), Boise Paper Solutions (which included the paper andpackaging and newsprint businesses), and Corporate and Other (support staffservices). We have recast the financial information of our predecessor includedin this Form 10-K to conform to our current segment

 

1

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presentation. OfficeMax historically allocated the results of itstimberland operations to each of its Boise Building Solutions and Boise PaperSolutions segments. Since we did not acquire the timberland operations fromOfficeMax, they are not included in the predecessor financial informationincluded in this Form 10-K.

 

On February 4,2005, Timber Holdings sold all of its timberlands to Forest Capital Partners, L.L.C.(Forest Capital), an unrelated party, for $1.65 billion in cash(Timberlands Sale). As part of the Timberlands Sale, we entered into a numberof long-term fiber supply agreements with Forest Capital to support thecontinued supply of fiber to our wood products and paper manufacturingfacilities.

 

On May 9, 2005, weconverted from a limited liability company to a C corporation by filing acertificate of conversion with the Delaware Secretary of State. This conversionwas in anticipation of an initial public offering of equity securities, whichwe subsequently abandoned. On December 20, 2005, acting pursuant to aRescission Agreement among our shareholders, we rescinded our conversion to C corporationstatus by filing a conversion certificate with the Delaware Secretary of Statethat restored our status as a limited liability company and changed our nameback to Boise Cascade Holdings, L.L.C. In connection with converting back to alimited liability company, in fourth quarter 2005, the shares of preferred andcommon stock were exchanged for equity units at a 1:1 ratio for the Series Apreferred stock and at a 13:1 ratio for the Class B and C commonstock. We also reversed the taxes we had recorded as acorporate entity. For more information related to the rescission seeNote 5, Income Taxes in “Item 8. Consolidated Financial Statements and Supplemental Data” of this Form 10-K.

 

2

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***Corporate Structure***

 

The followingchart summarizes our corporate structure and equity ownership (based on votingpower):

 

 

###### ***Building Materials Distribution***

 

# *Products*

# * *

Weare a leading national inventory-carrying wholesale distributor of buildingmaterials. We distribute a broad line of building materials, including engineeredwood products (EWP), oriented strand board (OSB), plywood, lumber, and generalline items such as framing accessories, composite decking, roofing, siding, andinsulation. We purchase most of these building materials from third-partysuppliers and market them primarily to customers that resell building materialsto professional builders in the residential, light commercial construction, andrepair-and-remodeling markets. In 2005, EWP sales generated 16% of revenue inthis segment. We believe our broad product line provides our customers with aone-stop resource for their needs and lowers per-unit freight costs. We alsohave expertise in special-order sourcing and merchandising support, and ournationwide supplier relationships allow us to offer excellent customer serviceon top brands in the building materials industry.

 

3

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The following table setsforth segment sales and earnings before interest, taxes, depreciation, andamortization (EBITDA) for the periods indicated:

 
| ** ** | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|------------|------------|-----------------------|------------|-----------------------|------------|
| ** ** | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** ** | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** ** | ** ** | **(millions)**        | ** ** |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Sales      |       | $                     | 3,052.3    |                  | $          | 401.7 |   | $ | 2,442.4 |   | $ | 2,047.8 |   | $ | 1,696.1 |   | $ | 1,596.4 |   |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| EBITDA (a) |       | 109.0                 |       | 11.6                  |       | 84.9 |   | 54.8 |   | 32.2 |   | 26.3 |   |
|            |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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# *(a)*                                  Formore information about our use of EBITDA, see "Non-GAAP FinancialMeasures" in "Item 7. Management's Discussion and Analysis ofFinancial Condition and Results of Operations" of this Form 10-K.

 

# *Facilities*

# * *

Weoperate 29 wholesale building materials distribution facilities locatedstrategically throughout the United States. Since 2000, we have relocated orexpanded several facilities, mostly in the eastern United States. We increasedour national footprint by adding two facilities in California, one in 2002 andanother in 2005. We also added a facility in Ohio during 2003. This expansionhas occurred through both acquisitions and organic growth.

 

# *RawMaterials and Input Costs*

# * *

Wepurchase the majority of the building materials we distribute from third-partysuppliers. Approximately 25% of the lumber, commodity panels, and engineeredwood products purchased by Building Materials Distribution during 2005 werepurchased from our Wood Products segment. Our vendor base includes over1,300 suppliers. We generally do not have long-term supply contracts withour vendors. This flexibility and our national presence allow us to obtainfavorable price and term arrangements on a constant basis.

 

# *Sales,Marketing, and Distribution*

# * *

Utilizingcentralized systems, each of our distribution centers implements its owndistribution and logistics model tailored to the customers it serves. Weoperate a fleet of trucks to deliver materials on a regularly scheduled basis.We have a large decentralized sales force able to use timely and accurate marketinformation and local product knowledge to support customers.

 

# *Customers*

# * *

Ourcustomer base in this segment includes a wide range of customers acrossmultiple market segments and various end markets. In 2005, a majority of oursales in this segment were to “pro dealers,” retail distributors that sellbuilding materials to professional builders in the residential, lightcommercial construction, and repair-and-remodeling markets. We also serviceretail lumberyards, home improvement centers, and other industrial accounts.

 

# *Business Plan*

# * *

Weintend to continue to expand our building materials distribution network intonew geographic markets and to grow in our existing markets. Since 2000, we have relocated or expandedseveral facilities, mostly in the eastern United States. Sales in thissegment have grown from $1.6 billion in 2000 to $3.1 billion in 2005.The business has grown successfully by acquiring facilities, opening newlocations, relocating and expanding existing facilities, and capturing local marketshare through superior customer service.

 

***Wood Products***

 

# *Products*

# * *

We area leading producer of EWP, consisting of laminated veneer lumber (LVL), ahigh-strength engineered lumber often used in beams; I-joists, a structuralsupport typically used in floors and roofs;

 

4

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and laminated beams. We believe we are the second-largest EWPmanufacturer in North America, with an estimated market share of approximately 20%in 2005. Over the past ten years, we have shifted our product focus fromcommodity products, such as plywood and lumber, to EWP which has more stableprices and higher margins. EWP accounted for 44% of our sales in this segmentin 2005. As a result of growth in new housing construction and substitutiontrends away from traditional wide-dimension lumber to EWP, our EWP sales grewfrom 1998 through 2005 at a compound annual rate of 19%. We also produceplywood, particleboard, dimension lumber, and high-quality ponderosa pinelumber, a premium lumber grade sold primarily to manufacturers of specialtywood windows, moldings, and doors. Our wood products are used in newresidential and light commercial construction and in residential repair and remodeling.

 

Thefollowing table sets forth segment sales and EBITDA for the periods indicated:

 
| ** **     | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|----------------|------------|-----------------------|------------|-----------------------|------------|
| ** **     | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** **     | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **     | ** ** | **(millions)**        | ** ** |
|           |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Sales          |       | $                     | 1,294.4    |                  | $          | 200.1 |   | $ | 1,159.9 |   | $ | 1,115.7 |   | $ | 1,004.2 |   | $ | 1,010.1 |   |
|           |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| EBITDA (a) (b) |       | 142.4                 |       | 18.9                  |       | 226.5 |   | 77.7 |   | 37.1 |   | (20.5 | ) |
|                |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                  The period of January 1 through October 28,2004, included a $46.5 million pretax gain for the sale of our predecessor’s47% interest in Voyageur Panel.

 

(b)                                 For more information about our use of EBITDA,see "Non-GAAP Financial Measures" in "Item 7. Management'sDiscussion and Analysis of Financial Condition and Results of Operations"of this Form 10-K.

 

# *Facilities*

# * *

We currently operate an integrated network of 3 EWPfacilities and 11 plywood and veneer plants, some of which manufactureinputs used in our EWP facilities. We also operate 5 sawmills and 1 particleboardplant. The following table lists annual capacities of our Wood Productsfacilities as of December 31, 2005, and production for the year thenended:

 
| ** **                                              | ** ** | **Number  of Mills** | ** ** | **Capacity (a)** | ** ** | **Production** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|-----------------------|------------|----------------|------------|
| ** **                                              | ** ** | **(millions)**       | ** ** |
|                                                    |       |                 |       |                  |       |           |       |
| Engineered wood products (EWP) (b)                 |       | 3                    |       |                  |       |           |       |
| Laminated veneer  lumber (LVL) (cubic feet)             |       |                 |       | 25.0                  |       | 19.6           |       |
| I-joists  (equivalent lineal feet)                      |       |                 |       |                  |       | 228            |       |
| Plywood and veneer (sq. ft.) (3/8” basis) (c) |       | 10                   |       | 1,620                 |       | 1,603          |       |
| Lumber (board feet) (d)                                 |       | 5                    |       | 270                   |       | 259            |       |
| Particleboard (sq. ft.) (3/4” basis)               |       | 1                    |       | 160                   |       | 163            |       |
| Brazilian veneer (sq. ft.) (3/8” basis) (e)   |       | 1                    |       | 170                   |       | 148            |       |

 

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(a)                                  Capacity is production assuming normal operating shiftconfigurations. Accordingly, production can exceed capacity under someoperating conditions.

 

(b)                                 A portion of LVL production is used tomanufacture I-joists at two EWP plants. Capacity is based on LVL productiononly. We are currently expanding our LVLcapacity by approximately 4.0 million cubic feet. This capacity will comeonline in June 2006 and should be fully operational by year-end. As thecapacity installed in 2005 continues to ramp up, we expect our total capacityto increase 24% by the end of2006, as compared with the end of 2005.

 

(c)                                  Production and capacity applicable to plywood only.Approximately 20% of the plywood we produced in 2005 was utilized internally toproduce EWP.

 

(d)                                 We own one sawmill in Jackson, Alabama, which is managed as part of ourJackson pulp and paper mill complex. The financial results for this mill arereported in our Paper segment, and the production and capacity data in thistable exclude this facility.

 

5

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(e)                                  Most of the veneer is used for production of LVL at ourplant in Alexandria, Louisiana. The remainder is processed into plywood inBrazil or sold in the open market.

 

*Raw Materials and Input Costs*

 

Ourdomestic plywood and veneer facilities use Douglas fir, white woods, and pinelogs as raw materials. We use ponderosa pine, spruce, and white fir logs tomanufacture various grades of lumber. Our EWP facilities in Louisiana andOregon use veneers and parallel-laminated veneer panels produced by ourfacilities and purchased from third parties, together with OSB purchased fromthird parties, to manufacture LVL and I-joists. In conjunction with theTimberlands Sale, we entered into long-term supply contracts with the buyer fora portion of our fiber needs. These agreements expire on December 31,2014, and fiber purchased under these agreements is purchased at prices thatapproximate market levels. We currently supply our mills with fiber pursuant tothese contracts, as well as pursuant to agreements with other third parties andopen-market purchases. As a result of the Timberlands Sale, we increased ouropen-market purchases of wood fiber. Since most of our manufacturing facilitiesare located in close proximity to active wood markets, we believe theTimberlands Sale has not adversely affected our access to fiber at competitiveprices.

 

Otherimportant materials used to manufacture and prepare our wood products for saleinclude resins, adhesives, plastic strapping, and lumber wrap, which wepurchase both on the open market and through long-term contracts.

 

During2005, energy, primarily electricity, natural gas, and fuel oil, accounted forapproximately 3% of the sum of our materials, labor, and other operatingexpenses, including fiber costs, in this segment. We purchase substantialportions of our natural gas and electricity under supply contracts, most ofwhich are with local providers in regions in which our facilities are located.Our gas contracts have pricing mechanisms based primarily on current marketprices, and our electricity contracts have pricing mechanisms based primarilyon published tariffs. In addition, we may also enter into energy hedgeagreements to mitigate price risk.

 

# *Customers*

# * *

OurBuilding Materials Distribution segment is our Wood Products segment’s largestcustomer, representing approximately 36% of its overall sales, including approximately60% of its EWP sales, in 2005. Our third-party customers in this segmentinclude wholesalers, major retailers, and industrial converters in bothdomestic and export markets.

 

*Sales, Marketing, and Distribution*

 

Salesof plywood, lumber, and particleboard are managed centrally by product. Our EWPsales force is managed centrally through a main office that oversees regionalsales teams. Our sales force provides a variety of technical support servicesfor our EWP, including integrated design, engineering, product specificationsoftware, distributor inventory management software, and job-pack preparationsystems.

 

6

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The following table lists sales volumes for our WoodProducts facilities for the periods indicated:

 
| ** **                                       | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** **                                       | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                       | ** ** | **(millions)**        | ** ** |
|                                             |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Laminated veneer  lumber (LVL) (cubic feet) |       | 12.3                  |       | 1.8                   |       | 10.1 |   | 9.8 |   | 7.8 |   | 6.7 |   |
| I-joists (equivalent lineal feet)                |       | 243                   |       | 31                    |       | 192 |   | 200 |   | 166 |   | 156 |   |
| Plywood (sq. ft.) (3/8” basis)              |       | 1,328                 |       | 243                   |       | 1,228 |   | 1,655 |   | 1,603 |   | 1,636 |   |
| Lumber (board feet)                              |       | 327                   |       | 60                    |       | 303 |   | 364 |   | 395 |   | 398 |   |
| Particleboard (sq. ft.) (3/4” basis)        |       | 165                   |       | 22                    |       | 134 |   | 153 |   | 189 |   | 199 |   |

 

*Business Plan*

 

We plan to further expandour market position in EWP. We believe EWP will continue to gain market sharefrom traditional building products and that margins for EWP, over time, willcontinue to exceed those for most commodity wood-based building products. Weare focused on leveraging our competitive cost structure, comprehensivecustomer service offering, design support capabilities, and efficientdistribution network to continue to gain market share among homebuilders,building products retailers, and other distributors. To that end, we seek toexpand our presence in EWP by adding capacity in a cost-effective manner. In 2005,demand for EWP remained strong, and average prices increased from those in 2004in response. We are currently expanding our LVL capacity by approximately 4.0 million cubic feet. Thiscapacity will come on-line in June 2006 and should be fully operational byyear-end. As the capacity we installed in 2005 continues to ramp up, we expectour total capacity to increase 24%by the end of 2006, as compared with the end of 2005. We believe we havefurther opportunities to increase our EWP capacity with lower capitalrequirements due to the integration of our EWP production facilities with ourveneer and plywood plants.

 

###### ***Paper***

 

# *Products*

# * *

Wemanufacture and sell uncoated free sheet (including cut-size office papers,commercial printing paper, business forms, envelope papers, and a wide range ofvalue-added papers), market pulp, and containerboard (corrugating medium). Manyof our paper products are commodity products, while others have specializedfeatures that make these products “value-added.” Our value-added grades includebright and colored cut-size office papers and custom-developed specialty papersfor such uses as label and release, security, and food wrap applications. Wesell to end-users both directly from our mills and through distribution centers.We are the fourth-largest manufacturer of uncoated free sheet in North America,with annual uncoated free sheet production capacity of approximately 1.6 millionshort tons (a short ton is equal to 2,000 pounds) and market share ofapproximately 11% in 2005. During 2005, uncoated free sheet accounted forapproximately 81% of segment sales.

 

7

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The following table sets forth segment sales andEBITDA for the periods indicated:

 
| ** ** | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|------------|------------|-----------------------|------------|-----------------------|------------|
| ** ** | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** ** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** ** | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** ** | ** ** | **(millions)**        | ** ** |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Sales      |       | $                     | 1,417.8    |                  | $          | 230.1 |   | $ | 1,140.4 |   | $ | 1,257.1 |   | $ | 1,285.1 |   | $ | 1,287.0 |   |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| EBITDA (a) |       | 112.6                 |       | 27.3                  |       | 83.1 |   | 112.6 |   | 174.5 |   | 145.9 |   |
|            |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)                                  For more information about our use of EBITDA,see "Non-GAAP Financial Measures" in "Item 7. Management'sDiscussion and Analysis of Financial Condition and Results of Operations"of this Form 10-K.

 

Ourcommodity grade paper products are produced primarily on our larger papermachines in long, high-volume production runs that achieve economies of scale.On our smaller paper machines, our cost-competitively manufactured value-addedgrades are displacing the production of commodity grades. Value-added gradestend to require shorter production runs, generate higher and more stable prices,and have higher margins. Sales volumes of value-added grades increased 2%, from426,000 tons in 2004 to 436,000 tons in 2005. This increased focus onvalue-added grades is an important component of our strategy.

 

We sell market pulp in quantitiesapproximately equal to the market pulp we purchase; therefore, any market priceand cost changes tend to offset one another. We also benefit from long-termpulp supply contracts at our mills that buy market pulp. We produce corrugating medium for use in ourPackaging & Newsprint segment.

 

*Facilities*

 

We manufacture our uncoated free sheet paper atfour mills in the United States. These mills had an annual capacity of 1.6 millionshort tons of uncoated free sheet as of December 31, 2005. Our uncoatedfree sheet paper mills are supported by converting machines that have thecapacity to convert 1,001,000 tons of roll paper into cut- and folio-sizesheets annually. From 2000 to 2005, approximately $512 million wasinvested in these mills to improve their cost position, expand capacity,enhance product capabilities, maintain facilities, and comply withenvironmental regulations.

 

8

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The following table sets forth the annual capacities ofmanufacturing locations in our Paper segment as of December 31, 2005, andproduction for the year then ended:

 
| ** **                     | ** ** | **Number of  Machines** | ** ** | **Capacity (a)** | ** ** | **Production** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                     | ** ** | ** **              | ** ** | **(short tons)**      | ** ** |
| **PULP AND PAPER MILLS**       |       |                    |       |                  |       |           |       |
| Jackson, Alabama               |       |                    |       |                  |       |           |       |
| Uncoated free  sheet           |       | 2                       |       | 512,000               |       | 476,000        |       |
| International Falls, Minnesota |       |                    |       |                  |       |           |       |
| Uncoated free  sheet           |       | 4                       |       | 544,000               |       | 518,000        |       |
| St. Helens, Oregon             |       |                    |       |                  |       |           |       |
| Uncoated free  sheet           |       | 3                       |       | 254,000               |       | 260,000        |       |
| Market pulp                    |       | —                  |       | 98,000                |       | 98,000         |       |
| Wallula, Washington            |       |                    |       |                  |       |           |       |
| Uncoated free  sheet           |       | 1                       |       | 240,000               |       | 233,000        |       |
| Market pulp                    |       | 1                       |       | 130,000               |       | 131,000        |       |
| Containerboard  (medium)       |       | 1                       |       | 130,000               |       | 128,000        |       |
| ** **                     | ** ** | **12**                  | ** ** | **1,908,000**         | ** ** | **1,844,000**  |       |
|                           |       |                    |       |                  |       |           |       |
| **ANNUAL CAPACITY BY PRODUCT** |       |                    |       |                  |       |           |       |
| Uncoated free sheet            |       |                    |       | 1,550,000             |       |           |       |
| Containerboard (medium)        |       |                    |       | 130,000               |       |           |       |
| Market pulp                    |       |                    |       | 228,000               |       |           |       |
| ** **                     |       | ** **              |       | **1,908,000**         |       |           |       |

 

----

(a)                      Capacity assumes production 24 hours per day,365 days per year, less days allotted for planned maintenance.

 

*RawMaterials and Input Costs*

 

Wood fiber is ourprincipal raw material in this segment. The primary sources of wood fiber aretimber and its byproducts, such as wood chips, wood shavings, and sawdust.Prior to the Timberlands Sale, we supplied our paper mills with fiber from ourpredecessor’s timberland operations and Timber Holdings, as well as from thirdparties. Upon the Timberlands Sale, we entered into long-term supply contractswith the buyer for a portion of our fiber needs. These agreements expire on December 31,2014, and fiber purchased under these agreements is purchased at prices thatapproximate market levels. We currently supply our paper mills with fiberpursuant to these contracts, as well as pursuant to agreements with other thirdparties and open-market purchases. As a result of the Timberlands Sale, we haveincreased our open-market purchases of wood fiber. Since most of ourmanufacturing facilities are located in close proximity to active wood markets,the Timberlands Sale did not adversely affect our access to fiber atcompetitive prices. We obtain some of our wood residuals from our sawmills and woodproducts facilities in the Northwest and, to a lesser extent, in the South, andthe remainder are purchased from outside sources. We also obtain fiber for ourpulp mills in the Pacific Northwest from our cottonwood fiber farm nearWallula, Washington.

 

Allof our paper mills have on-site pulp production facilities. Some of our papermills also purchase pulp from third parties. In addition to wood fiber andmarket pulp, we purchase wastepaper to convert into recycled pulp for use inour paper products. Other important raw materials used in this segment includeprecipitated calcium carbonate, sodium chlorate, sodium hydroxide, and dyes.

 

Wegenerally purchase raw materials through contracts or open-market purchases.Our contracts are generally with suppliers located in closest proximity to thespecific facility they supply, and they generally contain price adjustmentmechanisms to account for market price and expense volatility.

 

# *Our Paper segment consumes substantial amounts of energy,such as electricity, natural gas, and fuel oil. During 2005, energy costsaccounted for approximately 16% of the aggregate amount of materials, labor,and other operating expenses, including fiber costs in this segment. Wepurchase substantial portions of our natural gas and electricity under supplycontracts, most of which are between a specific plant and a specific localprovider. Under most of these contracts, the providers are bound to provide uswith all of our needs for a particular type of energy at a specific facility.Most of these contracts*

 

9

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# *have pricing mechanisms that adjust or set pricesbased on current market prices. In addition, we also enter into energy hedgeagreements to mitigate price risk.*

# * *

# *Sales,Marketing, and Distribution*

# * *

Our uncoated free sheet is sold primarily by our ownsales personnel. We sell to end-users both directly from our mills and throughdistribution centers. This allows us to respond quickly to customer demands. In2005, we processed a majority of our uncoated free sheet orders electronically,either over the internet or using Electronic Data Interchange, acomputer-to-computer purchase ordering and tracking system.

 

Thefollowing table sets forth sales volumes of paper and paper products for the periodsindicated:

 
| ** **              | ** ** | **Boise**                     | ** ** | **Predecessor**       |       |
|-------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **              | ** ** | ** **                    | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **              | ** ** | ** **                    | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **              | ** ** | **Year Ended**                | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **              | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** |   |
| ** **              | ** ** | **2005**                      | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** |   |
| ** **              | ** ** | **(thousands of short tons)** |       |
|                    |       |                          |       |                  |       |   |   |   |   |   |   |   |   |
| Uncoated free sheet     |       | 1,516                         |       | 246                   |       | 1,249 |   | 1,396 |   | 1,425 |   | 1,386 |   |
| Containerboard (medium) |       | 128                           |       | 23                    |       | 110 |   | 126 |   | 123 |   | 123 |   |
| Market pulp and other   |       | 142                           |       | 27                    |       | 138 |   | 146 |   | 179 |   | 157 |   |
| ** **              | ** ** | **1,786**                     | ** ** | **296**               | ** ** | **1,497** | ** ** | **1,668** | ** ** | **1,727** | ** ** | **1,666** | ** ** |

 

*Customers*

 

Ourlargest customer in this segment is OfficeMax. In 2005, sales to OfficeMaxaccounted for $562.3 million of paper segment sales, including 47% of ouruncoated free sheet sales volume and 82% of our office papers sales volume. In October 2004,OfficeMax agreed to purchase from us its full North American requirements forcut-size office paper, to the extent we choose to supply such paper to them,through December 2012. The price for paper sold under this supplyagreement approximates market prices. OfficeMax’s purchase obligations underthe agreement will phase out over a four-year period beginning one year afterthe delivery of notice of termination, but not prior to December 31, 2012.This supply agreement provides us with access to one of North America’s largestoffice products sales and distribution networks, giving us a competitiveadvantage from the perspective of market access and customer supply-chainmanagement.

 

Inaddition to OfficeMax, we have over 900 uncoated free sheet papercustomers, none of which individually represents a material portion of oursales. Our customers include paper merchants, commercial and financialprinters, paper converters, such as envelope and form manufacturers, andcustomers who use our paper for specialty applications, such as label andrelease products or food wrap. The majority of these customers purchaseproducts through individual purchase orders. In addition to our paper supplyagreement with OfficeMax, we have long-term relationships with other customers,although no single relationship, other than the one with OfficeMax, is materialto our business.

 

*Business Plan*

 

Weplan to work closely with our customers to develop and manufacture innovativevalue-added papers and service programs that respond to their changing needsand technical requirements. On our smaller machines, we will continue todisplace the production of commodity grades with higher-margin value-addedgrades, which we believe we can produce at competitive costs. By leveraging ourexisting customer relationships, design capabilities, competitive costposition, and efficient logistics network, we seek to become a leading NorthAmerican supplier of value-added papers.

 

We alsointend to build on our successful relationship with OfficeMax to become apreferred supplier of cut-size office papers to a greater portion of theircommercial and retail customers. Our long-term supply agreement with OfficeMaxallows us to focus our largest paper machines on producing commodity productsin long, high-volume production runs. This relationship allows us to continueto improve the capacity utilization of our largest paper machines, leveragesupply-chain efficiencies, and

 

10

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develop and test product and packaging innovations. We plan to leveragethe expertise developed in this relationship to better serve our othercustomers and develop new customers and products while pursuing productivityimprovements and cost reductions.

 

###### ***Packaging & Newsprint***

 

# *Products*

# * *

We manufacture and sell containerboard (linerboard) andcorrugated containers, as well as newsprint. The following table sets forth segmentsales and EBITDA for the periods indicated:

 
| ** ** | ** ** | **Boise**             | ** ** | **Predecessor**       |       |
|------------|------------|-----------------------|------------|-----------------------|------------|
| ** ** | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** ** | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** ** | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** ** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** |   |
| ** ** | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** |   |
| ** ** | ** ** | **(millions)**        | ** ** |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Sales      |       | $                     | 731.6      |                  | $          | 128.9 |   | $ | 565.6 |   | $ | 638.1 |   | $ | 633.4 |   | $ | 702.1 |   |
|       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| EBITDA (a) |       | 61.0                  |       | 13.3                  |       | 33.5 |   | 25.4 |   | 18.4 |   | 65.6 |   |
|            |            |                       |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(a)                                  For more information about our use of EBITDA,see "Non-GAAP Financial Measures" in "Item 7. Management'sDiscussion and Analysis of Financial Condition and Results of Operations"of this Form 10-K.

 

Containerboard is used in the production ofcorrugated containers. Our corrugated containers are used in the packaging offresh fruit and vegetables, processed food, beverages, and other industrial andconsumer products. During 2005, we produced approximately 533,000 short tonsof linerboard and approximately 4.8 billion square feet of corrugatedcontainers, and our corrugated container plants consumed (either directly orthrough trades with other containerboard producers) approximately 55% of Boise’scontainerboard production, including the corrugating medium manufactured in ourPaper segment.

 

Wemanufactured approximately 411,000 tons of newsprint during 2005,primarily for use in printing daily newspapers and other publications in NorthAmerica.

 

# *Facilities*

# * *

We manufacture containerboard (linerboard) and newsprint atour mill in DeRidder, Louisiana. This mill is one of the largest paper mills inNorth America, with an approximate annual production capacity of 1.0 millionshort tons as of December 31, 2005. From 2000 to 2005, our Packaging &Newsprint segment invested approximately $198 million in the DeRidder millto improve its cost position, expand capacity, enhance product capabilities,maintain the facility, and comply with environmental regulations. We alsomanufacture corrugated containers at five plants in the Pacific Northwest, withan aggregate annual capacity of approximately 6.5 billion square feet,based on operating the plants five days a week, 24 hours a day.

 

Thefollowing table sets forth annual capacities of our containerboard (linerboard)and newsprint mill in DeRidder, Louisiana, as of December 31, 2005, andproduction for the year then ended:

 
| ** **                   | ** ** | **Number of  Machines** | ** ** | **Capacity (a)** | ** ** | **Production** | ** ** |
|------------------------------|------------|-------------------------|------------|-----------------------|------------|----------------|------------|
| ** **                   | ** ** | ** **              | ** ** | **(short tons)**      | ** ** |
| **PULP AND PAPER MILL**      |       |                    |       |                  |       |           |       |
| DeRidder, Louisiana          |       |                    |       |                  |       |           |       |
| Containerboard  (linerboard) |       | 1                       |       | 554,000               |       | 533,000        |       |
| Newsprint                    |       | 2                       |       | 434,000               |       | 411,000        |       |
| ** **                   | ** ** | **3**                   | ** ** | **988,000**           | ** ** | **944,000**    |       |

 

----

(a)                      Capacity assumes production 24 hours per day,365 days per year, less days allotted for planned maintenance.

 

11

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On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for approximately $45 millionplus adjustments for working capital items. CTC manufactures corrugated sheets thatit sells primarily to regional independents and full-line container plants inTexas, Louisiana, Arkansas, and Mexico. CTC is located close to our mill inDeRidder, Louisiana, which produces linerboard used in CTC’s manufacturingprocesses. We expect the acquisition to increase our Packaging &Newsprint segment’s containerboard integration from 55% to 77%. The operationcontinues to operate under the name Central Texas Corrugated.

 

# *RawMaterials and Input Costs*

# * *

Woodfiber is the principal raw material in this segment. The primary sources ofwood fiber are timber and its byproducts, such as wood chips, wood shavings,and sawdust. Prior to the Timberlands Sale, we supplied our DeRidder mill withfiber from our predecessor’s timberland operations and Timber Holdings, as wellas from third parties. In connection with the Timberlands Sale, we entered intoa long-term supply contract with the buyer for a significant portion of ourfiber needs. We currently supply our DeRidder mill with fiber pursuant to thiscontract, as well as pursuant to agreements with other third parties andopen-market purchases. As a result of the Timberlands Sale, we increased ouropen-market purchases of wood fiber. We obtain some of our wood residuals fromour wood products plants in the South, and the remainder are purchased fromoutside sources. Since our manufacturing facility is located in close proximityto an active wood market, the Timberlands Sale did not reduce our access to fiberat competitive prices.

 

Wegenerally purchase raw materials through contracts or open-market purchases.Our contracts are generally with suppliers located in close proximity to thespecific facility they supply, and they generally contain price adjustmentmechanisms to account for market price and expense volatility.

 

OurPackaging & Newsprint segment consumes substantial amounts of energy,such as electricity and natural gas. During 2005, energy costs accounted forapproximately 14% of the sum of materials, labor, and other operating expenses,including fiber costs, in this segment. We purchase substantial portions of ournatural gas and electricity under supply contracts. Under most of thesecontracts, the providers are bound to supply us with all of our needs for aparticular type of energy at a specific facility. Our gas contracts havepricing mechanisms based primarily on current market prices, and ourelectricity contracts have pricing mechanisms based primarily on publishedtariffs. We also enter into energy hedge agreements to mitigate price risk.

 

*Sales, Marketing, and Distribution*

 

Ourcontainerboard (linerboard) and corrugated container products are sold bybrokers or our own sales personnel. We market our newsprint throughAbitibi-Consolidated (Abitibi) pursuant to an arrangement, whereby Abitibipurchases all of the newsprint we produce at a price equal to the price Abitibi’smills in the southern United States receive from customers, less associatedexpenses and a sales and marketing discount. Abitibi is one of the world’slargest producers and marketers of newsprint. It sells our newsprint primarilyin regional markets near our DeRidder, Louisiana, manufacturing facility. Ourcontract with Abitibi expires in 2008. The agreement automatically renews forone additional five-year term unless terminated by either party at the end ofthe initial term or at any time during the renewal term on one year’s priorwritten notice.

 

12

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Thefollowing table sets forth sales volumes of containerboard (linerboard) andnewsprint for the periods indicated:

 
| ** **                   | ** ** | **Boise**                     | ** ** | **Predecessor**       |       |
|------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | ** **                    | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **                   | ** ** | ** **                    | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **                   | ** ** | **Year Ended**                | ** ** | **through**           | ** ** | **through** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| ** **                   | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** |   |
| ** **                   | ** ** | **2005**                      | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** |   |
| ** **                   | ** ** | **(thousands of short tons)** | ** ** |
|                         |       |                          |       |                  |       |   |   |   |   |   |   |   |   |
| Containerboard  (linerboard) |       | 452                           |       | 81                    |       | 382 |   | 451 |   | 479 |   | 450 |   |
| Newsprint                    |       | 408                           |       | 81                    |       | 349 |   | 416 |   | 406 |   | 395 |   |
|                         |       |                          |       |                  |       |   |   |   |   |   |   |   |   |
| ** **                   | ** ** | **(millions of square feet)** | ** ** |
|                         |       |                          |       |                  |       |   |   |   |   |   |   |   |   |
| Corrugated containers        |       | 4,770                         |       | 787                   |       | 3,876 |   | 4,591 |   | 4,463 |   | 4,736 |   |

 

*Customers*

 

During 2005, we sold approximately 59% of our linerboard inthe open market, of which approximately 32% was sold domestically. We sell ourcorrugated containers to over 1,000 active customers, including largeagricultural producers and food and beverage processors. We sell all of ournewsprint to Abitibi, which sells to newspaper publishers located near ourmill.

 

*Business Plan*

 

                                                Weoperate our Packaging & Newsprint business segment to optimize cash flowthrough increasing integration between our containerboard and convertingoperations and operational improvements in our facilities to lower costs andimprove efficiency. The recent acquisition of CTC is a significant step inincreasing our integration. We are a relatively small producer of newsprintwhich is sold through Abitibi-Consolidated, one of the largest manufacturers ofnewsprint in the world.

 

***Environmental Issues***

 

Our discussion of environmental issues is presentedunder the caption “Environmental” in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-K. Inaddition, environmental issues are discussed under “Item 3.  Legal Proceedings” of this Form 10-K.

 

###### ***CapitalInvestment***

 

Information concerning our capital expenditures ispresented under the caption “Investment Activities” in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-K.

 

***Competition***

 

The markets in each of our business segments arelarge and highly competitive. Our products and services compete with similarproducts manufactured and distributed by others. Many factors influence ourcompetitive position in each of our operating segments. Those factors includeprice, service, quality, product selection, and convenience of location.

 

Some of our competitors in each of our segments arelarger than we are and have greater financial resources. These resources affordthose competitors greater purchasing power, increased financial flexibility,and more capital resources for expansion and improvement, which may enablethose competitors to compete more effectively than can we.

 

*Building Materials Distribution*.  Thebuilding materials distribution markets in which we operate are highlyfragmented, and we compete in each of our geographic and product markets withnational, regional, and local distributors. We compete on the basis of deliverycost and speed, quality of service, and compatibility with customers’ needs,and our competition consists of distributors of all types of buildingmaterials. We compete with other national inventory-carrying distributors aswell as wholesale brokers and buying cooperatives, some of which have salesgreater than ours and/or have more extensive relationships with professionalbuilders. If one or more of these competitors are able to leverage geographiccoverage and/or customer relationships into new markets, our growth strategy inthis segment could be negatively impacted. In recent years, there has beenconsolidation among homebuilders, pro dealers, and big box retailers. As thecustomer base consolidates, this dynamic could impact our ability to maintainmargins. Proximity to customersis an important factor in minimizing

 

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shipping costs and facilitating quick order turnaround and on-timedelivery. We believe our ability to obtain quality materials, from bothinternal and external sources, and our focus on customer service are ourprimary competitive advantages in this segment.

 

*Wood Products*.  Ourmarkets in this segment are large and highly competitive. There are severalmajor producers of most of our products, including EWP and plywood, as well asnumerous local and regional manufacturers. We have leading market positions inthe manufacture of EWP, plywood, and ponderosa pine lumber. We hold muchsmaller competitive positions with respect to our other building products. Our productsin this segment compete primarily on the basis of price, quality, andparticularly with respect to EWP, levels of customer service. We believe ourcost-competitive production facilities and our customer service are ourprincipal competitive advantages in this segment. Most of our competitors arelocated in the United States and Canada, although competition frommanufacturers in other countries has increased in recent years. Many of theseforeign competitors have lower operating costs than do we. We compete not onlywith manufacturers and distributors of similar building products but also withproducts made from alternative materials, such as steel and plastic. Some ofour competitors, though, also enjoy strong reputations for product quality andcustomer service, and these competitors may have strong relationships withcertain distributors, making it difficult for our products to gain additionalmarket share. Some of our competitors in this segment are more verticallyintegrated than are we and/or have access to internal sources of wood fiber,which may allow them to subsidize their base manufacturing business in periodsof rising fiber prices.

 

*Paper*.  Themarkets in which our Paper segment competes are large and highly competitive.Commodity grades of uncoated free sheet are globally traded, with numerousworldwide manufacturers, and as a result, these products compete primarily onthe basis of price. All of our paper manufacturing facilities are located inthe United States, and although we compete largely in the domestic market, wedo face competition from foreign producers, some of which have lower operatingcosts than do we. The level of this competition varies, depending on domesticand foreign demand and foreign currency exchange rates. In general, paperproduction does not rely on proprietary processes or formulas, except in highlyspecialized or custom grades.

 

Aboutfive major manufacturers compete in the North American uncoated free sheetmarket, making up approximately 76% of capacity. We are the fourth-largestproducer of uncoated free sheet in North America. Some of our competitors inthis segment are more vertically integrated than are we and/or have access tointernal sources of wood fiber, which may allow them to subsidize their basemanufacturing business in periods of rising fiber prices. Although price is theprimary basis for competition in most of our paper grades, quality and serviceare important competitive determinants, especially in value-added grades. Ourpaper products also compete with other paper grades, electronic transmission,and document storage alternatives. As the use of these alternatives continuesto grow, we may see variances in the overall demand for paper products orshifts from one type of paper to another.

 

*Packaging &Newsprint*. Containerboard (linerboard) and newsprint are globally tradedcommodities with numerous worldwide manufacturers, and as a result, theseproducts compete primarily on the basis of price. The intensity of competitionin these industries fluctuates based on demand levels and prevailing foreigncurrency exchange rates. Our corrugated container operations in the PacificNorthwest have a leading regional market position and compete with severalnational and regional manufacturers. Some of our competitors have loweroperating costs than do we and/or enjoy greater integration between theircontainerboard production and corrugated container production. During 2005, wehad market shares of approximately 2% and 3% in the North American linerboardand newsprint markets, respectively.

 

***Seasonality***

 

Our building products businesses are dependent on housingstarts, repair-and-remodel activity, and commercial and industrial building.Declines in building activity that may occur during winter affect our buildingproducts businesses. To a lesser degree, our paper businesses also experiencesome seasonality in their businesses based primarily on buying patternsassociated with particular products. For example, the demand for our corrugatedcontainer plants is influenced by agricultural demand in the Pacific Northwest.In addition, seasonally cold weather increases costs, especially energyconsumption at all of our manufacturing facilities.

 

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***Working Capital***

 

Wehave no unusual working capital practices. We believe our management practiceswith respect to working capital conform to common business practices in theUnited States.

 

***Acquisitions and Divestures***

 

We may engage in acquisition and divestiture discussionswith other companies and make acquisitions and divestures from time to time. Wereview our operations and dispose of assets that fail to meet our criteria forreturn on investment or cease to warrant retention for other reasons. For moreinformation about our acquisitions and divestitures, see “Effects of theAcquisition,” “Acquisitions,” and “Divestitures” in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” of this Form 10-K.

 

***Employees***

 

As of December 31, 2005, we had 10,155employees. Approximately 5,060, or 50%, of these employees work pursuant tocollective bargaining agreements. Several of these agreements have recentlyexpired or will expire in 2006, although the parties are generally continuingthe agreements while bargaining. In March 2005, the agreements coveringapproximately 860 workers at our paper facilities in St. Helens,Oregon; Vancouver, Washington; Salem, Oregon; and Wallula, Washington, expired.In November, we reached a four-year agreement covering the Wallula facility. Weare currently in negotiations with respect to agreements covering approximately490 workers at our St. Helens, Oregon, and Salem, Oregon, paperfacilities. In June 2005, we announced the permanent closure of ourVancouver, Washington, facility and will not extend that agreement beyond the March 2006expected closure. We are currently bargaining the effects of that decision withthe union. We are also in current negotiations regarding a collectivebargaining agreement at our DeRidder, Louisiana, paper mill coveringapproximately 440 employees. That agreement expired February 15,2006. The agreements at our Nampa, Idaho, container plant; our Jackson,Alabama, paper mill; and our St. Jacques, New Brunswick, Canada, I-joist plant will expire in thesecond, third, and fourth quarters of 2006, respectively. We are also currentlyin negotiations for a new contract at our veneer and plywood facility inBrazil.

 

***Identification of Executive Officers***

 

Informationwith respect to our executive officers is set forth in “Item 10.  Directors and Executive Officers of theRegistrant” of this Form 10-K.

 

***ITEM 1A.******                                 ******RISK FACTORS***

 

This AnnualReport on Form 10-K contains forward-looking statements. Statements thatare not historical or current facts, including statements about ourexpectations, anticipated financial results, projected capital expenditures,and future business prospects, are forward-looking statements. You can identifythese statements by our use of words such as “may,” “will,” “expect,” “believe,”“should,” “plan,” “anticipate,” and other similar expressions. You can findexamples of these statements throughout this report, including the descriptionof business in "Item 1. Business" and the Operational Outlook section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations. We cannot guarantee that our actual results will be consistent withthe forward-looking statements we make in this report. You should reviewcarefully the risk factors listed below, as well as those factors listed inother documents we file with the SEC. We do not assume an obligation to updateany forward-looking statement.

 

***The paper and forest products industry ishighly cyclical. Fluctuations in the prices of and the demand for our productscould result in smaller profit margins and lower sales volumes****.* Historically, economic and market shifts,fluctuations in capacity, and changes in foreign currency exchange rates havecreated cyclical changes in prices, sales volumes, and margins for ourproducts. The length and magnitude of industry cycles have varied over time andby product but generally reflect changes in macroeconomic conditions and levelsof industry capacity. Most of our paper products, including our cut-size officepaper, containerboard, and newsprint, and many of our wood products, includingour plywood, lumber, and particleboard, are commodities that are widelyavailable from other producers. Even our noncommodity products, such asvalue-added papers and EWP, are susceptible to

 

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commodity dynamics. Because commodity products have few distinguishingqualities from producer to producer, competition for these products is basedprimarily on price, which is determined by supply relative to demand.

 

Theoverall levels of demand for the commodity products we make and distribute, andconsequently our sales and profitability, reflect fluctuations in levels ofend-user demand, which depend in large part on general macroeconomic conditionsin North America and regional economic conditions in our markets, as well asforeign currency exchange rates. For example, demand for wood products dependson new residential and light commercial construction and residentialrepair-and-remodeling activity, which are impacted by demographic trends,interest rate levels, weather, and general economic conditions. Demand for ourpaper products fluctuates with levels of employment, the state of durable andnondurable goods industries, and prevailing levels of advertising and printcirculation. In recent years, paper demand for some grades of paper has alsodecreased as electronic transmission and document storage alternatives becomemore prevalent.

 

Industrysupply of commodity papers and wood products is also subject to fluctuation, aschanging industry conditions can influence producers to idle or permanentlyclose individual machines or entire mills. In addition, to avoid substantialcash costs in connection with idling or closing a mill, some producers willchoose to continue to operate at a loss, sometimes even a cash loss, whichcould prolong weak pricing environments due to oversupply. Oversupply in thesemarkets can also result from producers introducing new capacity in response tofavorable short-term pricing trends.

 

Industry supply ofcommodity papers and wood products is also influenced by overseas productioncapacity, which has grown in recent years and is expected to continue to grow.While the weakness of the U.S. dollar has mitigated the levels of imports inrecent years, a strengthening of the U.S. dollar is likely to increase importsof commodity papers and wood products from overseas, putting downward pressureon prices. In 2005, most North American manufacturers of uncoatedfree sheet paper grades increased the brightness level of their products. Thishigher brightness level conforms to the brightness level of papers sold in mostother major markets in the world. This could make the our products morevulnerable to imported products.

 

Pricesfor all of our products are driven by many factors outside our control, and wehave little influence over the timing and extent of price changes, which areoften volatile. Because market conditions beyond our control determine theprices for our commodity products, the price for any one or more of theseproducts may fall below our cash production costs, requiring us to either incurshort-term losses on product sales or cease production at one or more of ourmanufacturing facilities. Therefore, our profitability with respect to theseproducts depends on managing our cost structure, particularly raw materials andenergy prices, which represent the largest components of our operating costsand can fluctuate based upon factors beyond our control, as described below. Ifthe prices of our products decline, or if our raw materials or energy costsincrease, or both, demand for our products may decline, and our sales andprofitability could be materially and adversely affected.

 

***We face strong competition in ourmarkets.  ***The paper and forest productsindustry is highly competitive. We face competition from numerous competitors,domestic as well as foreign. Some of our competitors in each of our businessesare large, vertically integrated companies that have greater financial andother resources, greater manufacturing economies of scale, greater energyself-sufficiency, and/or lower operating costs than we do. In addition, some ofour competitors have less indebtedness than do we, and therefore, more of theircash is available for business purposes other than debt service. We may beunable to compete, particularly with respect to our commodity products, duringthe various stages of the business cycle.

 

***Further increases in the cost of ourpurchased energy or chemicals would lead to higher manufacturing costs, therebyreducing our margins. ***Energyis one of our most significant raw materials, comprising approximately 3%, 16%,and 14% of the aggregate amount of materials, labor, and other operatingexpenses, including fiber costs for our Wood Products, Paper, and Packaging &Newsprint segments, respectively, for the year ended December 31, 2005.Energy prices, particularly for electricity, natural gas, and fuel oil, havebeen volatile in recent years and currently exceed historical averages. Thesefluctuations impact our manufacturing costs and contribute to earningsvolatility. We have someflexibility to switch between fuel sources; however, we have significantexposure to natural gas and fuel oil price increases. While energy prices inearly first quarter 2006 are generally lower than we experienced in fourthquarter 2005, Gulf-area natural gas production has still not achievedprehurricane levels and pricing remains high by historical standards. Inaddition, increased demand (which could be driven by cold weather) or furthersupply constraints could drive prices higher. If current

 

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fuel prices persist and we areunable to pass these increases on to our customers in the form of higherprices, we may experience a material negative financial impact. In addition,the rates we are charged by our electrical suppliers are impacted by theincrease in natural gas prices, although the degree of impact depends on eachutility’s mix of energy resources and regulatory situation. In particular,electrical costs at our DeRidder, Louisiana, mill increased approximately$5.3 million in fourth quarter 2005, compared with third quarter 2005.

 

Otherraw materials we use include various chemical compounds, such as precipitatedcalcium carbonate, sodium chlorate, sodium hydroxide, dyes, resins, andadhesives. Purchases of chemicals accounted for approximately 6%, 13%, and 4%of the aggregate amount of materials, labor, and other operating expenses, includingfiber costs, for our Wood Products, Paper, and Packaging & Newsprintsegments, respectively, for the year ended December 31, 2005. The costs ofthese chemicals have been volatile historically and are influenced by capacityutilization, energy prices, and other factors beyond our control.

 

Forour commodity products, the relationship between industry supply and demand,rather than changes in the cost of raw materials, determines our ability toincrease prices. Consequently, we may be unable to pass increases in ouroperating costs to our customers in the short term. Any sustained increase inchemical or energy prices would reduce our operating margins and potentiallyrequire us to limit or cease operations of one or more of our machines.

 

***Some of our paper and wood products arevulnerable to long-term declines in demand due to competing technologies ormaterials.  ***Our uncoated free sheet andnewsprint compete with electronic transmission and document storagealternatives, as well as with paper grades we do not produce. As the use ofthese alternatives grow, demand for paper products may shift from one grade ofpaper to another, or be eliminated altogether. For example, demand fornewsprint has declined and may continue to decline as newspapers are replacedwith electronic media, and demand for our uncoated free sheet for use inpreprinted forms has declined and may continue to decline as the use of desktoppublishing and on-demand printing continues to displace traditional forms.Demand for our containerboard may decline as corrugated paper packaging isreplaced with reusable plastic alternatives, particularly with respect to usesfor perishable food products. Demand for plywood may also decline as customerscontinue to shift to oriented strand board, a product we do not manufacture.Any substantial shift in demand from our products to competing technologies ormaterials could result in a material decrease in sales of our products.

 

***Our manufacturing businesses may havedifficulty obtaining timber at favorable prices or at all****.  *Wood fiber is our principalraw material, comprising approximately 32%, 17%, and 13% of the aggregateamount of materials, labor, and other operating expenses, including fiber costs,for our Wood Products, Paper, and Packaging & Newsprint segments,respectively, for the year ended December 31, 2005. Wood fiber is acommodity and historically prices have been cyclical. Environmental litigationand regulatory developments have caused, and may cause in the future,significant reductions in the amount of timber available for commercial harvestin the United States. These reductions have caused the closure of plywood andlumber operations in some of the geographic areas in which we operate. Inaddition, future domestic or foreign legislation and litigation concerning theuse of timberlands, the protection of endangered species, the promotion offorest health, and the response to and prevention of catastrophic wildfirescould also affect timber supplies. Availability of harvested timber may be furtherlimited by fire, insect infestation, disease, ice storms, windstorms,hurricanes, flooding, and other natural and man-made causes, thereby reducingsupply and increasing prices. Wood fiber pricing is subject to regional marketinfluences, and our cost of wood fiber may increase in particular regions dueto market shifts in those regions. In addition, our ability to obtain woodfiber from Brazil may be impacted by legal and political conditions in thatcountry as well as transportation difficulties. Any sustained increase in woodfiber prices would increase our operating costs, and we may be unable toincrease prices for our products in response to increased wood fiber costs dueto additional factors affecting the demand or supply of these products.

 

Priorto the Timberlands Sale, our predecessor’s timberland operations provided, onaverage, approximately 47% of our wood fiber requirements. In connection withthe Timberlands Sale, we entered into long-term supply agreements, pursuant towhich we expect to obtain a significant portion of our future wood fiberrequirements. We purchase substantially all of our wood fiber from thirdparties, either pursuant to these supply agreements or in the open market. Ifany of our major suppliers of wood fiber stops selling or is unable to sellwood fiber to us, our financial condition and operating results would suffer.As a result of the Timberlands Sale, we increased our open-market purchases ofwood fiber. In

 

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2005, wood fiber costs exceeded historical costs since we had nothistorically made open-market purchases of wood fiber in such large amounts. Asthe amount of wood fiber we purchase pursuant to existing supply agreementsdeclines, our wood fiber costs may increase further as we increase our relianceon open-market purchases. In addition, our limited access to an internal supplyof timber exposes us to the effects of short-term price volatility and limitsour flexibility in responding to shortages in wood fiber supply and could causeour operating costs to increase to a greater extent than those of ourcompetitors that own timberlands. If we experience constraints on our timbersupply for any of these or other reasons, we would be required to limitproduction in and/or close manufacturing facilities.

 

***A material disruption at one of ourmanufacturing facilities could prevent us from meeting customer demand, reduceour sales, and/or negatively impact our net income.  ***Anyof our paper or EWP manufacturing facilities, or any of our machines within anotherwise operational facility, could cease operations unexpectedly due to anumber of events, including:

 

•                        Maintenance outages;

 

•                        Prolonged power failures;

 

•                        An equipment failure;

 

•                        A chemical spill or release;

 

•                        Explosion of a boiler;

 

•                        The effect of a drought orreduced rainfall on our water supply;

 

•                        Disruptions in thetransportation infrastructure, including roads, bridges, railroad tracks, andtunnels;

 

•                        Fires, floods, earthquakes,hurricanes, or other catastrophes;

 

•                        Terrorism or threats ofterrorism;

 

•                        Labor difficulties; or

 

•                        Other operational problems.

 

Events such as those listed above haveresulted in operating losses in the past. For example, we experiencedmarket pulp production losses due to the mechanical failure of one of ourdigesters at our Wallula, Washington, facility. This interruption resulted in areduction in second quarter 2005 operating income of approximately$2.2 million. For the year ended December 31, 2005, damage causedby Hurricanes Dennis, Katrina, and Rita led to lost production, lost sales, andtemporary shutdowns in our facilities along the Gulf Coast. We estimate areduction in operating income of approximately $6 million as a result oflost production.

 

Future events may cause similar shutdowns,which may result in additional downtime and/or may cause additional damage toour facilities. Any such downtime or facility damage could prevent us frommeeting customer demand for our products and/or require us to make unplannedcapital expenditures. If one of these machines or facilities were to incursignificant downtime, our ability to meet our production capacity targets andsatisfy customer requirements would be impaired, resulting in lower sales andnet income.

 

***Our operations require substantial capital,and we may not have adequate capital resources to provide for all of ourcapital requirements.***   Our manufacturing businessesare capital-intensive, and we regularly incur capital expenditures to expandour operations, maintain our equipment, increase our operating efficiency, andcomply with environmental laws. During 2005, our total capital expenditures,excluding acquisitions, were approximately $170 million, includingapproximately $83 million for maintenance capital and approximately $17 millionfor environmental expenditures. Our total capital expenditures, excludingacquisitions, were approximately $169 million during 2004, includingapproximately $114 million for maintenance capital and approximately$8 million for environmental expenditures. We expect to spendapproximately $160 million, excluding acquisitions, on capitalexpenditures during 2006, including approximately $84 million formaintenance capital and approximately $13 million for environmentalexpenditures. We anticipate our available cash resources and cash generatedfrom operations will be sufficient to fund our operating needs and capitalexpenditures for at least the next year. However, if we require additionalfunds, we may not be able to obtain them on favorable terms, or at all. Inaddition, our debt service obligations reduce our available cash flows. If wecannot maintain or upgrade our equipment as we require or ensure environmentalcompliance, we could

 

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be required to cease or curtail some of our manufacturing operations orwe may become unable to manufacture products that can compete effectively inone or more of our markets.

 

***Our operations are affected by ourrelationship with OfficeMax.***   Until October 2004,we operated as business units of OfficeMax and not as a stand-alone company.For the year ended December 31, 2005, sales to OfficeMax accounted forapproximately 47% of our uncoated free sheet volume, including approximately 82%of our office paper volume. We anticipate that OfficeMax will continue to beour largest customer and that we will continue to depend on its distributionnetwork for a substantial portion of our uncoated free sheet sales in thefuture. In connection with the Acquisition, OfficeMax retained and indemnifiedus against certain liabilities related to our business. Furthermore, we andOfficeMax entered into an Additional Consideration Agreement, pursuant to whichOfficeMax may be required to make substantial payments to us. Any significantdeterioration in OfficeMax’s financial condition or our relationship withOfficeMax, or a significant change in OfficeMax’s business strategy, couldresult in OfficeMax ceasing to be our customer or failing to satisfy itscontractual obligations to us, which in turn could reduce our sales and subjectus to additional material liabilities.

 

Inaddition, we may be required to make substantial payments to OfficeMax inconnection with agreements we entered into related to the Acquisition. Wecurrently indemnify OfficeMax for breaches of representations, warranties, andcovenants made in the Asset Purchase Agreement, as well as for all liabilitieswe assumed in connection with the Acquisition. Our indemnification obligationswith respect to breaches of representations and warranties are, with certainexceptions, subject to a deductible of $20.7 million, and ourindemnification obligations are capped at $248.9 million in the aggregate.The Additional Consideration Agreement also requires us to pay OfficeMax, tothe extent that the average market price for a benchmark grade of cut-sizeoffice paper manufactured within our Paper segment exceeds a specified amount,up to an aggregate cap of $125 million. If we are required to makesubstantial payments to OfficeMax in respect of our indemnificationobligations, the resulting outflows of cash would adversely affect ouroperating results and financial condition. In addition, if we are required tomake substantial payments to OfficeMax under the Additional ConsiderationAgreement, our financial condition would be adversely affected.

 

***We are subject to significant environmentalregulation and environmental compliance expenditures, as well as otherpotential environmental liabilities.***   We are subjectto a wide range of general and industry-specific environmental laws andregulations, particularly with respect to air emissions, wastewater discharges,solid and hazardous waste management, and site remediation. Our capitalexpenditures for environmental compliance were approximately $17 million,$8 million, and $12 million in 2005, 2004, and 2003, respectively,and we expect to incur approximately $13 million in 2006. We expect tocontinue to incur significant capital and operating expenditures in order tomaintain compliance with applicable environmental laws and regulations. In 2004, the Environmental ProtectionAgency (EPA) promulgated rules regulating toxic air emissions from woodpanel plants and from industrial boilers at wood products plants and paper mills.We are currently developing compliance strategies at the affected operationswhich will determine the amount of capital expenditures that will be required.We expect to incur capital expenditures ranging from $19 million to $25 millionfor the period from 2006 through 2008 to comply with these regulations. Wemay also be required to incur substantial additional capital expenditures tocomply with future environmental regulations. If we fail to comply withapplicable environmental laws and regulations, we may face civil or criminalfines, penalties, or enforcement actions, including orders limiting ouroperations or requiring corrective measures, installation of pollution controlequipment, or other remedial actions.

 

Asowners and operators of real estate, we may be liable under environmental lawsfor cleanup and other damages, including tort liability, resulting fromreleases of hazardous substances on or from our properties. We may haveliability under these laws whether or not we knew of, or were responsible for,the presence of these substances on our property, and in some cases, ourliability may not be limited to the value of the property. OfficeMax retainsresponsibility for environmental liabilities that occurred with respect tobusinesses, facilities, and other assets not purchased by us in theAcquisition. In addition, OfficeMax generally indemnifies us for hazardoussubstance releases and other environmental violations that occurred prior tothe Acquisition or arose out of pre-Acquisition operations at the businesses,facilities, and other assets purchased by us. However, OfficeMax may not havesufficient funds to fully satisfy its indemnification obligations whenrequired, and in some cases, we may not be contractually entitled toindemnification by OfficeMax. Furthermore, we are not entitled toindemnification for liabilities incurred due to releases and violations ofenvironmental laws occurring after the Acquisition. With respect to ourpredecessor’s timberland operations, we may have responsibility for certainenvironmental liabilities that occurred in the period following the Acquisitionbut prior to the Timberlands Sale. Any

 

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material liability we incur would adversely impact our financial conditionand could preclude us from making capital expenditures that would otherwisebenefit our business.

 

Enactmentof new environmental laws or regulations or changes in existing laws orregulations might require significant expenditures. We may be unable togenerate funds or other sources of liquidity and capital to fund unforeseenenvironmental liabilities or expenditures.

 

***Labor disruptions or increased labor costscould adversely affect our business.***   We couldexperience a material labor disruption or significantly increased labor costsat one or more of our facilities, either in the course of negotiations of alabor agreement or otherwise, any of which could prevent us from meetingcustomer demand, reducing our sales and profitability. As of December 31,2005, we had 10,155 employees. Approximately 5,060, or 50%, of theseemployees work pursuant to collective bargaining agreements. Several of theseagreements have recently expired or will expire in 2006, although the partiesare generally continuing the agreements while bargaining. In March 2005,the agreements covering approximately 860 workers at our paper facilitiesin St. Helens, Oregon; Vancouver, Washington; Salem, Oregon; and Wallula,Washington, expired. In November, we reached a four-year agreement covering theWallula facility. We are currently in negotiations with respect to agreementscovering approximately 490 workers at our St. Helens, Oregon, andSalem, Oregon, paper facilities. In June 2005, we announced the permanentclosure of our Vancouver, Washington, facility and will not extend thatagreement beyond the March 2006 expected closure. We are currentlybargaining the effects of that decision with the union. We are also in current negotiationsregarding a collective bargaining agreement at our DeRidder, Louisiana, papermill covering approximately 440 employees. That agreement expired February 15,2006. The agreements at our Nampa, Idaho, container plant; our Jackson,Alabama, paper mill; and our St. Jacques, New Brunswick, Canada, I-joistplant will expire in the second, third, and fourth quarters of 2006,respectively. We are also currently in negotiations for a new contract at ourveneer and plywood facility in Brazil. We may be unable to renew theseagreements without work stoppages or significant increases in costs, whichwould reduce our operating margins and could require us to limit or ceasemanufacturing operations at one or more facilities.

 

***Our substantial indebtedness could adverselyaffect our financial condition and impair our ability to operate our business.***   Weare a highly leveraged company. As of December 31, 2005, we had $1.6 billionof outstanding indebtedness, including $635.8 million of indebtednessunder our senior secured credit facilities (excluding unused availability underour revolving credit facility and outstanding and undrawn letters of credit), a$270.9 million related-party note (the related party is a guarantor of ourdebt), $250.0 million of senior notes, $400.0 million of seniorsubordinated notes, and $80.0 million of net borrowings outstanding underour accounts receivable securitization program. This level of indebtednesscould have important consequences on our business, financial condition, andoperating results, including the following:

 

•                  It may limit our ability to borrowmoney or sell stock to fund our working capital, capital expenditures,acquisitions, and debt service requirements and other financing needs;

 

•                  Our interest expense would increaseif interest rates in general increase because a substantial portion of ourindebtedness, including all of our indebtedness under our senior secured creditfacilities and the senior notes, bears interest at floating rates;

 

•                  It may limit our flexibility inplanning for, or reacting to, changes in our business and future businessopportunities;

 

•                  We are more highly leveraged thansome of our competitors, which may place us at a competitive disadvantage;

 

•                  It may make us more vulnerable to adownturn in our business, industry, or the economy in general;

 

•                  A substantial portion of our cash flowfrom operations is dedicated to the repayment of our indebtedness, includingindebtedness we may incur in the future, and will not be available for otherbusiness purposes; and

 

•                  There would be a material adverseeffect on our business and financial condition if we were unable to service ourindebtedness or obtain additional financing as needed.

 

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***We may not be able to generate sufficientcash flows to meet our debt service obligations.***   Ourability to make payments on and to refinance our indebtedness and to fundplanned capital expenditures depends on our ability to generate cash from ourfuture operations. This, to a certain extent, is subject to general economic,financial, competitive, legislative, regulatory, and other factors that arebeyond our control.

 

Ourbusiness may not generate sufficient cash flow from operations, or futureborrowings under our senior secured credit facilities or from other sources maynot be available to us in an amount sufficient, to enable us to repay ourindebtedness or to fund our other liquidity needs, including capitalexpenditure requirements. A substantial portion of our indebtedness bearsinterest at floating rates, and accordingly, if interest rates rise, our debtservice requirements will increase. We may not be able to refinance any of ourindebtedness on commercially reasonable terms, or at all. If we cannot serviceour indebtedness, we may have to take actions such as selling assets, seekingadditional equity, or reducing or delaying capital expenditures, strategicacquisitions, investments, and alliances, any of which could impede theimplementation of our business strategy or prevent us from entering intotransactions that would otherwise benefit our business. Additionally, we maynot be able to affect such actions, if necessary, on commercially reasonableterms, or at all.

 

***The terms of our senior secured creditagreement and the indenture governing our notes restrict our ability to operateour business and to pursue our business strategies.***   Oursenior secured credit agreement and the indenture governing our notes contain,and any future indebtedness of ours would likely contain, a number ofrestrictive covenants that impose significant operating and financial restrictionson us. Our senior secured credit agreement and the indenture governing ournotes limit our ability, among other things, to:

 

•                  Incur additional indebtedness orenter into sale/leaseback transactions;

 

•                  Sell assets, including capital stockof subsidiaries;

 

•                  Agree to limitations on the abilityof our subsidiaries to make distributions;

 

•                  Enter into transactions with ouraffiliates;

 

•                  Incur liens;

 

•                  Enter into new lines of business; and

 

•                  Engage in consolidations, mergers, orsales of substantially all of our assets.

 

Oursenior secured credit agreement also requires us to achieve specified financialand operating results and maintain compliance with specified financial ratios.Our ability to comply with these ratios may be affected by events beyond ourcontrol.

 

Therestrictions contained in our senior secured credit agreement and the indenturecould:

 

•                  Limit our ability to plan for orreact to market conditions or meet capital needs or otherwise restrict ouractivities or business plans; and

 

•                  Adversely affect our ability tofinance our operations, strategic acquisitions, investments or alliances, orother capital needs or to engage in other business activities that would be inour interest.

 

***ITEM1B.******                                 ******UNRESOLVED STAFF COMMENTS***

 

None.

 

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***ITEM 2.******                                          ******PROPERTIES***

 

We own substantially all of our facilities. Our propertiesare in good operating condition and are suitable and adequate for theoperations for which they are used. We own substantially all equipment used inour facilities. Information concerning production capacity and the utilizationof our manufacturing facilities is presented in “Item 1.  Business” of this Form 10-K.

 

Following is a list ofour facilities by segment as of January 31, 2006. In December 2005,we entered into an agreement to sell our headquarters building in Boise, Idaho.In first quarter 2006, we anticipate leasing back approximately 65% of thebuilding over a staggered lease term of ten to 12 years. Both agreementsare scheduled to close in first quarter 2006. Our corporate headquarters willcontinue to be located in Boise, Idaho.

 

On February 1, 2006, we purchased the assets ofCentral Texas Corrugated (CTC) in Waco, Texas. As part of this transaction weacquired one facility located in Waco, Texas. This facility manufacturescorrugated sheets and is part of our Packaging & Newsprint segment.

 

***Building Materials Distribution***

 

Thefollowing table summarizes our 29 Building Materials Distribution facilities:

 
| **Location**                 | ** ** | **Owned  or  Leased** | ** ** | **Approximate  Warehouse  Square Footage** | ** ** |
|------------------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| Phoenix, Arizona             |       | Owned/Leased          |       | 32,027                                     |       |
| Lathrop, California          |       | Leased                |       | 162,000                                    |       |
| Riverside, California        |       | Leased                |       | 131,263                                    |       |
| Denver, Colorado             |       | Owned                 |       | 203,212                                    |       |
| Grand Junction, Colorado     |       | Owned                 |       | 82,000                                     |       |
| Orlando, Florida             |       | Owned                 |       | 105,000                                    |       |
| Tucker, Georgia              |       | Leased                |       | 79,620                                     |       |
| Boise, Idaho                 |       | Owned                 |       | 62,297                                     |       |
| Idaho Falls, Idaho           |       | Owned                 |       | 51,752                                     |       |
| Rochelle, Illinois           |       | Owned                 |       | 86,000                                     |       |
| Annapolis Junction, Maryland |       | Owned/Leased          |       | 14,000                                     |       |
| Westfield, Massachusetts     |       | Leased                |       | 112,400                                    |       |
| Wayne, Michigan              |       | Leased                |       | 40,500                                     |       |
| Lakeville, Minnesota         |       | Owned                 |       | 72,000                                     |       |
| Billings, Montana            |       | Owned                 |       | 77,024                                     |       |
| Portsmouth, New Hampshire    |       | Owned/Leased          |       | 39,400                                     |       |
| Delanco, New Jersey          |       | Owned/Subleased       |       | 15,000                                     |       |
| Albuquerque, New Mexico      |       | Owned                 |       | 30,000                                     |       |
| Greensboro, North Carolina   |       | Leased                |       | 88,140                                     |       |
| Marion, Ohio                 |       | Leased                |       | 30,000                                     |       |
| Tulsa, Oklahoma              |       | Owned                 |       | 128,552                                    |       |
| Memphis, Tennessee           |       | Owned                 |       | 38,926                                     |       |
| Dallas, Texas                |       | Owned                 |       | 137,840                                    |       |
| Sugarland, Texas             |       | Leased                |       | 104,949                                    |       |
| Salt Lake City, Utah         |       | Owned                 |       | 114,610                                    |       |
| Spokane, Washington          |       | Owned/Leased          |       | 43,060                                     |       |
| Vancouver, Washington        |       | Leased                |       | 50,600                                     |       |
| Woodinville, Washington      |       | Owned/Leased          |       | 32,200                                     |       |
| Yakima, Washington           |       | Owned/Leased          |       | 33,779                                     |       |

 

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###### ***Wood Products***

###### *** ***

The following table summarizes our WoodProducts facilities:

 
| **Facility Type**         | ** ** | **Number of   Facilities** | ** ** | **Locations**                                      |
|---------------------------|------------|----------------------------|------------|----------------------------------------------------|
| LVL/I-joist plants        |       | 3                          |       | Louisiana, Oregon, and Canada                      |
| Plywood and veneer plants |       | 11                         |       | Louisiana (2), Oregon (7), Washington, and  Brazil |
| Sawmills (a)              |       | 6                          |       | Alabama, Oregon (3), and Washington (2)            |
| Particleboard plant       |       | 1                          |       | Oregon                                             |
| Wood beam plant           |       | 1                          |       | Idaho                                              |

 

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(a)           The Alabama sawmillis managed by our Paper segment.

 

***Paper***

 

The following table summarizes our Paperfacilities:

 
| **Facility Type**     | ** ** | **Number of   Facilities** | ** ** | **Locations**                              |
|-----------------------|------------|----------------------------|------------|--------------------------------------------|
| Pulp and paper mills  |       | 4                          |       | Alabama, Minnesota, Oregon, and Washington |
| Distribution centers  |       | 3                          |       | California, Illinois, and Oregon           |
| Converting facilities |       | 2                          |       | Oregon and Washington                      |

 

***Packaging & Newsprint***

 

The following table summarizes our Packaging &Newsprint facilities:

 
| **Facility Type**           | ** ** | **Number of   Facilities** | ** ** | **Locations**                           |
|-----------------------------|------------|----------------------------|------------|-----------------------------------------|
| Pulp and paper mills        |       | 1                          |       | Louisiana                               |
| Corrugated container plants |       | 5                          |       | Idaho (2), Oregon, Utah, and Washington |

 

***ITEM 3.                 LEGALPROCEEDINGS***

 

*Legal Proceedings*

 

OfficeMax agreed to retain responsibility for essentially all legalproceedings related to our businesses that arose before October 29, 2004.We did, however, assume responsibility for a small number of legal proceedingsthat arose before this date. We are also a party to routine legal proceedingsthat have arisen in our businesses after October 29, 2004. Management doesnot believe any of the legal proceedings for which we have responsibility willhave a material adverse effect on our financial position, results ofoperations, or cash flows.

 

*Environmental Matters*

 

We are not currently involved in any material environmentalproceedings. OfficeMax retained responsibility for environmental claims andliabilities related to businesses, facilities, and other assets not purchasedby us in the Acquisition. In addition, OfficeMax indemnifies us for hazardoussubstance releases and other environmental regulatory violations that relate tothe businesses we purchased and that occurred before the Acquisition or arosefrom pre-Acquisition operations. OfficeMax, however, may not have sufficientfunds to satisfy in full its indemnification obligations, and in some cases, wemay not be entitled to indemnification. Management does not believe that thepotential exposure to the company for environmental matters would have amaterial adverse effect on our financial position, results of operations, orcash flows even if OfficeMax failed to fulfill its indemnificationresponsibilities.

 

***ITEM 4.                 SUBMISSION OF MATTERS TO A VOTEOF SECURITYHOLDERS***

 

NotApplicable.

 

***ITEM 5.                MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUERPURCHASES OF EQUITY SECURITIES***

 

We are alimited liability company, and the equity in our company is neither listed norpublicly traded in any market. The equity units issued and outstanding onJanuary 31, 2006, were as follows:

 
| Series A  Common Units |   | 66,000,000  |   |
|------------------------|--------|-------------|--------|
| Series B  Common Units |   | 547,499,475 |   |
| Series C  Common Units |   | 32,173,830  |   |

 

As of January31, 2006, OfficeMax owned all of the Series A equity units. FPH and OfficeMaxowned 438,499,475 and 109,000,000 Series B equity units, respectively. FPHholds all 32,173,830 Series C equity units.

 

The Series A equityunits accrue dividends daily at a rate of 8% per annum on the holder’s capitalcontributions (net of any distributions previously received by such holder)plus any accumulated dividends. Accrued and unpaid dividends accumulate on theSeries A equity units on June 30 and December 31 of each year. At December 31,2005 and 2004, $3.5 million and $0.5 million, respectively, of dividends wereaccrued on our Consolidated Balance Sheets as an increase in the value of theSeries A equity units. Neither the Series B nor Series C equity units accruedividends, but they do participate in distributions (liquidating andotherwise.)

 

We do not havecompensation plans that provide for the issuance of equity in our company. TheManagement Equity Agreement described elsewhere in this Annual Report on Form10-K provides for the grant of equity units in FPH, our majority owner.

 

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**PART II**

 

***ITEM 6.                SELECTEDFINANCIAL DATA***

 

The following table sets forth our selectedfinancial data for the periods indicated and should be read in conjunction withthe disclosures in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and “Item 8. Consolidated Financial Statements and Supplementary Data” of this Form 10-K.

 
| ** **                                                                         | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                         | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** |
| ** **                                                                         | ** ** | **Year  Ended**       | ** ** | **through**           | ** ** | **through** | ** ** | ** ** |
| ** **                                                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** **                                                                         | ** ** | **2005  (a)**         | ** ** | **2004 (b)**     | ** ** | **2004 (c)** | ** ** | **2003 (d)** | ** ** | **2002** | ** ** | **2001 (e)** | ** ** |
| ** **                                                                         | ** ** | **(millions)**        | ** ** |
| ** **                                                                         |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Assets**                                                                         |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Current assets                                                                     |       | $                     | 1,136      |                  | $          | 1,112 |   | $ | 1,049 |   | $ | 699 |   | $ | 704 |   | $ | 671 |   |
| Property and equipment, net                                                        |       | 1,549                 |       | 1,510                 |       | 2,191 |   | 2,252 |   | 2,299 |   | 2,397 |   |
| Deferred financing costs                                                           |       | 38                    |       | 84                    |       | 17 |   | 8 |   | 5 |   | 4 |   |
| Note receivable from related party                                                 |       | —                |       | 158                   |       | — |   | — |   | — |   | — |   |
| Other                                                                              |       | 91                    |       | 68                    |       | 109 |   | 165 |   | 157 |   | 154 |   |
| ** **                                                                         | ** ** | **$**                 | **2,814**  | ** **            | **$**      | **2,932** | ** ** | **$** | **3,366** | ** ** | **$** | **3,124** | ** ** | **$** | **3,165** | ** ** | **$** | **3,226** |   |
|                                                                               |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| **Liabilities and Capital**                                                        |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Current liabilities                                                                |       | $                     | 546        |                  | $          | 438 |   | $ | 701 |   | $ | 495 |   | $ | 534 |   | $ | 736 |   |
| Long-term debt, less current portion                                               |       | 1,366                 |       | 1,967                 |       | 1,109 |   | 1,222 |   | 1,160 |   | 957 |   |
| Note payable to related party, net                                                 |       | 271                   |       | —                |       | — |   | — |   | — |   | — |   |
| Other                                                                              |       | 153                   |       | 157                   |       | 691 |   | 678 |   | 667 |   | 662 |   |
| Redeemable equity units                                                            |       | 13                    |       | 10                    |       | — |   | — |   | — |   | — |   |
| Capital                                                                            |       | 465                   |       | 360                   |       | 865 |   | 729 |   | 804 |   | 871 |   |
| ** **                                                                         | ** ** | **$**                 | **2,814**  | ** **            | **$**      | **2,932** | ** ** | **$** | **3,366** | ** ** | **$** | **3,124** | ** ** | **$** | **3,165** | ** ** | **$** | **3,226** |   |
| **Net sales**                                                                      | ** ** | **$**                 | **5,907**  | ** **            | **$**      | **873** | ** ** | **$** | **4,862** | ** ** | **$** | **4,654** | ** ** | **$** | **4,276** | ** ** | **$** | **4,252** | ** ** |
|                                                                               |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Income (loss) before cumulative effect of  accounting change                       |       | $                     | 121        |                  | $          | 25 |   | $ | 69 |   | $ | (43 | ) | $ | (61 | ) | $ | (78 | ) |
| Cumulative effect of accounting change, net  of income tax                         |       | —                |       | —                |       | — |   | (4 | ) | — |   | — |   |
| Net income (loss)                                                                  | ** ** | **$**                 | **121**    | ** **            | **$**      | **25** | ** ** | **$** | **69** | ** ** | **$** | **(47** | **)** | **$** | **(61** | **)** | **$** | **(78** | **)** |
|                                                                               |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Earnings before interest, taxes,  depreciation, and amortization (EBITDA) (f) | ** ** | **$**                 | **401**    | ** **            | **$**      | **65** | ** ** | **$** | **382** | ** ** | **$** | **238** | ** ** | **$** | **221** | ** ** | **$** | **176** | ** ** |

 

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(a)           Included$3.6 million of expense for the write-off of costs incurred in connectionwith the canceled initial public offering.

 

Included a net $9.9 million gain for the changein the fair value of interest rate swaps related to our amended and restatedsenior credit facilities.

 

Included the write-off of $43.0 million ofdeferred financing costs resulting from the repayment of the Tranche Bterm loan.

 

Included a $9.9 million gain for changes to ourretiree healthcare programs.

 

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(b)                                 Asa result of purchase price accounting, we wrote up the value of our inventory,which increased the costs and expenses recognized by us upon the sale of theinventory by $20.2 million for the period of October 29 (inception)through December 31, 2004.

 

(c)                                  Included a $46.5 million pretax gain for the sale of ourpredecessor’s 47% interest in Voyageur Panel (see Note 8, Investments inEquity Affiliate of the Notes to the Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K).

 

Included$7.1 million of costs incurred in connection with the February 2004sale of our predecessor’s plywood and lumber operations in Yakima, Washington.

 

Included$12.7 million of expense, primarily for a one-time retention bonusOfficeMax granted to our employees.

 

Included$14.6 million of noncash restricted stock expenses.

 

(d)                                 Included a net $7.2 million one-time taxbenefit related to a favorable tax ruling, net of changes in other tax items.

 

Included a $14.7 million pretax charge for thewrite-down of impaired assets at our predecessor’s plywood and lumberoperations in Yakima, Washington, in December 2003.

 

Included a $3.6 million charge for the early termination of anoperating lease used in connection with our predecessor’s paper business.

 

(e)                                  Included a pretax charge of $54.0 million for the closure ofour predecessor’s plywood and lumber operations in Emmett, Idaho, and sawmillin Cascade, Idaho, and a $4.9 million charge for the write-off of assetsin Chile.

 

Included a pretax charge of $10.9 million to accrue for a one-timeliability related to postretirement benefits for our Northwest hourly paperworkers.

 

(f)            The following table reconciles net income (loss) toEBITDA for the periods indicated:

 
| ** **                                   | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|----------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** |
| ** **                                   | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | ** ** |
| ** **                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **Year Ended December 31** | ** ** |
| ** **                                   | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                   | ** ** | **(millions)**        | ** ** |
|                                         |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Net income  (loss)                           |       | $                     | 121        |                  | $          | 25 |   | $ | 69 |   | $ | (47 | ) | $ | (61 | ) | $ | (78 | ) |
| Change in  fair value of interest rate swaps |       | (10                   | )          | —                |       | — |   | — |   | — |   | — |   |
| Interest expense                             |       | 166                   |       | 22                    |       | 72 |   | 93 |   | 94 |   | 93 |   |
| Interest  income                             |       | (3                    | )          | (2                    | )          | — |   | (1 | ) | (1 | ) | (2 | ) |
| Income tax  provision (benefit)              |       | (2                    | )          | —                |       | 47 |   | (37 | ) | (45 | ) | (58 | ) |
| Depreciation,  amortization, and depletion   |       | 129                   |       | 20                    |       | 194 |   | 230 |   | 234 |   | 221 |   |
| EBITDA                                       | ** ** | **$**                 | **401**    | ** **            | **$**      | **65** | ** ** | **$** | **382** | ** ** | **$** | **238** | ** ** | **$** | **221** | ** ** | **$** | **176** | ** ** |

 

                                                EBITDArepresents income (loss) before interest (interest expense, interest income,and change in fair value of interest rate swaps), income tax provision(benefit), and depreciation, amortization, and depletion. EBITDA is the primarymeasure used by our chief operating decision makers to evaluate segmentoperating performance and to decide how to allocate resources to segments. Webelieve EBITDA is useful to investors because it provides a means to evaluatethe operating performance of our segments and our company on an ongoing basisusing criteria that are used by our internal decision makers and because it isfrequently used by investors and other interested parties in the evaluation ofcompanies with substantial financial leverage. We believe EBITDA is ameaningful measure because it presents a transparent view of our recurringoperating performance and allows management to readily view operating trends,perform analytical comparisons, and identify strategies to improve operatingperformance. For example, we believe that the inclusion of items such as taxes,interest expense, and interest income distorts management’s ability to assessand view the core operating trends in our segments. EBITDA, however, is not ameasure of our liquidity or financial performance under generally acceptedaccounting principles (GAAP) and should not be considered as an alternative tonet income (loss), income (loss) from operations, or any other performancemeasure derived in accordance with GAAP or as an alternative to cash flow fromoperating activities as a measure of our liquidity. The use of EBITDA insteadof net income (loss) or segment income (loss) has limitations as an analyticaltool, including the inability to determine profitability; the exclusion ofinterest expense, interest income, change in the fair value of interest rateswaps, and associated significant cash 

 

25

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requirements;and the exclusion of depreciation, amortization, and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying on our GAAP results.Our measures of EBITDA are not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the methods ofcalculation. 

 

***ITEM 7.******                                                 ******MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

 

This Management’s Discussion and Analysis ofFinancial Condition and Results of operations includes statements regarding ourexpectations with respect to our performance, liquidity, and capital resources.Such statements, along with any other nonhistorical statements in thediscussion, are forward-looking. These forward-looking statements are subjectto numerous risks and uncertainties, including, but not limited to, the risksand uncertainties described in “Item 1A. Risk Factors” in this Form 10-K. Our actual results may differmaterially from those contained in or implied by any of these forward-lookingstatements.

 

***Acquisition of Assets from OfficeMax***

 

Our operations began on October 29,2004, when we acquired the forest products and paper assets of OfficeMax (theAcquisition). Before the Acquisition, OfficeMax was known as Boise CascadeCorporation. We acquired the names “Boise” and “Boise Cascade” as part of theAcquisition. We acquired OfficeMax’s forest products and paper assets, otherthan its timberland operations, for an aggregate purchase price of$2.2 billion, including approximately $140 million of related feesand expenses. Concurrently with the Acquisition, Boise Land & TimberHoldings Corp. (Timber Holdings), an entity that is majority-owned by ourmajority owner, Forest Products Holdings, L.L.C. (FPH), acquired fromOfficeMax its timberland operations.

 

***Effects of the Acquisition***

 

*Purchase Accounting*

 

We accounted for the Acquisition using thepurchase method of accounting. As a result, the purchase price of$2.2 billion was allocated to the tangible and intangible assets acquiredand liabilities assumed based on their respective fair values as of the date ofthe Acquisition. The purchase price was determined based on negotiations betweenOfficeMax and Madison Dearborn Partners (MDP), our equity sponsor who controlsFPH. In accordance with Statement of Financial Accounting Standards (SFAS) No. 141,we had one year from the purchase date to record changes in estimates of thefair value of assets acquired and liabilities assumed. During 2005, we recorded$3.3 million of net purchase price adjustments that decreased the recordedamount of goodwill. The adjustments were related to fair value assetadjustments, liability accruals, and pension and other severance accruals. Formore information, see Note 2, Purchase of OfficeMax’s Forest Products andPaper Assets, of the Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K.

 

Compared with the predecessor periodspresented, the allocation of the purchase price resulted in a decrease indepreciation expense related to our acquired assets because we allocated alower fair value to the acquired assets. We also assigned new estimated usefullives, resulting in an average useful life of 11.5 years, compared withnine years for our predecessor. We wrote up the value of the inventory by$20.2 million, resulting in increased costs and expenses recognized by usupon the sale of the inventory during the period of October 29 (inception)through December 31, 2004.

 

Assuming the Acquisition had occurred on January 1,2004, our unaudited pro forma sales and net income would have been$5.7 billion and $258.4 million, respectively, for the year ended December 31,2004. This unaudited pro forma financial information does not necessarilyrepresent what would have occurred if the Acquisition had taken place on thedate presented and should not be taken as representative of our futureconsolidated results of operations, financial position, or cash flows.

 

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*Restructuring Activities*

 

In connection with the Acquisition, weevaluated the acquired facilities and organizational structure. In accordancewith the provisions of Emerging Issues Task Force (EITF) 95-3, Recognitionof Liabilities in Connection With a Purchase Business Combination, exitactivities related to the Acquisition increase goodwill. We had one year fromthe acquisition date to develop our restructuring plans and adjust goodwill. AtDecember 31, 2004, we had finalized a portion of our plans in sufficientdetail to meet the requirements of EITF 95-3 to record a liability. During2005, we recorded an additional restructuring reserve of $7.1 million.These charges reflect additional severance costs and increase the totalrestructuring reserve recorded since the Acquisition to $21.4 million.Most of the severance cost adjustments relate to severance costs for350 employees. At December 31, 2005, we had terminated approximately320 employees. Most of the remaining costs will be paid during 2006.

 

At December 31, 2005, approximately$3.5 million of the restructuring reserve was included in “Accruedliabilities, Compensation and benefits,” and $0.1 million was included in “Accruedliabilities, Other.” Of the $3.6 million remaining restructuring reserve,$2.3 million was recorded in our Paper segment and $1.3 million wasin Corporate and Other. Restructuring reserve liability account activity relatedto these charges are as follows:

 
| ** **                                       | ** ** | **Severance**  | ** ** | **Other**  | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------|------------|------------|------------|-----------|------------|
| ** **                                       | ** ** | **(millions)** | ** ** |
|                                             |       |           |       |       |       |      |       |
| 2004  restructuring reserve                      |       | $              | 13.8       |       | $          | 0.5       |       | $ | 14.3 |   |
| Charges  against reserve                         |       | (1.0           | )          | —     |       | (1.0      | )          |
| Restructuring  reserve at December 31, 2004 |       | 12.8           |       | 0.5        |       | 13.3      |       |
|                                             |       |           |       |       |       |      |       |
| Additions to  restructuring reserve              |       | 6.9            |       | 0.2        |       | 7.1       |       |
| Charges  against reserve                         |       | (16.2          | )          | (0.6       | )          | (16.8     | )          |
| Restructuring  reserve at December 31, 2005 | ** ** | **$**          | **3.5**    | ** ** | **$**      | **0.1**   | ** ** | **$** | **3.6** | ** ** |

 

*Acquisition Financing*

 

To finance the Acquisition, we incurred $2.0billion of debt. At December 31, 2005, we had $1.6 billion oflong-term debt, including a $270.9 million note payable to a relatedparty. These borrowings are subject to financial covenants and restrictions,including a minimum interest expense coverage ratio, maximum leverage ratio,and limitations on capital expenditures. At December 31, 2005, we were incompliance with our debt covenants. Our level of debt makes us more vulnerableto a downturn in our operations, the forest products and paper industry, or theeconomy in general. See “Financing Activities” under the “Liquidity and CapitalResources” discussion in this Management’s Discussion and Analysis of FinancialCondition and Results of Operations in this Form 10-K for moreinformation.

 

*Material Ongoing Agreements With OfficeMax*

 

In connection with the Acquisition, weentered into the following agreements with OfficeMax:

 

*Paper Supply Agreement*.  Underthis agreement, OfficeMax will purchase from us all of its North Americanrequirements for cut-size office paper, to the extent we choose to supply suchpaper to them, through December 2012 at prices approximating marketprices. OfficeMax’s purchase obligations under the agreement will phase outover a four-year period beginning one year after the delivery of notice oftermination, but not prior to December 31, 2012.

 

*Additional Consideration Agreement*.  Underthis agreement, we will adjust the purchase price for the Acquisition based onchanges in paper prices from closing of the Acquisition through 2010. OfficeMaxhas agreed to pay us $710,000 for each dollar by which the average market priceper ton of a specified benchmark grade of cut-size office paper during any 12-monthperiod ending on the anniversary of the Acquisition, or the annual paper price,is less than $800 per ton. We have agreed to pay $710,000 to OfficeMax for eachdollar by which the annual paper price exceeds $920 per ton. Neither party willbe obligated to make a payment under the agreement in excess of$45 million in any one year. Payments are also subject to an aggregate capof $125 million, which declines to $115 million for the period endingon October 29, 2009, and $105 million for the period ending on October 29,2010, and, in each case, are calculated on a net basis. After each anniversaryof the Acquisition, we review paper prices with the 

 

27

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provisions of the AdditionalConsideration Agreement to determine whether any amounts are owed or receivableunder the agreement. For the first anniversary period ending October 29,2005, neither Boise nor OfficeMax owed additional consideration for thepurchase price.

 

Any payments made or received pursuant to theAdditional Consideration Agreement will be treated as adjustments to thepurchase price for the Acquisition and, therefore, will not be reported in ourConsolidated Statement of Income (Loss) but will be included in consolidatedEBITDA for purposes of certain covenants under our debt agreements.

 

*Acquisition Effect on Pension and BenefitPlans*

 

During the predecessor periods, most of BoiseForest Products Operations employees, along with some employees of OfficeMax,participated in OfficeMax’s defined benefit pension plans. Accordingly, BoiseForest Products Operations recorded costs associated with the employees whoparticipated in OfficeMax’s plans in the Consolidated Statements of Income(Loss). For the year ended December 31, 2005, and the period of October 29through December 31, 2004, we recognized $26.8 million and$2.6 million of pension expense, respectively. For the period of January 1through October 28, 2004, and the year ended December 31, 2003, ourpredecessor incurred $60.9 million and $52.9 million of pensionexpense, respectively. In connection with the Acquisition, OfficeMaxtransferred to Boise Cascade, L.L.C. (Boise LLC), our operating subsidiary, theportion of the pension plan liability that was attributable to active employeeswho became employed by Boise LLC immediately following the Acquisition and toBoise Forest Products Operations employees who terminated employment after July 31,2004. OfficeMax also transferred sufficient assets to fund the accumulatedbenefit obligation at a 6.25% discount rate, and as a result, we were notrequired to make any contributions in 2005. However, we made a$10.3 million contribution during 2005. We are not required to make anycontributions in 2006; however, we may elect to make a voluntary contribution.In addition, OfficeMax retained all pension costs related to its employees whoretired or were terminated on or before July 31, 2004, all postretirementbenefits costs related to its employees who retired or were terminated beforethe Acquisition, and all pension and postretirement benefit costs related toactive OfficeMax employees. As a result, our annual pension expense is lowerthan amounts included in the predecessor financial statements.

 

*Stand-Alone Company*

 

Prior to October 29, 2004, we operatedas business units of OfficeMax and not as a stand-alone company. Financialinformation for Boise Forest Products Operations that is included in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations has been derived from the historical financial statements ofOfficeMax and includes the assets, obligations, and activities of OfficeMax forBoise Forest Products Operations. The predecessor financial informationincluded in this Form 10-K may not reflect what our results of operations,financial position, and cash flows would have been had we operated as aseparate, stand-alone company without the shared resources of OfficeMax for theperiods presented and may not be indicative of our future results ofoperations, financial position, and cash flows.

 

The predecessor financial information in thisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations includes amounts specifically attributable to Boise Forest ProductsOperations and a portion of OfficeMax’s shared corporate general andadministrative expenses. These shared services include, but are not limited to,finance, accounting, legal, information technology, and human resourcefunctions. Some of OfficeMax’s corporate costs related solely to Boise ForestProducts Operations and were allocated totally to these operations in thepredecessor financial information included in this Form 10-K. Sharedcorporate general and administrative expenses that were not specificallyattributable to Boise Forest Products Operations were allocated based onaverage sales, assets, and labor costs. We believe these allocations are areasonable reflection of the use of the shared services of OfficeMax. However,the amounts could differ from amounts that would have resulted if we hadoperated on a stand-alone basis and are not necessarily indicative of costs tobe incurred in the future.

 

Our predecessor participated in OfficeMax’scentralized cash management system. Cash receipts attributable to ouroperations were collected by OfficeMax, and cash disbursements were funded byOfficeMax. Cash advances necessary to fund our major improvements to andreplacements of assets, acquisitions, and expansion, to the extent not providedthrough internally generated funds, were provided by OfficeMax’s cash or fundedwith debt. As such, the amounts of cash and cash equivalents recorded on 

 

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our predecessor ConsolidatedStatement of Cash Flows do not represent the amounts required or generated byour businesses. In the predecessor period presented, OfficeMax’s total debt andrelated interest expense was allocated to us based on our average assetbalances. We believe the allocations of debt and interest expense are areasonable reflection of our debt position and interest costs. However, theamounts are not necessarily indicative of debt balances and interest costs inthe future. In connection with the Acquisition, we incurred a substantialamount of indebtedness, interest expense, and repayment obligations. For moreinformation, see “Liquidity and Capital Resources” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations inthis Form 10-K.

 

***Rescission of Corporate Status***

 

On May 9, 2005, we converted from a limited liability company to aC corporation by filing a certificate of conversion with the DelawareSecretary of State. This conversion was in anticipation of an initial publicoffering of equity securities, which we subsequently abandoned. On December 20,2005, acting pursuant to a Rescission Agreement among our shareholders, werescinded our conversion to C corporation status by filing a conversioncertificate with the Delaware Secretary of State that restored our status as alimited liability company and changed our name back to Boise Cascade Holdings,L.L.C. In connection with converting back to a limited liability company, theshares of preferred and common stock in Boise Cascade reverted into equityunits in Boise Cascade Holdings, L.L.C. We alsoreversed the taxes we had recorded as a corporate entity.

 

***Our Segments***

 

We operate our business using five reportablesegments:  Building MaterialsDistribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other. These segments represent distinct businesses that aremanaged separately because of differing products and services. Each of thesebusinesses requires distinct operating and marketing strategies. Managementreviews the performance of the company based on these segments. Historically,OfficeMax conducted Boise Forest Products Operations in three segments:  Boise Building Solutions, Boise PaperSolutions, and Corporate and Other. We have recast the financial statements ofour predecessor included herein to conform with our current segmentpresentation. OfficeMax historically allocated the results of its timberlandoperations to each of its Boise Building Solutions and Boise Paper Solutionssegments. Since we did not acquire the timberland operations from OfficeMax,they are not included in these financial statements.

 

*Building Materials Distribution. *Our BuildingMaterials Distribution segment is a leading national inventory-carryingwholesale distributor of building materials. We distribute a broad line ofbuilding materials, including engineered wood products (EWP), oriented strandboard (OSB), plywood, lumber, and general line items such as framingaccessories, composite decking, roofing, siding, and insulation. We purchasemost of these building materials from third-party suppliers and market themprimarily to customers that resell building materials to professional buildersin the residential, light commercial construction, and repair-and-remodelingmarkets.

 

*Wood Products. *Our Wood Productssegment manufactures and sells EWP, consisting of laminated veneer lumber(LVL), a high-strength engineered lumber often used in beams; I-joists, astructural support typically used in floors and roofs; and laminated beams. Wealso produce plywood, particleboard, dimension lumber, and high-qualityponderosa pine lumber, a premium lumber grade sold primarily to manufacturersof specialty wood windows, moldings, and doors. Our wood products are used innew residential and light commercial construction and in residential repair andremodeling. Most of these products are sold to wholesalers, major retailers,and industrial converters or through our own wholesale building materialsdistribution outlets. During 2005, approximately 36% of the wood products wemanufactured, including approximately 60% of our EWP, were sold to our BuildingMaterials Distribution segment.

 

*Paper. *OurPaper segment manufactures and sells uncoated free sheet (including cut-sizeoffice papers, commercial printing paper, business forms, envelope papers, anda wide range of value-added papers), market pulp, and containerboard(corrugating medium). Many of our paper products are commodity products, whileothers have specialized features that make these products “value-added.” Ourvalue-added grades include bright and colored cut-size office papers andcustom-developed specialty papers for such uses as label and release, security,and food wrap applications. We sell to end-users both directly from our millsand through distribution centers. In 2005, approximately 47% of our uncoatedfree sheet sales volume, including about 82% of our office papers sales volume,was sold to OfficeMax.

 

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*Packaging & Newsprint*.  Our Packaging & Newsprint segmentmanufactures and sells containerboard (linerboard) and newsprint at our mill inDeRidder, Louisiana. We also operate five corrugated container plants in thePacific Northwest. Our corrugated containers are used in the packaging of freshfruit and vegetables, processed food, beverages, and other industrial andconsumer products. Our containerboard and corrugated container products aresold by brokers or our own sales personnel. We market our newsprint throughAbitibi-Consolidated (Abitibi) pursuant to an arrangement, whereby Abitibipurchases all of the newsprint we produce at a price equal to the price atwhich Abitibi sells newsprint produced at its mills located in the southernUnited States, less associated expenses and a sales and marketing discount. Thenewsprint price is verified through a third-party audit.

 

*Corporate and Other*.  Our Corporate and Other segment includescorporate support staff services, related assets and liabilities, and foreignexchange gains and losses.

 

***Factors That Affect Our Operating Results***

 

Our results of operations and financialperformance are influenced by a variety of factors, including the following:

 

•                  Commodity natureof our products and our ability to maintain margins;

 

•                  Industry cyclesand capacity utilization rates;

 

•                  Pricingvolatility in our distribution business;

 

•                  Volatility inraw material and energy prices; and

 

•                  Theother factors described in “Item 1A. Risk Factors” in this Form 10-K.

 

*Commodity and Value-Added Products andProduct Margins*

 

Most of our products are widely available andcan be readily produced by our competitors. Because commodity products have fewdistinguishing qualities from producer to producer, competition for theseproducts is primarily based on price, which is determined by supply relative todemand. Generally, market conditions beyond our control determine the price forour commodity products, and the price for any one or more of these products mayfall below our cash production costs. Therefore, our profitability with respectto these products depends on managing our cost structure, particularly rawmaterials and energy prices, which also exhibit commodity characteristics.

 

Not all of our products are commodities. Ourvalue-added papers and EWP are differentiated from competing products based onquality and product design, as well as related customer service. In the case ofthese value-added products, we are generally able to influence price based onthe strength of differentiation and levels of customer service and aregenerally able to sell these products at higher margins than our commodityproducts. In order to reduce our sensitivity to the cyclicality of ourindustry, a fundamental component of our strategy is to increase production ofEWP and value-added papers, which are less susceptible to commodity dynamics.

 

*Demand*

 

The overall level of demand for the productswe make and distribute, and consequently our financial results, are affectedby, among other things, manufacturing activity, construction, employment, andconsumer spending. Accordingly, we believe that our financial results depend inlarge part on general macroeconomic conditions in North America, as well as onregional economic conditions in the geographic markets in which we operate.While no single product line drives our overall financial performance,individual product lines are influenced by conditions in their respective industries.For example:

 

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•                  Demand forbuilding materials, including wood products, depends on new residential andlight commercial construction and residential repair-and-remodeling activity,which are impacted by demographic trends, interest rate levels, weather, andgeneral economic conditions. In recent years, demand for wood products has beenstrong, due to strong new housing starts, the increasing size of new homes, arobust repair-and-remodeling market, and a recovering light commercialconstruction market.

 

•                  Historically,demand for uncoated free sheet, like demand for paper products generally, hascorrelated positively with general economic activity. More recently, demand forsome paper grades has decreased as the use of electronic transmission anddocument storage alternatives has become more widespread. In 2005, demand forNorth American shipments of uncoated free sheet, as measured by the AmericanForest and Paper Association, declined approximately 3% despite a relativelystrong economy.

 

•                  A largeshare of the demand for corrugated containers, and therefore containerboard, isdriven by manufacturing, specifically that of nondurable goods. In addition,inventory stocking or liquidation of these goods has an impact, as do currencyexchange rates that affect the cost-competitiveness of foreign manufacturers.Demand continues to be negatively impacted by the offshoring of durable andnondurable goods manufacturing, as those products are then packaged abroadrather than in North America. U.S. demand has also been hurt by the largeincrease of containerboard capacity, especially in China and Europe, over thepast three to four years.

 

•                  Demand fornewsprint depends upon prevailing levels of newspaper advertising andcirculation. Demand for newsprint in North America declined approximately 10%between 2001 and 2005, according to Resource Information Systems, Inc.(RISI), due in part to the growth of online media as well as substitutiontoward uncoated groundwood grades.

 

*Supply*

 

Industry supply of commodity wood productsand paper is affected by the number of operational or idled facilities, thebuilding of new capacity, or the shutting down of existing capacity. Capacityalso tends to increase gradually over time without significant capitalexpenditures, as manufacturers implement production efficiencies. Generally,more capacity is added or employed when supply is tight and margins arerelatively high, and capacity is idled or eliminated when supply significantlyexceeds demand and margins are poor. Margins tend to decrease with lowercapacity utilization because of downward price pressure and because fixed costsattributable to a product are spread across lower volumes.

 

While new capacity additions are constrainedby the high capital investment and long lead times required to plan, obtainregulatory approvals for, and build a new mill, a favorable pricing environmentmay prompt manufacturers to initiate expansion projects. For example, inresponse to the strong demand for EWP, some EWP manufacturers, including us,have initiated capacity expansion projects.

 

In2005, faced with declining demand, rising costs (especially energy costs),ongoing dissatisfaction with financial performance, and in some cases, a risingCanadian dollar, several North American paper producers announced mill closuresthat decreased or will decrease supply. From 2001 to 2005, NorthAmerican uncoated free sheet, containerboard, and newsprint capacities havedeclined by 5%, 2%, and 15%, respectively, according to RISI.

 

Industry supply of commodity wood productsand papers is also influenced by the level of imports and overseas productioncapacity, which has grown in recent years and is expected to continue to grow.While the weakness of the U.S. dollar has mitigated the level of imports inrecent years, a strengthening in the U.S. dollar is likely to increase importsof commodity wood products and papers from overseas, thereby offsettingdomestic capacity rationalization and putting downward pressure on prices.

 

***Recent Trends***

 

Pricingfor building products remained strong during 2005, a year where housing startswere the strongest since the 1970s. Although down from the very high levels of2004, lumber and plywood pricing in 2005 was generally robust relative tohistorical pricing. In recent years, there has been consolidation in thehomebuilding channel at the builder, pro dealer, and big box retailer areas. Asthe customer base 

 

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consolidates, this dynamic could lessen ourability to maintain margins. Demand for engineered wood products remained high,and according to RISI, prices for the year were up more than 10% over 2004prices.

 

Uncoatedfree sheet demand continued to decline in 2005, largely offset by significantcapacity closures that amounted to 4% of North American capacity. Industryparticipants have announced further closures for the first quarter of 2006.According to RISI, prices for 20 lb. copy paper decreased from $840 perton in December 2004 to $790 per ton in December 2005. Costsincreased, particularly for energy in the latter half of the year.

 

*Operating Costs*

 

Our major costs of production are labor, woodfiber, energy, and chemicals. The relative importance of these costs varies bysegment. Given the significance of raw materials and energy costs to our totaloperating expenses and our limited ability to control these costs, comparedwith other operating costs, volatility in these costs can materially affect ourmargins. In addition, the timing and degree of price cycles of raw materialsand energy differ with respect to each type of raw material and energy we use.

 

*Labor.*  Ourlabor costs tend to increase steadily due to inflation in healthcare as well aswage costs. However, labor costs are not as volatile as our energy and woodfiber costs. See “Item 1. Business—Employees” of this Form 10-K for more information.

 

*Wood fiber.*  Ourprimary raw material is wood fiber, comprising the following percentages ofmaterials, labor, and other operating expenses, including fiber costs, for ourWood Products, Paper, and Packaging & Newsprint segments:

 
| ** **                      | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** |
| ** **                      | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** |
| ** **                      | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** |
|                            |       |                  |       |                  |       |   |   |
| Wood  Products                  |       | 32                    | %          | 30                    | %          | 30 | % |
| Paper                           |       | 17                    | %          | 19                    | %          | 16 | % |
| Packaging &  Newsprint |       | 13                    | %          | 13                    | %          | 13 | % |

 

Our primary sources of wood fiber are timberand byproducts of timber, such as wood chips, wood shavings, and sawdust.Historically, we acquired fiber from OfficeMax’s timberland operations and fromoutside sources. Since the Timberlands Sale, we have acquired substantially allof our fiber from outside sources, including pursuant to supply agreements withthe buyer of the timberland operations. Our 2005 wood fiber costs exceededhistorical costs primarily due to higher market prices. We convert the woodfiber to pulp at our paper mills. On an aggregate basis, we are able to produceall of our pulp needs, generally purchasing and selling similar amounts on theopen market. After the Timberlands Sale in February 2005, we purchased themajority of our fiber requirements through private sources. Wood fiber is acommodity, and prices for wood fiber have historically been cyclical due tochanging levels of demand. As the amount of wood fiber we purchase pursuant toexisting supply agreements declines, our wood fiber costs may increase furtheras we increase our reliance on open-market purchases. In addition, our limited accessto an internal supply of timber could expose us to the effects of short-termprice volatility, limit our flexibility in responding to shortages in woodfiber supply, and cause our operating costs to increase to a greater extentthan those of our competitors that own timberlands. In addition, timber supplymay be limited by fire, insect infestation, disease, ice storms, windstorms,hurricanes, flooding, other weather conditions, and other natural and man-madecauses. In recent years, declines in timber supply have been severe enough tocause the closure of numerous facilities in some of the regions in which weoperate. Any sustained undersupply and resulting increase in wood fiber priceswould increase our operating costs. Prices for our products might not reflectincreases in wood fiber prices, and as a result, our operating margins woulddecrease. Our sensitivity to these fluctuations increased after the TimberlandsSale.

 

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*Raw material and energy purchasing andpricing.*  We purchase raw materials andenergy used in the manufacture of our products in both the open market andthrough long-term contracts. These contracts are generally with regionalsuppliers, who agree to supply all of our needs for a certain raw material orenergy at one of our facilities. These contracts normally contain minimumpurchase requirements and are for terms of various lengths. They also containprice adjustment mechanisms that take into account changes in market prices.Therefore, although our long-term contracts provide us with supplies of rawmaterials and energy that are more stable than open-market purchases, in manycases they may not alleviate fluctuations in market prices.

 

Ourcosts will rise if prices for our raw materials or energy rises, and ourmargins are impacted by how much and how quickly we can pass such priceincreases through to our customers. Specifically, some of our key chemicals areheavily influenced by energy costs. We anticipate that as these contracts comeup for renegotiation, our suppliers will be requesting price increases tied totheir increased energy costs. While we cannot anticipate their success inpassing through cost increases, there is a risk that our chemical costs willincrease as a result. Our ability to pass through price increases depends onseveral factors, which vary based on product line.

 

*Energy.*  Energyprices, particularly for electricity, natural gas, and fuel oil, have beenvolatile in recent years and currently exceed historical averages. When energyprices rise, as they have recently, our fuel costs increase, leading to highercosts and lower margins. Energy costs comprised the following percentages ofmaterials, labor, and other operating expenses, including fiber costs, for ourWood Products, Paper, and Packaging & Newsprint segments:

 

 
| ** **                      | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** |
| ** **                      | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** |
| ** **                      | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** |
|                            |       |                  |       |                  |       |   |   |
| Wood Products                   |       | 3                     | %          | 4                     | %          | 3 | % |
| Paper                           |       | 16                    | %          | 17                    | %          | 13 | % |
| Packaging &  Newsprint |       | 14                    | %          | 14                    | %          | 12 | % |

 

Wehave limited flexibility to switch between fuel sources in the short term;accordingly, we have significant exposure to natural gas and fuel oil priceincreases. While energy prices in early first quarter 2006 are generally lowerthan we experienced in fourth quarter 2005, Gulf-area natural gas productionhas still not achieved prehurricane levels and pricing remains high byhistorical standards. In addition, increased demand (which could be driven bycold weather) or further supply constraints could drive prices higher. In theevent the current fuel prices persist and we are unable to pass these increaseson to our customers in the form of higher prices, we may experience a materialnegative financial impact. In addition, the rates we are charged by ourelectrical suppliers are impacted by the increase in natural gas prices,although the degree of impact depends on each utility’s mix of energy resourcesand regulatory situation. In particular, electrical costs at our DeRidder,Louisiana, mill increased approximately $5.3 million in fourth quarter2005, compared with third quarter 2005.

 

*Chemicals.*  Importantchemicals we use in the production of our products include precipitated calciumcarbonate, sodium chlorate, sodium hydroxide, dyes, resins, and adhesives.Purchases of chemicals comprised the following percentages of materials, labor,and other operating expenses, including fiber costs, for our Wood Products,Paper, and Packaging & Newsprint segments:

 

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| ** **                      | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** |
| ** **                      | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** |
| ** **                      | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** |
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** |
| ** **                      | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** |
|                            |       |                  |       |                  |       |   |   |
| Wood  Products                  |       | 6                     | %          | 5                     | %          | 5 | % |
| Paper                           |       | 13                    | %          | 13                    | %          | 12 | % |
| Packaging &  Newsprint |       | 4                     | %          | 3                     | %          | 3 | % |

 

 

*Impact of Hurricanes*. All of our operating segments were affected by the hurricanes in theGulf Coast states during 2005. The direct impact included lost production, lostsales, and modest physical damage in the case of our Paper mill in Jackson,Alabama, and our Packaging & Newsprint mill in DeRidder, Louisiana.Our Wood Products facilities in Alexandria, Oakdale, and Florien, Louisiana,also experienced lost production and lost sales due to the impact of thehurricanes. All of our Gulf Coast operations are now operating normally. Weestimate operating income decreased approximately $6 million as a resultof lost production.

 

Indirectimpacts of the hurricanes, which continue to affect our financial results,include higher energy and chemical costs and higher freight costs as a resultof higher fuel costs. As described above, energy is a significant component ofour cost structure, especially in our Paper and Packaging & Newsprintsegments.

 

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***Results of Operations***

 

The following tables set forth the results ofoperations of Boise and Boise Forest Products Operations in dollars and as apercentage of sales for the year ended December 31, 2005, the period of October 29(inception) through December 31, 2004, for the predecessor period of January 1through October 28, 2004, and for the predecessor year ended December 31,2003. We have not included period-to-period comparisons for net income (loss)or other items below income (loss) from operations, as we believe thecomparisons with predecessor periods are not relevant for an understanding ofour business following the Acquisition.

 
| ** **                                      | ** ** | **Boise**                 | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | ** **                | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Year Ended**            | ** ** | **through**           | ** ** | **through** | ** ** | **Year Ended** | ** ** |
| ** **                                      | ** ** | **December 31,**     | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **December 31,** | ** ** |
| ** **                                      | ** ** | **2005**                  | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(millions)**            | ** ** |
| **Sales**                                       |       |                      |       |                  |       |   |   |   |   |
| Trade                                           |       | $                         | 5,345.1    |                  | $          | 780.0 |   | $ | 4,417.4 |   | $ | 4,217.3 |   |
| Related  parties                                |       | 562.3                     |       | 92.7                  |       | 444.6 |   | 436.4 |   |
|                                            |       | 5,907.4                   |       | 872.7                 |       | 4,862.0 |   | 4,653.7 |   |
|                                            |       |                      |       |                  |       |   |   |   |   |
| **Costs  and expenses**                         |       |                      |       |                  |       |   |   |   |   |
| Materials,  labor, and other operating expenses |       | 5,155.1                   |       | 733.5                 |       | 4,122.1 |   | 3,982.2 |   |
| Fiber costs from  related parties               |       | 17.6                      |       | 24.5                  |       | 95.5 |   | 113.8 |   |
| Depreciation,  amortization, and depletion      |       | 128.8                     |       | 20.0                  |       | 193.8 |   | 229.8 |   |
| Selling and  distribution expenses              |       | 264.1                     |       | 40.1                  |       | 211.3 |   | 224.4 |   |
| General and  administrative expenses            |       | 74.7                      |       | 10.6                  |       | 79.3 |   | 69.7 |   |
| Other  (income) expense, net                    |       | (5.6                      | )          | —                |       | 25.3 |   | 32.8 |   |
|                                            |       | 5,634.7                   |       | 828.7                 |       | 4,727.3 |   | 4,652.7 |   |
|                                            |       |                      |       |                  |       |   |   |   |   |
| Income from  operations                         | ** ** | **$**                     | **272.7**  | ** **            | **$**      | **44.0** | ** ** | **$** | **134.7** | ** ** | **$** | **1.0** | ** ** |
|                                            |       |                      |       |                  |       |   |   |   |   |
| ** **                                      | ** ** | **(percentage of sales)** | ** ** |
| **Sales**                                       |       |                      |       |                  |       |   |   |   |   |
| Trade                                           |       | 90.5                      | %          | 89.4                  | %          | 90.9 | % | 90.6 | % |
| Related  parties                                |       | 9.5                       |       | 10.6                  |       | 9.1 |   | 9.4 |   |
|                                            |       | 100.0                     | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
|                                            |       |                      |       |                  |       |   |   |   |   |
| **Costs  and expenses**                         |       |                      |       |                  |       |   |   |   |   |
| Materials,  labor, and other operating expenses |       |                      |       |                  |       |   |   |   |   |
| and fiber  costs from related parties           |       | 87.5                      | %          | 86.9                  | %          | 86.8 | % | 88.0 | % |
| Depreciation,  amortization, and depletion      |       | 2.2                       |       | 2.3                   |       | 4.0 |   | 4.9 |   |
| Selling and  distribution expenses              |       | 4.5                       |       | 4.6                   |       | 4.3 |   | 4.8 |   |
| General and  administrative expenses            |       | 1.3                       |       | 1.2                   |       | 1.6 |   | 1.5 |   |
| Other  (income) expense, net                    |       | (0.1                      | )          | —                |       | 0.5 |   | 0.8 |   |
|                                            |       | 95.4                      | %          | 95.0                  | %          | 97.2 | % | 100.0 | % |
|                                            |       |                      |       |                  |       |   |   |   |   |
| Income from  operations                         | ** ** | **4.6**                   | **%**      | **5.0**               | **%**      | **2.8** | **%** | **—** | ** ** |

 

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***Sales Volumes and Prices***

 

Set forthbelow are our segment sales volumes and average net selling prices for ourprincipal products for the year ended December 31, 2005, the period of October 29(inception) through December 31, 2004, the period of January 1through October 28, 2004, and the year ended December 31, 2003.

 
| ** **                                       | ** ** | **Boise**                                                   | ** ** | **Predecessor**                                                    | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                       | ** ** | **Year Ended  December 31,  2005**                     | ** ** | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28, 2004** | ** ** | **Year Ended  December 31, 2003** | ** ** |
| ** **                                       | ** ** | **(millions)**                                              | ** ** |
| **Building  Materials Distribution**             |       |                                                        |       |                                                               |       |   |   |   |   |
| Sales  dollars                                   |       | $                                                           | 3,052.3    |                                                               | $          | 401.7 |   | $ | 2,442.4 |   | $ | 2,047.8 |   |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| **Sales  Volumes**                               |       |                                                        |       |                                                               |       |   |   |   |   |
| **Wood  Products**                               |       |                                                        |       |                                                               |       |   |   |   |   |
| Laminated  veneer lumber (LVL) (cubic feet)      |       | 12.3                                                        |       | 1.8                                                                |       | 10.1 |   | 9.8 |   |
| I-joists  (equivalent lineal feet)               |       | 243                                                         |       | 31                                                                 |       | 192 |   | 200 |   |
| Plywood (sq.  ft.) (3/8” basis)             |       | 1,328                                                       |       | 243                                                                |       | 1,228 |   | 1,655 |   |
| Lumber  (board feet)                             |       | 327                                                         |       | 60                                                                 |       | 303 |   | 364 |   |
| Particleboard  (sq. ft.) (3/4” basis)       |       | 165                                                         |       | 22                                                                 |       | 134 |   | 153 |   |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(thousands of short tons, except corrugated containers)** | ** ** |
| **Paper**                                        |       |                                                        |       |                                                               |       |   |   |   |   |
| Uncoated  free sheet                             |       | 1,516                                                       |       | 246                                                                |       | 1,249 |   | 1,396 |   |
| Containerboard  (medium)                         |       | 128                                                         |       | 23                                                                 |       | 110 |   | 126 |   |
| Market pulp  and other                           |       | 142                                                         |       | 27                                                                 |       | 138 |   | 146 |   |
| ** **                                       | ** ** | **1,786**                                                   | ** ** | **296**                                                            | ** ** | **1,497** | ** ** | **1,668** | ** ** |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| **Packaging &  Newsprint**              |       |                                                        |       |                                                               |       |   |   |   |   |
| Containerboard  (linerboard)                     |       | 452                                                         |       | 81                                                                 |       | 382 |   | 451 |   |
| Newsprint                                        |       | 408                                                         |       | 81                                                                 |       | 349 |   | 416 |   |
| Corrugated  containers (mmsf)                    |       | 4,770                                                       |       | 787                                                                |       | 3,876 |   | 4,591 |   |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(dollars per unit)**                                      | ** ** |
| **Average  Net Selling Prices**                  | ** ** | ** **                                                  | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                               | ** ** | ** **                                                  | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated  veneer lumber (LVL) (100 cubic feet)  |       | $                                                           | 1,941      |                                                               | $          | 1,853 |   | $ | 1,640 |   | $ | 1,463 |   |
| I-joists  (1,000 equivalent lineal feet)         |       | 1,095                                                       |       | 1,032                                                              |       | 978 |   | 874 |   |
| Plywood  (1,000 sq. ft.) (3/8” basis)       |       | 293                                                         |       | 261                                                                |       | 334 |   | 255 |   |
| Lumber  (1,000 board feet)                       |       | 491                                                         |       | 511                                                                |       | 552 |   | 431 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 263                                                         |       | 295                                                                |       | 305 |   | 236 |   |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(dollars per short ton, except corrugated containers)**   | ** ** |
| **Paper**                                        |       |                                                        |       |                                                               |       |   |   |   |   |
| Uncoated  free sheet                             |       | $                                                           | 742        |                                                               | $          | 768 |   | $ | 718 |   | $ | 721 |   |
| Containerboard  (medium)                         |       | 330                                                         |       | 452                                                                |       | 388 |   | 360 |   |
| Market pulp  and other                           |       | 396                                                         |       | 394                                                                |       | 400 |   | 355 |   |
|                                             |       |                                                        |       |                                                               |       |   |   |   |   |
| **Packaging &  Newsprint**              |       |                                                        |       |                                                               |       |   |   |   |   |
| Containerboard  (linerboard)                     |       | $                                                           | 349        |                                                               | $          | 392 |   | $ | 354 |   | $ | 321 |   |
| Newsprint                                        |       | 491                                                         |       | 445                                                                |       | 434 |   | 397 |   |
| Corrugated  containers ($/msf)                   |       | 50                                                          |       | 49                                                                 |       | 47 |   | 46 |   |

 

***Operating Results***

 

The consolidated financial statements presentthe financial results of Boise for the year ended December 31, 2005, andfor the period of October 29 (inception) through December 31, 2004,and the financial results of Boise Forest Products Operations for the period ofJanuary 1 through October 28, 

 

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2004, and the year ended December 31,2003. We refer to the period of October 29 (inception) through December 31,2004, which represents the portion of 2004 following the closing of the Acquisition,as the last two months of 2004 and the period of January 1 through October 28,2004, as the first ten months of 2004. When we refer to our 2004 results, weare referring to the combined results of Boise for the period of October 29through December 31, 2004, and Boise Forest Products Operations for theperiod of January 1 through October 28, 2004.

 

***2005 Compared With 2004***

 

*Sales*

 

Totalsales increased $172.7 million, or 3%, to $5.9 billion in 2005 from$5.7 billion in 2004. With the exception of Wood Products, sales in all ofour segments increased during 2005, compared with 2004. Building MaterialsDistribution sales rose 7% primarily due to growth in sales volumes. WoodProducts sales decreased 5% due to lower plywood and lumber prices and volumes,offset in part by increased engineered wood products sales. Paper salesincreased 3% primarily due to higher average uncoated free sheet prices.Packaging & Newsprint sales increased 5% primarily due to increasedcorrugated container sales volume and improved corrugated container andnewsprint prices, offset in part by lower newsprint volumes, lower linerboardprices, and lower linerboard sales volumes, as we moved more of our linerboardproduction through our own corrugated container plants.

 

*Building Materials Distribution.*  Sales increased $208.2 million, or 7%,to $3,052.3 million in 2005 from $2,844.1 million in 2004. Salesincreased due to organic growth in legacy facilities coupled with continuedramp-up of new facilities and expansions in existing facilities. We alsocontinued to improve our product mix as a result of increased volumes ofengineered wood products and general line items, which tend to have higherproduct margins. Market demand was strong during the year as 2005 housingstarts surpassed 2004 levels.

 

*Wood Products.* Sales decreased $65.6 million, or 5%, to$1,294.4 million in 2005 from $1,360.0 million in 2004. Whileengineered wood products sales were up 22% from 2004, our plywood prices weredown approximately 9% and our plywood volumes declined 10% as we moved moreveneer through our engineered wood products plants. Compared with 2004, lumberprices fell 10% and lumber volumes declined 10%. Although down from 2004levels, lumber and plywood prices in 2005 were generally strong when comparedwith historical periods.

 

*Paper.* Sales increased $47.2 million, or 3%, to $1,417.8 million in2005 from $1,370.6 million in 2004. The sales increase was drivenprimarily by increased uncoated free sheet prices. Despite an overall marketdemand decline, our uncoated free sheet sales volume increased, reflecting a 2%increase in sales of our specialty and premium papers and a 1% increase insales of our commodity papers. Prices for uncoated free sheet increased 2%,reflecting a 3% increase in commodity papers while specialty and premium paperprices remained flat. In 2005, we took 17,000 tons of market-relateddowntime, compared with 50,000 tons in 2004. In third quarter 2005, welost approximately 3,500 tons of uncoated free sheet production due toHurricanes Dennis and Katrina.

 

*Packaging & Newsprint. *Salesincreased $37.1 million, or 5%, to $731.6 million in 2005 from$694.5 million in 2004. Corrugated container sales prices and volumesincreased 4% and 2%, respectively, driven by strengthening supply-demandfundamentals, while newsprint prices and volumes****wereup 13% and down 5%, respectively. Newsprint price increases reflect improvedsupply-demand dynamics for the grade as competitors shut down production orconverted production to other grades. Linerboard sales prices and volumesdecreased 3% and 2%, respectively. Linerboard price decreases reflect lowerend-user demand. In 2005, we took 13,000 tons of market-related downtime,compared with 23,000 tons in 2004. In both periods, the market-related downtimewas primarily in newsprint. In third quarter 2005, we lost approximately9,500 tons of linerboard production and 8,200 tons of newsprintproduction due to Hurricane Rita.

 

*Costs andExpenses*

 

Materials, labor, and other operatingexpenses, including fiber costs, increased $197.1 million, or 4%, to$5.2 billion in 2005 from $5.0 billion in 2004. As a percentage ofsales, these costs increased to 87.5% in 2005 from 86.8% in 2004. The increasewas primarily attributable to increased energy, chemical, and fiber costs. WoodProducts incurred higher delivered-log, energy, and resin costs, 

 

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compared with 2004. Paper and Packaging &Newsprint experienced lower fixed costs, including labor, which partially offsetincreased variable costs, including energy, chemicals, and fiber.Relative to 2004, as a percentage of sales, materials, labor, and otheroperating expenses in the Building Materials Distribution segment wererelatively flat.

 

Depreciation,amortization, and depletion expenses decreased $85.0 million, or 40%, to$128.8 million for the year ended December 31, 2005, compared with$213.8 million for the year ended December 31, 2004. The reduction indepreciation and amortization is primarily the result of the revaluation ofassets associated with the purchase of the assets from our predecessor.

 

Sellingand distribution expenses increased $12.7 million, or 5%, to$264.1 million in 2005 from $251.4 million in 2004. As a percentageof sales, selling and distribution expenses increased slightly to 4.5% in 2005from 4.4% in 2004.

 

Generaland administrative expenses decreased $15.2 million, or 17%, to$74.7 million in 2005 from $89.9 million in 2004. General andadministrative expenses as a percentage of sales decreased 0.3% in 2005, from1.6% in 2004 to 1.3% in 2005. These decreases reflect lower pension andincentive compensation costs, as described in more detail below.

 

Thecosts and expenses discussed above reflect the positive impact of the reducedbenefit costs we realized as a result of the Acquisition, due to OfficeMaxretaining the benefit obligation for all of its former employees except for theOfficeMax employees hired by us. For the year ended December 31, 2005, ourpension and other postretirement benefit expense decreased $40.8 million,or 59%, to $28.7 million from $69.5 million in 2004.

 

Other(income) expense, net, was $5.6 million of income in 2005, compared with$25.3 million of expense in 2004. Other (income) expense, net, in 2005primarily included $9.9 million of income for changes in our retireehealthcare programs, offset in part by $3.6 million of expense for thewrite-off of costs incurred in connection with the canceled initial publicoffering. Other (income) expense, net, in 2004 included $12.7 million ofexpense related primarily to a one-time retention bonus OfficeMax granted toour employees, $7.1 million of expenses related to the sale of ourpredecessor’s plywood and lumber operations in Yakima, Washington, and a$3.0 million loss on sale of assets, offset by other miscellaneous incomeand expense items.

 

*Income (Loss)From Operations*

 

Income(loss) from operations increased $94.0 million, or 53%, to income of$272.7 million in 2005, compared with $178.7 million in 2004. Relative to2004, segment income increased in Building Materials Distribution, Paper, andPackaging & Newsprint, while it decreased in Wood Products.

 

*Building Materials Distribution.*  Segment results improved $11.0 million,or 12%, to $99.9 million of income in 2005 from $88.9 million of income in2004. The improved financial performance was driven by increased volumes as wecontinued to grow the business and improved product mix by increasing thepercentage of sales from engineered wood products and general line items.

 

*Wood Products.* Segment income decreased $99.1 million to$119.4 million of income in 2005, compared with $218.5 million of incomein 2004. In 2004, our predecessor recorded a $46.5 million pretax gain forthe sale of its 47% interest in Voyageur Panel to Ainsworth Lumber Co. Ltd.Before the gain recorded for the sale of the interest in Voyageur Panel,segment income decreased $52.6 million, or 31%, primarily due to lowerplywood and lumber prices and volumes, coupled****withhigher wood and resin costs. The reduction in plywood volumes was largely theresult of shifting more of our veneer production from plywood to engineeredwood products. The decreases in income were offset, in part, by increasedengineered wood products sales, reflecting continued strength in the housingmarket.

 

*Paper.*  Segment results****improved $75.0 million to $58.6 million of incomein 2005 from a $16.4 million loss in 2004. The increase in segment income,relative to the same period in 2004, is due to improved pricing, product mix,and reduced fixed costs, including labor and depreciation and amortization,partially offset by increases in variable costs, including energy, chemicals,and fiber. While uncoated free sheet markets started the year strong, pricessoftened during the second half of the year, reflecting unfavorablesupply-demand balances.

 

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*Packaging & Newsprint. *Segmentresults improved**$17.7 million,or 289%, to $23.8 million of income in 2005, compared with$6.1 million in 2004. In 2005, the increase in segment income, relative tothe same period in 2004, was due to improved sales volumes and prices in ourbox plants driven by improved supply-demand balances in the industry. Resultswere also positively influenced by improved pricing in newsprint and reducedfixed costs. These impacts more than offset lower linerboard prices and salesvolumes, lower newsprint volumes, and significantly higher energy and chemicalcosts.

 

*Other*

 

*Change in fair value of interest rate swaps.*  For the year ended December 31, 2005, werecorded $9.9 million of income in “Change in fair value of interest rateswaps” in our Consolidated Statements of Income for the change in the fairvalue of interest rate swaps related to our amended and restated creditfacilities (see Liquidity and Capital Resources discussion below). Inconnection with the anticipated repayment of the Tranche B term loan, theinterest rate swaps associated with this debt were no longer considered hedgesof the variable interest payments on that loan. As a result, during firstquarter 2005, we recorded the fair value of the interest rate swaps, or$15.2 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statement of Income. In second quarter, we redesignated the$550 million of interest rate swaps as hedges of the cash flow from theLondon Interbank Offered Rate (LIBOR)-based variable interest payments onamounts borrowed under our senior secured credit facilities (the Facilities)and recognized $5.3 million of noncash expense in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Loss. The net$9.9 million of value recorded in “Other assets” in our ConsolidatedBalance Sheet will result in higher interest expense over the remaining life ofthe interest rate swaps.

 

*Interest expense.* For the year ended December 31, 2005, interest expense was$166.3 million, compared with $94.3 million in the same period a yearago. The expense recorded for the year ended December 31, 2005, includes a$43.0 million charge for the write-off of deferred financing costsresulting from the repayment of the Tranche B term loan. Also included in2005, is $18.9 million of interest expense related to a note payable to asubsidiary of Timber Holdings. In the predecessor periods presented, OfficeMaxallocated interest costs to Boise Forest Products Operations based on itsaverage asset balances.

 

***Two Months Ended December 31, 2004***

 

*Sales*

 

Total sales during the last two months of2004 were $872.7 million. Sales in our Building Materials Distribution,Wood Products, Paper, and Packaging & Newsprint segments were$401.7 million, $200.1 million, $230.1 million, and $128.9 million,respectively, during that period. Our Building Materials Distribution and WoodProducts segments benefited from favorable prices for EWP, offset by generallylower prices for plywood and lumber, compared with prices for these products inthe first ten months of 2004. Our Paper segment realized a 7% price increasefor uncoated free sheet, compared with prices for the first ten months of 2004.Containerboard and newsprint prices in our Packaging & Newsprintsegment increased 11% and 3%, respectively, compared with prices for the firstten months of 2004.

 

*Costs and Expenses*

 

The aggregate amount of materials, labor, andother operating expenses, including fiber costs, was $758.0 million forthe last two months of 2004. As a percentage of sales, these expenses and costswere flat, compared with the first ten months of 2004.

 

Selling and distribution expenses were$40.1 million in the last two months of 2004. As a percentage of sales,selling and distribution expenses increased slightly from 4.3% for the firstten months of 2004 to 4.6% for the last two months of 2004, due primarily tohigher transportation costs.

 

General and administrative expenses were$10.6 million for the last two months of 2004. General and administrativeexpenses as a percentage of sales decreased in the last two months of 2004 from1.6% for the first ten months of 2004 to 1.2% for the last two months of 2004.This decrease was due in part to our lower benefit costs as a result of theAcquisition.

 

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*Income from Operations*

 

Income from operations for the last two monthsof 2004 was $44.0 million. Each operating segment reported positiveresults for that period, with Building Materials Distribution segment income of$10.1 million, Wood Products segment income of $15.6 million, Papersegment income of $19.0 million, and Packaging & Newsprintsegment income of $7.3 million. As a percentage of sales, income fromoperations increased to 5% for the last two months of 2004 from 3% for thefirst ten months of 2004. This improvement reflects a decrease in depreciation,amortization, and depletion expenses as a percentage of sales from 4% for thefirst ten months of 2004 to 2% for the last two months of 2004, due to a lowerdepreciable asset base as a result of the Acquisition. Income from operationsfor the last two months of 2004 reflects a $20.2 million noncash chargedue to an inventory valuation adjustment recorded as a result of theAcquisition.

 

***Ten Months Ended October 28, 2004,Compared with 2003***

 

*Sales*

 

Total sales increased $0.2 billion, or4%, to $4.9 billion for the first ten months of 2004 from$4.7 billion for the full year 2003. Sales in our Building MaterialsDistribution and Wood Products segments increased 19% and 4%, respectively, forthe first ten months of 2004, compared with full year 2003 sales. Paper salesdecreased 9% primarily due to decreased sales volume, given the shorterreporting period, and relatively flat paper prices. Packaging &Newsprint sales decreased 11% primarily due to a 17% decrease in sales volume,given the shorter reporting period, partially offset by a 10% increase inweighted average prices. Despite the shorter reporting period, Wood Productssales increased 4% due to plywood and lumber prices that were 31% and 28%higher, respectively, for the first ten months in 2004 than for full year 2003,as well as increased prices for our EWP. Building Materials Distribution salesrose 19% primarily due to 22% higher prices, offset by a 2% decrease in salesvolume, given the shorter reporting period.

 

*Building Materials Distribution*.  Salesincreased $394.6 million, or 19%, to $2.4 billion for the first tenmonths of 2004 from $2.0 billion for full year 2003. Average pricesincreased 22%, and sales volume decreased 2% for the first ten months of 2004,compared with full year 2003. The increase in prices resulted from a stronghousing market, and the decrease in volume resulted from the shorter reportingperiod in 2004.

 

*Wood Products*.  Salesincreased $44.2 million, or 4%, to $1.2 billion for the first tenmonths of 2004 from $1.1 billion for full year 2003. The increase was dueto strong product pricing. Average prices for our EWP increased 12% in thefirst ten months of 2004, compared with full year 2003. As a result ofincreased demand from new residential construction and lower interest rates, averageplywood prices rose 31%, and average lumber prices rose 28%, in each casecompared with full year 2003 average prices. At the same time, unit salesvolume for plywood decreased 26% and sales volume of lumber decreased 17%,compared with full year 2003, due primarily to the shorter reporting period.The decrease in the plywood sales volume was also due to the sale of ourpredecessor’s plywood and lumber facilities in Yakima, Washington, in February 2004.The sale of the Yakima, Washington, facilities did not have a material impacton our predecessor’s results of operations for the first ten months of 2004.

 

*Paper*.  Salesdecreased $116.7 million, or 9%, to $1.1 billion for the first tenmonths of 2004 from $1.3 billion for full year 2003. The decrease was dueprimarily to an 11% decrease in sales volume of our uncoated free sheet asstronger average monthly sales volume was more than offset by the shorterreporting period in 2004. In 2004, we began to sell our paper products toOfficeMax’s retail operation. The volume of our office paper sales to OfficeMaxwas 579,000 tons for the first ten months in 2004. The increase in averagemonthly sales volume, as a result of increased sales to OfficeMax, led to an80% decrease in market-related downtime from 172,000 tons of market-relateddowntime in the full year 2003 to 34,750 tons of market-related downtime in thefirst ten months of 2004. Average paper prices for uncoated free sheet wererelatively flat for the first ten months of 2004, compared with full year 2003,as paper prices rebounded during the second half of 2004 from a declineexperienced during the second half of 2003.

 

*Packaging & Newsprint*.  Salesdecreased $72.5 million, or 11%, to $565.6 million for the first tenmonths of 2004 from $638.1 million for full year 2003. The decrease wasprimarily due to decreased newsprint and containerboard sales volumes of 16%and 15%, respectively, in the first ten months of 

 

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2004 due primarily to theshorter reporting period, partially offset by a 10% increase in weightedaverage prices for linerboard and newsprint. Maintenance downtime in linerboardmore than doubled to 24,000 tons in 2004 as a result of the planned replacementof the linerboard machine dryer hood at our DeRidder, Louisiana, mill.

 

*Costs and Expenses*

 

The aggregate amount of materials, labor, andother operating expenses, including fiber costs, increased $121.6 million,or 3.0%, to $4.2 billion for the first ten months of 2004 from$4.1 billion for full year 2003. As a percentage of sales, however, theseexpenses and costs decreased to 86.8% for the first ten months of 2004 from88.0% for full year 2003. The percentage decrease was primarily attributable toincreased sales in our Wood Products segment, mostly as a result of higherprices.

 

Selling and distribution expenses decreased$13.1 million, or 6%, to $211.3 million for the first ten months of2004 from $224.4 million for full year 2003. As a percentage of sales,selling and distribution expenses decreased to 4.3% for the first ten months of2004 from 4.8% for full year 2003 because of higher sales in our Wood Productsand Building Materials Distribution segments, primarily as a result of higherprices.

 

General and administrative expenses increased$9.6 million, or 14%, to $79.3 million for the first ten months of2004 from $69.7 million for full year 2003, due primarily to higherpension, healthcare, and benefit expenses. Because of the increase in sales inthe first ten months of 2004, compared with full year 2003, general andadministrative expenses as a percentage of sales increased only 0.1% for thefirst ten months of 2004, from 1.5% for full year 2003 to 1.6% for the firstten months of 2004.

 

Other (income) expense, net, decreased $7.5 millionfrom $32.8 million of expense for full year 2003 to $25.3 million ofexpense for the first ten months of 2004. Other (income) expense, net, for thefirst ten months of 2004 included $12.7 million of expense related to aone-time retention bonus OfficeMax granted to our employees, $7.1 millionof expenses related to the sale of our predecessor’s plywood and lumberoperations in Yakima, Washington, and a $3.0 million loss on sale ofassets. Other (income) expense, net, for full year 2003 included a $14.7 millionpretax charge for the write-down of impaired assets at our predecessor’splywood and lumber operations in Yakima, Washington, $3.6 million of costsassociated with the September 2003 early termination of an operating leaseused in connection with our Paper segment, $4.6 million for the write-downof miscellaneous assets, and a $3.1 million loss on sale of assets.

 

*Income (Loss) from Operations*

 

Each of our operating segments other than thePaper segment reported increased segment income for the first ten months of2004, compared with full year 2003, despite a shorter reporting period andhigher pension, healthcare, and benefit expenses. The increase in segmentincome for our Building Materials Distribution segment was due to increasedprices. Our Wood Products segment income increased for the first ten months of2004 from full year 2003 results at a greater percentage than any of our otheroperating segments. In our Wood Products segment, segment income increased by$159.5 million, due primarily to increased prices for plywood, lumber, andEWP. In addition, results for our Wood Products segment included a$46.5 million pretax gain for the sale of our predecessor’s 47% interestin Voyageur Panel, which was completed in May 2004. Packaging &Newsprint segment income improved 92% due to 10% higher weighted averageselling prices for linerboard and newsprint.

 

*Building Materials Distribution.*  Segmentincome increased $31.1 million, or 65%, to $78.8 million for thefirst ten months of 2004 from $47.7 million of income for full year 2003.The increase resulted from strong plywood and lumber markets driven by a stronghousing market. Prices increased 22%, and sales volumes decreased 2% for thefirst ten months of 2004, compared with full year 2003.

 

*Wood Products.*  Fueledby continued strong plywood and lumber markets, Wood Products segment incomeincreased $159.5 million to $203.0 million of income for the first tenmonths of 2004 from $43.5 million of income for full year 2003. In thefirst ten months of 2004, we recorded a $46.5 million pretax gain for thesale of our predecessor’s 47% interest in Voyageur Panel. This gain was offsetby $7.1 million of expenses related to the sale of our predecessor’splywood and lumber facilities in Yakima, Washington. Prior to the sale of theinterest in Voyageur Panel, it accounted for the joint venture under the equitymethod. Accordingly, segment results do not include the joint venture’s salesbut do include

 

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$6.3 million of equity inearnings for the first ten months of 2004, compared with $8.7 million ofequity in earnings for full year 2003. Before the gain recorded from the saleof the interest in Voyageur Panel, segment income increased 260% for the firstten months of 2004 to $156.5 million, primarily due to increased productprices.

 

*Paper.*  Segmentloss increased $11.7 million, or 49%, to a $35.4 million loss for thefirst ten months of 2004 from a $23.7 million loss for full year 2003. Inaddition to volume decreases in uncoated free sheet, we incurred$2.8 million of costs and/or lost income due to mill damage and lostproduction at our Alabama paper mill related to disruption from hurricanes in September 2004and adverse weather conditions and operating difficulties in the first quarterof 2004. Relative to full year 2003, the largest manufacturing cost increasesfor the first ten months of 2004 were fiber costs, which increased 9% due tohigher prices paid for pulp and wood.

 

*Packaging & Newsprint.*  Segmentincome increased $13.8 million, or 92%, to a $1.2 million loss forthe first ten months of 2004 from a $15.0 million loss for full year 2003.The weighted average selling prices for linerboard and newsprint were 10%higher in the first ten months of 2004 than in full year 2003.

 

***Operational Outlook***

 

2005 was a very strong year in theresidential construction markets with record housing starts and strong repairand remodel activity. Many economists are forecasting lower levels ofresidential construction activity in 2006 driven largely by decreased singlefamily home affordability. A reduction in residential construction activitywould likely have a negative impact on our Building Materials Distribution andWood Products segments. If general housing construction activity declines, itwill be more difficult to continue to grow our distribution business. Inaddition, a number of our competitors are in the process of starting up or haveannounced their intention to start up new oriented strand board (OSB) plants in2006 and 2007. OSB competes with plywood in many applications and the increasein OSB supply may materially impact plywood prices. We believe that ourstrategy of shifting more of our veneers from plywood into growing engineeredwood product production will help mitigate the impact of OSB substitution onour overall results. EWP has enjoyed strong pricing dynamics throughout 2005;however, a major competitor has announced price reductions, which we havefollowed in markets where we must do so to stay competitive. Additional pricereductions could spread to other areas if supply-demand dynamics warrant.

 

In early 2006, we announced a price increasein our Paper business for virtually all of our uncoated free sheet grades.While we are shipping and invoicing based on the increased prices, there is noguarantee we will be able to sustain the price increases. In the longer term,we believe electronic substitution is the single greatest risk to market demandfor communications papers. We believe continued improvement in personalcomputer software, coupled with demographic factors reducing the propensity toprint, is limiting growth in copy paper consumption in the office. At the sametime, increasing use of personal computers in the home is providing some offsetto the trend in offices. We believe increasing postal rates have also had anegative impact on the consumption of some grades of paper as alternative formsof communication become relatively cheaper than mailing paper. Offsetting thetrend in copy papers is continued growth in more specialized paper markets suchas label and release papers and flexible food wrap. The respective demand forthese papers has grown as product labeling processes move to this technologyand the “fast-food” industry continues to grow. Mitigating the demand trendsare capacity reductions as less cost competitive machines have been shut downresulting in lower levels of market supply.

 

We have alsoannounced a price increase in linerboard. Nevertheless, our ability to sustainthe increase over time is uncertain, driven largely by the levels of generaleconomic activity. In the longer term, we believe that the demand for packagingpapers is driven primarily by industrial production in North America. Whileconsumption of goods in the United States has continued to grow, more of thisconsumption is being manufactured offshore in places like China and India. Theresult is limited demand growth for corrugated containers in the United States.Because it is not typically cost- and service-effective to ship emptycorrugated containers long distances, the markets for our corrugated containers

 

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tend to be within a100 mile radius of our container plants. A significant percentage of ourcorrugated containers are sold to producers of agricultural products in thePacific Northwest, which we believe, are less vulnerable to “off-shoring” thanmanufactured products.

 

***Acquisitions***

 

OnFebruary 1, 2006, we purchased the assets of Central Texas Corrugated(CTC) in Waco, Texas for approximately $45 million plus adjustments for workingcapital items. CTC manufactures corrugated sheets that it sells primarily toregional independents and full-line container plants in Texas, Louisiana,Arkansas, and Mexico. CTC is located close to our mill in DeRidder, Louisiana,which produces linerboard used in CTC’s manufacturing processes. We expect theacquisition to increase our Packaging & Newsprint segment’scontainerboard integration from 55% to 77%. The operation continues to operateunder the name Central Texas Corrugated. We are accounting for this acquisitionusing the purchase method of accounting. As a result, we allocate the purchaseprice to the tangible and intangible assets acquired and liabilities assumedbased on their fair values on the date of the acquisition. We have notcompleted our purchase price allocation.

 

***Divestitures***

 

InDecember 2005, we entered into an agreement to sell our headquartersbuilding in Boise, Idaho. In first quarter 2006, we anticipate leasing backapproximately 65% of the building over a staggered lease term of ten to12 years. Both agreements are scheduled to close in first quarter 2006.The lease will be accounted for as an operating lease.

 

In May 2004, our predecessor sold its 47% interest in VoyageurPanel, which owned an oriented strand board plant in Barwick, Ontario, Canada,to Ainsworth Lumber Co. Ltd. for $91.2 million in cash. Ourpredecessor recorded a $46.5 million pretax gain in the Wood Products segment.This item increased net income after tax by $28.4 million during 2004.

 

Our predecessor historically accounted forVoyageur Panel under the equity method. Accordingly, our predecessor’s resultsdo not include Voyageur Panel sales. For the period of October 1 through October 28,2004, and the year ended December 31, 2003, the Wood Products segmentresults included $6.3 million and $8.7 million, respectively, ofequity in earnings.

 

In February 2004, our predecessor soldits plywood and lumber facilities in Yakima, Washington. In connection with thesale, our predecessor recorded $7.1 million of costs and a$7.4 million reduction in its estimated LIFO reserve. In December 2003,our predecessor recorded a $14.7 million pretax charge for the write-downof impaired assets at these facilities after its internal review of theoperations and indications of the current market value of such operations.

 

***Liquidity and Capital Resources***

 

We believe that funds generated fromoperations and available borrowing capacity will be adequate to fund debtservice requirements, capital expenditures, and working capital requirementsfor the next 12 months. Our ability to continue to fund these items may beaffected by general economic, financial, competitive, legislative, andregulatory factors.

 

We believe that our current financialposition and financing plans will provide flexibility in financing activitiesand permit us to respond to changing conditions in credit markets. We cannotassure, however, that our business will generate sufficient cash flow fromoperations or that future borrowings will be available for use under ouramended and restated revolving credit facility in an amount sufficient toenable us to pay our indebtedness or to fund our other liquidity needs.

 

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***Operating Activities***

 

Weoperate in a cyclical industry, and our operating cash flows vary accordingly.Our principal operating cash expenditures are for compensation, fiber, energy,and interest. For the year ended December 31, 2005, our operatingactivities provided $306.7 million of cash. In 2005, items included in netincome provided $328.3 million of cash. Other operating cash expendituresused $17.1 million, primarily for contributions of $11.1 million toour pension and other postretirement benefit plans. Unfavorable changes inworking capital used $4.5 million of cash from operations. Working capitalis subject to cyclical operating needs, the timing of collection of receivablesand the payment of payables and expenses, and to a lesser extent, seasonalfluctuations in our operations. In 2005, the increase in working capital andother items was primarily attributable to higher receivables, and to a lesserextent, increased inventories, which were almost completely offset by increasedaccounts payable and accrued liabilities.

 

For the period of October 29 (inception)through December 31, 2004, our operating activities provided$230.5 million of cash. This cash generation was due primarily tofavorable changes in working capital items. The collection of receivablesprovided $122.0 million of cash, and increases in accounts payable andaccrued liabilities provided $85.6 million of cash. Increases ininventories used $21.4 million of cash.

 

Forthe period of January 1 through October 28, 2004, operatingactivities used $47.8 million of cash. Items included in net incomeprovided $275.9 million of cash. Unfavorable changes in working capital itemsused $261.9 million of cash. The unfavorable changes in working capitalitems resulted from a $320.9 million increase in receivables due primarilyto the changes in the receivable sales program discussed below, a$15.4 million increase in inventory, offset by a $74.4 millionincrease in accounts payable and accrued liabilities. Other operating cashexpenditures used $61.8 million, primarily for pension and otherpostretirement benefit payments.

 

During the predecessor periods presented,Boise Forest Products Operations participated in OfficeMax’s receivable salesprogram. Under that program, OfficeMax sold fractional ownership interests in adefined pool of trade accounts receivable. In anticipation of the Acquisition,we ceased to participate in OfficeMax’s receivable sales program. Accordingly,at October 28, 2004, no sold accounts receivable were excluded fromreceivables on our Consolidated Balance Sheet, compared with$148.8 million and $105.4 million of receivables excluded at December 31,2003 and 2002. The decrease of $148.8 million in sold accounts receivableat October 28, 2004, compared with the amount of sold accounts receivable 

 

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at December 31, 2003, usedcash from operations for the period ended October 28, 2004. The increaseof $43.4 million in sold accounts receivable at December 31, 2003,from the amount at December 31, 2002, provided cash from operations in2003. The portion of fractional ownership interest retained was included in thepredecessor’s Consolidated Balance Sheet.

 

***Investment Activities***

 

Cash investing activities provided$9.4 million in 2005, compared with $2.4 billion used for the periodof October 29 through December 31, 2004, $37.1 million used forthe period of January 1 through October 28, 2004, and$192.6 million used in 2003.

 

In 2005, investing activities included$157.5 million for collection of a related-party note received from asubsidiary of Timber Holdings and $18.5 million of proceeds received fromthe sale of assets. Approximately $10.4 million of the proceeds related tothe sale of a portion of our fiber farms. These proceeds were substantiallyoffset by $170.3 million used for the purchase of property and equipment.

 

For the period of October 29 through December 31,2004, our cash investing activities used $2.4 billion of cash, including$2.2 billion for the acquisition of OfficeMax’s forest products and paperassets and $157.5 million for our loan to Timber Holdings.

 

For the period of January 1 through October 28,2004, our cash investing activities used $37.1 million of cash, including$140.2 million for property, plant, and equipment purchases, offset by$103.2 million of proceeds from the sale of our predecessor’s Yakima,Washington, plywood and lumber facilities in February 2004 and the sale ofits interest in Voyageur Panel in May 2004.

 

In 2003, cash investing activities included $175.1 million forproperty and equipment purchases.

 

In all periods, capital expenditures for property and equipmentconsisted primarily of facility and equipment modernization, energy,cost-saving projects, and environmental compliance.

 

Details of 2005 capital investment by segment are includedin the table below:

 
| ** **                       | ** ** | **Boise**                             | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **Year Ended December 31, 2005** | ** ** |
| ** **                       | ** ** | **Acquisition/  Expansion**           | ** ** | **Quality/  Efficiency (a)** | ** ** | **Replacement,  Environmental,  and Other** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(millions)**                        | ** ** |
|                             |       |                                  |       |   |   |   |   |   |   |
| Building  Materials Distribution |       | $                                     | 3.3        |   | $ | — |   | $ | 8.4 |   | $ | 11.7 |   |
| Wood  Products                   |       | 31.4                                  |       | 7.1 |   | 11.6 |   | 50.1 |   |
| Paper                            |       | 1.8                                   |       | 17.2 |   | 61.3 |   | 80.3 |   |
| Packaging &  Newsprint  |       | 1.2                                   |       | 4.0 |   | 14.3 |   | 19.5 |   |
| Corporate  and Other             |       | —                                |       | 3.9 |   | 4.8 |   | 8.7 |   |
| ** **                       | ** ** | **$**                                 | **37.7**   | ** ** | **$** | **32.2** | ** ** | **$** | **100.4** | ** ** | **$** | **170.3** |   |

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(a)                                  Quality and efficiency projects includequality improvements, modernization, energy, and cost-saving projects.

 

We expect capital investments in 2006 tototal approximately $160 million, excluding acquisitions. This level ofcapital expenditures could increase or decrease as a result of a number offactors, including our financial results and future economic conditions. Ourcapital spending in 2006 will be for quality and efficiency projects,replacement projects, and ongoing environmental compliance. During 2005, wespent $17 million on environmental compliance. We expect to spendapproximately $13 million in 2006 for this purpose.

 

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***Financing Activities***

 

Cashused for financing activities was $391.3 million in 2005, compared with$2.3 billion provided****for theperiod of October 29 through December 31, 2004, $84.9 millionprovided for the period of January 1 through October 28, 2004, and$26.6 million used in 2003.

 

In2005, financing activities included $1.5 billion of debt repayments,$920.0 million of debt issued to third parties, a $250.3 millionrelated-party note payable to Timber Holdings, and $23.1 million of cashpaid to our equity investors to fund their tax obligations related to theirinvestment in us. The $1.5 billion of debt repayments consisted of$1.3 billion of debt prepayments related to our Tranche B term loan,which was paid down primarily with the proceeds from our new $840.0 millionTranche D term loan, $157.5 million related to the collection of aloan to a subsidiary of Timber Holdings, and approximately $250.3 millionreceived in connection with a related-party note payable to a subsidiary ofTimber Holdings, as well as cash flow from operations. In October 2005, weprepaid $200.0 million toward our Tranche D term loan with the netproceeds from the initial sale of receivables under our receivablessecuritization program. We also made $4.2 million of scheduled principalpayments during the year. The $920.0 million of additions to long-term debtincluded the $840.0 million Tranche D term loan discussed above and$80.0 million of net borrowings outstanding under our accounts receivablesecuritization program. See discussion under “Borrowings Secured by Receivables”below for more information.

 

Cashprovided by financing activities for the period of October 29 through December 31,2004, included $2.0 billion of indebtedness incurred as a result of theAcquisition and $338.9 million of cash from the issuance of equity units,offset partially by $40.0 million of debt repayments. Cash provided byfinancing activities for the period of January 1 through October 28,2004, included $67.1 million of cash received through net equitytransactions with OfficeMax and $17.8 million of debt issuances toOfficeMax. Cash used for financing for the year ended December 31, 2003,included $27.6 million of cash used through net equity transactions withOfficeMax, offset in part by $0.9 million of cash provided by financingthrough debt issuances to OfficeMax.

 

The following discussion describes our debt and equitytransactions in more detail.

 

***Debt Transactions***

 

At December 31, 2005 and 2004, ourlong-term debt consisted of the following:

 
| ** **                                      | ** ** | **December 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| ** **                                      | ** ** | **(millions)**              | ** **  |
|                                            |       |                        |        |                        |       |
| Revolving  credit facility, due 2010            |       | $                           | —      |                        | $          | — |   |
| Tranche B  term loan, due 2011             |       | —                      |        | 1,330.0                     |       |
| Tranche D  term loan, due 2011             |       | 635.8                       |        | —                      |       |
| Senior  unsecured floating-rate notes, due 2012 |       | 250.0                       |        | 250.0                       |       |
| 7.125% senior  subordinated notes, due 2014     |       | 400.0                       |        | 400.0                       |       |
| Borrowings  secured by receivables              |       | 80.0                        |        | —                      |       |
|                                            |       | 1,365.8                     |        | 1,980.0                     |       |
| Less current  portion                           |       | —                      |        | (13.3                       | )          |
|                                            |       | 1,365.8                     |        | 1,966.7                     | ** ** |
| Note payable  to related party, net, due 2015   |       | 270.9                       |        | —                      |       |
| ** **                                      | ** ** | **$**                       | **1,636.7** | ** **                  | **$**      | **1,966.7** | ** ** |

 

*Senior Secured**Credit Facilities*

 

In October 2004, Boise LLC andaffiliates entered into a six-year $400.0 million senior secured revolvingcredit facility and a seven-year senior secured floating-rate$1,330.0 million Tranche B term loan used to fund the Acquisition andfor general corporate purposes. These borrowings represent our senior securedcredit facilities (the Facilities). On April 18, 2005, weamended and restated the Facilities. Our amended and restated Facilitiesconsist of a $475.0 million revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). In connection with theamendment and restatement, we repaid all amounts outstanding under ourTranche B term loan.

 

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Our amended revolving credit facility agreement permits us to borrow upto $475.0 million for general corporate purposes. At December 31,2005, we had no borrowings outstanding under our revolving credit facility;however, $63.1 million of letters of credit were considered a draw on therevolver, reducing our borrowing capacity to $411.9 million. Borrowingsunder our revolving credit facility are based on the prime rate, the federalfunds effective rate, or LIBOR. Pricing is subject to quarterly adjustmentbased on the ratio of our total indebtedness to our last four quarters ofconsolidated earnings before interest, taxes, depreciation, and amortization(EBITDA). The range of borrowing costs under the pricing grid is:  (i) the higher of prime plus 0.50% to1.25% or the federal funds effective rate plus 1.00% to 1.75%; or (ii) LIBORplus 1.50% to 2.25%. For the year ended December 31, 2005, theaverage interest rate for our borrowings under the revolver was 5.1%. For theperiod ended December 31, 2004, the average interest rate for ourborrowings under the revolver was 4.7%. Letters of credit are subject to a0.25% fronting fee payable to the issuing bank and a fee payable to the lendersequal to the product of the interest rate spread applicable to LIBORborrowings under our revolving credit facility and the daily average amountavailable for drawing under the outstanding letters of credit. For the yearended December 31, 2005, our minimum and maximum borrowings under therevolver were zero and $126.5 million. The weighted average amount ofborrowings outstanding under the revolver during the year ended December 31,2005, was $11.8 million. The revolving credit facility provides for acommitment fee of 0.50% per annum payable to the lenders on the average dailyunused portion of the revolving credit facility. We also have a swinglineoption under the revolver, which allows us to borrow at negotiated rates up toan aggregate of $40 million from individual banks that are parties to theagreement. Swingline borrowings are considered borrowings under the revolvingcredit facility agreement.

 

At December 31, 2005,$635.8 million was outstanding under the Tranche D term loan amendedand restated credit facility, and our borrowing rate was 5.8%. Borrowings underthe Tranche D term loan are based on (i) the higher of the prime rateplus 0.75% or the federal funds effective rate plus 1.25%, or (ii) LIBORplus 1.75%. As a result of a $200.0 million prepayment in October 2005,we are not required to make scheduled principal payments on the Tranche Dterm loan until 2011, at which time the principal balance of$635.8 million is due.

 

Borrowings under the Facilities are subject to financial covenants andrestrictions, including a minimum interest expense coverage ratio, maximumleverage ratio, and limitations on capital expenditures. At December 31,2005 and 2004, we were in compliance with these covenants.

 

*Senior Notes*

 

In October 2004, we issued $250.0 million of senior unsecuredfloating-rate notes due in 2012 and $400.0 million of 7.125% seniorsubordinated notes due in 2014. Net proceeds from the notes were used to fund aportion of the purchase price for the Acquisition. In July 2005, wecompleted an exchange offer whereby all of our senior unsecured floating-ratenotes and senior subordinated notes were exchanged for publicly traded,registered securities with identical terms (other than terms relating toregistration rights) to the notes issued in October 2004. We may redeemall or part of the notes at any time at redemption prices defined in theindenture. If we sell specific assets or experience specific kinds of changesin control, we must offer to purchase the notes. The senior unsecuredfloating-rate notes bear interest at a floating rate equal to LIBOR plus 2.9%.At December 31, 2005 and 2004, our borrowing rates for the$250.0 million senior unsecured floating-rate notes were 7.0% and 5.0%,respectively.

 

*Borrowings Secured by Receivables*

 

OnOctober 26, 2005, our wholly owned subsidiary, Boise LLC, and several ofits subsidiaries, including Birch Creek Investments, L.L.C. (Birch Creek),entered into an accounts receivable securitization program with Bank of AmericaNational Association and Calyon New York Branch (the Investors). We enteredinto this receivable securitization program to obtain additional fundingflexibility at rates that are favorable to our existing borrowing arrangements.Under this three-year program, Boise LLC sells its interest in a defined poolof accounts receivable generated by its domestic operations on a revolvingbasis to Birch Creek, a fully consolidated, wholly owned, special-purposesubsidiary. In turn, Birch Creek sells the receivables to the affiliates of theInvestors. Because Boise LLC has the right to repurchase the sold receivables,sales of receivables under the program are accounted for as a securedborrowing. At December 31, 2005, we had $80.0 million outstandingunder our accounts receivable securitization program. The receivablesoutstanding and the corresponding debt are included as “Receivables” and “Long-termdebt, less current portion,” respectively, on our Consolidated Balance Sheet.We record the financing costs associated with the program in “Interest expense”in our 

 

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Consolidated Statement of Income. The cost offunds under this program varies based on changes in interest rates. At December 31,2005, the interest rate for borrowings secured by receivables was 4.1%.

 

Underthe accounts receivable securitization program, the maximum borrowing amount issubject to change based on the level of eligible receivables and restrictionson concentrations of receivables and cannot exceed $250 million. Theaccounts receivable securitization program contains the same financialcovenants as our amended and restated credit facilities.

 

Weused the net proceeds from the initial sale of receivables under thisreceivables securitization program to reduce our Tranche D term loanborrowings under our amended and restated credit facilities.

 

*Note Payable to Related Party, Net*

 

At December 31, 2005, we had a $270.9 million note payable toa subsidiary of Timber Holdings recorded as “Note payable to related party, net”on our Consolidated Balance Sheet. The note is subject to adjustment based ontransactions between the subsidiary and us. Our borrowing rate under the noteis 8%, and the note matures February 4, 2015. Included in “Note payable to related party, net” was$18.9 million of accrued interest expense related to the note at December 31,2005. Timber Holdings is a guarantor of our debt, see Note 18,Consolidating Guarantor and Nonguarantor Financial Information of the Notes toConsolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K.

 

*Other*

 

We have entered into interest rate swaps to hedge the majority of thecash flow risk from the variable interest payments on our variable-rate debt.These swaps gave us an effective interest rate on all of our variable-rate debtof 5.2% at December 31, 2005 and 2004. For additional information on ourinterest rate swaps, see Note 12, Financial Instruments of the Notes toConsolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K.

 

We paid approximately $85.9 million of fees and expensesassociated with our senior secured credit facilities, our senior unsecuredfloating-rate notes, and our senior subordinated notes, which we entered intoin October 2004. The fees are being amortized over the terms of the loans,which range from six years to ten years. At December 31, 2005 and 2004, wehad $37.8 million and $84.1 million of costs recorded in “Deferredfinancing costs” on our Consolidated Balance Sheets. In connection with therepayment of the Tranche B term loan, we recorded a $43.0 millioncharge for the write-off of the deferred financing costs. We recorded the $43.0million charge in “Interest expense” in our Consolidated Statement of Incomefor the year ended December 31, 2005.

 

At December 31, 2005 and 2004, ouraverage effective interest rates, including the effect of our interest rateswaps, on all of our debt except for our note payable to related party, net,were 5.8% and 5.6%, respectively.

 

# *PredecessorPeriods*

# * *

In the predecessor periods presented, ourpredecessor participated in OfficeMax’s centralized cash management system.Cash advances necessary to fund Boise Forest Products Operations’ majorimprovements to, and replacements of, property, as well as acquisitions andexpansion, to the extent not provided through internally generated funds, wereprovided by OfficeMax’s cash or funded with debt. In the predecessor periodspresented, interest costs were allocated to our predecessor based on itsaverage asset balances. The interest expense attributable to the debt allocatedfrom OfficeMax is included in our Consolidated Statements of Income (Loss). Forthe period of January 1 through October 28, 2004, and the year ended December 31,2003, our predecessor’s average interest rates were 6.7% and 7.3%,respectively. We believe the allocation of interest is a reasonable reflectionof Boise Forest Products Operations’ interest costs.

 

For the year ended December 31, 2005, the periods of October 29through December 31, 2004, and January 1 through October 28,2004, and the year ended December 31, 2003, cash payments for interest,net of interest capitalized, were $95.5 million, $11.3 million,$64.8 million, and $90.0 million, respectively.

 

During the predecessor periods, our principalsource of liquidity in excess of that provided by cash flow generated fromoperations was borrowings from OfficeMax. Since our predecessor’s financing 

 

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activities have beenrepresented historically by borrowings from OfficeMax, Boise Forest ProductsOperations financing activities are not comparable with our current operations.

 

***Equity Transactions***

 

On October 29, 2004, OfficeMax and ourmajority owner, Forest Products Holdings (FPH), made an aggregate cash equityinvestment in us of $338.9 million. The equity investment consisted of$242.4 million invested by FPH in exchange for 440 million Series Bequity units and $96.5 million invested by OfficeMax in exchange for109 million and 66 million Series B equity units and Series Aequity units, respectively. See Note 14, Redeemable Equity Units, andNote 15, Capital, of the Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K for a discussion of the change inequity units and their holders since the date of the Acquisition and adiscussion of the rights and privileges of the equity units.

 

***Contractual Obligations***

 

In the table below, we set forth ourenforceable and legally binding obligations as of December 31, 2005,unless otherwise noted. Some of the amounts included in the table are based onmanagement’s estimates and assumptions about these obligations, including theirduration, the possibility of renewal, anticipated actions by third parties, andother factors. Because these estimates and assumptions are necessarilysubjective, the enforceable and legally binding obligations we will actuallypay in future periods may vary from those reflected in the table. Purchase ordersmade in the ordinary course of business are excluded from the table below. Anyamounts for which we are liable under purchase orders are reflected on theConsolidated Balance Sheets as accounts payable and accrued liabilities.

 
| ** **                                                   | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                   | ** ** | **2006**                   | ** ** | **2007-2008** | ** ** | **2009-2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| ** **                                                   | ** ** | **(millions)**             | ** ** |
|                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt, including note payable to  related party (a) |       | $                          | —     |   | $ | 80.0 |   | $ | — |   | $ | 1,556.7 |   | $ | 1,636.7 |   |
| Interest (b)                                                 |       | 79.2                       |       | 161.5 |   | 165.3 |   | 172.3 |   | 578.3 |   |
| Operating  leases (c)                                        |       | 14.7                       |       | 28.0 |   | 24.5 |   | 59.1 |   | 126.3 |   |
| Purchase  obligations                                        |       |                       |       |   |   |   |   |   |   |   |   |
| Raw materials (d)                                            |       | 173.4                      |       | 302.8 |   | 251.6 |   | 419.6 |   | 1,147.4 |   |
| Utilities (e)                                                |       | 30.0                       |       | 14.4 |   | 0.6 |   | 1.1 |   | 46.1 |   |
| Capital spending                                             |       | 11.6                       |       | 9.0 |   | — |   | — |   | 20.6 |   |
| Other                                                        |       | 2.0                        |       | 0.5 |   | 0.2 |   | — |   | 2.7 |   |
| Other long-term liabilities reflected on  our Balance Sheets |       |                       |       |   |   |   |   |   |   |   |   |
| Compensation and benefits (f)                                |       | 20.9                       |       | 52.1 |   | 48.7 |   | 20.5 |   | 142.2 |   |
| Other                                                        |       | 5.3                        |       | 7.8 |   | 4.1 |   | 20.0 |   | 37.2 |   |
| ** **                                                   | ** ** | **$**                      | **337.1**  | ** ** | **$** | **656.1** | ** ** | **$** | **495.0** | ** ** | **$** | **2,249.3** | ** ** | **$** | **3,737.5** |   |

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(a)           These borrowings arefurther explained in Note 11, Debt, of the Notes to Consolidated FinancialStatements in “Item 8. Consolidated Financial Statements and Supplementary Data”in this Form 10-K. The table assumes our long-term debt is held tomaturity. 

 

(b)           Amounts representestimated interest payments using the effective interest rates as of December 31,2005, and assumes our long-term debt is held to maturity.

 

(c)           We enter into operatingleases in the normal course of business. We lease our property and equipmentunder operating leases. Some lease agreements provide us with the option torenew the lease or purchase the leased property. Our future operating leaseobligations would change if we exercised these renewal options and if weentered into additional operating lease agreements. In first quarter 2006, we anticipateleasing back approximately 65% of the building over a staggered lease term often to 12 years. The agreement is scheduled to close in first quarter2006. These payment requirements are reflected in the above table. Formore information, see Note 6, Leases, of the Notes to ConsolidatedFinancial Statements in “Item 8. Consolidated Financial Statements and Supplementary Data” of this Form 10-K.

 

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(d)                                 Includedin raw materials is $973.5 million for contracts to purchase timber. Undermost of these supply contracts, we have the right to cancel or reduce ourcommitment in the event of a mill curtailment or shutdown. The price for mostof these contracts is set quarterly or semiannually based on regional marketprices. Most of the contracts expire in December 2014. Estimates are basedon contract terms or first quarter 2006 pricing. These obligations are subjectto change based on, among other things, the effect of governmental laws andregulations, our manufacturing operations not operating in the normal course ofbusiness, timber availability, and the status of environmental appeals. Exceptfor deposits required pursuant to wood supply contracts, these obligations arenot recorded in our consolidated financial statements until contract paymentterms take effect. 

 

(e)                                  Weenter into utility contracts for the purchase of electricity and natural gas.We also purchase these services under utility tariffs. The contractual andtariff arrangements include multiple-year commitments and minimum annualpurchase requirements. Our payment obligations were valued at prices in effecton December 31, 2005, or contract language, if available. Theseobligations represent the face value of the contracts and do not considerresale value since we use the energy to manufacture our products. 

 

(f)                                    Includescurrent portion. 

 

In addition to the contractual obligationsquantified in the table above, we have other obligations for goods and servicesand raw materials entered into in the normal course of business. We expect tomake tax distributions to our equity holders equal to 38.9% of our taxableincome. Also, pursuant to an Additional Consideration Agreement between us andOfficeMax, we may be required to make substantial cash payments to, or receivesubstantial cash payments from, OfficeMax. Under the Additional ConsiderationAgreement, the purchase price paid for the forest products and paper assets maybe adjusted upward or downward based on paper prices during the six yearsfollowing the Acquisition, subject to annual and aggregate caps. Neither partywill be obligated to make a payment under the Additional ConsiderationAgreement in excess of $45 million in any one year. Payments are alsosubject to an aggregate cap of $125 million that declines to$115 million in the fifth year and $105 million in the sixth year.After each anniversary of the Acquisition, we review paper prices with theprovisions of the Additional Consideration Agreement to determine whether anyamounts are owed or receivable under the agreement. For the first anniversaryperiod ending October 29, 2005, neither Boise nor OfficeMax owedadditional consideration for the purchase price.

 

The Series A equity units issued toOfficeMax in connection with the Acquisition accrue dividends daily at a rateof 8% per annum on OfficeMax’s capital contribution (net of any distributionspreviously received) plus any accumulated dividends. Accrued and unpaiddividends accumulate on the Series A equity units on June 30 and December 31of each year. At December 31, 2005 and 2004, $3.5 million and$0.5 million, respectively, of dividends were accrued on our ConsolidatedBalance Sheets as an increase in the value of the Series A equity units.

 

***Off-Balance-Sheet Activities***

 

At December 31, 2005 and 2004, we had nooff-balance-sheet arrangements with unconsolidated entities.

 

***Guarantees***

 

Note 17, Commitments and Guarantees, ofthe Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” in this Form 10-K describes the nature of ourguarantees, including the approximate terms of the guarantees, how theguarantees arose, the events or circumstances that would require us to performunder the guarantees, and the maximum potential undiscounted amounts of futurepayments we could be required to make.

 

***Inflationary and Seasonal Influences***

 

Other than the effects of higher energycosts, which we describe in this Form 10-K, we believe inflation has nothad a material effect on our financial condition or results of operations.However, there can be no assurance that we will not be affected by inflation inthe future. Seasonal changes in levels of building activity affect our buildingproducts businesses. We typically have higher sales and working capital in thesecond and third quarters because of warmer weather.  To a lesser degree, our paper businesses alsoexperience some seasonality in their businesses based primarily on buyingpatterns associated with particular products. For example, the demand for ourcorrugated container plants is 

 

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influenced by agriculturaldemand in the Pacific Northwest. In addition, seasonally cold weather increasescosts, especially energy consumption at all of our manufacturing facilities.

 

***Disclosures of Financial Market Risks***

 

We areexposed to risks such as changes in interest rates, commodity prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is an economichedge, or we designate the derivative as a cash flow or fair value hedge. Weformally document all relationships between hedging instruments and the hedgeditem, as well as our risk management objectives and strategy for undertakingvarious hedged transactions. For those derivatives designated as cash flow orfair value hedges, we formally assess, both at the hedge’s inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in the hedged items. The ineffectiveportion of hedging transactions is recognized in current income (loss).

 

Inaccordance with SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheet at fair value. Fair value of these instruments is determined through ouruse of valuation professionals. Changes in the fair value of derivatives arerecorded in either “Income (Loss)” or “Other comprehensive income,” asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in “Other comprehensive income” in the period in which changes in fairvalue occur and is reclassified to income (loss) in the period in which thehedged item affects income (loss), and any ineffectiveness is recognizedcurrently in our Consolidated Statements of Income. The gain or loss onderivatives designated as fair value hedges and the offsetting gain or loss onthe hedged item attributable to the hedged risk are included in current income(loss) in the period in which changes in fair value occur. The gain or loss onderivatives that have not been designated as hedging instruments is included incurrent income (loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

Our debt is predominantly variable-rate. Wemanage interest rate risk on our variable-rate debt by entering into interestrate swaps. At December 31, 2005, the estimated current market value ofour fixed-rate debt, including our note payable to related party, based onthen-current interest rates for similar obligations with like maturities, wasapproximately $39.6 million less than the amount reported on ourConsolidated Balance Sheet.

 

Our obligations under our senior securedcredit facilities and senior notes expose us to changes in short-term interestrates since interest rates on this debt are variable. In November 2004, weentered into four interest rate swaps with a total notional amount of $550 millionto hedge the exposure to interest rate fluctuations associated with ourTranche B term loan. The swaps on $300 million of our Tranche B termloan were fixed at an average pay rate of 3.3% and expire in December 2007,while the swaps on $250 million of our Tranche B term loan were fixed atan average pay rate of 3.5% and expire in December 2008. With theanticipated repayment of the Tranche B term loan, these interest rateswaps were no longer considered hedges of the variable interest payments onthat loan. As a result, during first quarter 2005, we recorded the fair valueof the interest rate swaps, or $15.2 million, in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Income. In second quarter2005, we redesignated the $550 million of interest rate swaps as hedges ofthe cash flow from the LIBOR-based variable interest payments on amountsborrowed under our Facilities and recognized $5.3 million of noncashexpense in “Change in fair value of interest rate swaps” in our ConsolidatedStatement of Loss. The net $9.9 million of value that was recorded in“Other assets” on our Consolidated Balance Sheet will result in higher interestexpense over the remaining life of the interest rate swaps. The four interestrate swaps with a total notional amount of $550 million gave us aneffective interest rate of 4.9% on that debt at December 31, 2005. Changesin the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified tointerest expense as interest expense was recognized on the LIBOR-based debt.There was no ineffectiveness related to the redesignated hedges. At December 31,2005 and 2004, the fair market values of these instruments were$16.9 million and $4.8 million, respectively, which we recorded in “Otherassets” on our Consolidated Balance Sheets.

 

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In November 2004, we also entered intotwo 3.7% interest rate swaps with an aggregate notional amount of $250 millionto hedge the exposure to floating-rate interest rate risks associated with oursenior unsecured floating-rate notes, which gave us an effective interest rateon that debt of 6.6% and 6.1% at December 31, 2005 and 2004. These swapsexpire in October 2009. These swaps were designated as cash flow hedges.Accordingly, changes in the fair value of the interest rate swaps were recordedin “Other comprehensive income.” Amounts realized during the period werereclassified to “Interest expense” as interest expense was recognized onthe LIBOR-based debt. There was no ineffectiveness related to thesehedges. At December 31, 2005 and 2004, the fair market values of theseinstruments were $9.3 million and $1.5 million, which we recorded in “Otherassets” on our Consolidated Balance Sheets.

 

For the year ended December 31, 2005,and for the period of October 29 through December 31, 2004, amountsreclassified to interest expense for all of our cash flow hedges increasedinterest expense by $3.1 million and $1.8 million, respectively.Assuming no change in interest rates, $9.4 million would be reclassifiedas a decrease in interest expense in 2006.

 

*Commodity Risk*

 

We enter into natural gas swaps to hedge the variable cash flow risk ofnatural gas purchases to a fixed price. In December 2005, we entered intoswap agreements for 18,000 mmBtus per day for the month of December,9,500 mmBtus per day for January 2006, decreasing to 500 mmBtusper day for the months of February and March 2006. In January 2006,we entered into additional natural gas swaps that convert 10,000 mmBtus ofusage per day in January 2006, 4,000 mmBtus of usage per day in February 2006,and 1,000 mmBtus of usage per day in March 2006 to a fixed price.

 

We designated all of the swaps as cash flow hedges. Accordingly,changes in the fair value of these swaps were recorded in “Other comprehensiveincome.” Amounts realized during the period were reclassified to “Materials,labor, and other operating expenses” in our Consolidated Statement of Income asnatural gas was consumed. Amounts reclassified in 2005 increased “Materials,labor, and other operating expenses” by $0.2 million. Assuming no changein natural gas prices, $0.1 million would be reclassified as an increasein “Materials, labor, and other operating expenses” in 2006.

 

*Predecessor Period*

 

As described in Note 11, Debt, of theNotes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” in this Form 10-K, in the predecessor periods presented,OfficeMax allocated debt and interest costs to Boise Forest Products Operationsbased on its average asset balances. OfficeMax occasionally used derivativefinancial instruments, such as interest rate swaps, rate hedge agreements, andforward exchange contracts, to hedge underlying debt obligations or anticipatedtransactions. The effects of these financial instruments are not included inthe predecessor financial statements other than through OfficeMax’s allocationsto our predecessor.

 

The table below provides information as of December 31,2005, about our financial instruments that are sensitive to changes in interestrates or utility indexes. For debt obligations, the table presents principalcash flows and related weighted average interest rates by expected maturitydates. For obligations with variable interest rates and sensitivity to energymarket risk, the table sets forth payout amounts based on current rates anddoes not attempt to project future rates. Other instruments subject to marketrisk, such as obligations for pension plans and other postretirement benefits,are not reflected in the table.

 

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***Financial Instruments***

 
| ** **                                                                                    | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **December  31** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|------------------|------------|
| ** **                                                                                    | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **2005**         | ** ** | **2004** | ** ** |
| ** **                                                                                    | ** ** | **2006**       | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**   | ** ** | **Thereafter** | ** ** | **Total**        | ** ** | **Fair  Value** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| ** **                                                                                    | ** ** | **(millions)** | ** ** |
| **Debt**                                                                                      |       |           |       |       |       |       |       |       |       |       |       |           |       |             |       |   |   |   |   |   |   |
| Long-term  debt                                                                               |       |           |       |       |       |       |       |       |       |       |       |           |       |             |       |   |   |   |   |   |   |
| Fixed-rate  debt payments (a)  Senior subordinated notes                                      |       | $              | —     |       | $          | —     |       | $          | —     |       | $          | —         |       | $                | —     |   | $ | 400.0 |   | $ | 400.0 |   | $ | 372.6 |   | $ | 400.0 |   | $ | 409.7 |   |
| Average  interest rates                                                                       |       | —         |       | —     |       | —     |       | —     |       | —     |       | 7.1            | %          | 7.1              | %          | — |   | 7.1 | % | — |   |
| Note  payable to related party                                                                |       | $              | —     |       | $          | —     |       | $          | —     |       | $          | —         |       | $                | —     |   | $ | 270.9 |   | $ | 270.9 |   | $ | 258.6 |   | $ | — |   | $ | — |   |
| Average  interest rates                                                                       |       | —         |       | —     |       | —     |       | —     |       | —     |       | 8.0            | %          | 8.0              | %          | — |   | — |   | — |   |
| Variable-rate  debt payments (a)                                                              |       | $              | —     |       | $          | —     |       | $          | 80.0       |       | $          | —         |       | $                | —     |   | $ | 885.8 |   | $ | 965.8 |   | $ | 965.8 |   | $ | 1,580.0 |   | $ | 1,580.0 |   |
| Average  interest rates (b)                                                                   |       | —         |       | —     |       | 4.1        | %          | —     |       | —     |       | 6.2            | %          | 6.0              | %          | — |   | 4.7 | % | — |   |
|                                                                                          |       |           |       |       |       |       |       |       |       |       |       |           |       |             |       |   |   |   |   |   |   |
| **Interest rate swaps**                                                                       |       |           |       |       |       |       |       |       |       |       |       |           |       |             |       |   |   |   |   |   |   |
| Notional  principal amount of interest rate

exchange  agreements maturing  Variable to fixed |       | $              | —     |       | $          | 300.0      |       | $          | 250.0      |       | $          | 250.0          |       | $                | —     |   | $ | — |   | $ | 800.0 |   | $ | 26.2 |   | $ | 800.0 |   | $ | 6.3 |   |
| Average  pay rate                                                                             |       | —         |       | 3.3        | %          | 3.5        | %          | 3.7        | %          | —     |       | —         |       | 3.5              | %          | — |   | 3.5 | % | — |   |
| Average  receive rate                                                                         |       | —         |       | 4.5        | %          | 4.5        | %          | 4.2        | %          | —     |       | —         |       | 4.4              | %          | — |   | 2.3 | % | — |   |
|                                                                                          |       |           |       |       |       |       |       |       |       |       |       |           |       |             |       |   |   |   |   |   |   |
| **Natural gas swaps**                                                                         |       | $              | (0.1       | )          | $          | —     |       | $          | —     |       | $          | —         |       | $                | —     |   | $ | — |   | $ | (0.1 | ) | $ | (0.1 | ) | $ | — |   | $ | — |   |

 

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(a)                     These obligations are further explained inNote 11, Debt, of the Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements andSupplementary Data” in this Form 10-K. The table assumes ourlong-term debt is held to maturity.

 

(b)                    Does not include the effect of swaps.

 

***Taxes***

 

Asa result of converting back to a limited liability company, during fourthquarter 2005, we reversed the income tax expense and deferred taxes we recordedas a corporate entity.

 

Asa result of the rescission, at both December 31, 2005 and 2004, themajority of the businesses and assets of Boise were held and operated bylimited liability companies, which are not subject to entity-level federalincome taxation. The taxes in respect to these operations are payable by ourequity holders in accordance with their respective ownership percentage. Wemake cash distributions to permit the members of Boise and affiliates to pay thesetaxes. For the year ended December 31, 2005, and the period ofOctober 29 (inception) through December 31, 2004, we made$23.1 million and no cash distributions, respectively, to permit ourequity holders to pay these taxes. Of the $23.1 million of tax distributions,we paid $18.4 million to FPH.  FPHin turn paid $16.3 million to MDP, our equity sponsor who controls FPH, and$2.1 million to management investors. We also paid $4.7 million to OfficeMax.Both our senior credit facilities and the indenture governing our notes permitthese distributions.

 

In 2005, cash paid for corporate federal, state, and foreign incometaxes totaled $7.4 million, net of refunds received. In first quarter2006, we filed a federal refund request for the 2005 estimated tax paymentsmade by us. The $7.4 million of income taxes paid includes approximately$1.2 million paid by our taxable corporations that retained theircorporate status after the rescission. The $1.2 million of income taxes paid byour taxable corporations consisted of $713,000 for U.S. federal taxes, $256,000for U.S. state taxes, and $196,000 for Canadian taxes. For the period ofOctober 29 (inception) through December 31, 2004, these corporationspaid income taxes, net of refunds received, of $80,000 for Canadian taxes. AtDecember 31, 2005, we had a $388,000 deferred tax liability related tothese corporations recorded on our Consolidated Balance Sheet. In 2004, thesecorporations had no deferred tax assets or liabilities.

 

Duringthe period we were a corporation, we recorded approximately $4.8 millionof deferred tax liabilities related to our cash flow hedges, with the offset to“Other comprehensive income.” As described above, in connection with convertingback to a limited liability company, we reversed the income tax expense anddeferred taxes recorded while we were a corporate entity. The reversal of thedeferred tax liabilities related to our cash flow hedges resulted in a$4.8 million income tax benefit that was partially

 

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offset by income tax expenserecognized by our taxable corporations. The $4.8 million recorded in “Othercomprehensive income” will be recognized as income tax expense as the hedgesexpire.

 

AtDecember 31, 2005, our tax basis was $153.5 million lower than thereported amount of net assets recorded in our consolidated financialstatements, primarily due to a full year of accelerated deprecation recordedfor tax purposes. At December 31, 2004, our tax basis was $11.9 millionhigher than the reported amounts of assets and liabilities recorded on ourBalance Sheet, primarily due to inventory capitalized for tax purposes.

 

Boise Building Solutions Manufacturing Holdings Corp.,a wholly owned, fully consolidated operating entity, has an investment inforeign subsidiaries. At December 31, 2005 and 2004, the foreignsubsidiaries had $18.8 million and $12.3 million, respectively, ofdeferred tax assets that were fully offset by a valuation allowance.

 

In the predecessor periods presented, Boise Forest Products Operationsresults were included in the consolidated income tax returns of OfficeMax.However, in the predecessor consolidated financial statements, income taxeswere provided based on a calculation of the income tax expense that would havebeen incurred if our predecessor had operated as a separate taxpayer. Incometaxes have been provided for all items included in the Consolidated Statementsof Income (Loss), regardless of when such items were reported for tax purposesor when the taxes were actually paid or refunded. Current tax liabilities andreceivables were transferred to OfficeMax and are included in “Net equitytransactions with OfficeMax.” During the period of January 1 throughOctober 28, 2004, and the year ended December 31, 2003, the netcurrent tax liability (receivable) was $38.0 million and$(47.1) million, respectively.

 

***Environmental***

 

Our businesses are subject to a wide range of general andindustry-specific environmental laws and regulations. In particular, we areaffected by laws and regulations covering air emissions, wastewater discharges,solid and hazardous waste management, and site remediation. Compliance withthese laws and regulations is a significant factor in the operation of ourbusinesses. We believe that we have created a corporate culture of strongcompliance by taking a conservative approach to environmental issues in orderto assure that we are operating well within the bounds of regulatoryrequirements. However, we cannot assure you that we will at all times be infull compliance with environmental requirements, and we cannot assure you thatwe will not incur fines and penalties in the future. In 2005, we paid $2,550 inenvironmental fines and penalties across all of our segments.

 

Weincur substantial capital and operating expenditures to comply with federal,state, and local environmental laws and regulations. Failure to comply withthese laws and regulations could result in civil or criminal fines or penaltiesor in enforcement actions. Our failure to comply could also result ingovernmental or judicial orders that stop or interrupt our operations orrequire us to take corrective measures, install additional pollution controlequipment, or take other remedial actions. During 2005, we spent approximately $17 millionon capital expenditures to comply with environmental requirements. Weanticipate capital expenditures of approximately $13 million in 2006 tocomply with environmental requirements, and we expect to spend similar orgreater amounts on environmental capital expenditures in the years ahead.

 

In2004, the Environmental Protection Agency (EPA) promulgated rules to controltoxic air emissions from wood panel plants and industrial boilers. Compliancewith these rules is required in 2007. The rules will require capital spendingat our wood panel plants and paper mills. We expect spending to comply withthese rules to be in the range of $19 million to $25 million for theperiod from 2006 through 2008. This range will be refined as mills finalizetheir detailed compliance strategies.

 

Asan owner and operator of real estate, we may be liable under environmental lawsfor the cleanup of past and present spills and releases of hazardous or toxicsubstances on or from our properties and operations. We can be found liableunder these laws if we knew of, or were responsible for, the presence of suchsubstances. In some cases, this liability may exceed the value of the propertyitself.

 

OfficeMaxretains responsibility for environmental liabilities that occurred with respectto businesses, facilities, and other assets not purchased by us in theAcquisition. In addition, OfficeMax generally indemnifies us for hazardoussubstance releases and other environmental violations that occurred prior tothe Acquisition or arose out of pre-Acquisition operations at the businesses,facilities,

 

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andother assets purchased by us. However, OfficeMax may not have sufficient fundsto fully satisfy its indemnification obligations when required, and in somecases, we may not be contractually entitled to indemnification by OfficeMax.

 

***Critical Accounting Estimates***

 

Criticalaccounting estimates are those that are most important to the portrayal of ourfinancial condition and results. These estimates require management’s mostdifficult, subjective, or complex judgments, often as a result of the need toestimate matters that are inherently uncertain. We review the development,selection, and disclosure of our critical accounting estimates with the AuditCommittee of our board of directors. Our current critical accounting estimatesare as follows:

 

***Purchase Price Allocation***

 

On October 29, 2004, we acquired OfficeMax’s forest products andpaper assets. We accounted for the business combination under the purchasemethod of accounting in accordance with SFAS No. 141, BusinessCombinations, and allocated the assets acquired and liabilities assumed basedon their estimated fair values at the acquisition date. The determination ofthe fair values of the assets acquired and liabilities assumed, as well asassociated asset useful lives, required management to make estimates. Estimatedfair values were derived through consideration and application of standardvaluation approaches and techniques.

 

Weestimated the value of property, plant, and equipment assets based on theapplication of  a cost, market, or incomeapproach. Under the cost approach, replacement cost new was estimated and thenadjusted for depreciation due to physical, functional, and economicobsolescence. The market approach-derived value was based on an analysis ofcomparable asset sale information. The income approach-derived value was basedon the forecasted cash flow potential of the asset. We estimated the fair valueof trade names and trademarks and technology based on the application of theincome approach. The critical assumptions involved with valuing trade names andtrademarks and technology were the expected revenue and cash flow levelsanticipated over the assets’ expected lives and the risk profiles of theassets. The fair value of customer relationships was based on the applicationof the cost approach. The critical assumptions involved with valuing customerrelationships were associated with estimating the costs required to replicatethese assets to their current condition.

 

Liabilitiessubjective in nature primarily include estimates of costs to restructure theoperations of the acquired company. In accordance with the provision ofEmerging Issues Task Force (EITF) 95-3, Recognition of Liabilities inConnection With a Purchase Business Combination, restructuring activities inconnection with the Acquisition increase goodwill. In accordance with SFASNo. 141, we had one year from the acquisition date to develop our restructuringplans and adjust for changes in estimates of the fair value of assets acquiredand liabilities assumed. Also, we had one year from the date of the Acquisitionto adjust the initial purchase price allocations for changes in estimates ofthe fair value of assets acquired and liabilities assumed. See Effects of theAcquisition—Purchase Accounting in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for more information.

 

Thepurchase price may also be adjusted upward or downward based on paper salesprices during the six years following the Acquisition pursuant to theAdditional Consideration Agreement. Over that period, we could pay OfficeMax amaximum aggregate amount of $125.0 million, or OfficeMax could pay us a maximumaggregate amount of $125.0 million, in each case net of payments received.The purchase price allocation does not include the effect, if any, of thiscontingent additional consideration. After each anniversary of the Acquisition,we review paper prices with the provisions of the Additional ConsiderationAgreement to determine whether any amounts are owed or receivable under theagreement. For the first anniversary period ending October 29, 2005,neither Boise nor OfficeMax owed additional consideration for the purchaseprice.

 

Dueto the numerous variables associated with our judgments and assumptionsrelating to the valuation of the assets acquired and liabilities assumed, boththe precision and reliability of the resulting estimates are subject to uncertainty.

 

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***Goodwill and Intangible Asset Impairment***

 

We account for acquisitions under the purchase method of accounting,typically resulting in goodwill. Goodwill represents the excess of purchaseprice and related costs over the value assigned to the net tangible andintangible assets of businesses acquired. We account for goodwill in accordancewith the provisions of SFAS No. 142, Goodwill and Other Intangible Assets,which requires us to assess our acquired goodwill and intangible assets withindefinite lives for impairment at least annually in the absence of anindicator of possible impairment and immediately upon an indicator of possibleimpairment. We assess goodwill and intangible assets with indefinite lives inthe fourth quarter of each year using a fair-value-based approach. We alsoevaluate the remaining useful lives of our finite-lived purchased intangibleassets to determine whether any adjustments to the useful lives are necessary.The intangible assets with indefinite lives consist of trade names andtrademarks, while finite-lived intangible assets consist of customerrelationships and technology.

 

AtDecember 31, 2005, we had $15.1 million of goodwill recorded on ourConsolidated Balance Sheet. Of the $15.1 million, $5.6 million,$6.6 million, $1.3 million, and $1.6 million were recorded inour Building Materials Distribution, Wood Products, Paper, andPackaging & Newsprint segments, respectively. At December 31,2005, the net carrying amount recorded in our Consolidated Balance Sheet forintangible assets with indefinite lives, which represent trade names andtrademarks, was $22.8 million and finite-lived purchased intangiblecomprised of customer relationships and technology was $5.2 million and$3.8 million, respectively.

 

Duringfourth quarter 2005, we performed our annual impairment assessment of goodwilland indefinite-lived intangible assets for all our segments in accordance withthe provisions of SFAS No. 142. We concluded that no impairment existed.We also evaluated the remaining useful lives of our finite-lived purchasedintangible assets and determined no adjustments to the useful lives werenecessary.

 

Intesting for potential impairment, we measured the estimated fair value of ourreporting units based upon discounted future operating cash flows using adiscount rate reflecting our estimated average cost of funds. Differences inassumptions used in projecting future operating cash flows and cost of fundscould have a significant impact on the determination of the fair value of ourreporting units.

 

Inestimating future cash flows for our segments, we used our internal budgets.Our budgets were based on recent sales data for existing products, plannedtiming of capital projects, and customer commitments related to new andexisting products. These budgets also included assumptions of future productionvolumes and pricing of commodity products. Due to the inherent volatility ofcommodity product pricing, our pricing assumptions were based on the averagepricing over the commodity cycle. These prices were estimated from informationgathered from industry research firms, research reports published by investmentanalysts, and other published forecasts. If our estimates of projected future cashflows from income from operations were too high by 10%, there would be no impact on the reported value ofgoodwill on our Consolidated Balance Sheet.

 

Weassessed the finite-lived purchased intangible assets noting no impairmentindicators were present to suggest that the amortization period needed to beadjusted.

 

Dueto the numerous variables associated with our judgments and assumptionsrelating to the valuation of the reporting units and the effects of changes incircumstances on these valuations, both the precision and reliability of theresulting estimates are subject to uncertainty. As additional informationbecomes known, we may change our estimates.

 

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***Valuation of Redeemable Equity Units***

 

*ManagementEquity Agreement*

 

InDecember 2004, key managers of Boise purchased, pursuant to the terms of aManagement Equity Agreement (Equity Plan), 18.6 million equity units inour parent, Forest Products Holdings (FPH) at $1.00 per unit, which wasapproximately equal to the estimated fair value of $0.99 on the date ofpurchase. Those who purchased FPH’s Series B equity units received a grantof 35.6 million of FPH’s Series C equity units (profit interests)that represent the right to participate in profits after capital is returned tothe holders of FPH’s Series B equity units. FPH’s Series C equity unitsparticipate in equity value appreciation above a specified level. Although management’s investment is in FPH,because of the capital structure of Boise and Timber Holdings, 55% ofmanagement’s investment (along with 55% of FPH’s and OfficeMax’s investments)is included on our Consolidated Balance Sheets and 45% of the investment isincluded on Timber Holdings’ Consolidated Balance Sheets. In 2005, members ofmanagement did not purchase any Series B equity units in FPH, and FPH didnot grant any Series C equity units; however, the plan does contemplatepossible future purchases and grants by and to members of management. Weaccount for awards granted under the Equity Plan in our consolidated financialstatements in accordance with SFAS No. 123(R).

 

FPH’sSeries B and Series C equity units held by management are redeemableat FPH’s option upon termination of the management investor’s employment and atthe option of the holder in the event of death or disability or the sale of adivision resulting in the termination of his or her employment. Except in theevent of death or disability, we believe that the redemption of these units iswithin our control due to the interlocking boards of FPH and Boise and becauseFPH was organized solely for the purpose of establishing Boise to acquire theforest products and paper assets of OfficeMax. Should repurchases under theEquity Plan occur, it is expected that they would be funded by mirror-imageredemptions of B units/shares and C units/shares held by FPH in itssubsidiaries, Boise and Timber Holdings. Because the redemption of FPH’sSeries B and Series C equity units and the expected parallelredemptions of our Series B and Series C equity units are acontingent event outside the employee’s control and not currently deemedprobable of occurring, we account for the units using equity plan accounting inaccordance with Financial Accounting Standards Board (FASB) Staff Position (FSP)No. FAS 123(R)-4, Classification of Options and SimilarInstruments Issued as Employee Compensation That Allow for Cash Settlement uponthe Occurrence of a Contingent Event. However, because FPH units are subject tomandatory redemption in an event that is outside of our control (death ordisability), we are required to classify these units outside of permanentequity on our Consolidated Balance Sheets at grant-date fair value.Accordingly, we recorded 55% of management’s investment in us, or$12.4 million and $10.3 million in “Redeemable equity units” on ourConsolidated Balance Sheets at December 31, 2005 and 2004, and TimberHoldings recorded 45% of the investment, or $7.8 million and$8.4 million, respectively, in “Redeemable common stock” in their consolidatedfinancial statements. Under equity plan accounting, the carrying value ofmanagement’s investment will not be adjusted to redemption value unless paymentof redeemable amounts becomes probable. At the date it becomes probable, wewill adjust the carrying value to redemption value by marking the value of theequity units to market, which could result in additional compensation expense.

 

*Vesting*

 

Generally,the appreciation in the value of FPH’s Series B equity units issued underthe Equity Plan and 50% of its Series C equity units vest 20% each year onDecember 31, 2005 through 2009. The other 50% of the Series C equityunits vest at the end of 2009 if specific criteria tied to internal rates ofreturn are met. Upon either the sale of the company as defined in the EquityPlan or an initial public offering, vesting is accelerated for all managementinvestors. Other events may accelerate vesting for specifically affectedmanagement investors, but none of these events are within the control of the investor.The vesting schedules are shortened for managers who were at least60 years old as of December 31, 2004, so that the units fully vest byDecember 31 of the year in which the manager reaches age 65 and atleast two vesting periods have been met. Vesting does not trigger a right orobligation on the part of FPH or us to repurchase equity units held bymanagement investors.

 

*Series B Equity Units*

 

The determination of the fair value of the initial equity unitspurchased by management required a determination of our enterprise value. Thepurchase price for the Acquisition, which was determined on

 

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an arms-length basis following extensive negotiations between MadisonDearborn and OfficeMax and their respective financial advisors and was theculmination of a sales process conducted by OfficeMax over several monthsinvolving numerous potential buyers for all or a portion of the soldbusinesses, represented the best evidence of the fair market value of our businessesat the time of the Acquisition. Since the Acquisition occurred only42 days prior to management’s purchase of Series B equity units andthe grant to management of Series C equity units, the enterprise valueindicated by the purchase price for the Acquisition was the primary factorconsidered in determining our enterprise value for the purpose of valuingmanagement’s equity units. We considered whether any adjustment to the value ofthe Series B equity units, as implied in the Acquisition, was warrantedusing a form of income approach, known as discounted cash flow analysis, and amarket approach, which used an event analysis and a trend analysis.

 

Theoutcomes of the discounted cash flow analysis, the event analysis, and thetrend analysis were given equal consideration. This resulted in an averagevalue indication of $1.10 per unit for the Series B equity units. A 10%discount for lack of marketability was applied to management’s Series Bequity units based upon a consideration of specific liquidity factors,including transfer restrictions imposed by the operating agreement, the lack ofan active market for the units, and the limited circumstances in which we arerequired to redeem the units for cash. After application of the discount, thevalue per unit of management’s Series B equity units was estimated to be$0.99 per unit on the date of purchase. As a result, we did not recognizecompensation expense on the date of grant for the Series B equity unitsbecause the fair value of the units issued by FPH was equal to or less than theamount each employee paid.

 

*Series C Equity Units*

 

Thefair value of the Series C equity units as of the grant date was estimatedby analyzing our possible future events, the paths to liquidity for the holdersof the Series C equity units, and how these paths may affect the valuationof the Series C equity units. These possible future events included a saleof the company, an initial public offering, and remaining a private company. Weestimated probabilities of these events occurring based on our strategies as ofthe grant date. We assigned probabilities to these events for the remainder of2004 and years 2005 through 2009**,**the vesting period for the Series C equity units, and the assignedlikelihood varied by year, with a higher probability of being sold or becominga public company in later years. For example, in 2005 we assigned probabilitiesof 10% to being sold, 15% to becoming a public company, and 75% to remaining aprivate company. In 2007, we assigned probabilities of 30% to being sold, 45%to becoming a public company, and 25% to remaining a private company. In 2009,we assigned probabilities of 40% to being sold, 45% to becoming a publiccompany, and 15% to remaining a private company. A decision tree analysis thatincorporated these event outcomes and the likelihood of their occurrences wascreated. Payoffs to the holders of the Series C equity units wereconstructed at each event outcome on the decision tree. Based on thisframework, a simulation analysis was run to arrive at the fair values of theSeries C equity units.

 

SFAS No. 123(R) requires different valuationcalculations for equity grants that have a service condition and equity grantsthat have a market condition. The 50% of the Series C equity units that vestover time are “service condition” awards. Under the requirements of SFASNo. 123(R), the fair value of these awards is measured assuming that allconditions have been met, or as if they were fully vested on the grant date.Compensation expense is recognized over the vesting period and adjusted if theservice condition is not met. We determined the fair average value on the dateof grant of the Series C equity units that vest over time to beapproximately $0.46 per unit.

 

The 50% of Series C equity units that vest basedon internal rates of return are “market condition” grants under therequirements of SFAS No. 123(R).The standard requires that the valuation of market condition awards considersthe likelihood that the market condition will be satisfied rather than assumingthat the award is vested on the award date. Because the internal rate of returnrepresents a more difficult threshold to meet before payout, with greateruncertainty that the market condition will be satisfied, these awards have alower fair value than those that vest based solely on the passage of time.However, compensation expense is required to be recognized under SFASNo. 123(R) for an award regardless of when, if ever, the market conditionis satisfied. We determined the average fair value on the date of grant of theSeries C equity units that vest based on internal rates of return to beapproximately $0.24 per unit.

 

58

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AtDecember 31, 2005, we had $8.3 million of unrecognized compensationcost related to the nonvested Series C redeemable equity units grantedunder the Equity Plan. The cost is expected to be recognized generally over aweighted-average period of 3.3 years.

 

The determination of the fair value of the equityunits is complex and requires the use of numerous estimates. These estimatesinclude, but are not limited to, assumptions we made regarding our cost ofcapital, future performance, and the probability of remaining a privatecompany. Had we used different assumptions in our analysis, it could have had asignificant impact on our consolidated financial statements.

 

***Pensions***

 

We account for pension expense in accordance with SFAS No. 87,Employer’s Accounting for Pensions. This statement requires us to calculatepension expense and liabilities using actuarial assumptions, including discountrates, expected return on plan assets, expected rate of compensation increases,retirement rates, mortality rates, expected contributions, and other factors.We based the assumptions used to calculate pension expense on the followingfactors:

 

*Discount Rate Assumption.*  The discount rate assumptionwas determined using a spot rate yield curve constructed to replicate Aa-gradedcorporate bonds. The plan’s projected cash flows were duration matched to thisyield curve to develop an appropriate discount rate.

 

*Asset Return Assumption*.  We based our expected rate ofreturn on plan assets on the average rate of earnings expected on investedfunds. The 2005 expected rate of return on plan assets was 7.25%, which wasbased on a target allocation of approximately 53% U.S. equity securities (whichwere expected to earn approximately 8.0% in the long term), 15% internationalequity securities (which are expected to earn approximately 8.25% in the longterm), and 32% fixed-income securities (which were expected to earnapproximately 5.75% in the long term).

 

*Rate of Compensation Increases. *This assumption reflects our long-term actualexperience, the near-term outlook, and assumed inflation.

 

*Retirement and Mortality Rates*.  These rates are developed toreflect actual and projected plan experience.

 

*Expected Contributions.*  Plan obligations and expensesare based on existing retirement plan provisions. No assumption is made forfuture changes to benefit provisions beyond those to which we are presentlycommitted, for example, changes we might commit to in future labor contracts.In 2006, there is no required minimum contribution to our pension plans.However, we may make voluntary contributions.

 

Actualresults that differ from assumptions are accumulated and amortized over futureperiods and, therefore, generally affect recognized expense in future periods.At December 31, 2005, we had unrecognized actuarial gains of$5.1 million. While we believe that the assumptions used are reasonable,differences in actual experience or changes in assumptions may materiallyaffect our pension obligations and future expense.

 

Webelieve that the accounting estimate related to pensions is a criticalaccounting estimate for all of our segments because it is highly susceptible tochange from period to period. As discussed above, the future effects of pensionplans on our financial position and results of operations will depend oneconomic conditions, employee demographics, mortality rates, retirement rates,investment performance, and funding decisions, among other factors. Thefollowing table presents selected assumptions used and expected to be used inthe measurement of pension expense in the following periods:

 

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| ** **                             | ** ** | **Boise**                                 | ** ** | **Predecessor**                          | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **Year  Ending  December 31,  2006** | ** ** | **Year  Ended  December 31,  2005** | ** ** | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** |
| ** **                             | ** ** | **(millions, except for percentages)**    | ** ** |
|                                   |       |                                      |       |                                     |       |   |   |   |   |
| Pension expense                        |       | $                                         | 25.5       |                                     | $          | 26.8 |   | $ | 2.6 |   | $ | 60.9 |   |
| Discount rate                          |       | 5.60                                      | %          | 5.75                                     | %          | 5.75 | % | 6.25 | % |
| Expected rate of return on plan assets |       | 7.25                                      | %          | 7.25                                     | %          | 7.25 | % | 8.25 | % |
| Rate of compensation increases         |       | 4.25                                      | %          | 4.25                                     | %          | 4.25 | % | 4.25 | % |
|                                        |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

A 0.25% change in either direction to the discount rate, the expectedrate of return on plan assets, or the rate of compensation increases, wouldhave had the following effect on 2006 and 2005 pension expense. Thesesensitivities are specific to 2006 and 2005. The sensitivities may not beadditive, so the impact of changing multiple factors simultaneously cannot becalculated by combining the individual sensitivities shown.

 
| ** **                             | ** ** | ** **        | ** ** | **Increase (Decrease)  in Pension Expense** | ** ** |
|----------------------------------------|------------|-------------------|------------|---------------------------------------------|------------|
| ** **                             | ** ** | **Base  Expense** | ** ** | **0.25%  Increase**                         | ** ** | **0.25%  Decrease** | ** ** |
| ** **                             | ** ** | **(millions)**    | ** ** |
| **2005 Expense**                       |       |              |       |                                        |       |   |   |
| Discount rate                          |       | $                 | 26.8       |                                        | $          | (1.1 | ) | $ | 1.1 |   |
| Expected rate of return on plan assets |       | 26.8              |       | (1.0                                        | )          | 1.0 |   |
| Rate of compensation increases         |       | 26.8              |       | 0.4                                         |       | (0.4 | ) |
|                                   |       |              |       |                                        |       |   |   |
| **2006 Expense**                       |       |              |       |                                        |       |   |   |
| Discount rate                          |       | $                 | 25.5       |                                        | $          | (0.9 | ) | $ | 0.9 |   |
| Expected rate of return on plan assets |       | 25.5              |       | (1.2                                        | )          | 1.2 |   |
| Rate of compensation increases         |       | 25.5              |       | 0.4                                         |       | (0.4 | ) |

 

***Long-Lived Asset Impairment***

 

We account for the impairment of long-lived assets in all of oursegments in accordance with SFAS No. 144, Accounting for the Impairment orDisposal of Long-Lived Assets. An impairment of a long-lived asset exists whenthe carrying value of an asset exceeds its fair value and when the carryingvalue is not recoverable through future operations. We review the carryingvalue of long-lived assets for impairment when events or changes incircumstances indicate that the carrying amount of assets may not berecoverable.

 

Long-livedasset impairment is a critical accounting estimate, as it is susceptible tochange from period to period. To estimate whether the carrying value of anasset or asset group is impaired, we estimate the cash flows that could begenerated under a range of possible outcomes, and we estimate the likelihood ofpossible outcomes. To measure future cash flows, we are required to makeassumptions about future production volumes, future product pricing, and futureexpenses to be incurred. In addition, estimates of future cash flows may changebased on the availability of timber, environmental requirements, capitalspending, and other strategic management decisions. We estimate the fair valueof an asset or asset group based on quoted market prices (the amount for whichthe asset(s) could be bought or sold in a current transaction with a thirdparty) when available. When quoted market prices are not available, we use adiscounted cash flow model to estimate fair value.

 

Dueto the numerous variables associated with our judgments and assumptionsrelating to the valuation of assets and the effects of changes in circumstances(timber availability, environmental requirements, capital spending, and othermanagement decisions) on these valuations, both the precision and reliabilityof our estimates are subject to uncertainty. As additional information becomesknown, we may change our estimates.

 

60

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***Non-GAAP FinancialMeasures***

 

EBITDA represents income (loss) before interest (interest expense,interest income, and change in fair value of interest rate swaps), income taxprovision (benefit), and depreciation, amortization, and depletion. EBITDA isthe primary measure used by our chief operating decision makers to evaluatesegment operating performance and to decide how to allocate resources tosegments. We believe EBITDA is useful to investors because it provides a meansto evaluate the operating performance of our segments and our company on anongoing basis using criteria that are used by our internal decision makers andbecause it is frequently used by investors and other interested parties in theevaluation of companies with substantial financial leverage. We believe EBITDAis a meaningful measure because it presents a transparent view of our recurringoperating performance and allows management to readily view operating trends,perform analytical comparisons, and identify strategies to improve operatingperformance. For example, we believe that the inclusion of items such as taxes,interest expense, and interest income distorts management’s ability to assessand view the core operating trends in our segments. EBITDA, however, is not ameasure of our liquidity or financial performance under generally acceptedaccounting principles (GAAP) and should not be considered as an alternative tonet income (loss), income (loss) from operations, or any other performancemeasure derived in accordance with GAAP or as an alternative to cash flow fromoperating activities as a measure of our liquidity. The use of EBITDA insteadof net income (loss) or segment income (loss) has limitations as an analyticaltool, including the inability to determine profitability; the exclusion ofinterest expense, interest income, change in the fair value of interest rateswaps, and associated significant cash requirements; and the exclusion ofdepreciation, amortization, and depletion, which represent significant andunavoidable operating costs, given the level of our indebtedness and thecapital expenditures needed to maintain our businesses. Management compensatesfor these limitations by relying on our GAAP results. Our measures of EBITDAare not necessarily comparable to other similarly titled captions of othercompanies due to potential inconsistencies in the methods of calculation.

 

61

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For a reconciliation of net income (loss) to EBITDA see “Item 6.  Selected Financial Data” of this Form 10-K.The following is a reconciliation of historical income (loss) from operationsto EBITDA and the effects of items included in EBITDA for the year endedDecember 31, 2005, the periods of October 29 (inception) throughDecember 31, 2004, and January 1 through October 28, 2004, andthe year ended December 31, 2003: 

 
| ** **                                 | ** ** | **Boise**                             | ** ** |
|--------------------------------------------|------------|---------------------------------------|------------|
| ** **                                 | ** ** | **December  31, 2005**                | ** ** | **October  29 (inception) through December 31, 2004** | ** ** |
| ** **                                 | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging  & Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging  & Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** |
|                                       |       | **(millions)**                        |       |
|                                       |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from operations             |       | $                                     | 99.9       |   | $ | 119.4 |   | $ | 58.6 |   | $ | 23.8 |   | $ | (29.0 | ) | $ | 272.7 |   | $ | 10.1 |   | $ | 15.6 |   | $ | 19.0 |   | $ | 7.3 |   | $ | (8.0 | ) | $ | 44.0 |   |
| Foreign  exchange gain (loss)              |       | —                                |       | — |   | — |   | — |   | (0.3 | ) | (0.3 | ) | — |   | — |   | — |   | — |   | 1.2 |   | 1.2 |   |
| Segment  income (loss)                     |       | 99.9                                  |       | 119.4 |   | 58.6 |   | 23.8 |   | (29.4 | ) | 272.3 |   | 10.1 |   | 15.6 |   | 19.0 |   | 7.3 |   | (6.8 | ) | 45.2 |   |
| Depreciation,  amortization, and depletion |       | 9.1                                   |       | 23.0 |   | 54.0 |   | 37.2 |   | 5.5 |   | 128.8 |   | 1.5 |   | 3.3 |   | 8.3 |   | 6.0 |   | 0.9 |   | 20.0 |   |
| EBITDA                                     |       | $                                     | 109.0      |   | $ | 142.4 |   | $ | 112.6 |   | $ | 61.0 |   | $ | (23.8 | ) | $ | 401.2 |   | $ | 11.6 |   | $ | 18.9 |   | $ | 27.3 |   | $ | 13.3 |   | $ | (5.9 | ) | $ | 65.2 |   |

 

EBITDAfor the year ended December 31, 2005, and the period of October 29 (inception)through December 31, 2004, includes the effects of the following items :

 
|                                                |   | **(millions)** |   |
|-----------------------------------------------------|--------|----------------|--------|
|                                                |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Write-off  of offering costs (a)                    |   | $              | — |   | $ | — |   | $ | — |   | $ | — |   | $ | (3.6 | ) | $ | (3.6 | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Gain  on changes in retiree healthcare programs (b) |   | —         |   | — |   | — |   | — |   | 9.9 |   | 9.9 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Inventory  purchase price  adjustments (c)          |   | —         |   | — |   | — |   | — |   | — |   | — |   | (2.7 | ) | (5.8 | ) | (10.6 | ) | (1.1 | ) | — |   | (20.2 | ) |
|                                                |   | $              | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 6.3 |   | $ | 6.3 |   | $ | (2.7 | ) | $ | (5.8 | ) | $ | (10.6 | ) | $ | (1.1 | ) | $ | — |   | $ | (20.2 | ) |

 
|                                                       |   | **Predecessor**                         |       |
|------------------------------------------------------------|--------|-----------------------------------------|------------|
|                                                       |   | **January  1 through October 28, 2004** |       | **Year Ended  December 31, 2003** |   |
|                                                       |   | **Building  Materials  Distribution**   | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging  & Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging  & Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** |   |
|                                                       |   | **(millions)**                          |       |
|                                                       |   |                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income  (loss) from operations                             |   | $                                       |  78.8 |   | $ |  150.2 |   | $ |  (35.4 | ) | $ |  (1.2 | ) | $ |  (57.7 | ) | $ |  134.7 |   | $ |  47.7 |   | $ |  34.8 |   | $ | (23.7 | ) | $ |  (15.0 | ) | $ | (42.8 | ) | $ |  1.0 |   |
| Gain  on sale of equity affiliate (d)                      |   | —                                  |       | 46.5 |   | — |   | — |   | — |   | 46.5 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Foreign  exchange gain                                     |   | —                                  |       | — |   | — |   | — |   | 0.9 |   | 0.9 |   | — |   | — |   | — |   | — |   | 2.7 |   | 2.7 |   |
| Equity  in net income of affiliate                         |   | —                                  |       | 6.3 |   | — |   | — |   | — |   | 6.3 |   | — |   | 8.7 |   | — |   | — |   | — |   | 8.7 |   |
| Segment  income (loss)                                     |   | 78.8                                    |       | 203.0 |   | (35.4 | ) | (1.2 | ) | (56.8 | ) | 188.4 |   | 47.7 |   | 43.5 |   | (23.7 | ) | (15.0 | ) | (40.1 | ) | 12.4 |   |
| Depreciation,  amortization, and depletion                 |   | 6.1                                     |       | 23.5 |   | 118.5 |   | 34.7 |   | 11.0 |   | 193.8 |   | 7.1 |   | 34.2 |   | 136.3 |   | 40.4 |   | 11.8 |   | 229.8 |   |
| Cumulative  effect of accounting change, net of income tax |   | —                                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (4.1 | ) |
| EBITDA                                                     |   | $                                       |  84.9 |   | $ |  226.5 |   | $ |  83.1 |   | $ |  33.5 |   | $ |  (45.8 | ) | $ |  382.2 |   | $ |  54.8 |   | $ |  77.7 |   | $ | 112.6 |   | $ | 25.4 |   | $ | (28.3 | ) | $ |  238.1 |   |

 

EBITDAfor the period of January 1 through October 28, 2004, and the year endedDecember 31, 2003, includes the effects of the following items:

 
|                                                       |   | **(millions)** |   |
|------------------------------------------------------------|--------|----------------|--------|
|                                                       |   |           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gain  on sale of equity of affiliate (d)                   |   | $              | — |   | $ | 46.5 |   | $ | — |   | $ | — |   | $ | — |   | $ | 46.5 |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Equity  in net income of affiliate                         |   | —         |   | 6.3 |   | — |   | — |   | — |   | 6.3 |   | — |   | 8.7 |   | — |   | — |   | — |   | 8.7 |   |
| Write-down  of impaired assets (e)                         |   | —         |   | — |   | — |   | — |   | — |   | — |   | — |   | (14.7 | ) | — |   | — |   | — |   | (14.7 | ) |
| Loss  on sale of mill (f)                                  |   | —         |   | (7.1 | ) | — |   | — |   | — |   | (7.1 | ) | — |   | — |   | — |   | — |   | — |   | — |   |
| Retention  bonus (g)                                       |   | —         |   | — |   | — |   | — |   | (12.7 | ) | (12.7 | ) | — |   | — |   | — |   | — |   | — |   | — |   |
| Loss  on lease termination (h)                             |   | —         |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (3.6 | ) | — |   | — |   | (3.6 | ) |
| Cumulative  effect of accounting change, net of income tax |   | —         |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | — |   | (4.1 | ) |
|                                                       |   | $              | — |   | $ | 45.7 |   | $ | — |   | $ | — |   | $ | (12.7 | ) | $ | 33.0 |   | $ | — |   | $ | (6.0 | ) | $ | (3.6 | ) | $ | — |   | $ | — |   | $ | (13.7 | ) |

 

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(a)                                  Includes$3.6 million of expense for the write-off of costs incurred in connectionwith the canceled initial public offering.

 

(b)                                 Includes a$9.9 million gain for changes to our retiree healthcare programs. For moreinformation, see Note 13, Retirement and Benefit Plans of the Notes to theConsolidated Financial Statements in “Item 8. Consolidated FinancialStatements and Supplementary Data” of this Form 10-K.

 

(c)                                  As a result ofpurchase price accounting, we wrote up the value of our inventory, whichincreased the costs and expenses recognized by us upon the sale of theinventory by $20.2 million for the period of October 29 (inception)through December 31, 2004.

 

(d)                                 Represents a pretaxgain recognized in connection with our predecessor’s sale in May 2004 ofits 47% interest in Voyageur Panel.

 

(e)                                  Reflects costsincurred for our predecessor’s write-down of impaired assets at the plywood andlumber operations in Yakima, Washington, in December 2003.

 

(f)                                    Reflects costsincurred in connection with the February 2004 sale of our predecessor’s Yakima,Washington, plywood and lumber operations.

 

(g)                                 Reflects expenseprimarily for a one-time retention bonus OfficeMax granted to our employees.

 

(h)                                 Reflects costsassociated with the early termination of an operating lease used in connectionwith our predecessor’s paper business.

 

***ITEM 7A.             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

Information concerning quantitative and qualitativedisclosures about market risk is included under the caption “Disclosures ofFinancial Market Risks” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” of this Form 10-K.

 

63

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***ITEM 8.                CONSOLIDATEDFINANCIAL STATEMENTS AND SUPPLEMENTARY DATA***

 

**Boise Cascade Holdings, L.L.C.**

**Consolidated Statements of Income(Loss)**

 
| ** **                                                                        | ** ** | **Boise**                               | ** **  | **Predecessor**                                                    | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------|-------------|--------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **Year Ended  December 31,  2005** | ** **  | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                                                        | ** ** | **(thousands)**                         | ** **  |
| **Sales**                                                                         | ** ** | ** **                              | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                                                             |       | $                                       | 5,345,106   |                                                               | $          | 779,953 |   | $ | 4,417,440 |   | $ | 4,217,305 |   |
| Related parties                                                                   |       | 562,338                                 |        | 92,774                                                             |       | 444,608 |   | 436,415 |   |
|                                                                              |       | 5,907,444                               |        | 872,727                                                            |       | 4,862,048 |   | 4,653,720 |   |
|                                                                              |       |                                    |        |                                                               |       |   |   |   |   |
| **Costs  and expenses**                                                           | ** ** | ** **                              | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials, labor, and other operating  expenses                                   |       | 5,155,112                               |        | 733,509                                                            |       | 4,122,045 |   | 3,982,229 |   |
| Fiber costs from related parties                                                  |       | 17,609                                  |        | 24,451                                                             |       | 95,537 |   | 113,818 |   |
| Depreciation, amortization, and depletion                                         |       | 128,826                                 |        | 20,037                                                             |       | 193,816 |   | 229,820 |   |
| Selling and distribution expenses                                                 | * *   | 264,072                                 |        | 40,118                                                             |       | 211,319 |   | 224,338 |   |
| General and administrative expenses                                               |       | 74,732                                  |        | 10,608                                                             |       | 79,317 |   | 69,703 |   |
| Other (income) expense, net                                                       |       | (5,592                                  | )           | (23                                                                | )          | 25,348 |   | 32,806 |   |
|                                                                              |       | 5,634,759                               |        | 828,700                                                            |       | 4,727,382 |   | 4,652,714 |   |
| ** **                                                                        | ** ** | ** **                              | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  from operations**                                                       |       | 272,685                                 |        | 44,027                                                             |       | 134,666 |   | 1,006 |   |
|                                                                              |       |                                    |        |                                                               |       |   |   |   |   |
| Equity in net income of affiliates                                                |       | —                                  |        | —                                                             |       | 6,308 |   | 8,716 |   |
| Gain on sale of equity affiliate                                                  |       | —                                  |        | —                                                             |       | 46,498 |   | — |   |
| Foreign exchange gain (loss)                                                      |       | (340                                    | )           | 1,181                                                              |       | 912 |   | 2,672 |   |
| Change in fair value of interest rate swaps                                       |       | 9,886                                   |        | —                                                             |       | — |   | — |   |
| Interest expense                                                                  |       | (166,344                                | )           | (22,182                                                            | )          | (72,124 | ) | (92,935 | ) |
| Interest income                                                                   |       | 3,391                                   |        | 2,005                                                              |       | 557 |   | 850 |   |
|                                                                              |       | (153,407                                | )           | (18,996                                                            | )          | (17,849 | ) | (80,697 | ) |
|                                                                              |       |                                    |        |                                                               |       |   |   |   |   |
| **Income  (loss) before income taxes and cumulative effect of accounting change** |       | 119,278                                 |        | 25,031                                                             |       | 116,817 |   | (79,691 | ) |
| Income tax (provision) benefit                                                    |       | 2,089                                   |        | (329                                                               | )          | (47,351 | ) | 36,471 |   |
| ** **                                                                        | ** ** | ** **                              | ** **  | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  (loss) before cumulative effect of accounting change**                  |       | 121,367                                 |        | 24,702                                                             |       | 69,466 |   | (43,220 | ) |
|                                                                              |       |                                    |        |                                                               |       |   |   |   |   |
| Cumulative effect of accounting change, net  of income tax                        |       | —                                  |        | —                                                             |       | — |   | (4,133 | ) |
| **Net  income (loss)**                                                            | ** ** | **$**                                   | **121,367** | ** **                                                         | **$**      | **24,702** | ** ** | **$** | **69,466** | ** ** | **$** | **(47,353** | **)** |

 

Seeaccompanying notes to consolidated financial statements.

 

64

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Balance Sheets**

** **
| ** **                                        | ** ** | **December 31,  2005** | ** **    | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                        | ** ** | **(thousands)**             | ** **    |
| **ASSETS**                                        |       |                        |          |                        |       |
|                                              |       |                        |          |                        |       |
| **Current**                                       |       |                        |          |                        |       |
| Cash and cash equivalents                         |       | $                           | 88,171        |                        | $          | 163,345 |   |
| Receivables                                       |       |                        |          |                        |       |
| Trade, less allowances of $1,947  and $2,323 |       | 338,821                     |          | 276,668                     |       |
| Related parties                                   |       | 43,010                      |          | 42,055                      |       |
| Other                                             |       | 20,980                      |          | 19,174                      |       |
| Inventories                                       |       | 633,783                     |          | 594,869                     |       |
| Other                                             |       | 10,694                      |          | 15,621                      |       |
|                                              |       | 1,135,459                   |          | 1,111,732                   |       |
|                                              |       |                        |          |                        |       |
| **Property**                                      |       |                        |          |                        |       |
| Property and equipment                            |       |                        |          |                        |       |
| Land and land improvements                        |       | 79,420                      |          | 83,123                      |       |
| Buildings and improvements                        |       | 226,232                     |          | 204,704                     |       |
| Machinery and equipment                           |       | 1,331,292                   |          | 1,196,978                   |       |
|                                              |       | 1,636,944                   |          | 1,484,805                   |       |
|                                              |       |                        |          |                        |       |
| Accumulated depreciation                          |       | (139,890                    | )             | (18,956                     | )          |
|                                              |       | 1,497,054                   |          | 1,465,849                   |       |
| Fiber farms and timber deposits                   |       | 52,236                      |          | 44,646                      |       |
|                                              |       | 1,549,290                   |          | 1,510,495                   |       |
|                                              |       |                        |          |                        |       |
| **Note receivable from related party**            |       | —                      |          | 157,509                     |       |
| **Deferred financing costs**                      |       | 37,778                      |          | 84,054                      |       |
| **Goodwill**                                      |       | 15,101                      |          | 18,390                      |       |
| **Intangible assets**                             |       | 31,804                      |          | 34,357                      |       |
| **Other assets**                                  |       | 44,231                      |          | 15,532                      |       |
| **Total assets**                                  | ** ** | **$**                       | **2,813,663** | ** **                  | **$**      | **2,932,069** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

 

65

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** **

**Boise Cascade Holdings, L.L.C.**

**Consolidated Balance Sheets(continued)**

** **
| ** **                                                                                                                         | ** ** | **December 31,  2005** | ** **    | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                         | ** ** | **(thousands)**             | ** **    |
| **LIABILITIES AND CAPITAL**                                                                                                        |       |                        |          |                        |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Current**                                                                                                                        |       |                        |          |                        |       |
| Current portion of long-term debt                                                                                                  |       | $                           | —        |                        | $          | 13,300 |   |
| Accounts payable                                                                                                                   |       |                        |          |                        |       |
| Trade                                                                                                                              |       | 383,207                     |          | 310,148                     |       |
| Related parties                                                                                                                    |       | —                      |          | 150                         |       |
| Accrued liabilities                                                                                                                |       |                        |          |                        |       |
| Compensation and benefits                                                                                                          |       | 106,289                     |          | 62,495                      |       |
| Interest payable                                                                                                                   |       | 10,630                      |          | 8,584                       |       |
| Other                                                                                                                              |       | 46,244                      |          | 43,631                      |       |
|                                                                                                                               |       | 546,370                     |          | 438,308                     |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Debt**                                                                                                                           |       |                        |          |                        |       |
| Long-term debt, less current portion                                                                                               |       | 1,365,800                   |          | 1,966,700                   |       |
| Note payable to related party, net                                                                                                 |       | 270,854                     |          | —                      |       |
|                                                                                                                               |       | 1,636,654                   |          | 1,966,700                   |       |
| **Other**                                                                                                                          |       |                        |          |                        |       |
| Compensation and benefits                                                                                                          |       | 121,269                     |          | 133,648                     |       |
| Other long-term liabilities                                                                                                        |       | 31,937                      |          | 23,573                      |       |
|                                                                                                                               |       | 153,206                     |          | 157,221                     |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Redeemable equity units**                                                                                                        |       |                        |          |                        |       |
| Series B equity units – 17,296,624 and  18,643,399 units outstanding                                                |       | 9,508                       |          | 10,254                      |       |
| Series C equity units – 32,173,830 and  35,600,120 units outstanding                                                |       | 2,904                       |          | —                      |       |
|                                                                                                                               |       | 12,412                      |          | 10,254                      |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Commitments and contingent liabilities**                                                                                         |       |                        |          |                        |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Capital**                                                                                                                        |       |                        |          |                        |       |
| Series A equity units – no par value;  66,000,000 units authorized and outstanding                                  |       | 39,885                      |          | 36,868                      |       |
| Series B equity units – no par value;  549,000,000 units authorized; 530,356,601 and 530,356,601 units  outstanding |       | 417,601                     |          | 322,718                     |       |
| Series C equity units – no par value;  38,165,775 units authorized                                                  |       | 7,535                       |          | —                      |       |
| **Total capital**                                                                                                                  |       | 465,021                     |          | 359,586                     |       |
|                                                                                                                               |       |                        |          |                        |       |
| **Total liabilities and capital**                                                                                                  | ** ** | **$**                       | **2,813,663** | ** **                  | **$**      | **2,932,069** | ** ** |

 

Seeaccompanying notes to consolidated financial statements.

 

66

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Statements of CashFlows**

 
| ** **                                                                             | ** ** | **Boise**                               | ** ** | **Predecessor**                                                    | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **Year Ended  December 31,  2005** | ** ** | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**                         | ** ** |
| **Cash provided by (used for) operations**                                             |       |                                    |       |                                                               |       |   |   |   |   |
| Net income (loss)                                                                      |       | $                                       | 121,367    |                                                               | $          | 24,702 |   | $ | 69,466 |   | $ | (47,353 | ) |
| Items in net income (loss) not using  (providing) cash                                 |       |                                    |       |                                                               |       |   |   |   |   |
| Equity in net income of affiliate                                                      |       | —                                  |       | —                                                             |       | (6,308 | ) | (8,716 | ) |
| Depreciation, depletion, and amortization  of deferred financing costs and other costs |       | 178,677                                 |       | 22,361                                                             |       | 193,816 |   | 229,820 |   |
| Related-party interest expense                                                         |       | 18,909                                  |       | —                                                             |       | — |   | — |   |
| Pension and other postretirement benefit  expense                                      |       | 28,681                                  |       | 2,907                                                              |       | 66,623 |   | 58,927 |   |
| Gain on changes in retiree healthcare  programs                                        |       | (9,900                                  | )          | —                                                             |       | — |   | — |   |
| Change in fair value of interest rate swaps                                            |       | (9,886                                  | )          | —                                                             |       | — |   | — |   |
| Management equity units expense                                                        |       | 2,904                                   |       | —                                                             |       | — |   | — |   |
| Deferred income taxes                                                                  |       | (4,788                                  | )          | —                                                             |       | — |   | 10,580 |   |
| Cumulative effect of accounting change, net  of income tax                             |       | —                                  |       | —                                                             |       | — |   | 4,133 |   |
| Restructuring activities                                                               |       | —                                  |       | —                                                             |       | — |   | (806 | ) |
| Sale and write-down of assets                                                          |       | —                                  |       | —                                                             |       | (46,745 | ) | 14,699 |   |
| Other                                                                                  |       | 2,365                                   |       | (1,181                                                             | )          | (912 | ) | (2,738 | ) |
| Decrease (increase) in working capital, net of acquisitions                            |       |                                    |       |                                                               |       |   |   |   |   |
| Receivables                                                                            |       | (61,415                                 | )          | 121,952                                                            |       | (320,901 | ) | (783 | ) |
| Inventories                                                                            |       | (38,942                                 | )          | (21,403                                                            | )          | (15,433 | ) | (4,204 | ) |
| Accounts payable and accrued liabilities                                               |       | 95,897                                  |       | 85,568                                                             |       | 74,437 |   | 23,196 |   |
| Current and deferred income taxes                                                      |       | (4,466                                  | )          | —                                                             |       | 9,342 |   | (1,893 | ) |
| Pension and other postretirement benefit payments                                      |       | (11,073                                 | )          | (62                                                                | )          | (66,623 | ) | (58,927 | ) |
| Other                                                                                  |       | (1,591                                  | )          | (4,368                                                             | )          | (4,548 | ) | 3,330 |   |
| Cash provided by (used for) operations                                                 |       | 306,739                                 |       | 230,476                                                            |       | (47,786 | ) | 219,265 |   |
|                                                                                   |       |                                    |       |                                                               |       |   |   |   |   |
| **Cash provided by (used for) investment**                                             |       |                                    |       |                                                               |       |   |   |   |   |
| Expenditures for property and equipment                                                |       | (170,282                                | )          | (28,900                                                            | )          | (140,217 | ) | (175,096 | ) |
| Acquisition of businesses and facilities                                               |       | —                                  |       | (2,196,452                                                         | )          | — |   | — |   |
| Repayment of note receivable from related party, net                                   |       | 157,509                                 |       | —                                                             |       | — |   | — |   |
| Note receivable from related party, net                                                |       | —                                  |       | (157,509                                                           | )          | — |   | — |   |
| Sales of assets                                                                        |       | 18,536                                  |       | —                                                             |       | 103,229 |   | — |   |
| Other                                                                                  |       | 3,654                                   |       | (2,627                                                             | )          | (141 | ) | (17,528 | ) |
| Cash provided by (used for) investment                                                 |       | 9,417                                   |       | (2,385,488                                                         | )          | (37,129 | ) | (192,624 | ) |
|                                                                                   |       |                                    |       |                                                               |       |   |   |   |   |
| **Cash provided by (used for) financing**                                              |       |                                    |       |                                                               |       |   |   |   |   |
| Tax distributions to members                                                           |       | (23,143                                 | )          | —                                                             |       | — |   | — |   |
| Note payable to related party, net                                                     |       | 250,272                                 |       | —                                                             |       | — |   | — |   |
| Issuances of long-term debt                                                            |       | 920,000                                 |       | 2,020,000                                                          |       | — |   | — |   |
| Payments of long-term debt                                                             |       | (1,534,200                              | )          | (40,000                                                            | )          | — |   | — |   |
| Issuance of equity units                                                               |       | —                                  |       | 338,877                                                            |       | — |   | — |   |
| Net equity transactions with OfficeMax                                                 |       | —                                  |       | —                                                             |       | 67,131 |   | (27,569 | ) |
| Net debt issuances to OfficeMax                                                        |       | —                                  |       | —                                                             |       | 17,784 |   | 928 |   |
| Other                                                                                  |       | (4,259                                  | )          | (520                                                               | )          | — |   | — |   |
| Cash provided by (used for) financing                                                  |       | (391,330                                | )          | 2,318,357                                                          |       | 84,915 |   | (26,641 | ) |
|                                                                                   |       |                                    |       |                                                               |       |   |   |   |   |
| **Increase (decrease) in cash and cash equivalents**                                   |       | (75,174                                 | )          | 163,345                                                            |       | — |   | — |   |
|                                                                                   |       |                                    |       |                                                               |       |   |   |   |   |
| **Balance at beginning of the period**                                                 |       | 163,345                                 |       | —                                                             |       | — |   | — |   |
| **Balance at end of the period**                                                       | ** ** | **$**                                   | **88,171** | ** **                                                         | **$**      | **163,345** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

67

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**Boise Cascade Holdings, L.L.C.**

**Consolidated Statements ofCapital**

** **
| ** **                             | ** ** | **Business  Unit  Equity** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Capital** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------|------------|--------------------|------------|
| ** **                             | ** ** | **(thousands)**            | ** ** |
| ***Predecessor***                      |       |                       |       |                                                 |       |               |       |
|                                   |       |                       |       |                                                 |       |               |       |
| Balance at December 31, 2002      |       | $802,754                   |       | $896                                                 |       | $803,650           |       |
|                                   |       |                       |       |                                                 |       |               |       |
| Comprehensive loss:                    |       |                       |       |                                                 |       |               |       |
| Net loss                               |       | (47,353                    | )          | —                                               |       | (47,353            | )          |
| Other comprehensive loss, net of tax   |       |                       |       |                                                 |       |               |       |
| Cash flow hedges                       |       | —                     |       | (34                                                  | )          | (34                | )          |
|                                   |       |                       |       |                                                 |       |               |       |
| Comprehensive loss                     |       | (47,353                    | )          | (34                                                  | )          | (47,387            | )          |
| Net equity transactions with OfficeMax |       | (27,569                    | )          | —                                               |       | (27,569            | )          |
| Balance at December 31, 2003      |       | $727,832                   |       | $862                                                 |       | $728,694           |       |

 
| ** **                                                   | ** ** | **Series A  Equity Units** | ** ** | **Series B  Equity Units** | ** ** | **Series C  Equity Units** | ** **  | **Total**  | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|-------------|------------|------------|
| ** **                                                   | ** ** | **Units**                       | ** ** | **Amount**                      | ** ** | **Units**                       | ** **  | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| ** **                                                   | ** ** | **(thousands)**                 | ** ** |
| ***Boise***                                                  |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
|                                                         |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Balance at October 29, 2004 (inception)                      |       | —                          |       | $                               | —     |                            | —      |       | $          | — |   | — |   | $ | — |   | $ | — |   |
|                                                         |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Equity issued for acquisition                                |       | 66,000                          |       | 36,367                          |       | 530,357                         |        | 292,256    |       | — |   | — |   | 328,623 |   |
| Net income                                                   |       | —                          |       | —                          |       | —                          |        | 24,702     |       | — |   | — |   | 24,702 |   |
| Other comprehensive income (a)                          |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                             |       | —                          |       | —                          |       | —                          |        | 6,261      |       | — |   | — |   | 6,261 |   |
| Paid-in-kind dividend                                        |       | —                          |       | 501                             |       | —                          |        | (501       | )          | — |   | — |   | — |   |
| Balance at December 31, 2004                            |       | 66,000                          |       | 36,868                          |       | 530,357                         |        | 322,718    |       | — |   | — |   | 359,586 |   |
|                                                         |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Net income                                                   |       | —                          |       | —                          |       | —                          |        | 121,367    |       | — |   | — |   | 121,367 |   |
| Other comprehensive income (a)                          |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                             |       | —                          |       | —                          |       | —                          |        | 7,269      |       | — |   | — |   | 7,269 |   |
| Minimum pension liability adjustment                         |       | —                          |       | —                          |       | —                          |        | (58        | )          | — |   | — |   | (58 | ) |
| Paid-in-kind dividend                                        |       | —                          |       | 3,017                           |       | —                          |        | (3,017     | )          | — |   | — |   | — |   |
| Tax distributions to members                                 |       | —                          |       | —                          |       | —                          |        | (23,143    | )          | — |   | — |   | (23,143 | ) |
| Allocation of profit interest to  Series C equity units |       | —                          |       | —                          |       | —                          |        | (7,535     | )          | — |   | 7,535 |   | — |   |
| **Balance at December 31, 2005 (b)**                    | ** ** | **66,000**                      | ** ** | **$**                           | **39,885** | ** **                      | **530,357** | ** ** | **$**      | **417,601** | ** ** | **—** | ** ** | **$** | **7,535** | ** ** | **$** | **465,021** | ** ** |

 

----

(a)                                  Accumulated other comprehensive income forthe year ended December 31, 2005, and the period of October 29through December 31, 2004, was $13.5 million and $6.3 million,respectively. Total comprehensive income for the year ended December 31,2005, and the period of October 29 through December 31, 2004, was$128.6 million and $31.0 million, respectively.

 

(b)                                 The Consolidated Statement of Capital doesnot reflect the effect of our converting to a C corporation on May 9,2005. As a result of rescinding our C corporation status, the ConsolidatedStatement of Capital rolls forward our capital as if we had been a limitedliability company for the entire year. For more information, see Note 1,Summary of Significant Accounting Policies.

 

See accompanying notes to consolidated financial statements.

 

68

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***Notes to Consolidated Financial Statements***

 

***1.             Summaryof Significant Accounting Policies***

 

*Basis of Presentation*

 

Asused in these consolidated financial statements, the terms “Boise” and “we” referto Boise Cascade Holdings, L.L.C., and its consolidated subsidiaries and theirpredecessors in interest. The terms “Boise Forest Products Operations” and “predecessor”refer to the forest products and paper assets of OfficeMax Incorporated(OfficeMax) that we acquired on October 29, 2004, from OfficeMax.OfficeMax was formerly known as Boise Cascade Corporation. See Note 2,Purchase of OfficeMax’s Forest Products and Paper Assets, for additionalinformation.

 

Our operations began on the date we acquired the forest products andpaper assets of OfficeMax (the Acquisition). On the Acquisition date, ForestProducts Holdings, L.L.C. (FPH), a newly formed holding company controlled byMadison Dearborn Partners (MDP), our equity sponsor, and OfficeMax made a cashequity investment in Boise of $338.9 million. The equity investmentconsisted of $242.4 million invested by FPH in exchange for440 million of our Series B equity units and $96.5 millioninvested by OfficeMax in exchange for 109 million and 66 million ofour Series B equity units and Series A equity units, respectively.See the Consolidated Statements of Capital and Note 15, Capital, for adiscussion of the change in equity units and their holders since the date ofthe Acquisition and a discussion of the rights and privileges of the equityunits.

 

On May 9, 2005, we converted to a C corporationfrom a limited liability company by filing a certificate of conversion with theDelaware Secretary of State. This conversion was in anticipation of an initialpublic offering of equity securities, which we subsequently abandoned. OnDecember 20, 2005, acting pursuant to a Rescission Agreement among ourshareholders, we rescinded our conversion to C corporation status byfiling a conversion certificate with the Delaware Secretary of State thatrestored our status as a limited liability company and changed our name back toBoise Cascade Holdings, L.L.C. In connection with converting back to a limitedliability company, in fourth quarter 2005, the shares of preferred and commonstock were exchanged for equity units at a 1:1 ratio for the Series Apreferred stock and at a 13:1 ratio for the Class B and C commonstock. We also reversed the taxes we had recorded as a corporate entity (seeNote 5, Income Taxes).

 

OnMay 18, 2005, the Securities and Exchange Commission (SEC) declared ourregistration statement, filed on Form S-1 (Registration No. 333-122770)as amended, under the Securities Act of 1933, effective. Although we have notissued shares under this registration statement, we became a registrant withthe SEC and, accordingly, began filing periodic reports with them. We also havepublicly traded, registered debt securities, which also require the filing ofsuch reports. Our rescission from a corporation to a limited liability companyon December 20, 2005, had no impact on our status or filing requirementswith the SEC.

 

Weare a diversified North American paper and forest products company. We areheadquartered in Boise, Idaho. The consolidated financial statements presentthe financial results of Boise for the year ended December 31, 2005, andthe period of October 29 through December 31, 2004, and the resultsof Boise Forest Products Operations for the period of January 1 throughOctober 28, 2004, and the year ended December 31, 2003. We operateour business in the following five reportable segments: Building MaterialsDistribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other. Historically, OfficeMax conducted the businesses acquiredby Boise in three segments: Boise Building Solutions, Boise Paper Solutions,and Corporate and Other. We have recast the financial statements of ourpredecessor to conform with our current segment presentation. OfficeMax’sforest products and paper operations included timberland assets, which wereallocated to OfficeMax’s Boise Building Solutions and Boise Paper Solutions.Since we did not acquire the timberland operations from OfficeMax, they are notincluded in the predecessor financial statements. See Note 16, SegmentInformation, for additional information about our reportable segments.

 

Thepredecessor financial statements include accounts specifically attributed toBoise Forest Products Operations and a portion of OfficeMax’s shared corporategeneral and administrative expenses. These shared services included, but werenot limited to, finance, accounting, legal, information technology, and humanresource functions. Some of OfficeMax’s corporate costs related solely to BoiseForest Products Operations and were allocated in full to these operations.Shared corporate general and administrative expenses not specificallyidentifiable to Boise Forest Products Operations have been

 

69

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allocatedbased on sales, assets, and labor costs. The predecessor financial statementsalso include an allocation of OfficeMax’s total debt and related interestexpense based on average asset balances (see Note 11, Debt). Thepredecessor’s results have been included in OfficeMax’s consolidated taxreturns. Income taxes in the predecessor periods of these consolidatedfinancial statements have been calculated as if Boise Forest ProductsOperations was a separate taxable entity (see Note 5, Income Taxes).Information on the allocations and related-party transactions is included inNote 3, Transactions With Related Parties.

 

*Consolidation and Use of Estimates*

 

The consolidated financial statements include the accounts of Boise andits subsidiaries after elimination of intercompany balances and transactions.The preparation of financial statements in conformity with U.S. generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results may vary from thoseestimates.

 

# *ForeignCurrency Translation*

 

The functional currency for our operations outside the United States isthe U.S. dollar. Nonmonetary assets and liabilities and related depreciationand amortization for these foreign operations are remeasured into U.S. dollarsusing historical exchange rates. Remaining assets and liabilities areremeasured into U.S. dollars using the exchange rates as of the ConsolidatedBalance Sheet date. Revenue and expense items are remeasured into U.S. dollarsusing an average exchange rate for the period. The foreign exchange gains(losses) reported in the Consolidated Statements of Income (Loss) arose fromthe remeasurements into the U.S. dollar.

 

# *RevenueRecognition*

 

We recognize revenue when the following criteria are met:  persuasive evidence of an agreement exists,delivery has occurred or services have been rendered, our price to the buyer isfixed and determinable, and collectibility is reasonably assured. Delivery isnot considered to have occurred until the customer takes title and assumes therisks and rewards of ownership. The timing of revenue recognition is dependenton shipping terms. Revenue is recorded at the time of shipment for termsdesignated free on board (f.o.b) shipping point. For sales transactionsdesignated f.o.b destination, revenue is recorded when the product is deliveredto the customer’s delivery site.

 

*Cash and Cash Equivalents*

 

Cash equivalents consist of short-term investments that have a maturityof three months or less at the date of purchase. Cash equivalents totaled$23.6 million and $105.8 million at December 31, 2005 and 2004,respectively.

 

*Financial Instruments*

 

We are exposed to risks such as changes in interest rates, commodityprices, and foreign currency exchange rates. We employ a variety of practicesto manage these risks, including operating and financing activities and, wheredeemed appropriate, the use of derivative instruments. Derivative instrumentsare used only for risk management purposes and not for speculation or trading.A specific debt instrument, contract, or anticipated purchase determines theamount, maturity, and other specifics of the hedge. If a derivative contract isentered into, we either determine that it is an economic hedge, or we designatethe derivative as a cash flow hedge or a fair value hedge. We formally documentall relationships between hedging instruments and the hedged item, as well asour risk management objectives and strategy for undertaking various hedgedtransactions. For those derivatives designated as cash flow or fair valuehedges, we formally assess, both at the hedge’s inception and on an ongoingbasis, whether the derivatives that are used in hedging transactions are highlyeffective in offsetting changes in the hedged items. The ineffective portion ofhedging transactions is recognized in current income (loss).

 

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# *Vendorand Customer Rebates and Allowances*

 

We receive rebates and allowances from our vendors under a number ofdifferent programs, including vendor marketing programs. At December 31,2005 and 2004, we had $3.6 million and $2.0 million, respectively, ofvendor rebates and allowance recorded in “Receivables, Other” on theConsolidated Balance Sheets. These rebates and allowances are accounted for inaccordance with EITF 02-16, Accounting by a Customer (Including aReseller) for Certain Consideration Received From a Vendor. Rebates andallowances received from our vendors are recognized as a reduction of “Materials,labor, and other operating expenses” when the product is sold, unless therebates and allowances are linked to a specific incremental cost to sell a vendor’sproduct. Amounts received from vendors that are linked to specific selling anddistribution expenses are recognized as a reduction of “Selling anddistribution expenses” in the period the expense is incurred.

 

Included in the vendorrebate programs referred to above are various volume purchase rebate programs.These programs generally include annual purchase targets and may offerincreasing tiered rebates based on our reaching defined purchase levels. Forsuch tiered rebate programs, the company calculates an estimated considerationbased on the probability of the rebate being earned during the year. We reviewsales projections and related purchases on a quarterly basis and adjust theestimated consideration accordingly. We record consideration received for theseprograms as a reduction of “Materials, labor, and other operating expenses” asthe related inventory is sold.

 

We also provide rebates toour customers based on the volume of their purchases. We provide the rebates toincrease the sell-through of our products. The rebates provided to ourcustomers are accounted for in accordance with EITF 01-09,Accounting for Consideration Given by a Vendor to a Customer. AtDecember 31, 2005 and 2004, we had $23.7 million and$20.4 million, respectively, of rebates payable to our customers recordedin “Accrued liabilities, Other” on the Consolidated Balance Sheets.

 

*Inventory Valuation*

 

Inventories are valued at the lower of cost or market. Cost is based onthe average or first-in, first-out (FIFO) method of inventory valuation.Manufactured inventories include costs for materials, labor, and factoryoverhead. Log inventories include the costs of harvesting the timber.

 

Inventories include the following:

 
| ** **                         | ** ** | **December 31,  2005** | ** **  | **December 31,  2004** | ** ** |
|------------------------------------|------------|------------------------|-------------|------------------------|------------|
| ** **                         | ** ** | **(thousands)**        | ** **  |
|                               |       |                   |        |                   |       |
| Finished goods and work in process |       | $                      | 414,035     |                   | $          | 384,772 |   |
| Logs                               |       | 62,839                 |        | 62,406                 |       |
| Other raw materials and supplies   |       | 156,909                |        | 147,691                |       |
| ** **                         | ** ** | **$**                  | **633,783** | ** **             | **$**      | **594,869** |   |

 

*Property and Equipment*

 

Property and equipment are recorded at cost. Cost includes expendituresfor major improvements and replacements and the amount of interest costassociated with significant capital additions. For all periods presented,capitalized interest was not material. Planned shutdown maintenance costs inour paper businesses are charged to income (loss) ratably over the year. Gainsand losses from sales and retirements are included in income (loss) as theyoccur.

 

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For the year ended December 31, 2005, and the period ofOctober 29 through December 31, 2004, we used the straight-linemethod of depreciation. In the predecessor periods presented, our predecessordetermined depreciation on the straight-line method over the useful lives ofthe assets or on a units-of-production method that approximated straight-lineover three to five years. The estimated useful lives of depreciable assets aregenerally as follows:  building andimprovements, 15 to 40 years; furniture and equipment, 3 to10 years; and machinery, equipment, and delivery trucks, 2 to20 years. Leasehold improvements are amortized over the lesser of the termof the lease, including option periods we are reasonably assured of exercising,or 20 years.

 

*Fiber Farms and Timber Deposits*

 

The consolidated financial statements include our cottonwood fiber farmin our Paper segment and our eucalyptus plantation land in Brazil in our WoodProducts segment. Costs for activities related to the establishment of a newcrop of trees are capitalized, while costs for administration, insurance,property taxes, and interest are expensed. We charge capitalized costs,excluding land, to “Materials, labor, and other operating expenses” at the timethe timber is harvested based on periodically determined depletion rates. Thesecharges are included in “Depreciation, amortization, and depletion” in theaccompanying Consolidated Statements of Income (Loss).

 

Our cottonwood fiber farm is a short-rotation fiber farm that has agrowing cycle averaging seven to eight years. The eucalyptus in Brazil has agrowing cycle averaging 12 to 14 years. Costs for planting, thinning,fertilization, pest control, herbicide application, and irrigation arecapitalized. These capitalized costs are accumulated by specificallyidentifiable farms. As harvesting occurs, the accumulated capitalized costs arecharged to “Materials, labor, and other operating expenses” as depletion.

 

Historically, we owned or controlled, directly orthrough our affiliates, approximately 2.3 million acres of timber. InFebruary 2005, these timberlands were sold to Forest Capital Partners, LLC(Forest Capital), an unaffiliated party, for $1.65 billion in cash. Werefer to this sale as the Timberlands Sale. In connection with the Timberlands Sale, weentered into a number of long-term fiber supply agreements with Forest Capital.Our total obligation for timber purchases under contracts with third parties,including Forest Capital, is estimated to be approximately $973.5 million.Except for deposits required pursuant to wood supply contracts, theseobligations are not recorded in our consolidated financial statements untilcontract payment terms take effect. The obligations are subject to change basedon, among other things, the effect of governmental laws and regulations, ourmanufacturing operations not operating in the normal course of business, timberavailability, and the status of environmental appeals.

 

* Long-Lived Asset Impairment*

 

We account for the impairment of long-lived assets in accordance withStatement of Financial Accounting Standards (SFAS) No. 144, Accounting forthe Impairment or Disposal of Long-Lived Assets. An impairment of long-livedassets exists when the carrying value of an asset exceeds its fair value andwhen the carrying value is not recoverable through future undiscounted cashflows from operations. We review the carrying value of long-lived assets forimpairment when events or changes in circumstances indicate that the carryingamount of assets may not be recoverable. In December 2003, our predecessorrecorded a $14.7 million pretax charge for the write-down of impairedassets at its plywood and lumber operations in Yakima, Washington. For moreinformation, see Note 4, Other (Income) Expense, Net.

 

*Goodwill*

 

We account for goodwill and other intangible assets in accordance withFinancial Accounting Standards Board (FASB) SFAS No. 142, Goodwill andOther Intangible Assets. Goodwill represents the excess of purchase price andrelated costs over the value assigned to the net tangible and intangible assetsof businesses acquired. We assess goodwill in the fourth quarter of each yearusing a fair-value-based approach. We completed our annual assessment inaccordance with SFAS No. 142 in fourth quarter 2005 and determined thatthere was no impairment. Our predecessor completed its annual assessment inaccordance with SFAS No. 142 in first quarter 2004 and determinedthat there was no impairment.

 

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*Investments in Equity Affiliate*

 

We use the equity method to account for investments that we do notcontrol but in which we have significant influence. We periodically review therecoverability of investments in equity affiliates. The measurement of possibleimpairment is based on the estimated fair value of our investment (see Note 8,Investments in Equity Affiliate).

 

*Deferred Software Costs*

 

We defer internal-use software costs that benefit future years. Thesecosts are amortized using the straight-line method over the expected life ofthe software, typically three years to five years. “Other assets” in theConsolidated Balance Sheets includes $5.9 million and $5.5 million ofdeferred software costs at December 31, 2005 and 2004, respectively. Forthe year ended December 31, 2005, the periods of October 29 throughDecember 31, 2004, and January 1 through October 28, 2004, andthe year ended December 31, 2003, amortization of deferred software coststotaled $2.7 million, $0.4 million, $2.8 million, and$3.4 million, respectively.

 

# *AssetRetirement Obligations*

 

Weaccount for asset retirement obligations in accordance with SFAS No. 143,Accounting for Asset Retirement Obligations, and FASB Interpretation (FIN)No. 47, Accounting for Conditional Asset Retirement Obligations – AnInterpretation of FASB Statement No. 143. This standard primarily affectsthe way we account for landfill closure costs. We accrue for asset retirementobligations in the period in which they are incurred if sufficient informationis available to reasonably estimate the fair value of the obligation. When we recordthe liability, we capitalize the cost by increasing the carrying amount of therelated long-lived asset. Over time, the liability is accreted to itssettlement value, and the capitalized cost is depreciated over the useful lifeof the related asset. Upon settlement of the liability, we will recognize again or loss for any difference between the settlement amount and the liabilityrecorded. See Note 10, Asset Retirement Obligations, for additionalinformation.

 

*Equity Compensation*

 

We account for our Management Equity Agreement (Equity Plan) under SFASNo. 123(R), Share-Based Payment. Awards under our Equity Plan vest overperiods up to five years. In 2005, we recognized $2.9 million ofcompensation expense. See Note 14, Redeemable Equity Units, for a discussionof the plan and the method we use to calculate compensation expense.

 

During the predecessor periods presented, stock compensation wasgranted to our employees under OfficeMax’s stock compensation plans. In 2003,our predecessor adopted the fair-value-based method of accounting forstock-based employee compensation, using the prospective method of transitionunder the provisions of SFAS No. 148, Accounting for Stock-BasedCompensation, for all employee awards granted on or after January 1, 2003.Awards vested over periods of up to three years. Therefore, the cost related tostock-based employee compensation included in the determination of the BoiseForest Products Operations net loss in 2003 is less than that which would havebeen recognized if the fair-value-based method had been applied to all awardssince the original effective date of SFAS No. 123. The adoption did notmaterially affect their financial position or results of operations.

 

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The following table illustrates the effect on net income (loss) if ourpredecessor had applied the fair-value-based method to all outstanding andunvested awards in each period:

 
| ** **                                                                                                                                  | ** ** | **Predecessor**                                     | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                                                                                                                  | ** ** | **(thousands)**                                     | ** ** |
|                                                                                                                                        |       |                                                |       |   |   |
| Reported net income (loss)                                                                                                                  |       | $                                                   | 69,466     |   | $ | (47,353 | ) |
| Add: Total stock-based employee compensation  expense included in reported net income (loss), net of related tax effects                    |       | 8,924                                               |       | 2,618 |   |
| Deduct: Total stock-based employee compensation  expense determined under the fair-value method for all awards, net of related  tax effects |       | (8,924                                              | )          | (5,820 | ) |
| Pro forma net income (loss)                                                                                                                 | ** ** | **$**                                               | **69,466** | ** ** | **$** | **(50,555** | **)** |

 

To calculate stock-based employee compensation expense under SFASNo. 123, our predecessor estimated the fair value of each option grant onthe date of grant, using the Black-Scholes option pricing model with thefollowing weighted-average assumptions used for grants in 2003:  risk-free interest rate of 4.0%, expecteddividends of 60 cents per share, expected lives of 4.3 years and expected stock price volatility of40%.

 

OfficeMax allocated compensation expense for restricted stock awardsbased on the fair value of their stock on the date of grant. Our predecessorrecognized the expense over the vesting period. See Note 15, Capital.

 

*Research and Development Costs*

 

We expense research and development costs as incurred. For the yearended December 31, 2005, and the period of October 29 throughDecember 31, 2004, research and development expenses were$1.1 million and $0.2 million, respectively. For the period ofJanuary 1 through October 28, 2004, research and development expenseswere $1.9 million, compared with $2.4 million for the year endedDecember 31, 2003.

 

# *AdvertisingCosts*

 

We expense the cost of advertising as incurred. For the year endedDecember 31, 2005, and the period of October 29 throughDecember 31, 2004, advertising expenses were $9.2 million and$1.2 million, respectively. For the period of January 1 throughOctober 28, 2004, advertising expense was $7.9 million, compared with$9.9 million for the year ended December 31, 2003. These expenseswere recorded in “Selling and distribution expenses.”

 

*Recently Adopted Accounting Standards*

 

In September 2005, the FASB’s EITF reached a consensus onEITF 04-13, Accounting for Purchases and Sales of Inventory with the SameCounterparty. The consensus identifies circumstances under which two or moretransactions involving inventory with the same counterparty should be viewed asa single nonmonetary transaction within the scope of Accounting PrinciplesBoard (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. EITF04-13 is effective for new arrangements entered into in reporting periodsbeginning after March 15, 2006. Early application is permitted. We adopted thisstandard effective January 2006. In accordance with EITF 99-19, ReportingRevenue Gross as a Principal Versus Net as an Agent*,* and SAB No. 104, Revenue Recognition, we recordedsales and purchases related to our inventory buy/sell arrangements in ourPackaging & Newsprint segment on a gross basis in our ConsolidatedStatements of Income (Loss). Beginning January 2006, the consensus reached inEITF 04-13 required us to report these inventory buy/selltransactions on a net basis in the Consolidated Statements of Income (Loss).This consensus had no impact on net income (loss). Had this consensuspreviously been in effect, it would have reduced sales $76.1 million,$15.6 million, $63.6 million, and $73.8 million for the yearended December 31, 2005, the periods of October 29 through

 

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December 31, 2004, and January 1 through October 28,2004, and the year ended December 31, 2003, and would have reducedmaterials, labor, and other operating expenses by about the same amounts.

 

In March 2005, theFASB issued FASB FIN 47, Accounting for Conditional Asset RetirementObligations — An Interpretation of FASB Statement No. 143. FIN 47clarifies that the term “conditional asset retirement obligation,” as used inSFAS No. 143, Accounting for Asset Retirement Obligations, refers to alegal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional on a future event that may or maynot be within the control of the entity. FIN 47 also clarifies when anentity would have sufficient information to reasonably estimate the fair valueof an asset retirement obligation. We adopted FIN 47 in December 2005, andit did not have a material impact on our financial position or results ofoperations. For more information, see Note 10, Asset RetirementObligations.

 

In December 2004, the FASB issued SFAS No. 123(R), Share-BasedPayment. This statement requires an entity to use the fair-value method torecognize in the income statement the fair value of stock options and otherequity-based compensation issued to employees on the grant date and eliminatesan entity’s ability to account for share-based compensation transactions usingthe intrinsic-value method of accounting in APB Opinion No. 25, Accountingfor Stock Issued to Employees, which was permitted under SFAS No. 123 asoriginally issued. We adopted this statement effective October 29, 2004.See Note 14, Redeemable Equity Units, for more information.

 

In November 2004, the FASBissued SFAS No. 151, Inventory Costs — An Amendment of Accounting ResearchBulletin (ARB) No. 43, Chapter 4. SFAS No. 151 amends theguidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage). Among other provisions, the new rulerequires that items such as idle facility expense, excessive spoilage, doublefreight, and rehandling costs be recognized as current-period chargesregardless of whether they meet the criterion of “so abnormal” as stated in ARBNo. 43. Additionally, SFAS No. 151 requires that the allocation offixed production overheads to the costs of conversions be based on normalcapacity of the production facilities. The provisions of SFAS No. 151 areeffective for inventory costs incurred during fiscal years beginning afterSeptember 15, 2005. We adopted this standard effective January 1,2006, and it did not have a material impact on our financial position orresults of operations.

 

In November 2004, the FASB’s EITF reached a consensus on EITF 03-13,Applying the Conditions in Paragraph 42 of FASB Statement No. 144,Accounting for Impairment or Disposal of Long-Lived Assets, in DeterminingWhether to Report Discontinued Operations. We adopted EITF 03-13 onJanuary 1, 2005, and it did not have a material impact on our financialposition or results of operations.

 

In September 2004, the SEC staff made an announcement at the EITFmeeting prohibiting the use of the residual method to value acquired assetsother than goodwill. SEC Staff Announcement, Topic No. D-108, Use ofthe Residual Method to Value Acquired Assets Other Than Goodwill, requiresregistrants to apply the guidance to business combinations completed afterSeptember 29, 2004. We did not use the residual method to value the assetswe acquired from OfficeMax.

 

In January 2003, the FASB issued Interpretation No. 46, Consolidationof Variable Interest Entities. In December 2003, the FASB issued a revised FASBInterpretation No. 46 (FIN 46R). FIN 46R requires some variable-interestentities to be consolidated by the primary beneficiary of the entity if theequity investors in the entity do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties. The adoption of FIN 46R did not have a material impact on ourfinancial position or results of operations for any of the periods presented.

 

See Note 14, Redeemable Equity Units, for a discussion of FASBStaff Position (FSP) No. FAS 123(R)-4, Classification of Options andSimilar Instruments Issued as Employee Compensation That Allow for CashSettlement Upon the Occurrence of a Contingent Event.

 

*Reclassifications*

 

Certain amounts in prior-period financial statements have beenreclassified to conform with the current-period presentation. Thesereclassifications did not affect net income (loss).

 

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***2.***             ***Purchase of OfficeMax’s ForestProducts and Paper Assets***

 

On October 29, 2004, we acquired OfficeMax’s forest products andpaper assets, other than its timberland operations, for an aggregate purchaseprice of $2.2 billion, including approximately $140 million ofrelated fees and expenses (the Acquisition). The purchase price was determinedbased on negotiations between Madison Dearborn Partners (MDP), our equitysponsor who controls Forest Products Holdings, L.L.C. (FPH), and OfficeMax. Aspart of the Acquisition, we entered into an Additional Consideration Agreementwith OfficeMax, pursuant to which we agreed to adjust the purchase price basedon changes in paper prices over the six-year period following the Acquisition.Under the Additional Consideration Agreement, we could pay to OfficeMax, orOfficeMax could pay to us, a maximum aggregate amount of $125.0 million,in each case net of payments received. After eachanniversary of the Acquisition, we review paper prices with the provisions ofthe Additional Consideration Agreement to determine whether any amounts areowed or receivable under the agreement. For the first anniversary period endingOctober 29, 2005, neither Boise nor OfficeMax owed additionalconsideration for the purchase price. The recorded purchase price doesnot include the effect, if any, of this contingent consideration. We accountedfor the Acquisition using the purchase method of accounting. We allocated theassets acquired and liabilities assumed based on their estimated fair values atthe acquisition date. Estimated fair values were derived through considerationand application of standard valuation approaches and techniques.

 

The following table summarizes the estimated fair value of the assetsacquired and liabilities assumed as of October 29, 2004:

 
| ** **                      | ** ** | **October 29,  2004** | ** **    |
|---------------------------------|------------|----------------------------|---------------|
| ** **                      | ** ** | **(thousands)**            | ** **    |
|                            |       |                       |          |
| Current assets                  |       | $                          | 1,045,797     |   |
| Property and equipment          |       | 1,456,216                  |          |
| Fiber farms and timber deposits |       | 43,534                     |          |
| Deferred financing costs        |       | 85,858                     |          |
| Goodwill                        |       | 4,121                      |          |
| Intangible assets               |       | 34,680                     |          |
| Other assets                    |       | 9,921                      |          |
| Assets acquired                 |       | 2,680,127                  |          |
|                            |       |                       |          |
| Current liabilities             |       | 326,189                    |          |
| Long-term liabilities           |       | 157,486                    |          |
| Liabilities assumed             |       | 483,675                    |          |
|                            |       |                       |          |
| Net assets acquired             | ** ** | **$**                      | **2,196,452** | ** ** |

 

The excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill. We recorded $0.3 million, $1.4 million,$1.5 million, and $0.9 million of goodwill in our Building MaterialsDistribution, Wood Products, Paper, and Packaging & Newsprintsegments, respectively. See Note 9, Goodwill and Intangible Assets, forthe purchase price adjustments that have increased the recorded amount ofgoodwill since the acquisition date.

 

The amount allocated to intangible assets was attributed to thefollowing categories of intangibles:

 
| ** **                 | ** ** | **October 29,  2004** | ** ** |
|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **(thousands)**            | ** ** |
|                       |       |                       |       |
| Trade names and trademarks |       | $                          | 22,800     |   |
| Customer relationships     |       | 6,800                      |       |
| Technology                 |       | 5,080                      |       |
| ** **                 | ** ** | **$**                      | **34,680** | ** ** |

 

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Thetrade names and trademarks assets represent the fair value of the Boise Cascadename and other trade names and trademarks. This asset has an indefinite lifeand is not amortized. All other intangible assets are amortized over their expecteduseful lives. Customer relationships are amortized over five years, andtechnology is amortized over three to five years.

 

Assumingthe Acquisition had occurred on January 1, 2004, our unaudited pro formasales and net income would have been $5.7 billion and $258.4 million,respectively, for the year ended December 31, 2004. This unaudited proforma financial information does not necessarily represent what would haveoccurred if the Acquisition had taken place on the date presented and shouldnot be taken as representative of our future consolidated results ofoperations, financial position, or cash flows.

 

# *RestructuringActivities*

 

In connection with the Acquisition, we evaluated the acquiredfacilities and organizational structure. In accordance with the provisions ofEITF 95-3, Recognition of Liabilities in Connection With a PurchaseBusiness Combination, exit activities related to the Acquisition increasegoodwill. We had one year from the acquisition date to develop ourrestructuring plans and adjust goodwill. At December 31, 2004, we hadfinalized a portion of our plans in sufficient detail to meet the requirementsof EITF 95-3 to record a liability. During 2005, we recorded anadditional restructuring reserve of $7.1 million. These charges reflectadditional severance costs and increase the total restructuring reserverecorded since the Acquisition to $21.4 million. Most of the severancecost adjustments relate to severance costs for 350 employees. AtDecember 31, 2005, we had terminated approximately 320 employees.Most of the remaining costs will be paid during 2006.

 

AtDecember 31, 2005, approximately $3.5 million of the restructuringreserve was included in “Accrued liabilities, Compensation and benefits,” and$0.1 million was included in “Accrued liabilities, Other.” Of the$3.6 million remaining restructuring reserve, $2.3 million isrecorded in our Paper segment, and $1.3 million is in Corporate and Other.Restructuring reserve liability account activity related to these charges is asfollows:

 
| ** **                                      | ** ** | **Severance**   | ** ** | **Other**  | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------|------------|------------|------------|-----------|------------|
| ** **                                      | ** ** | **(thousands)** | ** ** |
|                                            |       |            |       |       |       |      |       |
| 2004 restructuring reserve                      |       | $               | 13,768     |       | $          | 501       |       | $ | 14,269 |   |
| Charges against reserve                         |       | (1,012          | )          | (1         | )          | (1,013    | )          |
| Restructuring reserve at December 31, 2004 |       | 12,756          |       | 500        |       | 13,256    |       |
|                                            |       |            |       |       |       |      |       |
| Additions to restructuring reserve              |       | 6,913           |       | 221        |       | 7,134     |       |
| Charges against reserve                         |       | (16,162         | )          | (593       | )          | (16,755   | )          |
| Restructuring reserve at December 31, 2005 | ** ** | **$**           | **3,507**  | ** ** | **$**      | **128**   | ** ** | **$** | **3,635** | ** ** |

 

***3.             TransactionsWith Related Parties***

 

During the predecessor periods presented, our predecessor participatedin OfficeMax’s cash management system. Cash receipts attributable to ourpredecessor’s operations were collected by OfficeMax, and cash disbursementswere funded by OfficeMax. The net effect of these transactions has beenreflected as “Net equity transactions with OfficeMax” in the ConsolidatedStatements of Cash Flows. The following table includes the components of netequity transactions with OfficeMax:

 

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| ** **                                      | ** ** | **Predecessor**                                     | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                      | ** ** | **(thousands)**                                     | ** ** |
|                                            |       |                                                |       |   |   |
| Cash collections                                |       | $                                                   | (4,644,933 | ) | $ | (4,653,787 | ) |
| Payment of accounts payable                     |       | 4,510,643                                           |       | 4,460,072 |   |
| Capital expenditures and acquisitions           |       | 140,217                                             |       | 175,096 |   |
| Income taxes                                    |       | 38,018                                              |       | (47,051 | ) |
| Net debt issuances                              |       | (17,784                                             | )          | (928 | ) |
| Corporate general and administrative allocation |       | 42,621                                              |       | 44,238 |   |
| Other                                           |       | (1,651                                              | )          | (5,209 | ) |
| Net equity transactions with OfficeMax          | ** ** | **$**                                               | **67,131** | ** ** | **$** | **(27,569** | **)** |

 

During the predecessor periods presented, our predecessor used servicesand administrative staff of OfficeMax. These services included, but were notlimited to, finance, accounting, legal, information technology, and humanresource functions. The costs not specifically identifiable to Boise ForestProducts Operations were allocated based on average sales, assets, and laborcosts. For the predecessor period of January 1 through October 28,2004, and the year ended December 31, 2003, the allocated costs amounted to$42.6 million and $44.2 million. These costs are included in “Generaland administrative expenses” in the Consolidated Statements of Income (Loss).Management believes these allocations are a reasonable reflection of ourpredecessor’s use of such services. However, they may not necessarily beindicative of costs to be incurred by us in the future.

 

At December 31, 2005, we had a $270.9 million note payable toa subsidiary of Boise Land & Timber Holdings Corp. (Timber Holdings)recorded as “Note payable to related party, net” on the Consolidated BalanceSheet. For more information, see Note 11, Debt. Also included in “Notepayable to related party, net” was $18.9 million of accrued interestexpense at December 31, 2005.

 

At December 31, 2004, we had a $157.5 million note receivablefrom a subsidiary of Timber Holdings recorded as “Note receivable from relatedparty” on our Consolidated Balance Sheet. The note was repaid in February 2005.The note accrued interest at 6%. For the year ended December 31, 2005, andthe period of October 29 through December 31, 2004, we recorded$0.9 million and $1.7 million of interest income from the note,respectively.

 

During each of the periodspresented, we sold paper and paper products to OfficeMax at sales prices thatwere designed to approximate market prices. For the year endedDecember 31, 2005, and the period of October 29 throughDecember 31, 2004, sales to OfficeMax were $562.3 million and$92.7 million, respectively. For the predecessor period of January 1through October 28, 2004, and the year ended December 31, 2003, salesto OfficeMax were $442.1 million and $431.5 million, respectively.These sales are included in “Sales, Related parties” in the ConsolidatedStatements of Income (Loss). Sales to OfficeMax represent a concentration inthe volume of business transacted and the revenue generated from thesetransactions. Apart from these sales, concentration of credit risks withrespect to trade receivables is limited due to the wide variety of customersand channels to and through which our products are sold, as well as theirdispersion across many geographic areas.

 

During each of the periods presented, we purchased fiberfrom related parties at prices that approximated market prices. During the yearended December 31, 2005, and the period of October 29 throughDecember 31, 2004, fiber purchases from Boise Land & Timber Corp., asubsidiary of Timber Holdings, were $17.6 million and $24.5 million.For the predecessor period of January 1 through October 28, 2004, andthe year ended December 31, 2003, fiber purchases from our predecessor’stimberland operations were $95.5 million and $113.8 million,respectively. The costs associated with these purchases are recorded as “Fibercosts from related parties” in the Consolidated Statements of Income (Loss). OnFebruary 4, 2005, Timber Holdings sold all of its timberlands.

 

During the predecessor periods, most Boise ForestProducts Operations employees, along with some employees of OfficeMax,participated in OfficeMax’s defined benefit pension plans. In addition, mostemployees of Boise Forest Products Operations were eligible for participationin OfficeMax’s defined contribution plans. Boise Forest Products Operationsrecorded costs associated with the employees who

 

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participated in OfficeMax’s plans in theConsolidated Statements of Income (Loss). For the period of January 1through October 28, 2004, and the year ended December 31, 2003, theConsolidated Statements of Income included $77.5 million and$74.7 million of expenses attributable to our participation in OfficeMax’sdefined benefit and defined contribution plans.

 

Inconnection with the Acquisition, OfficeMax transferred to Boise Cascade, L.L.C.(Boise LLC), our operating subsidiary, the portion of the pension planliability that was attributable to active employees who became employed byBoise LLC immediately following the Acquisition and Boise Forest ProductsOperations employees who terminated employment after July 31, 2004. OfficeMaxtransferred sufficient assets to fund our accumulated benefit obligation at a6.25% discount rate. At December 31, 2004, our Consolidated Balance Sheetreflected a projected benefit obligation of $114.4 million, assuming a5.75% discount rate and a 4.25% rate of compensation increase. In addition,OfficeMax also retained all pension costs related to its employees who retiredor were terminated on or before July 31, 2004, all postretirement benefitscosts related to employees who retired or were terminated before theAcquisition, and all pension and postretirement benefit costs related to activeOfficeMax employees.

 

BoiseForest Products Operations employees and former employees also participated inOfficeMax’s other postretirement benefit plans. All of the postretirementbenefit plans are unfunded (see Note 13, Retirement and Benefit Plans). Inaddition, employees participated in OfficeMax’s stock compensation programs.See Note 15, Capital, for a discussion of these programs.

 

The Asset Purchase Agreement contains customary representations,warranties, and covenants, including an obligation by OfficeMax to indemnify usfor breaches of representations, warranties, and covenants. OfficeMax’sindemnification obligations with respect to such breaches generally surviveuntil April 26, 2009, with indemnification obligations with respect tobreaches relating to employee and environmental law matters surviving untilOctober 29, 2009. OfficeMax’s indemnification obligations for breaches ofrepresentations, warranties, and covenants are, with certain exceptions,subject to a deductible of $20.7 million and an aggregate cap of$248.9 million. We are also indemnified with respect to certainpre-Acquisition liabilities, including environmental, asbestos, tax, benefits,and other legacy liabilities.

 

At the closing of the Acquisition, MDP received a fee of$40 million. MDP may be paid additional fees from time to time in thefuture for providing management, consulting or advisory services and will bereimbursed for all future expenses incurred in connection with its investmentin us. During 2005, FPH received payments from us totaling $18.4 million. FPHin turn paid $16.3 million to MDP and $2.1 million to management investors. Thesepayments represented cash paid to fund their tax obligations related to theirinvestments in us.

 

79

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***4.******                                     ******Other (Income) Expense, Net***

 

“Other (income) expense, net” includes miscellaneous income and expenseitems. The components of “Other (income) expense, net” in the ConsolidatedStatements of Income (Loss) are as follows:

 
| ** **                                      | ** ** | **Boise**                               | ** ** | **Predecessor**                                                    | ** ** |
|-------------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Year Ended  December 31,  2005** | ** ** | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                      | ** ** | **(thousands)**                         | ** ** |
|                                            |       |                                    |       |                                                               |       |   |   |   |   |
| Changes in retiree healthcare programs (a) |       | $                                       | (9,900     | )                                                                  | $          | — |   | $ | — |   | $ | — |   |
| Write-off of offering costs (b)            |       | 3,600                                   |       | —                                                             |       | — |   | — |   |
| Compensation expense (c)                   |       | —                                  |       | —                                                             |       | 12,665 |   | — |   |
| Sale of plywood and lumber operations (d)  |       | —                                  |       | —                                                             |       | 7,123 |   | — |   |
| Write-down of impaired assets (e)          |       | —                                  |       | —                                                             |       | — |   | 14,699 |   |
| Restructuring activities (f)               |       | —                                  |       | —                                                             |       | — |   | (806 | ) |
| Sales of receivables (g)                   |       | —                                  |       | —                                                             |       | 2,176 |   | 1,948 |   |
| Loss on lease termination                       |       | —                                  |       | —                                                             |       | — |   | 3,586 |   |
| Loss on sales of assets                         |       | 585                                     |       | 107                                                                |       | 2,915 |   | 3,086 |   |
| Write-down of assets                            |       | —                                  |       | —                                                             |       | 163 |   | 4,634 |   |
| Other, net                                      |       | 123                                     |       | (130                                                               | )          | 306 |   | 5,659 |   |
| ** **                                      | ** ** | **$**                                   | **(5,592** | **)**                                                              | **$**      | **(23** | **)** | **$** | **25,348** | ** ** | **$** | **32,806** | ** ** |

 

----

| (a)    |   | Reflects  a $9.9 million gain for changes in our retiree healthcare programs. See  Note 13, Retirement and Benefit Plans, for more information.                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (b)    |   | Represents  $3.6 million of expense for the write-off of costs incurred in  connection with the canceled initial public offering.                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (c)    |   | The period of January 1 through October 28, 2004,  included $12.7 million of expense primarily for a one-time retention  bonus OfficeMax granted to its employees.                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (d)    |   | In February 2004, Boise Forest Products Operations sold its  plywood and lumber facilities in Yakima, Washington. In connection with the  sale, it recorded $7.1 million of costs in “Other (income) expense, net”  in its Consolidated Statement of Income for the period of January 1  through October 28, 2004. However, the sale also resulted in a  $7.4 million reduction in the estimated LIFO reserve, which was recorded  in “Materials, labor, and other operating expenses.” |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (e)    |   | In  December 2003, Boise Forest Products Operations recorded a $14.7 million  pretax charge for the write-down of impaired assets at its plywood and lumber  operations in Yakima, Washington. The write-down related to the Wood Products  segment and resulted from an internal review of the operations and  indications of current market value. Boise Forest Products Operations  recorded the write-down in “Other (income) expense, net” in the Consolidated  Statement of Loss.                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (f)    |   | Reflects  the reversal of prior restructuring charges.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (g)    |   | In  the predecessor periods presented, Boise Forest Products Operations  participated in OfficeMax’s receivable sales program. The program consisted  of a revolving sale of receivables for 364 days and was subject to renewal.                                                                                                                                                                                                                                                                                          |

 

***5.             Income Taxes***

 

On May 9, 2005, we converted to a C corporation from a limitedliability company by filing a certificate of conversion with the DelawareSecretary of State. On December 20, 2005, acting pursuant to a RescissionAgreement among our shareholders, we rescinded our conversion toC corporation status by filing a conversion certificate with the DelawareSecretary of State that restored our status as a limited liability company andchanged our name back to Boise Cascade Holdings, L.L.C. In connection withconverting back to a limited liability company, in fourth quarter 2005, wereversed the income tax expense and deferred taxes we recorded as a corporateentity.

 

80

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As a result of therescission, at both December 31, 2005 and 2004, the majority of thebusinesses and assets of Boise were held and operated by limited liabilitycompanies, which are not subject to entity-level federal income taxation. Thetaxes in respect to these operations are payable by our equity holders inaccordance with their respective ownership percentage. We make cashdistributions to permit the members of Boise and affiliates to pay these taxes.For the year ended December 31, 2005, and the period of October 29through December 31, 2004, we made $23.1 million and no cashdistributions, respectively, to permit our equity holders to pay these taxes. Ofthe $23.1 million of tax distributions, we paid $18.4 million to FPH.FPH in turn paid $16.3 million to MDP, our equity sponsor who controls FPH, and$2.1 million to management investors. We also paid $4.7 million to OfficeMax. Bothour senior credit facilities and the indenture governing our notes permit thesedistributions.

 

In2005, cash paid for corporate federal, state, and foreign income taxes totaled$7.4 million, net of refunds received. In first quarter 2006, we filed afederal refund request for the 2005 estimated tax payments made by us. The$7.4 million of income taxes paid includes approximately $1.2 millionpaid by our taxable corporations that retained their corporate status after therescission. The $1.2 million of income taxes paid by our taxablecorporations consisted of $713,000 for U.S. federal taxes, $256,000 for U.S.state taxes, and $196,000 for Canadian taxes. For the period of October 29through December 31, 2004, these corporations paid income taxes, net ofrefunds received, of $80,000 for Canadian taxes. At December 31, 2005, wehad a $388,000 deferred tax liability related to these corporations recorded onour Consolidated Balance Sheet. In 2004, these corporations had no deferred taxassets or liabilities.

 

During the period we werea corporation, we recorded approximately $4.8 million of deferred taxliabilities related to our cash flow hedges, with the offset to “Othercomprehensive income.” As described above, in connection with converting backto a limited liability company, we reversed the income tax expense and deferredtaxes recorded while we were a corporate entity. The reversal of the deferredtax liabilities related to our cash flow hedges resulted in a $4.8 millionincome tax benefit that was partially offset by income tax expense recognizedby our taxable corporations. The $4.8 million recorded in “Othercomprehensive income” will be recognized as income tax expense as the hedgesexpire.

 

At December 31, 2005, our tax basiswas $153.5 million lower than the reported amount of net assets recordedin our consolidated financial statements, primarily due to a full year ofaccelerated deprecation recorded for tax purposes. At December 31, 2004,our tax basis was $11.9 million higher than the reported amounts of assetsand liabilities recorded on our Consolidated Balance Sheet, primarily due toinventory capitalized for tax purposes.

 

Boise Building Solutions ManufacturingHoldings Corp., a wholly owned, fully consolidated operating entity, has aninvestment in foreign subsidiaries. At December 31, 2005 and 2004, theforeign subsidiaries had $18.8 million and $12.3 million, respectively,of deferred tax assets that were fully offset by a valuation allowance.

 

*PredecessorPeriods*

* *

In thepredecessor periods presented, Boise Forest Products Operations results wereincluded in the consolidated income tax returns of OfficeMax. However, in thepredecessor consolidated financial statements, income taxes were provided basedon a calculation of the income tax expense that would have been incurred if ourpredecessor had operated as a separate taxpayer. Income taxes have beenprovided for all items included in the Consolidated Statements of Income(Loss), regardless of when such items were reported for tax purposes or whenthe taxes were actually paid or refunded. Current tax liabilities andreceivables were transferred to OfficeMax and are included in “Net equitytransactions with OfficeMax.” During the period of January 1 through October 28,2004, and the year ended December 31, 2003, the net current tax liability (receivable)was $38.0 million and $(47.1) million, respectively.

 

81

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Theincome tax (provision) benefit shown in the Consolidated Statements of Income(Loss) includes the following:

 
| ** **                              | ** ** | **Predecessor**      | ** **  |
|-----------------------------------------|------------|----------------------|-------------|
| ** **                              | ** ** | **January 1**   | ** **  | ** ** | ** ** |
| ** **                              | ** ** | **through**          | ** **  | **Year Ended** | ** ** |
| ** **                              | ** ** | **October 28,** | ** **  | **December 31,** | ** ** |
| ** **                              | ** ** | **2004**             | ** **  | **2003** | ** ** |
| ** **                              | ** ** | **(thousands)**      | ** **  |
|                                    |       |                 |        |   |   |
| Current income tax (provision) benefit  |       |                 |        |   |   |
| Federal                                 |       | $                    | (32,152     | ) | $ | 40,952 |   |
| State                                   |       | (5,864               | )           | 6,155 |   |
| Foreign                                 |       | (2                   | )           | (56 | ) |
|                                    |       | (38,018              | )           | 47,051 |   |
| Deferred income tax (provision) benefit |       |                 |        |   |   |
| Federal                                 |       | (7,894               | )           | (8,948 | ) |
| State                                   |       | (1,439               | )           | (1,632 | ) |
|                                    |       | (9,333               | )           | (10,580 | ) |
| ** **                              | ** ** | **$**                | **(47,351** | **)** | **$** | **36,471** |   |

 

A reconciliation of the statutory U.S. federal tax(provision) benefit and the reported tax (provision) benefit is as follows:

 
| ** **                                             | ** ** | **Predecessor**      | ** **  |
|--------------------------------------------------------|------------|----------------------|-------------|
| ** **                                             | ** ** | **January 1**   | ** **  | ** ** | ** ** |
| ** **                                             | ** ** | **through**          | ** **  | **Year Ended** | ** ** |
| ** **                                             | ** ** | **October 28,** | ** **  | **December 31,** | ** ** |
| ** **                                             | ** ** | **2004**             | ** **  | **2003** | ** ** |
| ** **                                             | ** ** | **(thousands)**      | ** **  |
|                                                   |       |                 |        |   |   |
| Statutory tax  (provision) benefit                     |       | $                    | (40,886     | ) | $ | 27,892 |   |
| State taxes                                            |       | (4,613               | )           | 3,197 |   |
| Foreign tax  provision different from theoretical rate |       | (3,998               | )           | (4,055 | ) |
| Tax settlement,  net of other charges                  |       | —               |        | 7,200 |   |
| ESOP dividend  deduction                               |       | 1,973                |        | 2,202 |   |
| Charitable  contributions                              |       | —               |        | (1,097 | ) |
| Increase in cash  surrender value of life insurance    |       | 866                  |        | 1,915 |   |
| Other, net                                             |       | (693                 | )           | (783 | ) |
| Reported tax  (provision) benefit                      | ** ** | **$**                | **(47,351** | **)** | **$** | **36,471** | ** ** |

 

Boise Forest Products Operations generated a net operatingloss during 2003. Net operating losses were not included as deferred tax assetsbut were transferred to our predecessor and included in “Net equitytransactions with OfficeMax.” Separate company net operating losses have been,or are expected to be, used in OfficeMax’s consolidated financial statements.

 

Pretaxincome (loss) from domestic and foreign sources is a follows:

 
| ** **           | ** ** | **Predecessor**      | ** **  |
|----------------------|------------|----------------------|-------------|
| ** **           | ** ** | **January 1**   | ** **  | ** ** | ** ** |
| ** **           | ** ** | **through**          | ** **  | **Year Ended** | ** ** |
| ** **           | ** ** | **October 28,** | ** **  | **December 31,** | ** ** |
| ** **           | ** ** | **2004**             | ** **  | **2003** | ** ** |
| ** **           | ** ** | **(thousands)**      | ** **  |
|                 |       |                 |        |   |   |
| Domestic             |       | $                    | 124,426     |   | $ | (75,575 | ) |
| Foreign              |       | (7,609               | )           | (4,116 | ) |
| Pretax income (loss) | ** ** | **$**                | **116,817** | ** ** | **$** | **(79,691** | **)** |

 

At October 28, 2004, our predecessor’s foreignsubsidiaries did not have any undistributed earnings that had been indefinitelyreinvested.

 

82

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***6.******             Leases***

*** ***

We didnot have any capital leases during any of the periods presented. We lease aportion of our distribution centers as well as other property and equipmentunder operating leases. For purposes of determining straight-line rent expense,the lease term is calculated from the date we first take possession of thefacility, including any periods of free rent and any option periods we are reasonablyassured of exercising. Straight-line rent expense is also adjusted to reflectany allowances or reimbursements provided by the lessor. Rental expense foroperating leases and sublease rental income received was as follows:

 
| ** **             | ** ** | **Boise**             | ** ** | **Predecessor**       | ** ** |
|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **             | ** ** | ** **            | ** ** | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **            | ** ** | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Year Ended**        | ** ** | **through**           | ** ** | **through** | ** ** | **Year Ended** | ** ** |
| ** **             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **October 28,** | ** ** | **December 31,** | ** ** |
| ** **             | ** ** | **2005**              | ** ** | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **             | ** ** | **(thousands)**       | ** ** |
|                   |       |                  |       |                  |       |   |   |   |   |
| Rental expense         |       | $                     | 17,089     |                  | $          | 2,889 |   | $ | 14,679 |   | $ | 18,981 |   |
| Sublease rental income |       | 70                    |       | —                |       | 28 |   | 14 |   |
|                        |            |                       |            |                       |            |  |  |  |  |  |  |  |  |

 

Forthe operating leases with remaining terms of more than one year, the minimumlease payment requirements are $14.7 million in both 2006 and 2007, $13.3 millionin 2008, $12.4 million in 2009, and $12.1 million in 2010, with totalpayments thereafter of $59.1 million. These future minimum lease paymentrequirements have not been reduced by sublease rentals due in the future undernoncancelable subleases. Minimum sublease income received in the future is notexpected to be material.

 

In December 2005,we entered into an agreement to sell our headquarters building in Boise, Idaho.In first quarter 2006, we anticipate leasing back approximately 65% of thebuilding over a staggered lease term of ten to 12 years. Both agreementsare scheduled to close in first quarter 2006. The lease will beaccounted for as an operating lease. The minimum lease payment requirementsrelated to this transaction are included in the minimum lease payment streamdisclosed above.

 

Substantiallyall lease agreements have fixed payment terms based on the passage of time.Some lease agreements provide us with the option to purchase the leasedproperty. Additionally, some agreements contain renewal options averaging eight years,with fixed payment terms similar to those in the original lease agreements.

 

***7.******             Receivables***

*** ***

Wehave a large, diversified customer base. We monitor extensions of credit andhave not experienced significant losses related to our receivables. A largeportion of our receivables are used to secure our borrowings under the accountsreceivable securitization program described in Note 11, Debt.

 

At December 31,2004, we had a $157.5 million note receivable from a subsidiary of TimberHoldings recorded as “Note receivable from related party” on our Consolidated BalanceSheet. The note was repaid in February 2005. The note accrued interest at6%. For the year ended December 31, 2005, and the period of October 29through December 31, 2004, we recorded, $0.9 million and $1.7 millionof interest income from the note, respectively.

 

*Predecessor*

* *

In thepredecessor periods presented, Boise Forest Products Operations participated inOfficeMax’s receivable sales program. The program consisted of a revolving saleof receivables for 364 days and was subject to renewal. Boise ForestProducts Operations’ portion of the costs related to the program are includedin “Other (income) expense, net” in the Consolidated Statements of Income(Loss). See Note 4, Other (Income) Expense, Net. During third quarter2004, in anticipation of the sale of the forest products and paper assets,OfficeMax stopped selling the receivables related to these businesses.

 

83

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Underthe sales program, OfficeMax sold fractional ownership interests in a definedpool of trade accounts receivable. At October 28, 2004, zero of soldaccounts receivable were excluded from Receivables, compared with$148.8 million and $105.4 million at December 31, 2003 and 2002,respectively. The decrease of $148.8 million at October 28, 2004,from the amount at December 31, 2003, used cash from operations for theperiod ended October 28, 2004. The increase at December 31, 2003, insold accounts receivable of $43.4 million over the amount at December 31,2002, provided cash from operations in 2003.

 

***8.******             Investmentsin Equity Affiliate***

*** ***

In May 2004, Boise Forest Products Operations sold its47% interest in Voyageur Panel, which owned an oriented strand board plant inBarwick, Ontario, Canada, to Ainsworth Lumber Co. Ltd. for $91.2 millionin cash. Boise Forest Products Operations recorded a $46.5 million pretaxgain, which is reflected in the Wood Products segment. This item increased netincome $28.4 million after taxes for the period of January 1 through October 28,2004.

 

Priorto the sale, Boise Forest Products Operations accounted for the joint ventureunder the equity method. Accordingly, the results do not include the jointventure’s sales but do include $6.3 million of equity in earnings duringthe period of January 1 through October 28, 2004, and$8.7 million of equity in earnings in 2003.

 

***9.******             Goodwilland Intangible Assets***

*** ***

Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and intangible assets of businesses acquired. Weaccount for goodwill in accordance with the provisions of SFAS No. 142,Goodwill and Other Intangible Assets, which requires us to assess our acquiredgoodwill and intangible assets with indefinite lives for impairment at leastannually in the absence of an indicator of possible impairment and immediatelyupon an indicator of possible impairment. We assess goodwill and intangibleassets with indefinite lives in the fourth quarter of each year using a fair-value-basedapproach. We also evaluate the remaining useful lives of our finite-livedpurchased intangible assets to determine whether any adjustments to the usefullives are necessary. The finite-lived purchased intangible assets consist ofcustomer relationships and technology. These intangible assets are discussed inmore detail below. We completed our annual assessment in accordance with SFAS No. 142in fourth quarter 2005 and determined that there was no impairment. Ourpredecessor completed its annual assessment in accordance with SFAS No. 142in first quarter 2004 and also determined that there was no impairment.

 

Weaccounted for the Acquisition using the purchase method of accounting. As aresult, the purchase price was allocated to the tangible and intangible assetsacquired and liabilities assumed based on their respective fair values as ofthe date of the Acquisition. In accordance with SFAS No. 141, we had oneyear from the purchase date to record changes in estimates of the fair value ofassets acquired and liabilities assumed. During 2005, we recorded$3.3 million of net purchase price adjustments that decreased the recordedamount of goodwill. The adjustments were related to fair value asset adjustments,liability accruals, and pension and other severance accruals. The 2004 purchaseprice adjustments primarily related to severance accruals.

 

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Changes in the carrying amount of our goodwill by segmentare as follows:

 
| ** **                                         | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging**** &****Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|-----------|------------|-------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **(thousands)**                       | ** ** |
|                                               |       |                                  |       |               |       |      |       |                                      |       |                      |       |      |       |
| Balance at  October 29, 2004 (inception) |       | $                                     | —     |               | $          | —    |       | $                                         | —     |                      | $          | —    |       | $ | — |   | $ | — |   |
| Goodwill  acquired during the year (Note 2)   |       | 348                                   |       | 1,399              |       | 1,499     |       | 875                                       |       | —                    |       | 4,121     |       |
| Purchase price  adjustments                        |       | —                                |       | 1,799              |       | 7,277     |       | 635                                       |       | 4,558                     |       | 14,269    |       |
| Balance at  December 31, 2004                 |       | 348                                   |       | 3,198              |       | 8,776     |       | 1,510                                     |       | 4,558                     |       | 18,390    |       |
|                                               |       |                                  |       |               |       |      |       |                                      |       |                      |       |      |       |
| Purchase price  adjustments                        |       | 5,245                                 |       | 3,379              |       | (7,435    | )          | 80                                        |       | (4,558                    | )          | (3,289    | )          |
| Balance at  December 31, 2005                 | ** ** | **$**                                 | **5,593**  | ** **         | **$**      | **6,577** | ** ** | **$**                                     | **1,341**  | ** **                | **$**      | **1,590** | ** ** | **$** | **—** | ** ** | **$** | **15,101** | ** ** |

 

Intangible assets represent the values assigned to tradenames and trademarks, customer relationships, and technology. The trade namesand trademarks assets have an indefinite life and are not amortized. All otherintangible assets are amortized over their expected useful lives. Customerrelationships are amortized over five years, and technology is amortized overthree to five years. Intangible assets consisted of the following:

 
| ** **                 | ** ** | **Year Ended December 31, 2005**   | ** ** |
|----------------------------|------------|-----------------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                 | ** ** | **(thousands)**                         | ** ** |
|                       |       |                                    |       |   |   |   |   |
| Trade names and trademarks |       | $                                       | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer relationships     |       | 6,800                                   |       | (1,588 | ) | 5,212 |   |
| Technology                 |       | 5,080                                   |       | (1,288 | ) | 3,792 |   |
| ** **                 | ** ** | **$**                                   | **34,680** | ** ** | **$** | **(2,876** | **)** | **$** | **31,804** |   |
| ** **                 | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** |   |
| ** **                 | ** ** | **Period Ended December 31, 2004** | ** ** |
| ** **                 | ** ** | **Gross Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                 | ** ** | **(thousands)**                         | ** ** |
|                       |       |                                    |       |   |   |   |   |
| Trade names and trademarks |       | $                                       | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer relationships     |       | 6,800                                   |       | (227 | ) | 6,573 |   |
| Technology                 |       | 5,080                                   |       | (96 | ) | 4,984 |   |
| ** **                 | ** ** | **$**                                   | **34,680** | ** ** | **$** | **(323** | **)** | **$** | **34,357** |   |

 

Intangibleasset amortization expense was $2.6 million for the year ended December 31,2005, $0.3 million and $0.1 million for the periods of October 29through December 31, 2004, and January 1 through October 28,2004, and $0.1 million for the year ended December 31, 2003. Theestimated amortization expense is $2.4 million in 2006, $2.5 millionin 2007, and $2.3 million in 2008, and the remaining net carrying amountof $1.8 million will be amortized in 2009.

 

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***10.******          AssetRetirement Obligations***

*** ***

We account for asset retirementobligations in accordance with SFAS No. 143, Accounting for AssetRetirement Obligations, and FIN 47, Accounting for Conditional Asset RetirementObligations – An Interpretation of FASB Statement No. 143. We accrue forasset retirement obligations in the period in which they are incurred if sufficientinformation is available to reasonably estimate the fair value of theobligation. When we record the liability, we capitalize the cost by increasingthe carrying amount of the related long-lived asset. Over time, the liabilityis accreted to its settlement value, and the capitalized cost is depreciatedover the useful life of the related asset. Upon settlement of the liability, wewill recognize a gain or loss for any difference between the settlement amountand the liability recorded. On a pro forma basis, if the provisions of FIN 47had been in effect during all of 2005 and 2004, our net income would not havechanged materially.

 

At December 31, 2005 and 2004, we had$11.5 million and $10.3 million of asset retirement obligationsrecorded in “Other, other long-term liabilities,” on our Consolidated BalanceSheets. These liabilities related primarily to landfill closure and closed-sitemonitoring costs. The liabilities are based on the best estimate of currentcosts and are updated periodically to reflect current technology, laws andregulations, inflation, and other economic factors. We do not have any assetslegally restricted for purposes of settling asset retirement obligations. Thetable below describes changes to our asset retirement obligations for the yearended December 31, 2005, and for the period of October 29 through December 31,2004:

 
| ** **                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| ** **                                         | ** ** | **(thousands)**       | ** ** |
|                                               |       |                  |       |                  |       |
| Asset retirement obligation at beginning of period |       | $                     | 10,286     |                  | $          | 10,163 |   |
| Net transition adjustment                          |       | 485                   |       | —                |       |
| Accretion expense                                  |       | 789                   |       | 123                   |       |
| Payments                                           |       | (76                   | )          | —                |       |
| Asset retirement obligation at end of year         | ** ** | **$**                 | **11,484** | ** **            | **$**      | **10,286** | ** ** |

 

We have additional asset retirementobligations with indeterminate settlement dates. The fair value of these assetretirement obligations cannot be estimated due to the lack of sufficientinformation to estimate the settlement dates of the obligations. These assetretirement obligations include, for example, (i) removal and disposal of potentiallyhazardous materials on equipment and/or an operating facility if the equipmentand/or facilities were to undergo major maintenance, renovation, or demolition;(ii) wastewater treatment ponds that may be required to be drained and/orcleaned if the related operating facility is closed; and (iii) storagesites or owned facilities for which removal and/or disposal of chemicals andother related materials are required if the operating facility is closed. Wewill recognize a liability in the period in which sufficient information becomesavailable to reasonably estimate the fair value of these obligations.

 

*Predecessor Periods*

* *

In January 2003, our predecessoradopted the provisions of SFAS No. 143, Accounting for Asset RetirementObligations, which primarily affected their accounting for landfill closurecosts. This statement required them to record an asset and a liability(discounted) for estimated closure and closed-site monitoring costs and todepreciate the asset over the landfill’s expected useful life. Previously, ourpredecessor accrued for the closure costs over the life of the landfill andexpensed monitoring costs as incurred. Effective January 1, 2003, ourpredecessor recorded a one-time, after-tax charge of $4.1 million as acumulative-effect adjustment for the difference between the amounts recognizedin the financial statements prior to the adoption of SFAS No. 143 and theamount recognized after the adoption of SFAS No. 143.

 

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***11.******          Debt***

*** ***

At December 31,2005 and 2004, our long-term debt consisted of the following:

 
| ** **                                      | ** ** | **December 31,  2005** | ** **    | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                      | ** ** | **(thousands)**             | ** **    |
|                                            |       |                        |          |                        |       |
| Revolving credit  facility, due 2010            |       | $                           | —        |                        | $          | — |   |
| Tranche B  term loan, due 2011             |       | —                      |          | 1,330,000                   |       |
| Tranche D  term loan, due 2011             |       | 635,800                     |          | —                      |       |
| Senior unsecured  floating-rate notes, due 2012 |       | 250,000                     |          | 250,000                     |       |
| 7.125% senior  subordinated notes, due 2014     |       | 400,000                     |          | 400,000                     |       |
| Borrowings  secured by receivables              |       | 80,000                      |          | —                      |       |
|                                            |       | 1,365,800                   |          | 1,980,000                   |       |
| Less current  portion                           |       | —                      |          | (13,300                     | )          |
|                                            |       | 1,365,800                   |          | 1,966,700                   | ** ** |
| Note payable to  related party, net, due 2015   |       | 270,854                     |          | —                      |       |
| ** **                                      | ** ** | ** **                  | ** **    | ** **                  | ** ** |
| ** **                                      | ** ** | **$**                       | **1,636,654** | ** **                  | **$**      | **1,966,700** | ** ** |

 

*Senior Secured Credit Facilities*

* *

In October 2004,Boise LLC and affiliates entered into a six-year $400.0 million seniorsecured revolving credit facility and a seven-year senior secured floating-rate$1,330.0 million Tranche B term loan used to fund the Acquisition andfor general corporate purposes. These borrowings represent our senior securedcredit facilities (the Facilities). On April 18, 2005, we amendedand restated the Facilities. Our amended and restated Facilities consist of a$475.0 million revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). In connection with theamendment and restatement, we repaid all amounts outstanding under ourTranche B term loan.

 

Our amended revolvingcredit facility agreement permits us to borrow up to $475.0 million forgeneral corporate purposes. At December 31, 2005, we had no borrowingsoutstanding under our revolving credit facility; however, $63.1 million ofletters of credit were considered a draw on the revolver, reducing ourborrowing capacity to $411.9 million. Borrowings under our revolvingcredit facility are based on the prime rate, the federal funds effective rate,or the London Interbank Offered Rate (LIBOR). Pricing is subject toquarterly adjustment based on the ratio of our total indebtedness to our lastfour quarters of consolidated earnings before interest, taxes, depreciation, andamortization (EBITDA). The range of borrowing costs under the pricing gridis:  (i) the higher of prime plus0.50% to 1.25% or the federal funds effective rate plus 1.00% to 1.75%; or (ii) LIBORplus 1.50% to 2.25%. For the year ended December 31, 2005, the averageinterest rate for our borrowings under the revolver was 5.1%. For the periodended December 31, 2004, the average interest rate for our borrowingsunder the revolver was 4.7%. Letters of credit are subject to a 0.25% frontingfee payable to the issuing bank and a fee payable to the lenders equal to theproduct of the interest rate spread applicable to LIBOR borrowings underour revolving credit facility and the daily average amount available fordrawing under the outstanding letters of credit. For the year ended December 31,2005, our minimum and maximum borrowings under the revolver were zero and $126.5 million.The weighted average amount of borrowings outstanding under the revolver duringthe year ended December 31, 2005, was $11.8 million. The revolvingcredit facility provides for a commitment fee of 0.50% per annum payable to thelenders on the average daily unused portion of the revolving credit facility.We also have a swingline option under the revolver, which allows us to borrowat negotiated rates up to an aggregate of $40 million from individualbanks that are parties to the agreement. Swingline borrowings are considered borrowingsunder the revolving credit facility agreement.

 

At December 31,2005, $635.8 million was outstanding under the Tranche D term loanamended and restated credit facility, and our borrowing rate was 5.8%.Borrowings under the Tranche D term loan are based on (i) the higherof the prime rate plus 0.75% or the federal funds effective rate plus 1.25%, or(ii) LIBOR plus 1.75%. As a result of a $200.0 million prepayment in October 2005,we are not required to make scheduled principal payments on the Tranche Dterm loan until 2011, at which time the principal balance of$635.8 million is due.

 

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Borrowings under theFacilities are subject to financial covenants and restrictions, including aminimum interest expense coverage ratio, maximum leverage ratio, andlimitations on capital expenditures.

 

*Senior Notes*

 

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Acquisition. In July 2005, we completed an exchange offer whereby allof our senior unsecured floating-rate notes and senior subordinated notes wereexchanged for publicly traded, registered securities with identical terms(other than terms relating to registration rights) to the notes issued in October 2004.We may redeem all or part of the notes at any time at redemption prices definedin the indenture. If we sell specific assets or experience specific kinds ofchanges in control, we must offer to purchase the notes. The senior unsecuredfloating-rate notes bear interest at a floating rate equal to LIBOR plus 2.9%.At December 31, 2005 and 2004, our borrowing rates for the$250.0 million senior unsecured floating-rate notes were 7.0% and 5.0%,respectively.

 

*BorrowingsSecured by Receivables*

* *

On October 26, 2005, our wholly ownedsubsidiary, Boise LLC, and several of its subsidiaries, including Birch CreekInvestments, L.L.C. (Birch Creek), entered into an accounts receivablesecuritization program with Bank of America National Association and Calyon NewYork Branch (the Investors). We entered into this receivable securitizationprogram to obtain additional funding flexibility at rates that are favorable toour existing borrowing arrangements. Under this three-year program, Boise LLCsells its interest in a defined pool of accounts receivable generated by itsdomestic operations on a revolving basis to Birch Creek, a fully consolidated,wholly owned, special-purpose subsidiary. In turn, Birch Creek sells thereceivables to the affiliates of the Investors. Because Boise LLC has the rightto repurchase the sold receivables, sales of receivables under the program areaccounted for as a secured borrowing. At December 31, 2005, we had $80.0 millionoutstanding under our accounts receivable securitization program. Thereceivables outstanding and the corresponding debt are included as “Receivables”and “Long-term debt, less current portion,” respectively, on our ConsolidatedBalance Sheet. We record the financing costs associated with the program in “Interestexpense” in our Consolidated Statement of Income. The cost of funds under thisprogram varies based on changes in interest rates. At December 31, 2005,the interest rate for borrowings secured by receivables was 4.1%.

 

Under the accounts receivablesecuritization program, the maximum borrowing amount is subject to change basedon the level of eligible receivables and restrictions on concentrations ofreceivables and cannot exceed $250 million. The accounts receivablesecuritization program contains the same financial covenants as our amended andrestated credit facilities.

 

We used the net proceeds from the initialsale of receivables under this receivables securitization program to reduce ourTranche D term loan borrowings under our amended and restated creditfacilities.

 

*Note Payable to Related Party, Net*

* *

At December 31,2005, we had a $270.9 million note payable to a subsidiary of TimberHoldings recorded as “Note payable to related party, net” on our ConsolidatedBalance Sheet. The note is subject to adjustment based on transactions betweenthe subsidiary and us. Our borrowing rate under the note is 8%, and the notematures February 4, 2015. Includedin “Note payable to related party, net” was $18.9 million of accrued interestexpense related to the note at December 31, 2005. Timber Holdings is aguarantor of our debt (see Note 18, Consolidating Guarantor and NonguarantorFinancial Information).

 

*Other*

 

We have entered intointerest rate swaps to hedge the majority of the cash flow risk from thevariable interest payments on our variable-rate debt. These swaps gave us aneffective interest rate on all of our variable-rate debt of 5.2% at December 31,2005 and 2004. For additional information on our interest rate swaps, seeNote 12, Financial Instruments.

 

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We paid approximately$85.9 million of fees and expenses associated with our senior securedcredit facilities, our senior unsecured floating-rate notes, and our seniorsubordinated notes, which we entered into in October 2004. The fees arebeing amortized over the terms of the loans, which range from six years to tenyears. At December 31, 2005 and 2004, we had $37.8 million and$84.1 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan, we recorded a $43.0 million charge for thewrite-off of the deferred financing costs. We recorded the $43.0 millioncharge in “Interest expense” in our Consolidated Statement of Income for the yearended December 31, 2005.

 

At December 31,2005 and 2004, our average effective interest rates, including the effect ofour interest rate swaps, on all of our debt except for our note payable torelated party, net, were 5.8% and 5.6%, respectively.

 

# *Predecessor Periods*

# * *

In thepredecessor periods presented, our predecessor participated in OfficeMax’scentralized cash management system. Cash advances necessary to fund BoiseForest Products Operations’ major improvements to, and replacements of,property, as well as acquisitions and expansion, to the extent not providedthrough internally generated funds, were provided by OfficeMax’s cash or fundedwith debt. In the predecessor periods presented, interest costs were allocatedto our predecessor based on its average asset balances. The interest expenseattributable to the debt allocated from OfficeMax is included in ourConsolidated Statements of Income (Loss). For the period of January 1through October 28, 2004, and the year ended December 31, 2003, ourpredecessor’s average interest rates were 6.7% and 7.3%, respectively. Webelieve the allocation of interest is a reasonable reflection of Boise ForestProducts Operations’ interest costs.

 

For the year ended December 31, 2005, the periods of October 29through December 31, 2004, and January 1 through October 28,2004, and the year ended December 31, 2003, cash payments for interest,net of interest capitalized, were $95.5 million, $11.3 million,$64.8 million, and $90.0 million, respectively.

 

***12.******          FinancialInstruments***

*** ***

We areexposed to risks such as changes in interest rates, commodity prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipated purchasedetermines the amount, maturity, and other specifics of the hedge. If aderivative contract is entered into, we either determine that it is an economichedge, or we designate the derivative as a cash flow or fair value hedge. Weformally document all relationships between hedging instruments and the hedgeditem, as well as our risk management objectives and strategy for undertakingvarious hedged transactions. For those derivatives designated as cash flow orfair value hedges, we formally assess, both at the hedge’s inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in the hedged items. The ineffectiveportion of hedging transactions is recognized in current income (loss).

 

Inaccordance with SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheet at fair value. Fair value of these instruments is determined through ouruse of valuation professionals. Changes in the fair value of derivatives arerecorded in either “Income (Loss)” or “Other comprehensive income,” asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in “Other comprehensive income” in the period in which changes in fairvalue occur and is reclassified to income (loss) in the period in which thehedged item affects income (loss), and any ineffectiveness is recognizedcurrently in our Consolidated Statements of Income. The gain or loss onderivatives designated as fair value hedges and the offsetting gain or loss onthe hedged item attributable to the hedged risk are included in current income(loss) in the period in which changes in fair value occur. The gain or loss onderivatives that have not been designated as hedging instruments is included incurrent income (loss) in the period in which changes in fair value occur.

 

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*InterestRate Risk*

* *

Ourdebt is predominantly variable-rate. We manage interest rate risk on ourvariable-rate debt by entering into interest rate swaps. At December 31,2005, the estimated current market value of our fixed-rate debt, including ournote payable to related party, based on then-current interest rates for similarobligations with like maturities, was approximately $39.6 million lessthan the amount reported on our Consolidated Balance Sheet.

 

Ourobligations under our senior secured credit facilities and senior notes exposeus to changes in short-term interest rates since interest rates on this debtare variable. In November 2004, we entered into four interest rate swapswith a total notional amount of $550 million to hedge the exposure tointerest rate fluctuations associated with our Tranche B term loan. Theswaps on $300 million of our Tranche B term loan were fixed at anaverage pay rate of 3.3% and expire in December 2007, while the swaps on$250 million of our Tranche B term loan were fixed at an average payrate of 3.5% and expire in December 2008. With the anticipated repaymentof the Tranche B term loan, these interest rate swaps were no longerconsidered hedges of the variable interest payments on that loan. As a result,during first quarter 2005, we recorded the fair value of the interest rateswaps, or $15.2 million, in “Change in fair value of interest rate swaps”in our Consolidated Statement of Income. In second quarter 2005, weredesignated the $550 million of interest rate swaps as hedges of the cashflow from the LIBOR-based variable interest payments on amounts borrowedunder our Facilities and recognized $5.3 million of noncash expense in “Changein fair value of interest rate swaps” in our Consolidated Statementof Loss. The net $9.9 million of value that was recorded in “Otherassets” on our Consolidated Balance Sheet will result in higher interestexpense over the remaining life of the interest rate swaps. The four interestrate swaps with a total notional amount of $550 million gave us an effectiveinterest rate of 4.9% on that debt at December 31, 2005. Changes in thefair value of the interest rate swaps were recorded in “Other comprehensiveincome.” Amounts realized during the period were reclassified to interestexpense as interest expense was recognized on the LIBOR-based debt. There wasno ineffectiveness related to the redesignated hedges. At December 31,2005 and 2004, the fair market values of these instruments were $16.9 millionand $4.8 million, respectively, which we recorded in “Other assets” on ourConsolidated Balance Sheets.

 

In November 2004,we also entered into two 3.7% interest rate swaps with an aggregate notionalamount of $250 million to hedge the exposure to floating-rate interestrate risks associated with our senior unsecured floating-rate notes, which gaveus an effective interest rate on that debt of 6.6% and 6.1% at December 31,2005 and 2004. These swaps expire in October 2009. These swaps weredesignated as cash flow hedges. Accordingly, changes in the fair value of theinterest rate swaps were recorded in “Other comprehensive income.” Amountsrealized during the period were reclassified to “Interest expense” as interestexpense was recognized on the LIBOR-based debt. There was noineffectiveness related to these hedges. At December 31, 2005 and 2004,the fair market values of these instruments were $9.3 million and $1.5 million,which we recorded in “Other assets” on our Consolidated Balance Sheets.

 

Forthe year ended December 31, 2005, and for the period of October 29through December 31, 2004, amounts reclassified to interest expense forall of our cash flow hedges increased interest expense by $3.1 million and$1.8 million, respectively. Assuming no change in interest rates, $9.4 millionwould be reclassified as a decrease in interest expense in 2006.

 

*CommodityRisk*

* *

We enter into natural gasswaps to hedge the variable cash flow risk of natural gas purchases to a fixedprice. In December 2005, we entered into swap agreements for 18,000 mmBtusper day for the month of December, 9,500 mmBtus per day for January 2006,decreasing to 500 mmBtus per day for the months of February and March 2006.In January 2006, we entered into additional natural gas swaps thatconvert 10,000 mmBtus of usage per day in January 2006, 4,000 mmBtusof usage per day in February 2006, and 1,000 mmBtus of usage per dayin March 2006 to a fixed price.

 

We designated all of theswaps as cash flow hedges. Accordingly, changes in the fair value of theseswaps were recorded in “Other comprehensive income.” Amounts realized duringthe period were reclassified to “Materials, labor, and other operating expenses”in our Consolidated Statement of Income as natural gas was consumed. Amountsreclassified in 2005 increased “Materials, labor, and other operating expenses”$0.2 million. Assuming no change in natural gas prices, $0.1 millionwould be reclassified as an increase in “Materials, labor, and other operatingexpenses” in 2006.

 

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*PredecessorPeriod*

* *

As describedin Note 11, Debt, in the predecessor periods presented, OfficeMaxallocated debt and interest costs to Boise Forest Products Operations based onits average asset balances. OfficeMax occasionally used derivative financialinstruments, such as interest rate swaps, rate hedge agreements, and forwardexchange contracts, to hedge underlying debt obligations or anticipatedtransactions. The effects of these financial instruments are not included inthe predecessor financial statements other than through OfficeMax’s allocationsto our predecessor.

 

***13.******          Retirementand Benefit Plans***

*** ***

*Pensionand Other Postretirement Benefit Plans*

*** ***

Someof our employees are covered by noncontributory defined benefit pension plans.The pension benefit for salaried employees is based primarily on the employees’years of service and highest five-year average compensation. The benefit forhourly employees is generally based on a fixed amount per year of service. Weuse a December 31 measurement date for our pension plans.

 

We also sponsor contributorydefined contribution savings plans for most of our salaried and hourlyemployees. For the year ended December 31, 2005, the periods of October 29through December 31, 2004, and January 1 through October 28,2004, and the year ended December 31, 2003, total expense for these planswas $13.6 million, $1.9 million, $16.6 million, and $21.8 million,respectively.

 

We also havepostretirement healthcare benefit plans. The type of retiree healthcarebenefits and the extent of coverage vary based on employee classification, dateof retirement, location, and other factors. All of our postretirementhealthcare plans are unfunded. In October 2005, we communicated toour employees changes to our retiree healthcare programs. Effective January 1,2006, we discontinued healthcare coverage for post-65 retirees (except inInternational Falls, Minnesota, where we are limited by a collective bargainingagreement). In addition, we eliminated the company subsidy for some of our pre-65hourly retirees. This change shifts retiree medical costs to the planparticipants. As a result of this change, we recorded a $9.9 million gainin our Consolidated Statement of Income for the year ended December 31,2005. We use a December 31 measurement date for our postretirementbenefit plans.

 

Duringthe predecessor periods, most Boise Forest Products Operations employees, alongwith some employees of OfficeMax, participated in OfficeMax’s defined benefitpension plans. In addition, most employees of Boise Forest Products Operationswere eligible for participation in OfficeMax’s defined contribution plans.Boise Forest Products Operations recorded costs associated with the employeeswho participated in OfficeMax’s plans in the Consolidated Statements of Income(Loss). For the year ended December 31, 2005, and the period of October 29through December 31, 2004, we recognized $26.8 million and$2.6 million, respectively, of pension expense. For the period of January 1through October 28, 2004, and the year ended December 31, 2003, ourpredecessor incurred $60.9 million and $52.9 million of pensionexpense. In connection with the Acquisition, OfficeMax transferred to BoiseLLC, our operating subsidiary, the portion of the pension plan liability thatwas attributable to active employees who became employed by Boise LLCimmediately following the Acquisition and Boise Forest Products Operationsemployees who terminated employment after July 31, 2004. OfficeMax alsotransferred sufficient assets to fund the accumulated benefit obligation at a6.25% discount rate, and as a result, we were not required to make anycontributions in 2005. However, we made $10.3 million of contributions in2005. In addition, OfficeMax retained all pension costs related to its employeeswho retired or were terminated on or before July 31, 2004, allpostretirement benefit costs related to its employees who retired or wereterminated before the Acquisition, and all pension and postretirement benefitcosts related to active OfficeMax employees. As a result, our annual pensionexpense is lower than amounts included in the predecessor financial statements.

 

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*Obligationsand Funded Status*

 

Thefollowing table, which includes only company-sponsored plans, reconciles thebeginning and ending balances of our benefit obligation. It also shows the fairvalue of plan assets and aggregate funded status of our plans, includingamounts not recognized and recognized. The funded status changes from year toyear based on the investment return from plan assets, contributions, benefitpayments, and the discount rate used to measure the liability.

 
| ** **                                           | ** ** | **Pension Benefits** | ** **   | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|----------------------|--------------|--------------------|------------|
| ** **                                           | ** ** | **2005**             | ** **   | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | **(thousands)**      | ** **   |
| Change in  benefit obligation                        |       |                 |         |               |       |   |   |   |   |
| Benefit obligation  at beginning of year             |       | $                    | 543,722      |               | $          | — |   | $ | 19,574 |   | $ | — |   |
| Benefit  obligation assumed from OfficeMax           |       | —               |         | 531,775            |       | — |   | 18,789 |   |
| Service cost                                         |       | 25,451               |         | 2,480              |       | 665 |   | 101 |   |
| Interest cost                                        |       | 30,813               |         | 5,096              |       | 1,213 |   | 180 |   |
| Amendments                                           |       | 4,343                |         | —             |       | — |   | — |   |
| Actuarial loss                                       |       | 10,871               |         | 3,787              |       | 108 |   | 504 |   |
| Special  termination benefits                        |       | 2,482                |         | 663                |       | — |   | — |   |
| Closure and  curtailment gain                        |       | (5,731               | )            | —             |       | (10,358 | ) | — |   |
| Benefits paid                                        |       | (4,667               | )            | (79                | )          | (222 | ) | — |   |
| Benefit  obligation at end of year                   | ** ** | **$**                | **607,284**  | ** **         | **$**      | **543,722** | ** ** | **$** | **10,980** | ** ** | **$** | **19,574** | ** ** |
|                                                 |       |                 |         |               |       |   |   |   |   |
| Change in plan  assets                               |       |                 |         |               |       |   |   |   |   |
| Fair value of  plan assets at beginning of year |       | $                    | 444,087      |               | $          | — |   | $ | — |   | $ | — |   |
| Fair value of  assets transferred from OfficeMax     |       | —               |         | 420,629            |       | — |   | — |   |
| Actual return on  plan assets                        |       | 31,190               |         | 23,537             |       | — |   | — |   |
| Employer  contributions                              |       | 10,348               |         | —             |       | — |   | — |   |
| Benefits paid                                        |       | (4,667               | )            | (79                | )          | — |   | — |   |
| Fair value of  plan assets at end of year            | ** ** | **$**                | **480,958**  | ** **         | **$**      | **444,087** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                                                 |       |                 |         |               |       |   |   |   |   |
| Funded status                                        |       | $                    | (126,326     | )                  | $          | (99,635 | ) | $ | (10,980 | ) | $ | (19,574 | ) |
| Unrecognized  actuarial loss (gain)                  |       | (5,098               | )            | (14,743            | )          | 154 |   | 504 |   |
| Unrecognized  prior service cost                     |       | 4,343                |         | —             |       | — |   | — |   |
| Net amount  recognized                               | ** ** | **$**                | **(127,081** | **)**              | **$**      | **(114,378** | **)** | **$** | **(10,826** | **)** | **$** | **(19,070** | **)** |

 

The projected benefit obligation,accumulated benefit obligation, and fair value of plan assets for the pensionplans with accumulated benefit obligations in excess of plan assets were $607.3 million,$532.5 million, and $481.0 million, respectively, as of December 31,2005, compared with $543.7 million, $461.0 million, and $444.1 million,respectively, as of December 31, 2004.

 

Thefollowing table shows the amounts recognized on our Consolidated BalanceSheets. The intangible asset is included in “Other assets.” The accrued benefitliability is included in “Other, compensation, and benefits,” net of a currentportion of $20.9 million and zero at December 31, 2005 and 2004,respectively. The current portion is reflected in “Accrued liabilities, compensation,and benefits.”

 
| ** **                 | ** ** | **Pension Benefits** | ** **   | **Other Benefits** | ** ** |
|----------------------------|------------|----------------------|--------------|--------------------|------------|
| ** **                 | ** ** | **2005**             | ** **   | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                 | ** ** | **(thousands)**      | ** **   |
|                       |       |                 |         |               |       |   |   |   |   |
| Intangible asset           |       | $                    | 2,029        |               | $          | — |   | $ | — |   | $ | — |   |
| Accrued benefit liability  |       | (129,168             | )            | (114,378           | )          | (10,826 | ) | (19,070 | ) |
| Other comprehensive income |       | 58                   |         | —             |       | — |   | — |   |
| Net amount recognized      | ** ** | **$**                | **(127,081** | **)**              | **$**      | **(114,378** | **)** | **$** | **(10,826** | **)** | **$** | **(19,070** | **)** |

 

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The increasein minimum pension liability recorded in “Other comprehensive income” was$58,000 and zero for the year ended December 31, 2005, and for the periodof October 29 through December 31, 2004.

 

*Componentsof Net Periodic Benefit Cost*

* *

Thecomponents of net periodic benefit cost are as follows:

 
| ** **                                     | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **Boise**             | ** ** | **Predecessor**     | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | ** **            | ** ** | **Oct. 29**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Oct. 29** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Year**              | ** ** | **(inception)**     | ** ** | **Jan. 1** | ** ** | **Year** | ** ** | **Year** | ** ** | **(inception)** | ** ** | **Jan. 1** | ** ** | **Year** | ** ** |
| ** **                                     | ** ** | **Ended**             | ** ** | **through**         | ** ** | **through** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **through** | ** ** | **through** | ** ** | **Ended** | ** ** |
| ** **                                     | ** ** | **Dec. 31,**     | ** ** | **Dec. 31,**   | ** ** | **Oct. 28,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Oct. 28,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                     | ** ** | **2005**              | ** ** | **2004**            | ** ** | **2004** | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                     | ** ** | **(thousands)**       | ** ** |
|                                           |       |                  |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                     | 25,451     |                | $          | 2,480 |   | $ | 24,046 |   | $ | 26,166 |   | $ | 665 |   | $ | 101 |   | $ | 992 |   | $ | 1,092 |   |
| Interest cost                                  |       | 30,813                |       | 5,096               |       | 69,223 |   | 81,225 |   | 1,213 |   | 180 |   | 4,635 |   | 6,034 |   |
| Expected (return)  loss on plan assets         |       | (30,338               | )          | (5,007              | )          | (66,728 | ) | (79,281 | ) | — |   | — |   | — |   | 1,228 |   |
| Recognized  actuarial loss                     |       | 374                   |       | —              |       | 25,205 |   | 18,465 |   | — |   | — |   | 970 |   | — |   |
| Amortization of  prior service costs and other |       | —                |       | —              |       | 8,658 |   | 5,769 |   | — |   | — |   | (838 | ) | (2,297 | ) |
| Company-sponsored  plans                       |       | 26,300                |       | 2,569               |       | 60,404 |   | 52,344 |   | 1,878 |   | 281 |   | 5,759 |   | 6,057 |   |
| Multiemployer  pension plans                   |       | 503                   |       | 57                  |       | 460 |   | 526 |   | — |   | — |   | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                 | **26,803** | ** **          | **$**      | **2,626** | ** ** | **$** | **60,864** | ** ** | **$** | **52,870** | ** ** | **$** | **1,878** | ** ** | **$** | **281** | ** ** | **$** | **5,759** | ** ** | **$** | **6,057** | ** ** |

 

# *Assumptions*

# * *

Theassumptions used in accounting for our plans are estimates of factors that willdetermine, among other things, the amount and timing of future benefitpayments. The following table presents the assumptions used in the measurementof our benefit obligations:

 
| ** **                                           | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                           | ** ** | **2005**             | ** ** | **2004**           | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                           | ** ** | ** **           | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  assumptions as of December 31 |       |                 |       |               |       |   |   |   |   |
| Discount rate                                        |       | 5.60                 | %          | 5.75               | %          | 5.40 | % | 5.50 | % |
| Rate of  compensation increase                       |       | 4.25                 | %          | 4.25               | %          | — |   | — |   |

 

Thefollowing table presents the assumptions used in the measurement of netperiodic benefit cost:

 
| ** **                                                               | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                               | ** ** | **Boise**             | ** ** | **Predecessor**     | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                                               | ** ** | ** **            | ** ** | **Oct. 29**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Oct. 29** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                               | ** ** | **Year**              | ** ** | **(inception)**     | ** ** | **Jan. 1** | ** ** | **Year** | ** ** | **Year** | ** ** | **(inception)** | ** ** | **Jan. 1** | ** ** | **Year** | ** ** |
| ** **                                                               | ** ** | **Ended**             | ** ** | **through**         | ** ** | **through** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **through** | ** ** | **through** | ** ** | **Ended** | ** ** |
| ** **                                                               | ** ** | **Dec. 31,**     | ** ** | **Dec. 31,**   | ** ** | **Oct. 28,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Dec. 31,** | ** ** | **Oct. 28,** | ** ** | **Dec. 31,** | ** ** |
| ** **                                                               | ** ** | **2005**              | ** ** | **2004**            | ** ** | **2004** | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                     |       |                  |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  assumptions as of the last day in the presented period |       |                  |       |                |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                            |       | 5.75                  | %          | 5.75                | %          | 6.25 | % | 6.75 | % | 5.50 | % | 5.75 | % | 6.25 | % | 6.75 | % |
| Expected  long-term rate of return on plan assets                        |       | 7.25                  | %          | 7.25                | %          | 8.25 | % | 8.50 | % | — |   | — |   | — |   | — |   |
| Rate of  compensation increases                                          |       | 4.25                  | %          | 4.25                | %          | 4.25 | % | 4.50 | % | — |   | — |   | — |   | — |   |

 

*DiscountRate Assumption*.  Inall periods presented, the discount rate assumption was determined using a spotrate yield curve constructed to replicate Aa-graded corporate bonds. The plan’sprojected cash flows were duration matched to this yield curve to develop anappropriate discount rate.

 

93

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*AssetReturn Assumption*.  Webase our expected long-term rate of return on plan assets on a weighted averageof our expected returns for the major asset classes in which we invest.Expected returns for the asset classes are based on long-term historicalreturns, inflation expectations, forecasted gross domestic product, earningsgrowth, and other economic factors. The weights we assign each asset class arebased on our investment strategy. Our weighted-average expected return on planassets used in our calculation of 2006 net periodic benefit cost is 7.25%.

 

*Rate ofCompensation Increases. *Thisassumption reflects our long-term actual experience, the near-term outlook, andassumed inflation.

 

Thefollowing table presents our assumed healthcare cost trend rates at December 31,2005 and 2004.

 
| ** **                                                                         | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  assumptions as of December 31                               |       |       |       |       |       |
| Healthcare cost  trend rate assumed for next year                                  |       | 7.00       | %          | 8.00       | %          |
| Rate to which  the cost trend rate is assumed to decline (the ultimate trend rate) |       | 5.00       | %          | 5.00       | %          |
| Year that the  rate reaches the ultimate trend rate                                |       | 2008       |       | 2008       |       |

 

Assumed healthcare cost trend rates have an effect on theamounts reported for the healthcare plans. At December 31, 2005, aone-percentage-point change in assumed healthcare cost trend rates would havethe following effects:

 
| ** **                                   | ** ** | **One-Percentage-  Point Increase** | ** ** | **One-Percentage-  Point Decrease** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **(thousands)**                     | ** ** |
| ** **                                   | ** ** | ** **                          | ** ** | ** **                          | ** ** |
| Effect on total of service and interest cost |       | $                                   | 32         |                                | $          | (27 | ) |
| Effect on postretirement benefit obligation  |       | 316                                 |       | (199                                | )          |
|                                              |            |                                     |            |                                     |            |  |  |

 

*PlanAssets*

* *

Ourpension plan asset allocations by asset category at December 31, 2005 and2004, are as follows:

 
| ** **                      | ** ** | **Plan Assets at  December 31** | ** ** |
|---------------------------------|------------|--------------------------------------|------------|
| **Asset Category**              | ** ** | **2005**                             | ** ** | **2004** | ** ** |
|                            |       |                                 |       |   |   |
| U.S. equity securities          |       | 52                                   | %          | 54 | % |
| International equity securities |       | 16                                   | %          | 15 | % |
| Fixed-income securities         |       | 32                                   | %          | 31 | % |
| ** **                      | ** ** | **100**                              | **%**      | **100** | **%** |

 

OurRetirement Funds Investment Committee is responsible for establishing andoverseeing the implementation of our investment policy. The investment policyis structured to optimize growth of the pension plan trust assets, whileminimizing the risk of significant losses, in order to enable the plans tosatisfy their benefit payment obligations over time. We currently investprimarily in U.S. equity securities, international equity securities, and fixedincome securities. We use benefit payments and sponsor contributions as ourprimary rebalancing mechanisms to maintain our asset class exposures within theguideline ranges established under the investment policy.

 

Our current guidelines set forth a U.S. equity range of 45%to 60%, an international equity range of 12.5% to 17.5%, and a fixed-incomerange of 25% to 40%. We adjust our asset class positions within the rangesbased on our expectations for future returns, our funded position, and marketrisks. Occasionally, we utilize futures or other financial instruments to alterour exposure to various asset classes in a lower-cost manner than tradingsecurities in the underlying portfolios.

 

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*CashFlows*

* *

Inconnection with the Acquisition, OfficeMax transferred sufficient assets tofund Boise’s accumulated benefit obligation at a 6.25% discount rate, and as aresult, we were not required to make any pension plan contributions during2005. During 2005, and for the period of October 29 through December 31,2004, we made cash contributions and certain benefit payments to our pensionand other postretirement benefit plans totaling $11.1 million and$0.1 million. For the period of January 1 through October 28,2004, and for the year ended December 31, 2003, our predecessor madecontributions of $66.6 million and $58.9 million. In 2006, we are notrequired to make a minimum contribution to our pension plans; however, we may electto make voluntary contributions.

 

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid. Qualified pension benefit payments arepaid from plan assets, while nonqualified pension and other benefit paymentsare paid by the company.

 
| ** **      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------|------------|----------------------|------------|--------------------|------------|
| ** **      | ** ** | **(thousands)**      | ** ** |
|            |       |                 |       |               |       |
| 2006            |       | $                    | 9,131      |               | $          | 712 |   |
| 2007            |       | 12,603               |       | 788                |       |
| 2008            |       | 16,676               |       | 918                |       |
| 2009            |       | 21,021               |       | 832                |       |
| 2010            |       | 25,431               |       | 956                |       |
| Years 2011-2015 |       | 194,032              |       | 5,073              |       |
|                 |            |                      |            |                    |            |  |  |

 

***14.******          RedeemableEquity Units***

*** ***

*ManagementEquity Agreement*

* *

In December 2004, key managers ofBoise purchased, pursuant to the terms of a Management Equity Agreement (EquityPlan), 18.6 million equity units in FPH at $1.00 per unit, which wasapproximately equal to the estimated fair value of $0.99 on the date ofpurchase. Those who purchased FPH’s Series B equity units received a grantof 35.6 million of FPH’s Series C equity units (profit interests)that represent the right to participate in profits after capital is returned tothe holders of FPH’s Series B equity units. FPH’s Series C equity unitsparticipate in equity value appreciation above a specified level. Although management’s investment is in FPH,because of the capital structure of Boise and Timber Holdings, 55% ofmanagement’s investment (along with 55% of FPH’s and OfficeMax’s investments)is included on our Consolidated Balance Sheets and 45% of the investment isincluded on Timber Holdings’ Consolidated Balance Sheets. In 2005, members ofmanagement did not purchase any Series B equity units in FPH, and FPH didnot grant any Series C equity units; however, the plan does contemplatepossible future purchases and grants by and to members of management. Weaccount for awards granted under the Equity Plan in our consolidated financialstatements in accordance with SFAS No. 123(R).

 

FPH’s Series B and Series Cequity units held by management are redeemable at FPH’s option upon terminationof the management investor’s employment and at the option of the holder in theevent of death or disability or the sale of a division resulting in the terminationof his or her employment. Except in the event of death or disability, webelieve that the redemption of these units is within our control due to theinterlocking boards of FPH and Boise and because FPH was organized solely forthe purpose of establishing Boise to acquire the forest products and paperassets of OfficeMax. Should repurchases under the Equity Plan occur, it isexpected that they would be funded by mirror-image redemptions ofB units/shares and C units/shares held by FPH in its subsidiaries,Boise Holdings and Timber Holdings. Because the redemption of FPH’s Series Band Series C equity units and the expected parallel redemptions of our Series Band Series C equity units are a contingent event outside the employee’scontrol and not currently deemed probable of occurring, we account for theunits using equity plan accounting in accordance with FASB Staff Position (FSP)No. FAS 123(R)-4, Classification of Options and Similar InstrumentsIssued as Employee Compensation That Allow for Cash Settlement Upon theOccurrence of a Contingent Event. However, because FPH units are subject tomandatory redemption in an event that is outside of our control (death ordisability), we are required to classify these units outside of permanentequity on our Consolidated Balance Sheets at grant-date fair value.Accordingly, we

 

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recorded 55% of management’s investment inus, or $12.4 million and $10.3 million in “Redeemable equity units” onour Consolidated Balance Sheets at December 31, 2005 and 2004, and TimberHoldings recorded 45% of the investment, or $7.8 million and $8.4 million,respectively, in “Redeemable common stock” in their consolidated financialstatements. Under equity plan accounting, the carrying value of management’sinvestment will not be adjusted to redemption value unless payment ofredeemable amounts becomes probable. At the date it becomes probable, we willadjust the carrying value to redemption value by marking the value of theequity units to market, which could result in additional compensation expense.

 

*Vesting*

* *

Generally, the appreciation in the valueof FPH’s Series B equity units issued under the Equity Plan and 50% of itsSeries C equity units vest 20% each year on December 31, 2005 through2009. The other 50% of the Series C equity units vest at the end of 2009if specific criteria tied to internal rates of return are met. Upon either thesale of the company as defined in the Equity Plan or an initial publicoffering, vesting is accelerated for all management investors. Other events mayaccelerate vesting for specifically affected management investors, but none of theseevents are within the control of the investor. The vesting schedules areshortened for managers who were at least 60 years old as of December 31,2004, so that the units fully vest by December 31 of the year in which themanager reaches age 65 and at least two vesting periods have been met.Vesting does not trigger a right or obligation on the part of FPH or us to repurchaseequity units held by management investors.

 

*CompensationExpense*

* *

We did not recognize compensation expenseon the date of grant for the Series B equity units because the fair valueof the units issued by FPH was equal to or less than the amount each employeewas required to pay. The Series C equity units are accounted for asrestricted stock. We accrue compensation expense for the Series C equityunits based on the fair value on the date of the grant as described below.Compensation expense is recognized ratably over the vesting period for the Series Cequity units that vest over time and ratably over the award period for theunits that vest based on internal rates of return. Although Timber Holdingsholds shares of Series C common stock, we recognize all of thecompensation expense related to the Series C units/stock grants in ourconsolidated financial statements because all of the employees grantedunits/common stock were employees of ours. Prior to the Timberlands Sale,Timber Holdings leased all of their employees from us. In 2005, we recognized$2.9 million of compensation expense, most of which was recorded in “Generaland administrative expenses” in our Consolidated Statement of Income.

 

*FairValue Measurement – Series C Equity Units*

* *

The fair value of the Series C equityunits as of the grant date was estimated by analyzing our possible futureevents, the paths to liquidity for the holders of the Series C equityunits, and how these paths may affect the valuation of the Series C equityunits. These possible future events included a sale of the company, an initialpublic offering, and remaining a private company. We estimated probabilities ofthese events occurring based on our strategies as of the grant date. Weassigned probabilities to these events for the remainder of 2004 and years 2005through 2009**,** the vesting periodfor the Series C equity units, and the assigned likelihood varied by year,with a higher probability of being sold or becoming a public company in lateryears. For example, in 2005, we assigned probabilities of 10% to being sold,15% to becoming a public company, and 75% to remaining a private company. In2007, we assigned probabilities of 30% to being sold, 45% to becoming a publiccompany, and 25% to remaining a private company. In 2009, we assignedprobabilities of 40% to being sold, 45% to becoming a public company, and 15%to remaining a private company. A decision tree analysis that incorporatedthese event outcomes and the likelihood of their occurrences was created. Payoffsto the holders of the Series C equity units were constructed at each eventoutcome on the decision tree. Based on this framework, a simulation analysiswas run to arrive at the fair values of the Series C equity units.

 

SFAS No. 123(R) requires differentvaluation calculations for equity grants that have a service condition andequity grants that have a market condition. The 50% of the Series C equityunits that vest over time are “service condition” awards. Under therequirements of SFAS No. 123(R), the fair value of these awards ismeasured assuming that all conditions have been met, or as if they were fullyvested on the grant date. Compensation expense is recognized over the vestingperiod and adjusted if the service

 

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condition is not met. We determined theaverage fair value on the date of grant of the Series C equity units thatvest over time to be approximately $0.46 per unit.

 

The 50% of Series C equity units thatvest based on internal rates of return are “market condition” grants under therequirements of SFAS No. 123(R).The standard requires that the valuation of market condition awards considersthe likelihood that the market condition will be satisfied rather than assumingthat the award is vested on the award date. Because the internal rate of returnrepresents a more difficult threshold to meet before payout, with greateruncertainty that the market condition will be satisfied, these awards have alower fair value than those that vest based solely on the passage of time.However, compensation expense is required to be recognized under SFAS No. 123(R)for an award regardless of when, if ever, the market condition is satisfied. Wedetermined the average fair value on the date of grant of the Series Cequity units that vest based on internal rates of return to be approximately$0.24 per unit.

 

*Activity of Redeemable Equity Units*

* *

The following summarizes the activity ofour outstanding service and market condition equity units awarded under theEquity Plan as of December 31, 2005, and changes during the year thenended:

 
| ** **                                                    | ** ** | **Service Condition**                      | ** ** | **Market Condition**                                     | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                    | ** ** | **Series B Redeemable  Equity Units** | ** ** | **Series C Redeemable  Equity Units**               | ** ** |
| **Outstanding Units**                                         | ** ** | **Units**                                  | ** ** | **Weighted-  Average  Grant-Date  Fair  Value (c)** | ** ** | **Units** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** | **Units** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
| ** **                                                    | ** ** | **(thousands)**                            | ** ** | ** **                                               | ** ** | **(thousands)** | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                                                          |       |                                       |       |                                                     |       |   |   |   |   |   |   |   |   |
| Outstanding at  December 31, 2004                        |       | 18,643                                     |       | $                                                        | 0.55       |   | 17,800 |   | $ | 0.46 |   | 17,800 |   | $ | 0.24 |   |
| Granted                                                       |       | —                                     |       | —                                                   |       | — |   | — |   | — |   | — |   |
| Repurchased                                                   |       | (1,346                                     | )          | 0.55                                                     |       | — |   | — |   | — |   | — |   |
| Forfeited                                                     |       | —                                     |       | —                                                   |       | (1,713 | ) | 0.46 |   | (1,713 | ) | 0.15 |   |
| Outstanding at  December 31, 2005 (a) (b) | ** ** | **17,297**                                 | ** ** | **$**                                                    | **0.55**   | ** ** | **16,087** | ** ** | **$** | **0.46** | ** ** | **16,087** | ** ** | **$** | **0.24** | ** ** |

 

----

(a)           The weighted average remaining contractual term is 3.4 years.

 

(b)           Outstanding units include both vested and nonvested units, as unitsoutstanding are only reduced through repurchase of units by us or throughforfeiture of units by employees.

 

(c)           The weighted-average grant-date fair value at FPH was $1.00, with 55%included in Boise and 45% included in Timber Holdings.

 

In the event that a management investor’semployment with us is terminated, FPH holds an option, pursuant to agreementsbetween it and the management investors, to reacquire its equity units held bydeparting investors at prices provided for in such agreements. During 2005, theFPH Series B equity units and Series C equity units of sevendeparting management investors were redeemed by FPH pursuant to the optionsheld by it. These redemptions were funded in each case by redemption by Boiseof an identical number of redeemable Series B equity units or redeemable Series Cequity units, as the case may be, from FPH for a consideration equal to 55% ofthe amount paid by FPH to reacquire its equity units from the departingmanagement investors. A parallel redemption of redeemable Series B sharesand redeemable Series C shares was made in each such case by TimberHoldings to provide the balance of the funds required by FPH for the redemptionof its equity units. The redemption by Timber Holdings of its shares held byFPH was in turn funded in each case by an advance by Boise under theintercompany note between it and Boise Land & Timber Corp., which is awholly owned subsidiary of Timber Holdings. During 2005, Boise redeemed1,346,775 redeemable Series B equity units and 360 redeemable Series Cequity units. The total cost incurred by Boise, including advances made toTimber Holdings, for parallel redemptions of 135 shares of redeemable Series Bshares and redeemable Series C shares by FPH was $1.4 million, consistingof $0.8 million for Boise and $0.6 million for Timber Holdings.

 

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The following summarizes the activity ofour nonvested service and market condition equity units awarded under theEquity Plan as of December 31, 2005, and changes during the year thenended:

 
| ** **                                | ** ** | **Service Condition**                      | ** ** | **Market Condition**                           | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                | ** ** | **Series B  Redeemable Equity Units** | ** ** | **Series C  Redeemable Equity Units**     | ** ** |
| **Nonvested Units**                       | ** ** | **Units**                                  | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** | **Units** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** | **Units** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
| ** **                                | ** ** | **(thousands)**                            | ** ** | ** **                                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                                      |       |                                       |       |                                           |       |   |   |   |   |   |   |   |   |
| Nonvested at December 31,  2004      |       | 18,643                                     |       | $                                              | 0.55       |   | 17,800 |   | $ | 0.46 |   | 17,800 |   | $ | 0.24 |   |
| Granted                                   |       | —                                     |       | —                                         |       | — |   | — |   | — |   | — |   |
| Repurchased                               |       | (1,346                                     | )          | 0.55                                           |       | — |   | — |   | — |   | — |   |
| Vested                                    |       | (4,011                                     | )          | 0.55                                           |       | (3,953 | ) | 0.46 |   | — |   | — |   |
| Forfeited                                 |       | —                                     |       | —                                         |       | (1,713 | ) | 0.46 |   | (1,713 | ) | 0.15 |   |
| Nonvested at  December 31, 2005 | ** ** | **13,286**                                 | ** ** | **$**                                          | **0.55**   | ** ** | **12,134** | ** ** | **$** | **0.46** | ** ** | **16,087** | ** ** | **$** | **0.24** | ** ** |

 

At December 31, 2005, we had$8.3 million of total unrecognized compensation cost related to thenonvested Series C redeemable equity units granted under the Equity Plan.The cost is expected to be recognized generally over a weighted-average periodof 3.3 years. The total grant-date fair value of service condition awardsvested during 2005 was $1.8 million. In addition, we recognized$1.1 million of compensation expense related to the market conditionawards that vest December 31, 2009.

 

***15.******         ******Capital***

*** ***

Excludingthe Series B and Series C redeemable equity units included in “Redeemable equityunits” on our Consolidated Balance Sheets at December 31, 2005 and 2004,Boise was capitalized with $465.0 million and $359.6 million ofequity capital allocated among three series of equity units as follows:

 

| ** **       | ** ** | **Units Outstanding** | ** ** | **Amount** | ** ** |
|------------------|------------|-----------------------|------------|------------|------------|
| **Equity Units** | ** ** | **2005**              | ** ** | **2004**   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **       | ** ** | **(thousands)**       | ** ** |
|             |       |                  |       |       |       |   |   |   |   |
| Series A    |       | 66,000                |       | 66,000     |       | $ | 39,885 |   | $ | 36,868 |   |
| Series B    |       | 530,357               |       | 530,357    |       | 417,601 |   | 322,718 |   |
| Series C    |       | —                |       | —     |       | 7,535 |   | — |   |
|                  |            |                       |            |            |            |  |  |  |  |  |  |

 

At December 31, 2005and 2004, OfficeMax owned all of the Series A equity units. FPH andOfficeMax owned 421 million and 109 million Series B equity unitsat December 31, 2005, reflecting $335 million and $83 million ofequity, respectively. At December 31, 2004, FPH and OfficeMax owned 421 millionand 109 million Series B equity units, reflecting $259 millionand $64 million of equity, respectively. The Series C equity unitswere issued to FPH without additional capital contributions, pursuant to theprovisions of the Equity Plan discussed in Note 14, Redeemable Equity Units.The profit interest allocated to the Series B and C equity units isreflected in the table above. The holders of the equity units, or the membersof the limited liability company, are not liable for any of the obligations ofthe company.

 

*Series AEquity Units. *The Series Aequity units have no voting rights. They accrue dividends daily at a rate of 8%per annum on the holder’s capital contributions (net of any distributionspreviously received by such holder) plus any accumulated dividends. Accrued andunpaid dividends accumulate on the Series A equity units on June 30and December 31 of each year. At December 31, 2005 and 2004, $3.5 millionand $0.5 million, respectively, of dividends were accrued on our ConsolidatedBalance Sheets as an increase in the value of the Series A equity units. Series Aequity units participate in distributions as described below. Other thanthrough receipt of dividends, the Series A equity units do not participatein the earnings of the company.

 

*Series BEquity Units. *The Series B equity unitsentitle each holder to one vote on matters to be voted on by the members ofBoise. The Series B equity units participate in distributions as describedbelow.

 

98

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*Series CEquity Units*.  The Series Cequity units have no voting rights. Series C equity units were issued to FPHwithout capital contributions in accordance with the arrangements described inNote 14, Redeemable Equity Units. They have no right to participate inearnings of the company until capital is returned to the holders of the Series Aequity units and Series B equity units. Accordingly, $7.5 million andzero income of the company for the year ended December 31, 2005, and the periodof October 29 through December 31, 2004, were allocated to the Series Cequity units. They participate in distributions as described below.

 

*Distributions*.  The allocation of distributions (liquidatingand otherwise) among the three series of equity units are made as follows:  first to Series A equity unit and Series Bequity unit holders ratably, based on the number of units outstanding, untileach has received distributions in an amount equal to his or her capitalcontributions (plus, in the case of Series A equity units, accumulateddividends and accrued and unpaid dividends) and then to Series B equityunit and Series C equity unit holders ratably, based on the number ofunits of each series outstanding. In addition, Boise’s Operating Agreementprovides for tax distributions to be made annually (or quarterly at thediscretion of the board of directors) to the holders of its equity units of allclasses in an amount equal to the estimated combined federal and state incometaxes incurred by such holders on their allocable share of the taxable incomeof Boise for such period (see Note 5, Income Taxes). Finally, in the eventthat FPH redeems its Series B equity units or Series C equity unitsissued by it to participants in its Equity Plan (see Note 14, RedeemableEquity Units), Boise is required to redeem a like number of Series B equityunits or Series C equity units held by FPH at a price equal to theredemption price to be paid by FPH for the equity units redeemed by it.Notwithstanding this redemption feature, we believe that the redemption ofthese units is within the control of Boise due to the interlocking boards of FPHand Boise and because FPH was organized solely for the purpose of establishingBoise to acquire the forest products and paper assets of OfficeMax. Taxdistributions and redemptions of Series B equity units pursuant to the EquityPlan arrangements are counted as distributions for purposes of the calculationof the allocation of other distributions.

 

*Securityholders Agreement*

* *

In connection with the Acquisition, weentered into a Securityholders Agreement with OfficeMax. This agreementdescribes the rights and responsibilities regarding OfficeMax’s equityownership in Boise Holdings. Specifically, under the agreement, OfficeMax hasthe right to appoint one director to our board of directors. The agreement alsorequires that OfficeMax obtain our consent before transferring its equityinterest in our company. The agreement grants “tag-along” rights, which entitleOfficeMax to participate in sales of equity interests to third parties. Inaddition, the agreement grants “drag-along” rights, which entitle OfficeMax torequire the other equity holders to participate in sales of all orsubstantially all of the equity interests in our company. If we propose toissue additional equity securities, we will generally be required to offerOfficeMax a pro rata portion of the securities issued in such a transaction.The agreement will terminate in a liquidation or dissolution of the company, inan initial public offering, or in a sale of all or substantially all of thecompany’s stock or assets.

 

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*RegistrationRights Agreement*

* *

Inconnection with the Acquisition, we entered into a Registration Rights Agreementwith FPH and OfficeMax with respect to the equity interests they own in us.Under the Registration Rights Agreement, (i) FPH has the right to demandthat we effect an unlimited number of registrations of its equity interests,whether pursuant to a long-form registration statement or a short-formregistration and pay all expenses, other than underwriting discounts andcommissions, related to such registrations and (ii) after the earlier ofthe fifth anniversary of the completion of the Acquisition or completion of aninitial public offering by us, OfficeMax has the right to demand that we effect(a) seven registrations of its equity interests on a long-formregistration statement and pay all expenses, other than underwriting discountsand commissions, related to any two of such registrations (with OfficeMaxpaying all expenses relating to the other five of such registrations) and (b) anunlimited number of registrations of its equity interests on a short-formregistration statement and pay all expenses, other than underwriting discountsand commissions, related to such registrations. In addition, FPH and OfficeMaxhave the right to participate in registrations of our equity interests effectedby us, whether such registrations relate to an offering by us or by ourstockholders. FPH and OfficeMax have agreed not to effect any public sale orprivate placement of any of our equity interests during the period beginningseven days prior to and ending 180 days after the effective date of theregistration statement for any underwritten public offering of our equityinterests in which FPH or OfficeMax participate.

 

*PredecessorPeriods*

* *

Duringthe predecessor periods presented, stock compensation was granted to ouremployees under OfficeMax’s stock compensation plans. Depending on the award,stock compensation awards were exercisable one year to three years after thegrant date.

 

*Restricted Stock.*  In 2003,OfficeMax granted employees of Boise Forest Products Operations and corporateemployees servicing all OfficeMax business units 1.0 million shares ofrestricted stock. The weighted-average fair value of the restricted stock at thegrant date was $25.17. The restricted stock vested at the end of July 2006,provided, however, that if specific performance criteria were met, some or allof the restricted stock could vest earlier than July 2006, but generallyno earlier than the end of January 2005. Under the terms of the originalgrant, all of the restricted stock awards granted to our employees underOfficeMax’s stock compensation plan were 100% vested upon the Acquisition,resulting in the acceleration of the recognition of $3.7 million ofexpense in October 2004.

 

BoiseForest Products Operations recognized compensation expense over the vestingperiod based on closing stock prices on the dates of grant. For the period of January 1through October 28, 2004, and the year ended December 31, 2003, theyrecognized $14.6 million and $4.3 million of pretax compensationexpense, respectively. Compensation expense was calculated based on shares ofrestricted stock granted to employees of Boise Forest Products Operations plusan allocation of expense related to restricted stock granted to corporateemployees that serviced all business units. The allocation was based on averagesales, assets, and labor costs. Management believes these allocations arereasonable. However, they are not necessarily indicative of costs to beincurred in the future.

 

*Stock Options.*  For the periodof January 1 through October 28, 2004, and the year ended December 31,2003, no options were granted to our employees. In 2002, OfficeMax granted ouremployees 1,243,550 options. The weighted average exercise price of theseoptions was $35.60. In connection with the sale, the stock options granted toemployees that were terminated from OfficeMax became 100% vested, and employeeshave three years after termination to exercise their stock options.

 

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

*** ***

Weoperate our business in the following five reportable segments:  Building Materials Distribution, WoodProducts, Paper, Packaging & Newsprint, and Corporate and Other. Thesesegments represent distinct businesses that are managed separately because ofdiffering products and services. Each of these businesses requires distinctoperating and marketing strategies. Management reviews the performance of thecompany based on these segments. Historically, OfficeMax conducted Boise ForestProducts Operations in three segments: Boise Building Solutions, Boise Paper Solutions, and Corporate andOther. We have recast the financial statements of our predecessor includedherein to conform with our current segment presentation. OfficeMax historicallyallocated the results of its timberland operations

 

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to each of its Boise Building Solutions and Boise Paper Solutionssegments. Since we did not acquire the timberland operations from OfficeMax,they are not included in these financial statements.

 

OurBuilding Materials Distribution segment is a leading nationalinventory-carrying wholesale distributor of building materials. We distribute abroad line of building materials, including engineered wood products (EWP),oriented strand board (OSB), plywood, lumber, and general line items such asframing accessories, composite decking, roofing, siding, and insulation. Wepurchase most of these building materials from third-party suppliers and marketthem primarily to customers that resell building materials to professionalbuilders in the residential, light commercial construction, andrepair-and-remodeling markets.

 

Our Wood Products segment manufactures and sells EWP, consistingof laminated veneer lumber (LVL), a high-strength engineered lumber often usedin beams; I-joists, a structural support typically used in floors and roofs;and laminated beams. We also produce plywood, particleboard, dimension lumber,and high-quality ponderosa pine lumber, a premium lumber grade sold primarilyto manufacturers of specialty wood windows, moldings, and doors. Our woodproducts are used in new residential and light commercial construction and inresidential repair and remodeling. Most of these products are sold towholesalers, majority retailers, and industrial converters or through our ownwholesale building materials distribution outlets. During 2005, approximately 36%of the wood products we manufactured, including approximately 60% of our EWP,were sold to our Building Materials Distribution segment.

 

Our Paper segmentmanufactures and sells uncoated free sheet (including cut-size office papers,commercial printing paper, business forms, envelope papers, and a wide range ofvalue-added papers), market pulp, and containerboard (corrugating medium). Manyof our paper products are commodity products, while others have specializedfeatures that make these products “value-added.” Our value-added grades includebright and colored cut-size office papers and custom-developed specialty papersfor such uses as label and release, security, and food wrap applications. Wesell to end-users both directly from our mills and through distributioncenters. In 2005, approximately 47% of our uncoated free sheet sales volume,including about 82% of our office papers sales volume, was sold to OfficeMax.

 

Our Packaging &Newsprint segment manufactures and sells containerboard (linerboard) andnewsprint at our mill in DeRidder, Louisiana. We also operate five corrugatedcontainer plants in the Pacific Northwest. Our corrugated containers are used inthe packaging of fresh fruit and vegetables, processed food, beverages, andother industrial and consumer products. Our containerboard and corrugatedcontainer products are sold by brokers or our own sales personnel. We marketour newsprint through Abitibi-Consolidated (Abitibi) pursuant to an arrangement,whereby Abitibi purchases all of the newsprint we produce at a price equal tothe price at which Abitibi sells newsprint produced at its mills located in thesouthern United States, less associated expenses and a sales and marketingdiscount.

 

OurCorporate and Other segment includes corporate support staff services, relatedassets and liabilities, and foreign exchange gains and losses.

 

Thesegments’ profits and losses are measured on operating profits before change infair value of interest rate swaps, interest expense, interest income, andcumulative effect of accounting change. Specified expenses are allocated to thesegments. For many of these allocated expenses, the related assets andliabilities remain in the Corporate and Other segment.

 

Thesegments follow the accounting principles described in Note 1, Summary ofSignificant Accounting Policies.

 

Salesto OfficeMax were $562.3 million during the year ended December 31,2005, representing 10% of total sales. For the period of October 29through December 31, 2004, sales to OfficeMax represented 11% of totalsales. In the predecessor periods, sales to OfficeMax were just over 9% of totalsales. No other single customer accounted for 10% or more of consolidated tradesales. Export sales to foreign unaffiliated customers were $217.3 millionand $30.7 million for the year ended December 31, 2005, and the periodof October 29 through December 31, 2004, respectively. For the periodof January 1 through October 28, 2004, our predecessor’s export saleswere $104.0 million, compared with $126.9 million in 2003.

 

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OurWood Products segment has a small wood I-joist plant in Canada and a plywoodplant in Brazil. Our predecessor had a 47% interest in an oriented strand boardplant in Canada, which it sold in May 2004 and which it accounted forunder the equity method.

 

Thefollowing table summarizes net sales and long-lived assets by geography:

 
| ** **        | ** ** | **Boise**             | ** **  | **Predecessor**       | ** ** |
|-------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **        | ** ** | ** **            | ** **  | **October 29**   | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **            | ** **  | **(inception)**       | ** ** | **January 1** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Year Ended**        | ** **  | **through**           | ** ** | **through** | ** ** | **Year Ended** | ** ** |
| ** **        | ** ** | **December 31,** | ** **  | **December 31,** | ** ** | **October 28,** | ** ** | **December 31,** | ** ** |
| ** **        | ** ** | **2005**              | ** **  | **2004**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **        | ** ** | **(millions)**        | ** **  |
| Net sales         |       |                  |        |                  |       |   |   |   |   |
| United States     |       | $                     | 5,848.0     |                  | $          | 866.4 |   | $ | 4,829.7 |   | $ | 4,619.9 |   |
| Foreign           |       | 59.4                  |        | 6.3                   |       | 32.3 |   | 33.8 |   |
| ** **        | ** ** | **$**                 | **5,907.4** | ** **            | **$**      | **872.7** | ** ** | **$** | **4,862.0** | ** ** | **$** | **4,653.7** | ** ** |
| ** **        | ** ** | ** **            | ** **  | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long-lived assets | ** ** | ** **            | ** **  | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States     |       | $                     | 1,630.8     |                  | $          | 1,778.0 |   | $ | 2,167.4 |   | $ | 2,384.1 |   |
| Foreign           |       | 47.4                  |        | 42.3                  |       | 48.1 |   | 40.4 |   |
| ** **        | ** ** | **$**                 | **1,678.2** | ** **            | **$**      | **1,820.3** | ** ** | **$** | **2,215.5** | ** ** | **$** | **2,424.5** | ** ** |

 

Segment sales to external customers by product line are asfollows:

 
| ** **                       | ** ** | **Boise**                               | ** **  | **Predecessor**                                                    | ** ** |
|----------------------------------|------------|-----------------------------------------|-------------|--------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Year Ended  December 31,  2005** | ** **  | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                       | ** ** | **(millions)**                          | ** **  |
|                             |       |                                    |        |                                                               |       |   |   |   |   |
| Building  Materials Distribution |       |                                    |        |                                                               |       |   |   |   |   |
| Structural  panels               |       | $                                       | 674.9       |                                                               | $          | 88.9 |   | $ | 655.0 |   | $ | 539.4 |   |
| Engineered wood  products        |       | 483.7                                   |        | 61.5                                                               |       | 318.6 |   | 273.4 |   |
| Lumber                           |       | 804.7                                   |        | 117.3                                                              |       | 727.3 |   | 590.8 |   |
| Particleboard                    |       | 21.2                                    |        | 3.4                                                                |       | 16.7 |   | 15.1 |   |
| Building  supplies and other     |       | 1,067.0                                 |        | 130.5                                                              |       | 724.8 |   | 629.1 |   |
|                             |       | 3,051.5                                 |        | 401.6                                                              |       | 2,442.4 |   | 2,047.8 |   |
|                             |       |                                    |        |                                                               |       |   |   |   |   |
| Wood Products                    |       |                                    |        |                                                               |       |   |   |   |   |
| Plywood and  veneer              |       | 364.9                                   |        | 62.0                                                               |       | 387.4 |   | 401.4 |   |
| Engineered wood  products        |       | 237.0                                   |        | 28.9                                                               |       | 168.4 |   | 160.4 |   |
| Lumber                           |       | 126.0                                   |        | 24.1                                                               |       | 132.2 |   | 151.6 |   |
| Particleboard                    |       | 44.3                                    |        | 5.7                                                                |       | 42.1 |   | 39.3 |   |
| Building  supplies and other     |       | 34.8                                    |        | 10.1                                                               |       | 60.1 |   | 46.3 |   |
|                             |       | 807.0                                   |        | 130.8                                                              |       | 790.2 |   | 799.0 |   |
|                             |       |                                    |        |                                                               |       |   |   |   |   |
| Paper                            |       |                                    |        |                                                               |       |   |   |   |   |
| Uncoated free  sheet             |       | 1,151.8                                 |        | 195.1                                                              |       | 972.4 |   | 1,096.4 |   |
| Containerboard  (medium)         |       | 10.1                                    |        | 1.3                                                                |       | 8.4 |   | 6.0 |   |
| Market pulp and  other           |       | 213.2                                   |        | 22.7                                                               |       | 113.6 |   | 110.2 |   |
|                             |       | 1,375.1                                 |        | 219.1                                                              |       | 1,094.4 |   | 1,212.6 |   |
|                             |       |                                    |        |                                                               |       |   |   |   |   |
| Packaging &  Newsprint  |       |                                    |        |                                                               |       |   |   |   |   |
| Containerboard  (linerboard)     |       | 430.0                                   |        | 75.9                                                               |       | 339.9 |   | 380.4 |   |
| Newsprint                        |       | 210.1                                   |        | 38.6                                                               |       | 158.2 |   | 173.5 |   |
| Other                            |       | 10.3                                    |        | 1.5                                                                |       | 10.7 |   | 17.4 |   |
|                             |       | 650.4                                   |        | 116.0                                                              |       | 508.8 |   | 571.3 |   |
|                             |       |                                    |        |                                                               |       |   |   |   |   |
| Corporate and  Other             |       | 23.4                                    |        | 5.2                                                                |       | 26.2 |   | 23.0 |   |
| ** **                       | ** ** | **$**                                   | **5,907.4** | ** **                                                         | **$**      | **872.7** | ** ** | **$** | **4,862.0** | ** ** | **$** | **4,653.7** | ** ** |

 

102

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An analysis of ouroperations by segment is as follows:

 
| ** **                                                      | ** ** | **Boise**      | ** **  |
|-----------------------------------------------------------------|------------|----------------|-------------|
| ** **                                                      | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Income** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Loss)** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Sales**      | ** **  | **Before** | ** ** | **Amortization,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | ** **     | ** **  | **Related** | ** ** | ** ** | ** ** | ** ** | ** ** | **Taxes** | ** ** | **and** | ** ** | **EBITDA** | ** ** | **Capital** | ** ** | ** ** | ** ** |
| ** **                                                      | ** ** | **Trade**      | ** **  | **Parties** | ** ** | **Intersegment** | ** ** | **Total** | ** ** | **(a) (b)** | ** ** | **Depletion** | ** ** | **(a) (b) (g)** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
| ** **                                                      | ** ** | **(millions)** | ** **  |
| **Year  Ended December 31, 2005**                          | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                                |       | $              | 3,051.5     |   | $ | — |   | $ | 0.8 |   | $ | 3,052.3 |   | $ | 99.9 |   | $ | 9.1 |   | $ | 109.0 |   | $ | 11.7 |   | $ | 433.8 |   |
| Wood Products                                                   |       | 807.0          |        | — |   | 487.4 |   | 1,294.4 |   | 119.4 |   | 23.0 |   | 142.4 |   | 50.1 |   | 499.0 |   |
| Paper                                                           |       | 812.8          |        | 562.3 |   | 42.7 |   | 1,417.8 |   | 58.6 |   | 54.0 |   | 112.6 |   | 80.3 |   | 1,149.8 |   |
| Packaging &  Newsprint                                 |       | 650.4          |        | — |   | 81.2 |   | 731.6 |   | 23.8 |   | 37.2 |   | 61.0 |   | 19.5 |   | 544.3 |   |
| Corporate and  Other                                            |       | 23.4           |        | — |   | 46.6 |   | 70.0 |   | (29.4 | ) | 5.5 |   | (23.8 | ) | 8.7 |   | 338.8 |   |
|                                                            |       | 5,345.1        |        | 562.3 |   | 658.7 |   | 6,566.1 |   | 272.3 |   | 128.8 |   | 401.2 |   | 170.3 |   | 2,965.7 |   |
| Intersegment  eliminations                                      |       | —         |        | — |   | (658.7 | ) | (658.7 | ) | — |   | — |   | — |   | — |   | (152.0 | ) |
| Change in fair  value of interest rate swaps (c)                |       | —         |        | — |   | — |   | — |   | 9.9 |   | — |   | — |   | — |   | — |   |
| Interest expense  (d)                                           |       | —         |        | — |   | — |   | — |   | (166.3 | ) | — |   | — |   | — |   | — |   |
| Interest income                                                 |       | —         |        | — |   | — |   | — |   | 3.4 |   | — |   | — |   | — |   | — |   |
| ** **                                                      | ** ** | **$**          | **5,345.1** | ** ** | **$** | **562.3** | ** ** | **$** | **—** | ** ** | **$** | **5,907.4** | ** ** | **$** | **119.3** | ** ** | **$** | **128.8** | ** ** | **$** | **401.2** | ** ** | **$** | **170.3** | ** ** | **$** | **2,813.7** | ** ** |
| **October 29  (inception) through December 31, 2004** | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                                |       | $              | 401.6       |   | $ | — |   | $ | 0.1 |   | $ | 401.7 |   | $ | 10.1 |   | $ | 1.5 |   | $ | 11.6 |   | $ | 1.1 |   | $ | 396.6 |   |
| Wood Products                                                   |       | 130.8          |        | — |   | 69.3 |   | 200.1 |   | 15.6 |   | 3.3 |   | 18.9 |   | 7.6 |   | 456.9 |   |
| Paper                                                           |       | 126.4          |        | 92.7 |   | 11.0 |   | 230.1 |   | 19.0 |   | 8.3 |   | 27.3 |   | 16.5 |   | 1,079.2 |   |
| Packaging &  Newsprint                                 |       | 116.0          |        | — |   | 12.9 |   | 128.9 |   | 7.3 |   | 6.0 |   | 13.3 |   | 2.8 |   | 550.1 |   |
| Corporate and  Other                                            |       | 5.2            |        | — |   | 7.9 |   | 13.1 |   | (6.8 | ) | 0.9 |   | (5.9 | ) | 0.9 |   | 615.0 |   |
| Acquisition of  forest products and paper businesses            |       | —         |        | — |   | — |   | — |   | — |   | — |   | — |   | 2,196.5 |   | — |   |
| Loan to related  party                                          |       | —         |        | — |   | — |   | — |   | — |   | — |   | — |   | 157.5 |   | — |   |
|                                                            |       | 780.0          |        | 92.7 |   | 101.2 |   | 973.9 |   | 45.2 |   | 20.0 |   | 65.2 |   | 2,382.9 |   | 3,097.8 |   |
| Intersegment  eliminations                                      |       | —         |        | — |   | (101.2 | ) | (101.2 | ) | — |   | — |   | — |   | — |   | (165.7 | ) |
| Interest expense                                                |       | —         |        | — |   | — |   | — |   | (22.2 | ) | — |   | — |   | — |   | — |   |
| Interest income                                                 |       | —         |        | — |   | — |   | — |   | 2.0 |   | — |   | — |   | — |   | — |   |
| ** **                                                      | ** ** | **$**          | **780.0**   | ** ** | **$** | **92.7** | ** ** | **$** | **—** | ** ** | **$** | **872.7** | ** ** | **$** | **25.0** | ** ** | **$** | **20.0** | ** ** | **$** | **65.2** | ** ** | **$** | **2,382.9** | ** ** | **$** | **2,932.1** | ** ** |

 

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| ** **                                                | ** ** | **Predecessor** | ** **  |
|-----------------------------------------------------------|------------|-----------------|-------------|
| ** **                                                | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Income** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(Loss)** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** | **Equity** | ** ** | ** ** | ** ** | ** ** | ** ** | **Investments** | ** ** |
| ** **                                                | ** ** | **Sales**       | ** **  | **Before** | ** ** | **Amortization,** | ** ** | ** ** | ** ** | **in Net** | ** ** | ** ** | ** ** | ** ** | ** ** | **in Equity** | ** ** |
| ** **                                                | ** ** | ** **      | ** **  | **Related** | ** ** | ** ** | ** ** | ** ** | ** ** | **Taxes** | ** ** | **and** | ** ** | **EBITDA** | ** ** | **Income of** | ** ** | **Capital** | ** ** | ** ** | ** ** | **Affiliates** | ** ** |
| ** **                                                | ** ** | **Trade**       | ** **  | **Parties** | ** ** | **Intersegment** | ** ** | **Total** | ** ** | **(e) (f)** | ** ** | **Depletion** | ** ** | **(e) (f)(g)** | ** ** | **Affiliates** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** | **(e)** | ** ** |
| ** **                                                | ** ** | **(millions)**  | ** **  |
| **January 1 through October 28, 2004**     | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building Materials Distribution                           |       | $               | 2,442.4     |   | $ | — |   | $ | — |   | $ | 2,442.4 |   | $ | 78.8 |   | $ | 6.1 |   | $ | 84.9 |   | $ | — |   | $ | 9.8 |   | $ | 442.9 |   | $ | — |   |
| Wood Products                                             |       | 787.7           |        | 2.5 |   | 369.7 |   | 1,159.9 |   | 203.0 |   | 23.5 |   | 226.5 |   | 6.3 |   | 41.3 |   | 437.9 |   | — |   |
| Paper                                                     |       | 652.4           |        | 442.0 |   | 46.0 |   | 1,140.4 |   | (35.4 | ) | 118.5 |   | 83.1 |   | — |   | 56.2 |   | 1,767.1 |   | — |   |
| Packaging & Newsprint                            |       | 508.7           |        | 0.1 |   | 56.8 |   | 565.6 |   | (1.2 | ) | 34.7 |   | 33.5 |   | — |   | 27.1 |   | 549.6 |   | — |   |
| Corporate and Other                                       |       | 26.2            |        | — |   | 51.2 |   | 77.4 |   | (56.8 | ) | 11.0 |   | (45.8 | ) | — |   | 5.8 |   | 375.7 |   | — |   |
|                                                      |       | 4,417.4         |        | 444.6 |   | 523.7 |   | 5,385.7 |   | 188.4 |   | 193.8 |   | 382.2 |   | 6.3 |   | 140.2 |   | 3,573.2 |   | — |   |
| Intersegment eliminations                                 |       | —          |        | — |   | (523.7 | ) | (523.7 | ) | — |   | — |   | — |   | — |   | — |   | (207.7 | ) | — |   |
| Interest expense                                          |       | —          |        | — |   | — |   | — |   | (72.1 | ) | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest income                                           |       | —          |        | — |   | — |   | — |   | 0.5 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| ** **                                                | ** ** | **$**           | **4,417.4** | ** ** | **$** | **444.6** | ** ** | **$** | **—** | ** ** | **$** | **4,862.0** | ** ** | **$** | **116.8** | ** ** | **$** | **193.8** | ** ** | **$** | **382.2** | ** ** | **$** | **6.3** | ** ** | **$** | **140.2** | ** ** | **$** | **3,365.5** | ** ** | **$** | **—** | ** ** |
| ** **                                                | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Year Ended December 31, 2003**                     |       |            |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Building Materials Distribution                           |       | $               | 2,047.8     |   | $ | — |   | $ | — |   | $ | 2,047.8 |   | $ | 47.7 |   | $ | 7.1 |   | $ | 54.8 |   | $ | — |   | $ | 13.6 |   | $ | 299.9 |   | $ | — |   |
| Wood Products                                             |       | 794.1           |        | 4.9 |   | 316.7 |   | 1,115.7 |   | 43.5 |   | 34.2 |   | 77.7 |   | 8.7 |   | 33.8 |   | 450.9 |   | 44.2 |   |
| Paper                                                     |       | 781.1           |        | 431.5 |   | 44.5 |   | 1,257.1 |   | (23.7 | ) | 136.3 |   | 112.6 |   | — |   | 84.6 |   | 1,818.1 |   | — |   |
| Packaging & Newsprint                            |       | 571.3           |        | — |   | 66.8 |   | 638.1 |   | (15.0 | ) | 40.4 |   | 25.4 |   | — |   | 36.3 |   | 534.6 |   | — |   |
| Corporate and Other                                       |       | 23.0            |        | — |   | 54.9 |   | 77.9 |   | (40.1 | ) | 11.8 |   | (28.3 | ) | — |   | 6.8 |   | 210.9 |   | — |   |
|                                                      |       | 4,217.3         |        | 436.4 |   | 482.9 |   | 5,136.6 |   | 12.4 |   | 229.8 |   | 242.2 |   | 8.7 |   | 175.1 |   | 3,314.4 |   | 44.2 |   |
| Intersegment eliminations                                 |       | —          |        | — |   | (482.9 | ) | (482.9 | ) | — |   | — |   | — |   | — |   | — |   | (190.6 | ) | — |   |
| Interest expense                                          |       | —          |        | — |   | — |   | — |   | (92.9 | ) | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest income                                           |       | —          |        | — |   | — |   | — |   | 0.8 |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Cumulative effect of accounting change, net of income tax |       | —          |        | — |   | — |   | — |   | — |   | — |   | (4.1 | ) | — |   | — |   | — |   | — |   |
| ** **                                                | ** ** | **$**           | **4,217.3** | ** ** | **$** | **436.4** | ** ** | **$** | **—** | ** ** | **$** | **4,653.7** | ** ** | **$** | **(79.7** | **)** | **$** | **229.8** | ** ** | **$** | **238.1** | ** ** | **$** | **8.7** | ** ** | **$** | **175.1** | ** ** | **$** | **3,123.8** | ** ** | **$** | **44.2** | ** ** |

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(a)           The year ended December 31, 2005, includes$3.6 million of expense for the write-off of costs incurred in connectionwith the canceled initial public offering and a $9.9 million gain forchanges in our retiree healthcare programs. For more information about thechanges to our retiree healthcare programs, see Note 13, Retirement andBenefit Plans.

 

(b)           As a result of purchase price accounting, wewrote up the value of our inventory, which increased the costs and expensesrecognized by us upon the sale of the inventory by $20.2 million for theperiod of October 29 (inception) through December 31, 2004.

 

(c)           Includes a net $9.9 million gain for thechange in the fair value of interest rate swaps related to our amended andrestated senior credit facilities.

 

(d)           Includes the write-off of $43.0 millionof deferred financing costs resulting from the repayment of the Tranche Bterm loan.

 

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(e)                                  Income (loss) before taxes and EBITDA for theperiod of January 1 through October 28, 2004, include the followingitems: (i) $7.1 million of costs incurred in connection with the February 2004sale of our predecessor’s Yakima, Washington, plywood and lumber operations; (ii) a$46.5 million pretax gain for the sale of our predecessor’s 47% interest in Voyageur Panel in May 2004; (iii) $12.7million of expense primarily for a one-time retention bonus OfficeMax grantedto our employees; and (iv) $14.6 million of noncash restricted stockexpenses.

 

(f)                                    Income (loss) before taxes and EBITDA for theyear ended December 31, 2003, include the following items: (i) a$14.7 million pretax charge for the write-down of impaired assets at ourpredecessor’s plywood and lumber operations in Yakima, Washington, in December 2003;and (ii) a $3.6 million charge for the early termination of anoperating lease used in connection with our predecessor’s paper business.

 

(g)                                 EBITDA represents income (loss) beforeinterest (interest expense, interest income, and change in fair value ofinterest rate swaps), income tax provision (benefit), and depreciation,amortization, and depletion. EBITDA is the primary measure used by our chiefoperating decision makers to evaluate segment operating performance and todecide how to allocate resources to segments. We believe EBITDA is useful toinvestors because it provides a means to evaluate the operating performance ofour segments and our company on an ongoing basis using criteria that are usedby our internal decision makers and because it is frequently used by investorsand other interested parties in the evaluation of companies with substantialfinancial leverage. We believe EBITDA is a meaningful measure because itpresents a transparent view of our recurring operating performance and allowsmanagement to readily view operating trends, perform analytical comparisons,and identify strategies to improve operating performance. For example, webelieve that the inclusion of items such as taxes, interest expense, andinterest income distorts management’s ability to assess and view the coreoperating trends in our segments. EBITDA, however, is not a measure of ourliquidity or financial performance under GAAP and should not be considered asan alternative to net income (loss), income (loss) from operations, or anyother performance measure derived in accordance with GAAP or as an alternativeto cash flow from operating activities as a measure of our liquidity. The useof EBITDA instead of net income (loss) or segment income (loss) has limitationsas an analytical tool, including the inability to determine profitability; theexclusion of interest expense, interest income, change in the fair value ofinterest rate swaps, and associated significant cash requirements; and theexclusion of depreciation, amortization, and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying on our GAAP results.Our measures of EBITDA are not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the methods ofcalculation.

 

The following is areconciliation of net income (loss) to EBITDA:

 
| ** **                                   | ** ** | **Boise**                               | ** ** | **Predecessor**                                                    | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Year Ended  December 31,  2005** | ** ** | **October 29  (inception)  through  December 31,  2004** | ** ** | **January 1  through  October 28,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** |
| ** **                                   | ** ** | **(millions)**                          | ** ** |
|                                         |       |                                    |       |                                                               |       |   |   |   |   |
| Net income  (loss)                           |       | $                                       | 121.4      |                                                               | $          | 24.7 |   | $ | 69.5 |   | $ | (47.3 | ) |
| Change in  fair value of interest rate swaps |       | (9.9                                    | )          | —                                                             |       | — |   | — |   |
| Interest  expense                            |       | 166.3                                   |       | 22.2                                                               |       | 72.1 |   | 92.9 |   |
| Interest  income                             |       | (3.4                                    | )          | (2.0                                                               | )          | (0.5 | ) | (0.8 | ) |
| Income tax  provision (benefit)              |       | (2.1                                    | )          | 0.3                                                                |       | 47.3 |   | (36.5 | ) |
| Depreciation,  amortization, and depletion   |       | 128.8                                   |       | 20.0                                                               |       | 193.8 |   | 229.8 |   |
| EBITDA                                       | ** ** | **$**                                   | **401.2**  | ** **                                                         | **$**      | **65.2** | ** ** | **$** | **382.2** | ** ** | **$** | **238.1** | ** ** |

 

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***17.          Commitmentsand Guarantees***

 

*Commitments*

 

We have commitments for leases and long-term debt that are discussedfurther in Note 6, Leases, and Note 11, Debt. We havecommitments for raw materials and utilities. Most of our raw materialcommitments are for contracts to purchase timber. We estimate that we have acontractual obligation for approximately $973.5 million to purchase timber.This includes the obligations related to the long-term supply contracts enteredinto in connection with the Timberlands Sale. Under these supply contracts, wehave the right to cancel or reduce our commitments in the event of a millcurtailment or shutdown. The prices for most of these contracts are setquarterly or semiannually based on regional market prices. The$973.5 million estimate is based on contract terms or first quarter 2006pricing. Our timber obligations are subject to change based on, among otherthings, the effect of governmental laws and regulations, our manufacturingoperations not operating in the normal course of business, timber availability,and the status of environmental appeals. Except for deposits required pursuantto wood supply contracts, these obligations are not recorded in ourconsolidated financial statements until contract payment terms take effect.

 

We enter into utility contracts for the purchase of electricity andnatural gas. We also purchase these services under utility tariffs. Thecontractual and tariff arrangements include multiple-year commitments andminimum annual purchase requirements. At December 31, 2005, we hadapproximately $46.1 million of utility purchase commitments. These paymentobligations were valued at prices in effect on December 31, 2005, orcontract language, if available. Because we consume the energy in themanufacture of our products, these obligations represent the face value of thecontracts, not resale value.

 

Pursuant to an Additional Consideration Agreement between us andOfficeMax, we may be required to make substantial cash payments to, or receivesubstantial cash payments from, OfficeMax. Under the Additional ConsiderationAgreement, the purchase price paid for the forest products and paper assets maybe adjusted upward or downward based on paper prices during the six yearsfollowing the Acquisition, subject to annual and aggregate caps. Neither partywill be obligated to make a payment under the Additional ConsiderationAgreement in excess of $45 million in any one year. Payments are alsosubject to an aggregate cap of $125 million that declines to$115 million in the fifth year and $105 million in the sixth year. After eachanniversary of the Acquisition, we review paper prices with the provisions ofthe Additional Consideration Agreement to determine whether any amounts areowed or receivable under the agreement. For the first anniversary period, October 29,2005, neither Boise nor OfficeMax owed additional consideration for thepurchase price.

 

# *Guarantees*

# * *

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FASBInterpretation No. 45, Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others.

 

Boise Cascade Holdings, L.L.C., and TimberHoldings (collectively, The Companies) and their respective direct and indirectdomestic subsidiaries, excluding foreign subsidiaries, are parties to anamended and restated Credit Agreement dated as of April 18, 2005, withJPMorgan Chase Bank, as Administrative Agent, and certain lenders named thereinand to a related Guarantee and Collateral Agreement of the same date(collectively the Bank Credit Agreements). Boise Cascade LLC(Boise LLC), a wholly owned direct subsidiary of Boise Cascade Holdings,L.L.C., acts as borrower under the Bank Credit Agreements for the$635.8 million Tranche D term loan and a $475.0 millionrevolving credit facility that had no outstanding balance at December 31,2005, and contingent reimbursement obligations in respect of $63.1 millionof standby letters of credit issued under the revolving facility. In addition,Boise Land & Timber Corp., a wholly owned direct subsidiary ofTimber Holdings, acted as borrower under the original Bank Credit Agreementsfor the $1,225.0 million Tranche C term loan, which was paid in fullin February 2005 with the proceeds of the Timberlands Sale. Boise LLC’sloans and reimbursement obligations are guaranteed by The Companies and each oftheir domestic subsidiaries (other than Boise LLC). Prior to the repaymentby Boise Land & Timber Corp. of the Tranche C term loan, TheCompanies and each of their domestic subsidiaries (other than Boise Land &Timber Corp.) also guaranteed such loan.

 

Boise LLC and its wholly owned subsidiary, Boise Cascade FinanceCorporation, have jointly issued $250.0 million of senior unsecuredfloating-rate notes due in 2012 and $400.0 million of 7.125% seniorsubordinated notes due in 2014. The senior notes are guaranteed on a seniorbasis and the 

 

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subordinated notes on asubordinated basis by The Companies and each of the domestic subsidiaries,excluding foreign subsidiaries, of The Companies, other than Boise LLC andBoise Cascade Finance Corporation, which are the issuers of the notes. In July 2005,we completed an exchange offer whereby all of our senior unsecuredfloating-rate notes and senior subordinated notes were exchanged for publiclytraded, registered securities with identical terms (other than terms relatingto registration rights) to the $250.0 million senior unsecuredfloating-rate notes and the $400.0 million senior subordinated notesissued in October 2004. We may redeem all or part of the notes at any timeat redemption prices defined in the indenture. If we sell specific assets orexperience specific kinds of changes in control, we must offer to purchase thenotes.

 

Boise LLC guarantees the obligations and performance of its whollyowned subsidiary, Boise Cascade do Brasil Ltda., under the terms of timberand stumpage purchase agreements in Brazil. These agreements extendthrough 2014. Boise LLC’s exposure is effectively limited to the loss ofits investment in Boise Cascade do Brasil Ltda., which was approximately$35.3 million at December 31, 2005.

 

Boise LLC has issued guarantees to a limited number of tradecreditors of one or more of its principal operating subsidiaries, BoiseBuilding Solutions Distribution, L.L.C.; Boise Building SolutionsManufacturing, L.L.C.; Boise White Paper, L.L.C.; and Boise Packaging &Newsprint, L.L.C., for trade credit obligations arising in the ordinarycourse of the business of such operating subsidiaries. These include guaranteesof the obligations of both Boise White Paper, L.L.C., and Boise BuildingSolutions Manufacturing, L.L.C., in respect to present and future timbersale agreements and several facility leases entered into by such subsidiaries.We also enter into guarantees of various raw material or energy supplycontracts arising in the ordinary course of business.

 

Boise LLC provides credit support for its principal operatingsubsidiaries in the form of reimbursement or indemnity obligations to theissuers of surety bonds and standby letters of credit supporting obligations ofits operating subsidiaries arising in the ordinary course of business tosuppliers of goods and services and to government entities regulating suchsubsidiaries’ environmental and workers’ compensation obligations.

 

We enter into a wide range of indemnificationarrangements in the ordinary course of business. These include tortindemnifications, tax indemnifications, financing transactions,indemnifications against third-party claims arising out of arrangements toprovide services to us, and indemnifications in merger and acquisitionagreements. It is impossible to quantify the maximum potential liability underthese indemnifications. At December 31, 2005, we were not aware of anymaterial liabilities arising from these indemnifications.

 

Inconnection with the Timberlands Sale, we, along with Timber Holdings, agreed toindemnify the purchasers for any breach of representation, warranty, orcovenant contained in the purchase agreement. In all material respects, ourindemnification obligations survived until February 4, 2006, and weresubject to a deductible of $16.5 million and an aggregate cap of$100.0 million. Because we received no claims for indemnification before February 4,2006, our indemnification obligations with respect to the Timberlands Sale haveterminated.

 

***18.          ConsolidatingGuarantor and Nonguarantor Financial Information***

 

The following consolidating financialinformation presents the Statements of Income (Loss), Balance Sheets, and CashFlows related to our business. The senior notes are guaranteed on a seniorbasis, and the senior subordinated notes are guaranteed on a seniorsubordinated basis, in each case jointly and severally by Boise, TimberHoldings, and each of their existing and future subsidiaries (other than theco-issuers, Boise LLC and Boise Cascade Finance Corporation). Thenonguarantors include our foreign subsidiaries and Birch Creek. Other than theconsolidated financial statements and footnotes for Boise Cascade Holdings,L.L.C., and Boise Land & Timber Holdings Corp., financial statementsand other disclosures concerning the guarantors have not been presented becausemanagement believes that such information is not material to investors. See Exhibit 99of this Form 10-K for Boise Land & Timber Holdings Corp.consolidated financial statements and notes to consolidated financialstatements.

 

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**BoiseCascade Holdings, L.L.C., and Subsidiaries**

**ConsolidatingStatements of Income (Loss)**

**For the Year Ended December 31, 2005**
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|-------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **  |
| **Sales**                                                                            |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| Trade                                                                                |       | $                                               | —      |                    | $          | —                      |       | $                                 | 5,277,082   |             | $          | 68,024           |       | $ | — |   | $ | 5,345,106 |   |
| Intercompany                                                                         |       | —                                          |        | 2,567                   |       | 11,308                      |       | 58,394                            |        | (72,269          | )          | —           |       |
| Related parties                                                                      |       | —                                          |        | —                  |       | 562,338                     |       | —                            |        | —           |       | 562,338          |       |
|                                                                                 |       | —                                          |        | 2,567                   |       | 5,850,728                   |       | 126,418                           |        | (72,269          | )          | 5,907,444        |       |
|                                                                                 |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| **Costs and expenses**                                                               |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| Materials, labor, and other operating  expenses                                      |       | —                                          |        | 3,084                   |       | 5,095,067                   |       | 125,803                           |        | (68,842          | )          | 5,155,112        |       |
| Fiber costs from related parties                                                     |       | —                                          |        | —                  |       | 17,609                      |       | —                            |        | —           |       | 17,609           |       |
| Depreciation, amortization, and depletion                                            |       | —                                          |        | 3,952                   |       | 121,340                     |       | 3,534                             |        | —           |       | 128,826          |       |
| Selling and distribution expenses                                                    |       | —                                          |        | —                  |       | 261,825                     |       | 2,247                             |        | —           |       | 264,072          |       |
| General and administrative expenses                                             |       | —                                          |        | 34,524                  |       | 43,607                      |       | 28                                |        | (3,427           | )          | 74,732           |       |
| Other (income) expense, net                                                          |       | —                                          |        | (6,146                  | )          | (2,908                      | )          | 3,462                             |        | —           |       | (5,592           | )          |
|                                                                                 |       | —                                          |        | 35,414                  |       | 5,536,540                   |       | 135,074                           |        | (72,269          | )          | 5,634,759        |       |
| ** **                                                                           |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| **Income (loss) from operations**                                                    |       | —                                          |        | (32,847                 | )          | 314,188                     |       | (8,656                            | )           | —           |       | 272,685          |       |
|                                                                                 |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| Foreign exchange gain (loss)                                                         |       | —                                          |        | 4,145                   |       | 32                          |       | (4,517                            | )           | —           |       | (340             | )          |
| Change in fair value of interest rate swaps                                          |       | —                                          |        | 9,886                   |       | —                      |       | —                            |        | —           |       | 9,886            |       |
| Interest expense                                                                     |       | —                                          |        | (164,807                | )          | (7                          | )          | (1,530                            | )           | —           |       | (166,344         | )          |
| Interest expense—intercompany                                                   |       | —                                          |        | (230                    | )          | —                      |       | (2,302                            | )           | 2,532            |       | —           |       |
| Interest income                                                                      |       | —                                          |        | 3,076                   |       | 257                         |       | 58                                |        | —           |       | 3,391            |       |
| Interest income—intercompany                                                    |       | —                                          |        | 274                     |       | 2,258                       |       | —                            |        | (2,532           | )          | —           |       |
|                                                                                 |       | —                                          |        | (147,656                | )          | 2,540                       |       | (8,291                            | )           | —           |       | (153,407         | )          |
|                                                                                 |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| **Income (loss) before income taxes and  equity in net income (loss) of affiliates** |       | —                                          |        | (180,503                | )          | 316,728                     |       | (16,947                           | )           | —           |       | 119,278          |       |
| Income tax (provision) benefit                                                       |       | 4,785                                           |        | (59                     | )          | (2,687                      | )          | 50                                |        | —           |       | 2,089            |       |
|                                                                                 |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| **Income (loss) before equity in net income  (loss) of affiliates**                  |       | 4,785                                           |        | (180,562                | )          | 314,041                     |       | (16,897                           | )           | —           |       | 121,367          |       |
|                                                                                 |       |                                            |        |                    |       |                        |       |                              |        |             |       |             |       |
| **Equity in net income (loss) of affiliates**                                        |       | 116,582                                         |        | 297,144                 |       | —                      |       | —                            |        | (413,726         | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                           | **121,367** | ** **              | **$**      | **116,582**                 | ** ** | **$**                             | **314,041** | ** **       | **$**      | **(16,897**      | **)**      | **$** | **(413,726** | **)** | **$** | **121,367** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Income (Loss)For the Period of October 29 (inception) Through December 31, 2004**
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —     |                    | $          | —                      |       | $                                 | 773,636    |             | $          | 6,317            |       | $ | — |   | $ | 779,953 |   |
| Intercompany                                                                         |       | —                                          |       | —                  |       | —                      |       | 6,642                             |       | (6,642           | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                  |       | 92,774                      |       | —                            |       | —           |       | 92,774           |       |
|                                                                                 |       | —                                          |       | —                  |       | 866,410                     |       | 12,959                            |       | (6,642           | )          | 872,727          |       |
|                                                                                 |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Costs and expenses**                                                               |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| Materials, labor, and other operating  expenses                                      |       | —                                          |       | 1,320                   |       | 725,400                     |       | 13,431                            |       | (6,642           | )          | 733,509          |       |
| Fiber costs from related parties                                                     |       | —                                          |       | —                  |       | 24,451                      |       | —                            |       | —           |       | 24,451           |       |
| Depreciation, amortization, and depletion                                            |       | —                                          |       | 590                     |       | 18,904                      |       | 543                               |       | —           |       | 20,037           |       |
| Selling and distribution expenses                                                    |       | —                                          |       | —                  |       | 39,798                      |       | 320                               |       | —           |       | 40,118           |       |
| General and administrative expenses                                                  |       | —                                          |       | 6,115                   |       | 4,493                       |       | —                            |       | —           |       | 10,608           |       |
| Other (income) expense, net                                                          |       | —                                          |       | 196                     |       | (482                        | )          | 263                               |       | —           |       | (23              | )          |
|                                                                                 |       | —                                          |       | 8,221                   |       | 812,564                     |       | 14,557                            |       | (6,642           | )          | 828,700          |       |
| ** **                                                                           |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Income (loss) from operations**                                                    |       | —                                          |       | (8,221                  | )          | 53,846                      |       | (1,598                            | )          | —           |       | 44,027           |       |
|                                                                                 |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange gain (loss)                                                         |       | —                                          |       | 87                      |       | 276                         |       | 818                               |       | —           |       | 1,181            |       |
| Interest expense                                                                     |       | —                                          |       | (22,182                 | )          | —                      |       | —                            |       | —           |       | (22,182          | )          |
| Interest expense—intercompany                                                   |       | —                                          |       | (51                     | )          | —                      |       | (194                              | )          | 245              |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 1,960                   |       | 41                          |       | 4                                 |       | —           |       | 2,005            |       |
| Interest income—intercompany                                                    |       | —                                          |       | 194                     |       | 51                          |       | —                            |       | (245             | )          | —           |       |
|                                                                                 |       | —                                          |       | (19,992                 | )          | 368                         |       | 628                               |       | —           |       | (18,996          | )          |
|                                                                                 |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Income (loss) before income taxes and  equity in net income (loss) of affiliates** |       | —                                          |       | (28,213                 | )          | 54,214                      |       | (970                              | )          | —           |       | 25,031           |       |
| Income tax provision                                                                 |       | —                                          |       | (18                     | )          | (266                        | )          | (45                               | )          | —           |       | (329             | )          |
|                                                                                 |       |                                            |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Income (loss) before equity in net income  (loss) of affiliates**                  |       | —                                          |       | (28,231                 | )          | 53,948                      |       | (1,015                            | )          | —           |       | 24,702           |       |
| Equity in net income (loss) of affiliates                                            |       | 24,702                                          |       | 52,933                  |       | —                      |       | —                            |       | (77,635          | )          | —           |       |
| **Net income (loss)**                                                                | ** ** | **$**                                           | **24,702** | ** **              | **$**      | **24,702**                  | ** ** | **$**                             | **53,948** | ** **       | **$**      | **(1,015**       | **)**      | **$** | **(77,635** | **)** | **$** | **24,702** | ** ** |

 

109

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** **

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2005**

 
| ** **                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------------------------------|-------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **(thousands)**                                 | ** **  |
| **ASSETS**                       | ** ** | ** **                                      | ** **  | ** **              | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                             |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Current**                      |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Cash and  cash equivalents       |       | $                                               | —      |                    | $          | 85,469                      |       | $                                 | 34            |             | $          | 2,668            |       | $ | — |   | $ | 88,171 |   |
| Receivables                      |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Trade, less allowances           |       | —                                          |        | —                  |       | 2,668                       |       | 336,153                           |          | —           |       | 338,821          |       |
| Intercompany                     |       | —                                          |        | —                  |       | 1,204                       |       | 1,284                             |          | (2,488           | )          | —           |       |
| Related parties                  |       | —                                          |        | —                  |       | 3,335                       |       | 39,675                            |          | —           |       | 43,010           |       |
| Other                            |       | —                                          |        | 7,318                   |       | 10,570                      |       | 3,092                             |          | —           |       | 20,980           |       |
| Inventories                      |       | —                                          |        | 124                     |       | 610,418                     |       | 23,241                            |          | —           |       | 633,783          |       |
| Other                            |       | —                                          |        | 6,967                   |       | 3,195                       |       | 532                               |          | —           |       | 10,694           |       |
|                             |       | —                                          |        | 99,878                  |       | 631,424                     |       | 406,645                           |          | (2,488           | )          | 1,135,459        |       |
|                             |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Property**                     |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Property and  equipment          |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Land and land improvements       |       | —                                          |        | 6,881                   |       | 71,874                      |       | 665                               |          | —           |       | 79,420           |       |
| Buildings and improvements       |       | —                                          |        | 23,343                  |       | 194,518                     |       | 8,371                             |          | —           |       | 226,232          |       |
| Machinery and equipment          |       | —                                          |        | 9,508                   |       | 1,287,320                   |       | 34,464                            |          | —           |       | 1,331,292        |       |
|                             |       | —                                          |        | 39,732                  |       | 1,553,712                   |       | 43,500                            |          | —           |       | 1,636,944        |       |
|                             |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Accumulated  depreciation        |       | —                                          |        | (2,579                  | )          | (126,805                    | )          | (10,506                           | )             | —           |       | (139,890         | )          |
|                             |       | —                                          |        | 37,153                  |       | 1,426,907                   |       | 32,994                            |          | —           |       | 1,497,054        |       |
|                             |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Fiber farms  and timber deposits |       | —                                          |        | —                  |       | 40,955                      |       | 11,281                            |          | —           |       | 52,236           |       |
|                             |       | —                                          |        | 37,153                  |       | 1,467,862                   |       | 44,275                            |          | —           |       | 1,549,290        |       |
|                             |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Deferred  financing costs**    |       | —                                          |        | 37,294                  |       | —                      |       | 484                               |          | —           |       | 37,778           |       |
| **Goodwill**                     |       | —                                          |        | —                  |       | 15,101                      |       | —                            |          | —           |       | 15,101           |       |
| **Intangible  assets**           |       | —                                          |        | —                  |       | 31,804                      |       | —                            |          | —           |       | 31,804           |       |
| **Investments  in affiliates**   |       | 477,433                                         |        | 470,587                 |       | —                      |       | —                            |          | (948,020         | )          | —           |       |
| **Other  assets**                |       | —                                          |        | 33,237                  |       | 7,903                       |       | 3,091                             |          | —           |       | 44,231           |       |
| **Total  assets**                | ** ** | **$**                                           | **477,433** | ** **              | **$**      | **678,149**                 | ** ** | **$**                             | **2,154,094** | ** **       | **$**      | **454,495**      | ** ** | **$** | **(950,508** | **)** | **$** | **2,813,663** | ** ** |

 

110

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2005 (continued)**

 
| ** **                                 | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------|-------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **(thousands)**                                 | ** **  |
| **LIABILITIES  AND CAPITAL**               | ** ** | ** **                                      | ** **  | ** **              | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Current**                                |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Accounts  payable                          |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Trade                                      |       | $                                               | —      |                    | $          | 39,517                      |       | $                                 | 340,772       |             | $          | 2,918            |       | $ | — |   | $ | 383,207 |   |
| Intercompany                               |       | —                                          |        | —                  |       | 1,284                       |       | 1,204                             |          | (2,488           | )          | —           |       |
| Accrued  liabilities                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Compensation and benefits                  |       | —                                          |        | 42,240                  |       | 63,078                      |       | 971                               |          | —           |       | 106,289          |       |
| Interest payable                           |       | —                                          |        | 9,945                   |       | —                      |       | 685                               |          | —           |       | 10,630           |       |
| Other                                      |       | —                                          |        | 4,036                   |       | 38,469                      |       | 3,739                             |          | —           |       | 46,244           |       |
|                                       |       | —                                          |        | 95,738                  |       | 443,603                     |       | 9,517                             |          | (2,488           | )          | 546,370          |       |
|                                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                   |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Long-term  debt, less current portion |       | —                                          |        | 1,285,800               |       | —                      |       | 80,000                            |          | —           |       | 1,365,800        |       |
| Note payable  to related party, net        |       | —                                          |        | 270,854                 |       | —                      |       | —                            |          | —           |       | 270,854          |       |
|                                       |       | —                                          |        | 1,556,654               |       | —                      |       | 80,000                            |          | —           |       | 1,636,654        |       |
|                                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Other**                                  | ** ** | ** **                                      | ** **  | ** **              | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation  and benefits                 |       | —                                          |        | 121,269                 |       | —                      |       | —                            |          | —           |       | 121,269          |       |
| Other  long-term liabilities               |       | —                                          |        | 19,612                  |       | 12,325                      |       | —                            |          | —           |       | 31,937           |       |
|                                       |       | —                                          |        | 140,881                 |       | 12,325                      |       | —                            |          | —           |       | 153,206          |       |
| **Due to  (from) affiliates**              |       | —                                          |        | (1,592,557              | )          | 1,322,896                   |       | 269,661                           |          | —           |       | —           |       |
|                                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**               |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| Series B equity units                 |       | 9,508                                           |        | —                  |       | —                      |       | —                            |          | —           |       | 9,508            |       |
| Series C equity units                 |       | 2,904                                           |        | —                  |       | —                      |       | —                            |          | —           |       | 2,904            |       |
| Redeemable equity units                    |       | —                                          |        | 12,412                  |       | —                      |       | —                            |          | (12,412          | )          | —           |       |
|                                       |       | 12,412                                          |        | 12,412                  |       | —                      |       | —                            |          | (12,412          | )          | 12,412           |       |
|                                       |       |                                            |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Capital**                                | ** ** | ** **                                      | ** **  | ** **              | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A  equity units                |       | 39,885                                          |        | —                  |       | —                      |       | —                            |          | —           |       | 39,885           |       |
| Series B  equity units                |       | 417,601                                         |        | —                  |       | —                      |       | —                            |          | —           |       | 417,601          |       |
| Series C  equity units                |       | 7,535                                           |        | —                  |       | —                      |       | —                            |          | —           |       | 7,535            |       |
| Subsidiary  equity                         |       | —                                          |        | 465,021                 |       | 375,270                     |       | 95,317                            |          | (935,608         | )          | —           |       |
| **Total  capital**                         |       | 465,021                                         |        | 465,021                 |       | 375,270                     |       | 95,317                            |          | (935,608         | )          | 465,021          |       |
| **Total  liabilities and capital**         | ** ** | **$**                                           | **477,433** | ** **              | **$**      | **678,149**                 | ** ** | **$**                             | **2,154,094** | ** **       | **$**      | **454,495**      | ** ** | **$** | **(950,508** | **)** | **$** | **2,813,663** | ** ** |

 

111

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2004**
| ** **                             | ** ** | **Boise  Cascade  Holdings, L.L.C.  (Parent)** | ** **  | **Boise  Cascade   LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|------------------------------------------------|-------------|-------------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                             | ** ** | **(thousands)**                                | ** **  |
| **ASSETS**                             | ** ** | ** **                                     | ** **  | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                   |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Current**                            |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Cash and  cash equivalents             |       | $                                              | —      |                          | $          | 160,559                     |       | $                                 | 39            |             | $          | 2,747            |       | $ | — |   | $ | 163,345 |   |
| Receivables                            |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Trade, less allowances                 |       | —                                         |        | —                        |       | 272,825                     |       | 3,843                             |          | —           |       | 276,668          |       |
| Intercompany                           |       | —                                         |        | 1                             |       | 1,910                       |       | 935                               |          | (2,846           | )          | —           |       |
| Related parties                        |       | —                                         |        | —                        |       | 42,055                      |       | —                            |          | —           |       | 42,055           |       |
| Other                                  |       | —                                         |        | 4,951                         |       | 10,413                      |       | 3,810                             |          | —           |       | 19,174           |       |
| Inventories                            |       | —                                         |        | 18                            |       | 577,746                     |       | 17,105                            |          | —           |       | 594,869          |       |
| Other                                  |       | —                                         |        | 12,362                        |       | 2,903                       |       | 356                               |          | —           |       | 15,621           |       |
|                                   |       | —                                         |        | 177,891                       |       | 907,891                     |       | 28,796                            |          | (2,846           | )          | 1,111,732        |       |
|                                   |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Property**                           |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Property and  equipment                |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Land and land improvements             |       | —                                         |        | 7,600                         |       | 75,076                      |       | 447                               |          | —           |       | 83,123           |       |
| Buildings and improvements             |       | —                                         |        | 24,446                        |       | 173,740                     |       | 6,518                             |          | —           |       | 204,704          |       |
| Machinery and equipment                |       | —                                         |        | 3,997                         |       | 1,162,150                   |       | 30,831                            |          | —           |       | 1,196,978        |       |
|                                   |       | —                                         |        | 36,043                        |       | 1,410,966                   |       | 37,796                            |          | —           |       | 1,484,805        |       |
|                                   |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Accumulated  depreciation              |       | —                                         |        | (318                          | )          | (11,151                     | )          | (7,487                            | )             | —           |       | (18,956          | )          |
|                                   |       | —                                         |        | 35,725                        |       | 1,399,815                   |       | 30,309                            |          | —           |       | 1,465,849        |       |
|                                   |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| Fiber farms  and timber deposits       |       | —                                         |        | —                        |       | 33,135                      |       | 11,511                            |          | —           |       | 44,646           |       |
|                                   |       | —                                         |        | 35,725                        |       | 1,432,950                   |       | 41,820                            |          | —           |       | 1,510,495        |       |
|                                   |       |                                           |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Note receivable from related party** |       | —                                         |        | 157,509                       |       | —                      |       | —                            |          | —           |       | 157,509          |       |
| **Deferred  financing costs**          |       | —                                         |        | 84,054                        |       | —                      |       | —                            |          | —           |       | 84,054           |       |
| **Goodwill**                           |       | —                                         |        | 4,558                         |       | 13,832                      |       | —                            |          | —           |       | 18,390           |       |
| **Intangible  assets**                 |       | —                                         |        | —                        |       | 34,357                      |       | —                            |          | —           |       | 34,357           |       |
| **Investments  in affiliates**         |       | 369,840                                        |        | 115,650                       |       | —                      |       | —                            |          | (485,490         | )          | —           |       |
| **Other  assets**                      |       | —                                         |        | 9,679                         |       | 5,339                       |       | 514                               |          | —           |       | 15,532           |       |
| **Total  assets**                      | ** ** | **$**                                          | **369,840** | ** **                    | **$**      | **585,066**                 | ** ** | **$**                             | **2,394,369** | ** **       | **$**      | **71,130**       | ** ** | **$** | **(488,336** | **)** | **$** | **2,932,069** | ** ** |

 

112

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2004 (continued)**

 
| ** **                                | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise   Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|-------------|-------------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **(thousands)**                                 | ** **  |
| **LIABILITIES AND CAPITAL**               | ** ** | ** **                                      | ** **  | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Current**                               |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| Current portion of long-term debt         |       | $                                               | —      |                          | $          | 13,300                      |       | $                                 | —        |             | $          | —           |       | $ | — |   | $ | 13,300 |   |
| Accounts payable                          |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| Trade                                     |       | —                                          |        | 45,951                        |       | 260,737                     |       | 3,460                             |          | —           |       | 310,148          |       |
| Intercompany                              |       | —                                          |        | —                        |       | 936                         |       | 1,910                             |          | (2,846           | )          | —           |       |
| Related parties                           |       | —                                          |        | 27                            |       | 123                         |       | —                            |          | —           |       | 150              |       |
| Accrued liabilities                       |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| Compensation and benefits                 |       | —                                          |        | 18,684                        |       | 43,219                      |       | 592                               |          | —           |       | 62,495           |       |
| Interest payable                          |       | —                                          |        | 8,584                         |       | —                      |       | —                            |          | —           |       | 8,584            |       |
| Other                                     |       | —                                          |        | 6,323                         |       | 35,074                      |       | 2,234                             |          | —           |       | 43,631           |       |
|                                      |       | —                                          |        | 92,869                        |       | 340,089                     |       | 8,196                             |          | (2,846           | )          | 438,308          |       |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                  |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| Long-term debt, less current portion |       | —                                          |        | 1,966,700                     |       | —                      |       | —                            |          | —           |       | 1,966,700        |       |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Other**                                 | ** ** | ** **                                      | ** **  | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and benefits                 |       | —                                          |        | 133,648                       |       | —                      |       | —                            |          | —           |       | 133,648          |       |
| Other long-term liabilities               |       | —                                          |        | 13,157                        |       | 10,416                      |       | —                            |          | —           |       | 23,573           |       |
|                                      |       | —                                          |        | 146,805                       |       | 10,416                      |       | —                            |          | —           |       | 157,221          |       |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Due to (from) affiliates**              |       | —                                          |        | (1,991,148                    | )          | 1,986,736                   |       | 4,412                             |          | —           |       | —           |       |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Redeemable equity units**               |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| Series B equity units                |       | 10,254                                          |        | —                        |       | —                      |       | —                            |          | —           |       | 10,254           |       |
| Series C equity units                |       | —                                          |        | —                        |       | —                      |       | —                            |          | —           |       | —           |       |
| Redeemable equity units                   |       | —                                          |        | 10,254                        |       | —                      |       | —                            |          | (10,254          | )          | —           |       |
|                                      |       | 10,254                                          |        | 10,254                        |       | —                      |       | —                            |          | (10,254          | )          | 10,254           |       |
|                                      |       |                                            |        |                          |       |                        |       |                              |          |             |       |             |       |
| **Capital**                               | ** ** | ** **                                      | ** **  | ** **                    | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity units                |       | 36,868                                          |        | —                        |       | —                      |       | —                            |          | —           |       | 36,868           |       |
| Series B equity units                |       | 322,718                                         |        | —                        |       | —                      |       | —                            |          | —           |       | 322,718          |       |
| Series C equity units                |       | —                                          |        | —                        |       | —                      |       | —                            |          | —           |       | —           |       |
| Subsidiary equity                         |       | —                                          |        | 359,586                       |       | 57,128                      |       | 58,522                            |          | (475,236         | )          | —           |       |
| **Total capital**                         |       | 359,586                                         |        | 359,586                       |       | 57,128                      |       | 58,522                            |          | (475,236         | )          | 359,586          |       |
| **Total liabilities and capital**         | ** ** | **$**                                           | **369,840** | ** **                    | **$**      | **585,066**                 | ** ** | **$**                             | **2,394,369** | ** **       | **$**      | **71,130**       | ** ** | **$** | **(488,336** | **)** | **$** | **2,932,069** | ** ** |

 

113

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Year Ended December 31, 2005**
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade   LLC** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash provided by (used for) operations**                                        |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| Net income (loss)                                                                      |       | $                                               | 121,367    |                          | $          | 116,582                    |       | $                                 | 314,041    |             | $          | (16,897          | )          | $ | (413,726 | ) | $ | 121,367 |   |
| Items in net income (loss) not using  (providing) cash                                 |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| Equity in net (income) loss of affiliates                                              |       | (116,582                                        | )          | (297,144                      | )          | —                     |       | —                            |       | 413,726          |       | —           |       |
| Depreciation, depletion, and amortization  of deferred financing costs and other costs |       | —                                          |       | 53,803                        |       | 121,340                    |       | 3,534                             |       | —           |       | 178,677          |       |
| Related-party interest expense                                                         |       | —                                          |       | 18,909                        |       | —                     |       | —                            |       | —           |       | 18,909           |       |
| Pension and other postretirement benefit  expense                                      |       | —                                          |       | 28,681                        |       | —                     |       | —                            |       | —           |       | 28,681           |       |
| Gain on changes in retiree healthcare  programs                                        |       | —                                          |       | (9,900                        | )          | —                     |       | —                            |       | —           |       | (9,900           | )          |
| Change in fair value of interest rate swaps                                            |       | —                                          |       | (9,886                        | )          | —                     |       | —                            |       | —           |       | (9,886           | )          |
| Management equity units expense                                                   |       | —                                          |       | 2,904                         |       | —                     |       | —                            |       | —           |       | 2,904            |       |
| Deferred income taxes                                                                  |       | (4,785                                          | )          | —                        |       | (3                         | )          | —                            |       | —           |       | (4,788           | )          |
| Other                                                                                  |       | —                                          |       | (2,120                        | )          | (32                        | )          | 4,517                             |       | —           |       | 2,365            |       |
| Decrease (increase) in working capital, net  of acquisitions                           |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                          |       | (52,592                       | )          | 358,940                    |       | (367,763                          | )          | —           |       | (61,415          | )          |
| Inventories                                                                            |       | —                                          |       | (5,247                        | )          | (27,559                    | )          | (6,136                            | )          | —           |       | (38,942          | )          |
| Accounts payable and  accrued liabilities                                         |       | —                                          |       | 45,781                        |       | 48,788                     |       | 1,328                             |       | —           |       | 95,897           |       |
| Current and deferred income taxes                                                      |       | —                                          |       | (6,204                        | )          | 1,745                      |       | (7                                | )          | —           |       | (4,466           | )          |
| Pension and other postretirement benefit  payments                                     |       | —                                          |       | (11,073                       | )          | —                     |       | —                            |       | —           |       | (11,073          | )          |
| Other                                                                                  |       | —                                          |       | (965                          | )          | (489                       | )          | (137                              | )          | —           |       | (1,591           | )          |
| Cash provided by (used for) operations                                                 |       | —                                          |       | (128,471                      | )          | 816,771                    |       | (381,561                          | )          | —           |       | 306,739          |       |
|                                                                                   |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Cash provided by (used for) investment**                                             |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| Expenditures for property  and equipment                                          |       | —                                          |       | (8,716                        | )          | (155,324                   | )          | (6,242                            | )          | —           |       | (170,282         | )          |
| Repayment of note receivable from related  party, net                                  |       | —                                          |       | 157,509                       |       | —                     |       | —                            |       | —           |       | 157,509          |       |
| Sales of assets                                                                        |       | —                                          |       | —                        |       | 18,536                     |       | —                            |       | —           |       | 18,536           |       |
| Investments in related parties                                                         |       | 23,889                                          |       | 413,726                       |       | —                     |       | —                            |       | (437,615         | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 16,981                        |       | (6,780                     | )          | (6,547                            | )          | —           |       | 3,654            |       |
| Cash provided by (used for) investment                                                 |       | 23,889                                          |       | 579,500                       |       | (143,568                   | )          | (12,789                           | )          | (437,615         | )          | 9,417            |       |
|                                                                                   |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Cash provided by (used for) financing**                                              | ** ** | ** **                                      | ** ** | ** **                    | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Tax distributions to members                                                           |       | (23,143                                         | )          | —                        |       | —                     |       | —                            |       | 23,143           |       | —           |       |
| Tax distribution to Boise Cascade Holdings,  L.L.C.                                    |       | —                                          |       | (23,143                       | )          | —                     |       | —                            |       | —           |       | (23,143          | )          |
| Note payable to related party, net                                                     |       | —                                          |       | 250,272                       |       | —                     |       | —                            |       | —           |       | 250,272          |       |
| Issuances of long-term debt                                                            |       | —                                          |       | 840,000                       |       | —                     |       | 80,000                            |       | —           |       | 920,000          |       |
| Payments of long-term debt                                                             |       | —                                          |       | (1,534,200                    | )          | —                     |       | —                            |       | —           |       | (1,534,200       | )          |
| Purchases of equity units                                                              |       | (746                                            | )          | —                        |       | —                     |       | —                            |       | 746              |       | —           |       |
| Other                                                                                  |       | —                                          |       | (7,902                        | )          | —                     |       | 3,643                             |       | —           |       | (4,259           | )          |
| Cash provided by (used for) financing                                             |       | (23,889                                         | )          | (474,973                      | )          | —                     |       | 83,643                            |       | 23,889           |       | (391,330         | )          |
|                                                                                   |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| Due to (from) affiliates                                                               |       | —                                          |       | (51,146                       | )          | (673,208                   | )          | 310,628                           |       | 413,726          |       | —           |       |
|                                                                                   |       |                                            |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Decrease in cash and cash equivalents**                                         |       | —                                          |       | (75,090                       | )          | (5                         | )          | (79                               | )          | —           |       | (75,174          | )          |
| **Balance at beginning of the period**                                                 |       | —                                          |       | 160,559                       |       | 39                         |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance at end of the period**                                                       | ** ** | **$**                                           | **—** | ** **                    | **$**      | **85,469**                 | ** ** | **$**                             | **34**     | ** **       | **$**      | **2,668**        | ** ** | **$** | **—** | ** ** | **$** | **88,171** | ** ** |

 

114

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Period of October 29 (inception) Through December 31, 2004**

 
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C. (Parent)** | ** ** | **Boise  Cascade   LLC** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                | ** ** |
| **Cash provided by (used for) operations**                                        |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| Net income (loss)                                                                      |       | $                                              | 24,702     |                          | $          | 24,702                     |       | $                                 | 53,948     |             | $          | (1,015           | )          | $ | (77,635 | ) | $ | 24,702 |   |
| Items in net income (loss) not using  (providing) cash                                 |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| Equity in net (income) loss of affiliates                                              |       | (24,702                                        | )     | (52,933                       | )     | —                     |       | —                            |       | 77,635           |       | —           |       |
| Depreciation, depletion, and amortization  of deferred financing costs and other costs |       | —                                         |       | 2,915                         |       | 18,903                     |       | 543                               |       | —           |       | 22,361           |       |
| Pension and other postretirement benefit  expense                                      |       | —                                         |       | 441                           |       | 2,466                      |       | —                            |       | —           |       | 2,907            |       |
| Other                                                                                  |       | —                                         |       | (87                           | )          | (276                       | )          | (818                              | )          | —           |       | (1,181           | )          |
| Decrease (increase) in working capital, net  of acquisitions                           |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                         |       | (3,453                        | )          | 125,871                    |       | 1,315                             |       | (1,781           | )          | 121,952          |       |
| Inventories                                                                            |       | —                                         |       | (2,299                        | )          | (15,787                    | )          | (3,317                            | )          | —           |       | (21,403          | )          |
| Accounts payable and  accrued liabilities                                         |       | —                                         |       | 69,697                        |       | 14,858                     |       | (768                              | )          | 1,781            |       | 85,568           |       |
| Pension and other postretirement benefit  payments                                     |       | —                                         |       | (62                           | )          | —                     |       | —                            |       | —           |       | (62              | )          |
| Other                                                                                  |       | —                                         |       | (5,459                        | )          | 1,300                      |       | (8                                | )          | (201             | )          | (4,368           | )          |
| Cash provided by (used for) operations                                                 |       | —                                         |       | 33,462                        |       | 201,283                    |       | (4,068                            | )          | (201             | )          | 230,476          |       |
|                                                                                   |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Cash provided by (used for) investment**                                        |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| Expenditures for property  and equipment                                          |       | —                                         |       | (470                          | )          | (27,409                    | )          | (1,021                            | )          | —           |       | (28,900          | )          |
| Acquisition of businesses and facilities                                               |       | —                                         |       | 25,074                        |       | (2,162,989                 | )          | (58,537                           | )          | —           |       | (2,196,452       | )          |
| Note receivable from related party                                                     |       | —                                         |       | (157,509                      | )          | —                     |       | —                            |       | —           |       | (157,509         | )          |
| Investment in affiliate                                                                |       | (338,877                                       | )          | —                        |       | —                     |       | —                            |       | 338,877          |       | —           |       |
| Other                                                                                  |       | —                                         |       | (5,059                        | )          | 2,432                      |       | —                            |       | —           |       | (2,627           | )          |
| Cash provided by (used for) investment                                                 |       | (338,877                                       | )          | (137,964                      | )          | (2,187,966                 | )          | (59,558                           | )          | 338,877          |       | (2,385,488       | )          |
|                                                                                   |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Cash provided by (used for) financing**                                              | ** ** | ** **                                     | ** ** | ** **                    | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Additions to long-term debt for acquisition                                            |       | —                                         |       | 2,020,000                     |       | —                     |       | —                            |       | —           |       | 2,020,000        |       |
| Issuances of equity units                                                              |       | 338,877                                        |       | 338,877                       |       | —                     |       | —                            |       | (338,877         | )          | 338,877          |       |
| Payments of long-term debt                                                             |       | —                                         |       | (40,000                       | )          | —                     |       | —                            |       | —           |       | (40,000          | )          |
| Other                                                                                  |       | —                                         |       | (520                          | )          | —                     |       | —                            |       | —           |       | (520             | )          |
| Cash provided by (used for) financing                                             |       | 338,877                                        |       | 2,318,357                     |       | —                     |       | —                            |       | (338,877         | )          | 2,318,357        |       |
|                                                                                   |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| Due to (from) affiliates                                                               |       | —                                         |       | (2,053,296                    | )          | 1,986,722                  |       | 66,373                            |       | 201              |       | —           |       |
|                                                                                   |       |                                           |       |                          |       |                       |       |                              |       |             |       |             |       |
| **Increase in cash and cash equivalents**                                         |       | —                                         |       | 160,559                       |       | 39                         |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance at beginning of the period**                                                 |       | —                                         |       | —                        |       | —                     |       | —                            |       | —           |       | —           |       |
| **Balance at end of the period**                                                       | ** ** | **$**                                          | **—** | ** **                    | **$**      | **160,559**                | ** ** | **$**                             | **39**     | ** **       | **$**      | **2,747**        | ** ** | **$** | **—** | ** ** | **$** | **163,345** | ** ** |
|                                                                                        |            |                                                |            |                               |            |                            |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |

 

115

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***19.        LegalProceedings and Contingencies***

 

*Legal Proceedings*

 

OfficeMax agreed to retain responsibility for essentially all legalproceedings related to our businesses that arose before October 29, 2004.We did, however, assume responsibility for a small number of legal proceedingsthat arose before this date. We are also a party to routine legal proceedingsthat have arisen in our businesses after October 29, 2004. Management doesnot believe any of the legal proceedings for which we have responsibility willhave a material adverse effect on our financial position, results ofoperations, or cash flows.

 

*Environmental Matters*

 

We are not currently involved in any material environmentalproceedings. OfficeMax retained responsibility for environmental claims andliabilities related to businesses, facilities, and other assets not purchasedby us in the Acquisition. In addition, OfficeMax indemnifies us for hazardoussubstance releases and other environmental regulatory violations that relate tothe businesses we purchased and that occurred before the Acquisition or arosefrom pre-Acquisition operations. OfficeMax, however, may not have sufficientfunds to satisfy in full its indemnification obligations, and in some cases, wemay not be entitled to indemnification. Management does not believe that thepotential exposure to the company for environmental matters would have amaterial adverse effect on our financial position, results of operations, orcash flows even if OfficeMax failed to fulfill its indemnificationresponsibilities.

 

***20.          QuarterlyResults of Operations (unaudited)***

 
| ** **              | ** ** | **Boise**                   | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **2005**                    | ** ** |
| ** **              | ** ** | **First  Quarter (a)** | ** ** | **Second  Quarter (b)** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter (c)** | ** ** |
| ** **              | ** ** | **(millions)**              | ** ** |
|                    |       |                        |       |   |   |   |   |   |   |
| Net sales               |       | $                           | 1,432.3    |   | $ | 1,494.6 |   | $ | 1,556.3 |   | $ | 1,424.3 |   |
| Income from  operations |       | 81.7                        |       | 77.4 |   | 79.4 |   | 34.2 |   |
| Net income  (loss)      |       | 64.7                        |       | (14.5 | ) | 28.5 |   | 42.6 |   |
|                         |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                     | ** ** | **Predecessor**             | ** ** | **Boise**                    | ** ** |
|--------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                     | ** ** | **2004**                    | ** ** | **October 29**          | ** ** |
| ** **                     | ** ** | **First  Quarter (d)** | ** ** | **Second  Quarter (e)** | ** ** | **Third  Quarter** | ** ** | **October 1  through  October 28 (f)** | ** ** | **(inception)  through  December 31,  2004 (g)** | ** ** |
| ** **                     | ** ** | **(millions)**              | ** ** |
|                           |       |                        |       |                         |       |   |   |   |   |   |   |
| Net sales                      |       | $                           | 1,308.0    |                         | $          | 1,531.6 |   | $ | 1,559.3 |   | $ | 463.1 |   | $ | 872.7 |   |
| Income  (loss) from operations |       | 18.6                        |       | 51.4                         |       | 79.9 |   | (15.2 | ) | 44.0 |   |
| Net income  (loss)             |       | 2.1                         |       | 46.5                         |       | 35.2 |   | (14.3 | ) | 24.7 |   |
|                                |            |                             |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |

 

116

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| ** **                                                   | ** ** | **Predecessor**     | ** ** |
|--------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                   | ** ** | **2003**            | ** ** |
| ** **                                                   | ** ** | **First   Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter (h)** | ** ** | **Fourth  Quarter (i)** | ** ** |
| ** **                                                   | ** ** | **(millions)**      | ** ** |
|                                                         |       |                |       |   |   |   |   |   |   |
| Net sales                                                    |       | $                   | 1,026.9    |   | $ | 1,134.4 |   | $ | 1,284.0 |   | $ | 1,208.4 |   |
| Income  (loss) from operations                               |       | (22.8               | )          | (5.6 | ) | 31.3 |   | (1.9 | ) |
| Income (loss) before cumulative effect of  accounting change |       | (28.1               | )          | (15.5 | ) | 13.2 |   | (12.8 | ) |
| Net income  (loss)                                           |       | (32.3               | )          | (15.5 | ) | 13.2 |   | (12.8 | ) |
|                                                              |            |                     |            |  |  |  |  |  |  |  |  |  |  |

 

----

(a)           Included a $15.2 million gain for thechange in the fair value of interest rate swaps related to our amended andrestated senior credit facilities (see Note 12, Financial Instruments).

 

(b)           Included $3.6 million of expense for thewrite-off of costs incurred in connection with the canceled initial publicoffering.

 

Included the write-off of $43.0 million ofdeferred financing costs resulting from the repayment of the Tranche Bterm loan (see Note 11, Debt).

 

Included $5.3 million of expense for the changein the fair value of interest rate swaps related to our amended and restatedcredit facilities (see Note 12, Financial Instruments).

 

(c)           Included a $9.9 million gain for changesin our retiree healthcare programs. See Note 13, Retirement and BenefitPlans, for more information.

 

Included a $37.3 million net income tax benefitrecorded as a result of rescinding our C corporation status.

 

(d)           Included $7.1 million of costs incurredin connection with our predecessor’s sale of the Yakima, Washington, plywoodand lumber operations.

 

(e)           Included a $46.5 million pretax gain forthe sale of our predecessor’s 47% interest in Voyageur Panel in May 2004(see Note 8, Investments in Equity Affiliate).

 

(f)            Included$12.7 million of expense primarily for a one-time retention bonusOfficeMax granted to our employees.

 

Included$14.6 million of noncash restricted stock expenses.

 

(g)           As a result of purchase price accounting, wewrote up the value of our inventory, which increased the costs and expensesrecognized by us upon the sale of the inventory by $20.2 million for theperiod of October 29 (inception) through December 31, 2004.

 

(h)           Includeda net $7.2 million one-time tax benefit related to a favorable tax ruling,net of changes in other tax items.

 

Included a$3.6 million charge for the early termination of an operating lease usedin connection with our predecessor’s paper business.

 

(i)            Included a $14.7 million pretax charge forthe write-down of impaired assets at our predecessor’s plywood and lumberoperations in Yakima, Washington (see Note 4, Other (Income) Expense,Net).

 

117

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***Report of Independent Registered PublicAccounting Firm***

 

To the Board of Directors and Unit holders of Boise Cascade Holdings,L.L.C.:

 

We have audited the accompanying consolidated balance sheets of BoiseCascade Holdings, L.L.C., and subsidiaries as of December 31, 2005 and2004, and the related consolidated statements of income, capital, and cashflows for the year ended December 31, 2005, and the period from October 29,2004 (inception) through December 31, 2004. We have also audited theaccompanying statements of income (loss) and cash flows of Boise Forest ProductOperations (the predecessor) for the period from January 1, 2004 through October 28,2004, and for the year ended December 31, 2003, and the related statementof capital for the year ended December 31, 2003. These consolidatedfinancial statements are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements based onour audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Boise Cascade Holdings, L.L.C.,and subsidiaries as of December 31, 2005 and 2004, and the results oftheir operations and their cash flows for the year ended December 31,2005, and the period from October 29, 2004 (inception) through December 31,2004, as well as the results of operations of Boise Forest Product Operations(the predecessor) and its cash flows for the period from January 1, 2004through October 28, 2004, and for the year ended December 31, 2003,in conformity with U.S. generally accepted accounting principles.

 
|              | /s/ KPMG LLP |   |
|-------------------|--------------|--------|
|              |         |
|              |         |
| Boise, Idaho      |         |
| February 17, 2006 |         |

 

118

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***ITEM 9.******                                                 CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE***

 

None.

 

***ITEM 9A.             CONTROLSAND PROCEDURES***

 

Attachedas exhibits to this Form 10-K are certifications of our chief executiveofficer and chief financial officer. Rule 13a-14 of the SecuritiesExchange Act of 1934, as amended, requires that we include these certificationswith this report. This Controls and Procedures section includesinformation concerning the disclosure controls and procedures referred to inthe certifications. You should read this section in conjunction with thecertifications.

 

*Evaluationof Disclosure Controls and Procedures*

 

Wemaintain “disclosure controls and procedures,” as Rule 13a-15(e) underthe Securities and Exchange Act of 1934, as amended, defines such term. We havedesigned these controls and procedures to reasonably assure that informationrequired to be disclosed in our reports filed under the Exchange Act, such asthis Form 10-K, is recorded, processed, summarized, and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms. We have also designed our disclosure controls to provide reasonableassurance that such information is accumulated and communicated to our seniormanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), as appropriate, to allow them to make timely decisions regardingour required disclosures.

 

Weevaluate the effectiveness of our disclosure controls and procedures on at leasta quarterly basis. A number of key components in our internal control systemassist us in these evaluations. Since the company’s inception, we have had adisclosure committee. The committee meets regularly and includes input from oursenior management, general counsel, internal audit staff, and independentaccountants. This committee is charged with considering and evaluating themateriality of information and reviewing the company’s disclosure obligationson a timely basis. Our internal audit department also evaluates many componentsof our internal controls on an ongoing basis. To assist in its evaluations, theaudit staff uses a web-based application that helps to identify, document, andtest our internal controls. Our intent is to maintain disclosure controls andprocedures as dynamic processes that change as our business and workingenvironments change.

 

Ourmanagement, with the participation of our CEO and CFO, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the fiscal year covered by this Annual Report on Form 10-K.Based on that evaluation, the CEO and CFO have concluded that, as of such date,our disclosure controls and procedures were effective in meeting the objectivesfor which they were designed and were operating at a reasonable assurancelevel. Furthermore, the company’s management noted that, as a result of theirevaluation of changes in internal control over financial reporting, theyidentified no changes during the fourth quarter of fiscal 2005 that materiallyaffected, or would be reasonably likely to materially affect, the company’sinternal control over financial reporting.

 

*Limitationson the Effectiveness of Controls and Procedures*

 

Indesigning and evaluating our disclosure controls and procedures, we recognizedthat disclosure controls and procedures, no matter how well-conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the disclosure controls and procedures are met. Additionally, indesigning disclosure controls and procedures, our management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible disclosure controls and procedures. We have also designed ourdisclosure controls and procedures based in part upon assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

***ITEM 9B.             OTHERINFORMATION***

 

None.

 

119

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**PART III**

 

***ITEM 10.              DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT***

 

Following is a list of our directors and ourexecutive officers who are covered by Section 16 of the Securities andExchange Act of 1934 and brief descriptions of their business experience.

 
| **Name**               | ** ** | **Age** | ** ** | **Position**                                                        |
|------------------------|------------|---------|------------|---------------------------------------------------------------------|
| Zaid F. Alsikafi       |       | 30      |       | Director                                                            |
| Hank Brown             |       | 66      |       | Director                                                            |
| Sam K. Duncan          |       | 54      |       | Director                                                            |
| William S. Kirsch      |       | 49      |       | Director                                                            |
| John W. Madigan        |       | 68      |       | Director                                                            |
| Duane C. McDougall     |       | 54      |       | Director                                                            |
| Christopher J. McGowan |       | 34      |       | Director                                                            |
| Samuel M. Mencoff      |       | 49      |       | Director                                                            |
| Thomas S. Souleles     |       | 37      |       | Director                                                            |
| W. Thomas Stephens     |       | 63      |       | Chief Executive Officer  and Chairman, Director                     |
| Alexander Toeldte      |       | 46      |       | Executive Vice President,  Paper and Packaging & Newsprint |
| Stanley R. Bell        |       | 59      |       | Senior Vice President,  Building Materials Distribution             |
| Thomas E. Carlile      |       | 54      |       | Senior Vice President and  Chief Financial Officer                  |
| Miles A. Hewitt        |       | 47      |       | Senior Vice President,  Paper                                       |
| Thomas A. Lovlien      |       | 50      |       | Senior Vice President,  Wood Products                               |
| Samuel K. Cotterell    |       | 54      |       | Vice President and  Controller                                      |

 

**Zaid F. Alsikafi, 30, Director.* ***Mr. Alsikafibecame a director in October 2004. Mr. Alsikafi has been employed byMadison Dearborn Partners, LLC, since 2003 and currently serves as vicepresident. From 2001 to 2003, Mr. Alsikafi attended Harvard BusinessSchool. Mr. Alsikafi was employed by Madison Dearborn Partners, LLC, from1999 to 2001 as an associate. Mr. Alsikafi is also a member of the boardof directors of Astoria Generating Company Holdings, LLC.

 

**Hank Brown, 66, Director.**  Mr. Brown became a director in July 2005.Since August 2005, Mr. Brown has been president of the University ofColorado system. From 2002 to July 2005, Mr. Brown served aspresident and chief executive officer of The Daniels Fund in Denver, Colorado.Prior to his employment with The Daniels Fund, Mr. Brown served aspresident of the University of Northern Colorado, U.S. Senator from Colorado,U.S. Representative from Colorado, and state senator in the Coloradolegislature. He was also vice president of Monfort of Colorado from 1969 to1980. Mr. Brown is also a member of the boards of directors of CentennialBank Holdings Co., Sealed Air Corporation, and Sensient TechnologiesCorporation.

 

**Sam K. Duncan, 54, Director.**  Mr. Duncan became a director in July 2005.Mr. Duncan has been president and chief executive officer of OfficeMaxIncorporated since April 2005 and was elected chairman of the OfficeMaxboard of directors on June 30, 2005. Prior to his employment withOfficeMax, Mr. Duncan served as president and chief executive officer ofShopko Stores, president of Fred Meyer, president of the Ralphs division ofFred Meyer, executive vice president of the food division of Fred Meyer, and invarious positions with Albertson’s from 1969 to 1992.

 

**William S. Kirsch, 49, Director.**  Mr. Kirsch became a director in July 2005.  Mr. Kirsch has been a director andpresident and chief executive officer of Conseco, Inc., since August 2004.From September 2003 until August 2004, he served as executive vicepresident, general counsel, and secretary of Conseco. Mr. Kirsch was withthe law firm of Kirkland & Ellis LLP from 1981 until 2004.

 

**John W. Madigan, 68, Director.**  Mr. Madigan became a director in January 2005.Mr. Madigan retired in December 2003 from Tribune Company, where hehad served as chairman and chief executive officer since 1996. Mr. Madigancurrently serves as a consultant with Madison Dearborn Partners, LLC. Mr. Madiganis also a member of the board of directors of Gilead Sciences, Inc.

 

120

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**Duane C. McDougall, 54, Director.**  Mr. McDougall became a director in July 2005.Mr. McDougall was president and chief executive officer of WillametteIndustries, an international paper and forest products company, until itsacquisition in 2002. During his 23-year career with Willamette, Mr. McDougallheld numerous operating and finance positions before becoming president andchief executive officer. Mr. McDougall is also a member of the boards ofdirectors of Cascade Corporation, Greenbrier Companies, Infocus Corporation,and West Coast Bancorp.

 

**Christopher J. McGowan, 34, Director.**  Mr. McGowan became a director in October 2004.Mr. McGowan has been employed by Madison Dearborn Partners, LLC, since1999 and currently serves as a director. Mr. McGowan is also a member ofthe boards of directors of Auto Trade Center, Inc., and Smurfit KappaGroup Limited.

 

**Samuel M. Mencoff, 49, Director.**  Mr. Mencoff became a director in October 2004.Mr. Mencoff has been employed by Madison Dearborn Partners, LLC, since1993 and currently serves as co-president. From 1987 to 1993, Mr. Mencoffserved as vice president of First Chicago Venture Capital. Mr. Mencoff isalso a member of the boards of directors of Great Lakes Dredge & DockCorporation, Packaging Corporation of America, and Smurfit Kappa Group Limited.

 

**Thomas S. Souleles, 37, Director.**  Mr. Souleles became a director in October 2004.Mr. Souleles has been employed by Madison Dearborn Partners, LLC, since1995 and currently serves as a managing director. Mr. Souleles is also amember of the boards of directors of Astoria Generating Company Holdings, LLC,Great Lakes Dredge & Dock Corporation, Magellan GP, LLC, MagellanMidstream Holdings GP, LLC, Packaging Corporation of America, and Smurfit KappaGroup Limited.

 

**W. Thomas Stephens, 63, Chief ExecutiveOfficer and Chairman, Director.**  Mr. Stephens became our chief executiveofficer and chairman and a director in October 2004 following a period ofretirement. Mr. Stephens served as president and chief executive officerof MacMillan Bloedel from 1997 until his retirement in 1999. From 1986 to 1996,Mr. Stephens served as president and chief executive officer of ManvilleCorporation. From 1982 to 1985, Mr. Stephens served as chief executiveofficer of Riverwood Corporation. Mr. Stephens currently serves as atrustee of The Putnam Funds.

 

**Alexander Toeldte, 46, Executive VicePresident, Paper and Packaging & Newsprint.**  Mr. Toeldte became our executive vicepresident, Paper and Packaging & Newsprint, on October 28, 2005.Since October 1, 2005, he had served as president of the company’sPackaging & Newsprint business segment. Since 2004, Mr. Toeldtehas also served as chair of Algonac Limited, a private management andconsulting firm based in Auckland, New Zealand. From 2001 to 2003, Mr. Toeldteserved as executive vice president of Fonterra Co-operative Group, Ltd. andchief executive officer of Fonterra Enterprises. Fonterra, based in New Zealand,is a multinational dairy company and the world’s largest exporter of dairyproducts. From 1999 to 2001, Mr. Toeldte served in various capacities withFletcher Challenge Limited, which was formerly one of the largest companies inNew Zealand with holdings in paper, building materials, and energy. From 1999to 2000, he was chief executive officer of Fletcher Challenge Paper and chairof Fletcher Challenge Canada. From 2000 to 2001, he was chief executive officerof Fletcher Challenge Building, a New Zealand based-manufacturer anddistributor of building materials. In addition to the above, Mr. Toeldtehas held various positions with the following: McKinsey & Company, Agfa-Gevaert France S.A., and Ford inGermany.

 

**Stanley R. Bell, 59, Senior Vice President,Building Materials Distribution.**  Mr. Bell became our senior vicepresident, Building Materials Distribution, in connection with the Acquisition.From 2000 to 2004, Mr. Bell served as senior vice president and generalmanager, Boise Building Solutions, Distribution, of Boise Cascade Corporation.

 

**Thomas E. Carlile, 54, Senior Vice Presidentand Chief Financial Officer.**  Mr. Carlile became our senior vicepresident and chief financial officer in connection with the Acquisition. From1994 to 2004, Mr. Carlile served as vice president and controller of BoiseCascade Corporation.

 

**Miles A. Hewitt, 47, Senior Vice President,Paper*.***  Mr. Hewitt became our senior vicepresident, Paper, in connection with the Acquisition. From 2001 to 2004, Mr. Hewittserved as vice president and general manager, Boise Paper Solutions, of BoiseCascade Corporation. From 1999 to 2001, Mr. Hewitt served as vicepresident, Boise Paper Solutions — Minnesota Operations, of Boise CascadeCorporation.

 

121

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**Thomas A. Lovlien, 50, Senior Vice President,Wood Products.**  Mr. Lovlienbecame our senior vice president, Wood Products, in connection with theAcquisition. From 2000 to 2004, Mr. Lovlien served as vice president ofoperations, Boise Building Solutions, Manufacturing, of Boise CascadeCorporation. From 1999 to 2000, Mr. Lovlien served as operations managerof Boise Cascade Corporation’s Timber and Wood Products Division.

 

**Samuel K. Cotterell, 54, Vice President andController.**  Mr. Cotterellbecame our vice president and controller in connection with the Acquisition.From 1999 to 2004, Mr. Cotterell served as director of financial reportingof Boise Cascade Corporation.

 

Mr. Duncan joined our board of directorsas a designee of OfficeMax pursuant to the Securityholders Agreement dated October 29,2004, among OfficeMax, FPH, and us. The Securityholders Agreement is furtherdescribed in Item 13 of this Annual Report on Form 10-K. There are noother arrangements or understandings between any member of the board ofdirectors or executive officer and any other person pursuant to which thatperson was elected or appointed to his or her position.

 

Our board of directors has the power toappoint our officers. Each officer will hold office for the term determined bythe board of directors and until such person’s successor is chosen andqualified or until such person’s death, resignation, or removal. Each of ourdirectors will serve until such person’s successor is elected and qualified oruntil such person’s death, resignation, or removal.

 

In 2005, we used the consulting services ofAlgonac Limited, where Mr. Toeldte has served as chair since 2004. While thecompany did not compensate Mr. Toeldte for these services, the company didreimburse Algonac for certain out-of-pocket expenses incurred by Mr. Toeldteduring the course of his consultancy. In 2005, we also purchased a variety of othergoods and services from companies for which our directors also serve asofficers or directors. None of these purchases were material to the sellingentity or to our business.

 

There are no family relationships among anyof our directors or executive officers.

 

***Committees of the Board of Directors***

 

Our board of directors currently has an auditcommittee, a compensation committee, and a governance and nominating committee.The composition, duties, and responsibilities of these committees are set forthbelow. Committee members will hold office for a term of one year.

 

*Audit Committee*

 

Our audit committee currently consists of Messrs. Alsikafi,Madigan, McDougall, McGowan, Mencoff, and Souleles (chair). Mr. Soulelesis an “audit committee financial expert” as such term is defined in Item 401(h) ofRegulation S-K.

 

The audit committee is responsible forselecting the independent auditor; approving the overall scope of the audit;discussing the annual audited financial statements and quarterly financialstatements, including matters required to be reviewed under applicable legaland regulatory requirements, with management and the independent auditor;discussing earnings press releases and other financial information provided tothe public, with management and the independent auditor, as appropriate;discussing with management and the independent auditor, as appropriate, anyaudit problems or difficulties and management’s response; discussing thecompany’s risk assessment and risk management policies; reviewing the company’sfinancial reporting and accounting standards and principles, significantchanges in such standards or principles, and the key accounting decisionsaffecting the company’s financial statements; reviewing and approving theinternal corporate audit staff functions; reviewing the company’s internalsystem of audit, financial, and disclosure controls and the results of internalaudits; annually reviewing the independent auditor’s written report describingthe auditing firm’s internal quality-control procedures and any material issuesraised by the auditing firm’s internal quality-control review or peer reviewsof the auditing firm; reviewing and investigating matters pertaining to theintegrity of management; establishing procedures concerning the treatment ofcomplaints and concerns regarding accounting, internal accounting controls, oraudit matters; meeting separately with management, the corporate audit staff,and the independent auditor; handling such other matters that are specificallydelegated to the audit committee by the board of directors from time to time;and reporting regularly to the full board of directors.

 

122

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*CompensationCommittee*

 

Ourcompensation committee currently consists of Messrs. Kirsch, Madigan,McDougall, Mencoff (chair), and Souleles. 

 

Thecompensation committee is responsible for reviewing and approving corporategoals and objectives relevant to the compensation of our chief executiveofficer and annually evaluating the chief executive officer’s performance inlight of these goals; reviewing and approving the compensation and incentiveopportunities of our executive officers; reviewing and approving employmentcontracts, severance arrangements, incentive arrangements, change-in-controlarrangements, and other similar arrangements between us and our executiveofficers; receiving periodic reports on the company’s compensation programs asthey affect all employees; reviewing executive succession plans for businessand staff organizations; and handling such other matters that are specificallydelegated to the compensation committee by the board of directors from time totime.

 

*Governanceand Nominating Committee*

 

Ourgovernance and nominating committee currently consists of Messrs. Brown,Kirsch, McGowan, Mencoff (chair), and Souleles. 

 

Thegovernance and nominating committee’s purpose is to assist our board inidentifying individuals qualified to become members of our board of directors,assess the effectiveness of the board, and develop our corporate governance guidelines.This committee is responsible for identifying and recommending for electionindividuals who meet the criteria the board has established for boardmembership; reviewing the board’s committee structure and recommending to theboard the composition of each committee; annually reviewing directorcompensation and benefits; and developing and recommending to the board a setof corporate governance guidelines and reviewing them on an annual basis.

 

*OtherCommittees*

 

Ourboard of directors may establish other committees as it deems necessary orappropriate from time to time.

 

***Codeof Ethics***

 

Wehave adopted a Code of Ethics that applies to all employees, officers, anddirectors of the company and of any company that we own or manage. Copies ofour Code of Ethics are available, free of charge, on our website at www.bc.comby clicking on “About Boise,” and then “Code of Ethics.” You may also obtaincopies of our Code of Ethics by contacting our Investor Relations Department,1111 West Jefferson Street, Boise, Idaho, 83728, or by calling 208/384-6161. Ifwe amend or grant a waiver of one or more of the provisions of our Code ofEthics, we intend to disclose such amendments or waivers by posting therequired information on our website at the address above.

 

***ITEM11.******             ******EXECUTIVE COMPENSATION***

 

Noneof our executive officers received compensation from us prior to the closing ofthe Acquisition, with the exception of Mr. Stephens, who received a feefor consulting services prior to the closing. Therefore, all 2004 compensation figures cover the period between theclosing of the Acquisition and December 31, 2004. Prior to the closing ofthe Acquisition, each of our executive officers, other than Messrs. Stephensand Toeldte, were employed by, and received compensation from, OfficeMax (formerlyBoise Cascade Corporation) or its affiliates.

 

Thefollowing table presents compensation information for the fiscal years ended December 31,2005 and 2004, for Mr. Stephens, our chairman of the board and chiefexecutive officer, and Messrs. Toeldte, Bell, Carlile, and Lovlien, ourfour next most highly compensated executive officers. Mr. Toeldtejoined the company on October 1, 2005, so his 2005 compensationinformation is for the period October 1 through December 31, 2005. Compensationinformation is also presented for Mr. Holleran who left the companyon November 15, 2005. Mr. Holleran’s 2005 compensation information isfor the period January 1 through November 15, 2005. These executivesare referred to as the “named executive officers” elsewhere in this Annual ReportonForm 10-K.

 

123

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***SummaryCompensation Table***

 
| ** **                                                                | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation** | ** ** | ** **                              | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------------|------------|
| **Name and Principal Position**                                           | ** ** | **Year**   | ** ** | **Salary  ($) (1)**     | ** ** | **Bonus  ($) (2)**          | ** ** | **Other Annual  Compensation  ($) (3)** | ** ** | **Restricted  Stock Awards  ($) (4)** | ** ** | **All Other  Compensation  ($) (5)** | ** ** |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| W. Thomas  Stephens                                                       |       | 2005       |       | $                       | 1,000,000  |                        | $          | 650,000                                 |       | $ | 117,346 |   | $ | — |   | $ | 12,585 |   |
| Chairman and Chief Executive Officer                            |       | 2004       |       | 166,667                 |       | 192,128                     |       | —                                  |       | — |   | 438,757 |   |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| Alexander  Toeldte                                                        |       | 2005       |       | 106,090                 |       | 575,000                     |       | —                                  |       | — |   | 3,867 |   |
| Executive Vice  President,  Paper and Packaging & Newsprint |       | 2004       |       | —                  |       | —                      |       | —                                  |       | — |   | — |   |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| Stanley R. Bell                                                           |       | 2005       |       | 370,000                 |       | 406,000                     |       | —                                  |       | — |   | 34,177 |   |
| Senior Vice President,  Building Materials Distribution              |       | 2004       |       | 61,865                  |       | 80,082                      |       | —                                  |       | — |   | — |   |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| Thomas E.  Carlile                                                        |       | 2005       |       | 425,000                 |       | 275,000                     |       | —                                  |       | — |   | 30,081 |   |
| Senior Vice President  and Chief Financial Officer                   | * *   | 2004       |       | 71,230                  |       | 120,067                     |       | —                                  |       | — |   | — |   |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| Thomas A.  Lovlien                                                        |       | 2005       |       | 330,000                 |       | 300,000                     |       | —                                  |       | — |   | 28,519 |   |
| Senior Vice President,  Wood Products                                | * *   | 2004       |       | 55,313                  |       | 71,410                      |       | —                                  |       | — |   | — |   |
|                                                                      |       |       |       |                    |       |                        |       |                                    |       |   |   |   |   |
| John W. Holleran                                                          |       | 2005       |       | 437,500                 |       | 275,520                     |       | —                                  |       | — |   | 5,273,654 |   |
| Executive Vice  President, Administration and Chief Legal Officer    |       | 2004       |       | 83,453                  |       | 118,179                     |       | —                                  |       | — |   | — |   |
|                                                                           |            |            |            |                         |            |                             |            |                                         |            |  |  |  |  |  |  |  |  |  |

 

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| (1)    | Includes amounts deferred under our Savings Plan and Deferred  Compensation Plan. The Savings Plan is a profit-sharing plan intended to be  qualified under Section 401(a) of the Internal Revenue Code that  contains a cash or deferred arrangement meeting the requirements of  Section 401(k) of the Code. The Deferred Compensation Plan is a  nonqualified savings plan offered to a select group of management and key  employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    | Represents payments under our variable Incentive and Performance Plan.  Of the 2005 amount reported for Mr. Toeldte, $375,000 represents a  signing bonus when he joined the company on October 1. Mr. Holleran’s  2005 bonus was prorated based on his November 15 termination date. Of  the 2004 amounts reported for Messrs. Carlile and Holleran, $38,413 and  $22,115, respectively, represent special cash bonuses recognizing their  individual contributions to the Acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (3)    | Of the 2005 amount reported for Mr. Stephens, $53,986 represents  payment by the company of Mr. Stephens’ legal fees associated with  negotiating his employment agreement and $34,077 represents payment by the  company of his relocation expenses. The costs incurred by the company for  various other perquisites provided to each of the other named executive  officers is not reflected because the amounts did not exceed the lesser of  $50,000 or 10% of the executive’s salary and bonus.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (4)    | With the exception of Mr. Toeldte, the named executive officers  were granted Series C equity units of FPH. The Series C equity  units of FPH have no value to the holder until FPH’s equity value appreciates  above a specified level. One-half of the  Series C equity units issued to such named executive officers were  subject to vesting over a five-year period (with the exception of  Mr. Stephens’ units, which vest over a three-year period), and the other  half of the Series C equity units were subject to vesting only if the  original investors achieved a specified rate of return on their total  investment in FPH. When  Mr. Holleran left the company on November 15, 2005, he forfeited,  for no consideration, 2,812,000 Series C equity units. As of  December 31, 2005, the named executive officers held the following  Series C equity units of FPH: |

 

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| ** **         | ** ** | **Series C  Equity Units** | ** ** |
|--------------------|------------|--------------------------------------|------------|
|               |       |                                 |       |
| W. Thomas Stephens |       | 11,183,000                           |       |
| Alexander Toeldte  |       | —                               |       |
| Stanley R. Bell    |       | 1,917,000                            |       |
| Thomas E. Carlile  |       | 2,396,000                            |       |
| Thomas A. Lovlien  |       | 851,000                              |       |
| John W. Holleran   |       | —                               |       |

 
| (5) | Amounts disclosed in this column include the following:  |
|-----|---------------------------------------------------------------|

 
| **Name**           | ** ** | **Year** | ** ** | **Company-  Matching  Contributions  to Savings  and Deferred  Compensation  Plans (1)** | ** ** | **Company-  Paid  Portion of  Executive  Officer  Life Insurance** | ** ** | **Consulting  Agreement (2)** | ** ** | **Accruals  of Above-  Market  Interest on  Deferred  Compensation  Plan  Balances** | ** ** | **Amounts Paid  or Payable  to Named  Executive  Officer in  Connection with  Such Officer’s  Termination of  Employment (3)** | ** ** |
|--------------------|------------|----------|------------|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| W. Thomas Stephens |       | 2005     |       | $                                                                                        | 4,410      |                                                               | $          | 8,175                         |       | $                                                                                    | —     |                                                                                                                                | $          | — |   | $ | — |   |
|               |       | 2004     |       | 1,750                                                                                    |       | 7,555                                                              |       | 429,452                       |       | —                                                                               |       | —                                                                                                                              |       |
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| Alexander Toeldte  |       | 2005     |       | 3,800                                                                                    |       | 60                                                                 |       | —                        |       | 7                                                                                    |       | —                                                                                                                              |       |
|               |       | 2004     |       | —                                                                                   |       | —                                                             |       | —                        |       | —                                                                               |       | —                                                                                                                              |       |
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| Stanley R. Bell    |       | 2005     |       | 15,540                                                                                   |       | 18,111                                                             |       | —                        |       | 526                                                                                  |       | —                                                                                                                              |       |
|               |       | 2004     |       | —                                                                                   |       | —                                                             |       | —                        |       | —                                                                               |       | —                                                                                                                              |       |
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| Thomas E. Carlile  |       | 2005     |       | 17,850                                                                                   |       | 11,850                                                             |       | —                        |       | 381                                                                                  |       | —                                                                                                                              |       |
|               |       | 2004     |       | —                                                                                   |       | —                                                             |       | —                        |       | —                                                                               |       | —                                                                                                                              |       |
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| Thomas A. Lovlien  |       | 2005     |       | 13,860                                                                                   |       | 14,248                                                             |       | —                        |       | 411                                                                                  |       | —                                                                                                                              |       |
|               |       | 2004     |       | —                                                                                   |       | —                                                             |       | —                        |       | —                                                                               |       | —                                                                                                                              |       |
|               |       |     |       |                                                                                     |       |                                                               |       |                          |       |                                                                                 |       |                                                                                                                                |       |
| John W. Holleran   |       | 2005     |       | 18,375                                                                                   |       | 20,966                                                             |       | —                        |       | 619                                                                                  |       | 5,233,694                                                                                                                           |       |
|               |       | 2004     |       | —                                                                                   |       | —                                                             |       | —                        |       | —                                                                               |       | —                                                                                                                              |       |
|                    |            |          |            |                                                                                          |            |                                                                    |            |                               |            |                                                                                      |            |                                                                                                                                     |            |  |  |  |  |  |

 

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| (1)    | The company’s Savings Plan is a profit-sharing plan intended to be  qualified under Section 401(a) of the Internal Revenue Code that  contains a cash or deferred arrangement meeting the requirements of  Section 401(k) of the Code. The Deferred Compensation Plan is a  nonqualified savings plan offered to a select group of management and key  employees. Participants in the Deferred Compensation Plan may choose to have  matching contributions made under the Deferred Compensation Plan in lieu of  receiving matching contributions under the Savings Plan. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | The 2004 amount reported for Mr. Stephens represents payment of  consulting fees due for services he performed for the company from  July 26 to October 29, 2004.                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | The 2005 amount reported for Mr. Holleran represents a lump sum  severance payment of $1,650,000, which was equal to two times  Mr. Holleran’s salary plus his target annual incentive; $2,011,968 as a  taxable present value for a vested right to a nonqualified benefit; $845,611 and  $671,180 for payment of excise taxes and a gross-up payment, respectively;  and $54,935 for Mr. Holleran’s earned but unused time off.                                                                                                                                |

 

***Stock Option Grantsin 2005***

 

We did not grant anyoptions to purchase common stock or stock appreciation rights (SARs) to ournamed executive officers during the fiscal year ended December 31, 2005.There were no outstanding options to purchase common stock or SARs held by ournamed executive officers as of December 31, 2005.

 

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***Compensation of Directors***

 

EffectiveJuly 28, 2005, directors who are neither employees of the company norrepresentatives of the company’s two investors, FPH and OfficeMax, receivecompensation for their board service. Our directors who currently receivecompensation are Messrs. Brown, Kirsch, Madigan, and McDougall. In 2005,that compensation included:

 
| Annual Retainer:                 | $50,000                                                                                                                                                                                                                                                                     |
|----------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                             |                                                                                                                                                                                                                                                                        |
| Annual Committee Chair  Stipend: | $15,000 for  Audit Committee chair  $10,000 for all other committee chairs                                                                                                                                                                                                  |
|                             |                                                                                                                                                                                                                                                                        |
| Attendance Fees:                 | $1,500 for each  board meeting (attended in person, conducted by telephone, or written consent  in lieu of meeting)  $1,500 for each committee meeting (attended in person, conducted by  telephone, or written consent in lieu of meeting)  Expenses related to attendance |

 

*DirectorsDeferred Compensation Plan*

 

On October 28,2005, our board of directors approved the Directors Deferred Compensation Plan,which became effective on January 1, 2006. The plan allows each directorwho receives compensation for board service to defer all or a portion of suchcompensation in a calendar year. Amounts deferred are credited with imputedinterest at a rate equal to 130% of Moody’s Composite Average of Yields onCorporate Bonds. Participants elect the form and timing of distributions oftheir deferred compensation balances. Participants may receive payment in cashin a lump sum or in annual installments following their service on the board.One director has elected to participate in the program in 2006.

 

***CompensationCommittee Interlocks and Insider Participation***

 

None of our executive officers serve as a member ofthe board of directors or compensation committee of any entity that has one ormore executive officers serving on our board of directors or compensation committee.No interlocking relationship exists between the board of directors or thecompensation committee of any other company.

 

***EmploymentAgreements***

 

*W. Thomas Stephens*

 

Mr. Stephens isparty to an employment agreement with us pursuant to which he will serve as ourchairman and chief executive officer. This agreement is scheduled to expire in October 2007but will be automatically extended for an additional year beginning October 2006and each year thereafter unless either party gives the other party 60 days’notice prior to the extension date. Mr. Stephens received an initialannual base salary of $1,000,000, subject to adjustment at the discretion ofthe board of directors, and is eligible to receive an annual performance bonusup to a maximum of 146% of his annual salary, based upon the achievement ofperformance goals as determined by the compensation committee of our board ofdirectors or the board itself.

 

In the event oftermination for reasons other than for cause and other than as a result of expirationand nonrenewal of the employment agreement term, or if Mr. Stephensresigns for good reason, as defined in the agreement, subject to his executionof a valid release of employment-related claims, Mr. Stephens will beentitled to receive a lump sum payment of two times the sum of his base salaryand target bonus and will remain eligible to participate in our benefit plansfor a period of two years. We will also be required to increase Mr. Stephens’total payments under the agreement to cover any excise taxes imposed by theInternal Revenue Service as a result of such payments. We will also be

 

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required in suchan event to purchase real property in Boise, Idaho, from Mr. Stephens atfair market value, which as of July 2005 was estimated to be approximately$850,000. We also maintain a term life insurance policy on Mr. Stephens’life with a face amount of $2,000,000, which policy is payable to beneficiariesdesignated by Mr. Stephens.

 

As part of the agreement,we became obligated to purchase real property in Vancouver, British Columbia,and a boat from Mr. Stephens at fair market value in the event Mr. Stephensdid not sell the property. Mr. Stephens sold the real property inVancouver to a third party, and the company reimbursed him for his expensesrelated to the sale. The company purchased Mr. Stephens’ boat andsubsequently sold it to an unaffiliated third party. Upon the closing of theAcquisition, we also made a one-time payment totaling $429,452 to Mr. Stephensin exchange for consulting services performed in connection with theAcquisition.

 

Mr. Stephens has theright under this agreement to hold a position on our board of directors for solong as he is employed under the terms of this agreement. The employmentagreement also imposes on Mr. Stephens a permanent confidentialityobligation, and a noncompete and nonsolicitation obligation, which willcontinue to be in effect for two years after termination of his employment.

 

*Alexander Toeldte*

 

On October 1, 2005,the company entered into an Offer of Future Employment with Mr. Toeldte.Pursuant to the terms of the agreement, Mr. Toeldte received a signingbonus of $375,000 and an initial annual base salary of $250,000. Mr. Toeldte’sannual base salary was increased to $500,000 upon his promotion to executivevice president, Paper and Packaging & Newsprint, effective October 28,2005. Mr. Toeldte was reimbursed for his relocation expenses in accordancewith the Foreign Service Policy (Relocation) Agreement described below.**Mr. Toeldte is eligible to receive an annual bonuswith a target value of 65% of his base pay. His 2005 bonus was prorated basedon his entry into the plan on October 1, 2005. Mr. Toeldte has theopportunity to purchase a form of equity investment in the organization at aprice to be determined, as well as eligibility to receive long-term incentivegrants if and when such grants are authorized. Mr. Toeldte is eligible forstandard benefits offered to officers, which include an annual financialcounseling allowance of $5,000, supplemental healthcare benefits in addition toparticipation in the company’s standard healthcare plan, and participation inthe company’s Savings Plan and Deferred Compensation Plan. Mr. Toeldte iseligible to receive the maximum paid time off available to our salariedemployees, which is currently 31 days annually. If Mr. Toeldte isinvoluntarily terminated (other than for disciplinary reasons), he will beeligible to receive the severance benefits set forth in his severance agreementdescribed below.

 

On October 1,2005, the company also entered into a Foreign Service Policy (Relocation)Agreement with Mr. Toeldte. Pursuant to the terms of the agreement, Mr. Toeldtereceived $41,667 as a Relocation Allowance, plus storage of household goods forup to six months, reasonable air shipment of some household goods, purchases ofappliances up to $3,000, and up to six months of temporary living.  He waseligible for reimbursement of two rental cars for up to three months. Mr. Toeldteand his family were entitled to business class airfares to the United Statesupon his acceptance of employment. We will assist Mr. Toeldte in theprocess of obtaining permanent residence and will pay his legal expensesassociated with that process. For 2005 and 2006, we will protect Mr. Toeldtefrom any adverse tax impact resulting from his relocation. Additionally, wewill pay reasonable costs associated with the services of a tax advisor, to bechosen by the company, for the preparation of his personal income tax returnsin New Zealand, the United States, and any third country. Pursuant to ouragreement with Mr. Toeldte, we extended an Appraised Value Offer for hishome in New Zealand and paid all program costs, including closing costs. In2006, we sold the home to an unaffiliated third party. If, due to immigrationrequirements, Mr. Toeldte or members of his family cannot continue toreside in the United States, we will provide for his repatriation to NewZealand.

 

***SeveranceAgreements***

 

*W. ThomasStephens*

 

For a description of Mr. Stephens’ severancebenefits, please refer to the description of Mr. Stephens’ employmentagreement described above.

 

127

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*AlexanderToeldte*

 

On October 1, 2005,the company entered into a severance agreement with Mr. Toeldte. Pursuantto the terms of the agreement, if Mr. Toeldte’s employment isterminated without cause or if he terminates employment for good reason, asdefined in the agreement, and subject to his execution of a valid release ofemployment-related claims, he will be entitled to severance pay equal to twotimes his annual base salary plus his target annual incentive for the year inwhich the termination occurs. To the extent not already paid, he will receive alump sum amount equal to the greater of the value of his unused and accruedtime off, less any advanced time off. He will also be eligible for continuationfor two years of all life, disability, accident, and healthcare insurance plansand financial counseling services, or a lump sum payment equal to (a) 36times the monthly group premium for such insurance plans plus (b) threetimes the annual allowance for such financial counseling services. The companywill reimburse Mr. Toeldte for all legal expenses incurred through thetermination date in connection with attempting to obtain permanent residency inthe United States. If he continues to attempt to obtain permanent residencyafter the termination date, we will reimburse Mr. Toeldte for legal feesand expenses he incurs in that effort within 24 months after histermination date, to the extent those fees and expenses are not reimbursable byanother party. The agreement also imposes on Mr. Toeldte confidentialityand nondisparagement provisions, as well as a nonsolicitation provision thatapplies for a period of at least one year following the date of termination.

 

*Stanley R.Bell, Thomas E. Carlile, Thomas A. Lovlien*

 

Prior to the Acquisition,OfficeMax entered into agreements with most of our current executive officersto provide for severance benefits if we terminated the officer after theAcquisition. In connection with the Acquisition, we assumed these agreementsand agreed to perform these agreements following the closing of theAcquisition. These agreements generally expire in October 2007. Pursuantto the terms of these severance agreements, Messrs. Bell, Carlile, andLovlien are each entitled to the following benefits subject to his execution ofa valid release of employment-related claims:  if the officer’s employment is terminatedwithout cause or if the officer terminates employment for good reason, asdefined in the agreements, the officer will be entitled to severance pay equalto the following:  two times the officer’sannual base salary plus the greater of (1) the officer’s annual targetincentive bonus for the year in which the termination occurs or (2) theofficer’s incentive bonus for 2004; accrued and unpaid vacation; continuationfor two years of all life, disability, accident, and healthcare insuranceplans, and financial consulting services, or a lump sum payment equal to (a) 24 times150% of the monthly premium for such insurance plans plus (b) two timesthe annual allowance for such financial consulting services, and the premiumunder our supplemental life plan for 24 months following the officer’sdate of termination. We will also be required to increase the officer’s totalpayments under the agreement to cover any excise taxes imposed by the InternalRevenue Service as a result of such payments.

 

Such officer will also beentitled to additional special pension benefits. For purposes of calculatingthe amount of the special pension benefit, the officer will be deemed to haveaccrued at least two additional years of service credit at a salary equal tothe officer’s base salary and target bonus at the time of termination. Theofficer is also entitled to legal fees incurred to enforce the agreement.

 

The agreements also imposeon the officers confidentiality and nondisparagement provisions, as well as anonsolicitation provision that applies for a period of at least one yearfollowing the date of the officer’s termination.

 

The estimated amount ofpayments and other benefits (not including legal fees, if any) each namedexecutive officer would receive under his severance agreement based on 2005compensation figures (in excess of the benefits to which the officer isentitled without the agreement) is:

 
| **Name**           | ** ** | **Severance  Payment** | ** ** |
|--------------------|------------|------------------------|------------|
|               |       |                   |       |
| W. Thomas Stephens |       | $                      | 4,209,880  |   |
| Alexander Toeldte  |       | 1,712,472              |       |
| Stanley R. Bell    |       | 1,889,962              |       |
| Thomas E. Carlile  |       | 3,481,213              |       |
| Thomas A. Lovlien  |       | 2,034,766              |       |
|                    |            |                        |            |  |

 

128

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Payments that would bemade subsequent to an officer’s termination date have been discounted as of December 31,2005, at a rate of 5.36**%**, according tothe requirements of Section 280G of the Internal Revenue Code. Actualpayments made under the agreements at any future date would vary, depending inpart upon what the executive has accrued under the variable compensation plansand benefit plans.

 

Prior to the Acquisition,OfficeMax also entered into severance agreements with certain of our otherexecutive officers, with terms similar to those described above, but whichgenerally provide for one year of compensation and other benefits instead oftwo years and for at least one year of service credit for the special pensionbenefit rather than two years.

 

*John W. Holleran*

 

In connection with Mr. Holleran’sdeparture from the company effective November 15, 2005, the compensationcommittee of our board of directors approved the entry into a severancearrangement with Mr. Holleran, which described and confirmed the benefitsand responsibilities set forth in the Executive Officer Severance Agreementbetween Mr. Holleran and the company. The severance arrangement includedthe following material provisions:  alump sum severance payment of $1,650,000, which is two times Mr. Holleran’sbase salary and target annual incentive; payment of a pro rata award under thecompany’s annual incentive plan; repurchase of Mr. Holleran’s 1,000,000 Series Bequity units under the company’s management equity plan at his original cost;forfeiture of Mr. Holleran’s 2,812,000 Series C equity units underthe company’s management equity plan; payment of unused time off; payment of anamount to reimburse Mr. Holleran for excise taxes levied in connectionwith the severance arrangement; covenants of confidentiality, nonsolicitationof employees, and nondisparagement; signature of a release in the form approvedby the company; and compliance with the other provisions outlined in theExecutive Officer Severance Agreement between Mr. Holleran and thecompany.

 

***Management EquityArrangements***

 

Pursuant to an equityincentive program established shortly after the closing of the Acquisition,approximately 170 of our management-level employees purchased Series Bequity units of FPH for approximately $18.6 million. Purchasers of FPH Series Bequity units in this program also received Series C equity units of FPH,representing the right to participate in our profits after the holders of theFPH Series B equity units have received a return of all of their investedcapital. The FPH Series C equity units have no value to the holder untilFPH’s equity value appreciates above a specified level. To prevent dilution ofMadison Dearborn’s interest in Boise Cascade Holdings, L.L.C., FPH wasissued Series C equity units in Boise Cascade Holdings, L.L.C., toreflect management’s equity interest in FPH.

 

In connection with thisprogram, the management investors received (1) an aggregate ofapproximately 4.2% of the total FPH Series B equity units as of the dateof their investment, representing a 3.4% ownership interest in our total equityat such date, and (2) FPH Series C equity units representing a 7.5%profits interest in FPH at such date. As of December 31, 2005, themanagement investors’ FPH Series B equity units represented a 3.2%ownership interest in our total equity and their FPH Series C equity unitsrepresented a 6.8% profits interest in FPH.

 

Set forth below are thenumbers of shares of FPH Series B equity units and FPH Series Cequity units held by our named executive officers as of December 31, 2005:

 
| **Name**                | ** ** | **FPH Series B  Equity Units** | ** ** | **FPH Series C  Equity Units** | ** ** |
|-------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
|                    |       |                                     |       |                                     |       |
| W. Thomas Stephens |       | 4,000,000                                |       | 11,183,000                               |       |
| Alexander Toeldte       |       | —                                   |       | —                                   |       |
| Stanley R. Bell    |       | 740,000                                  |       | 1,917,000                                |       |
| Thomas E. Carlile  |       | 850,000                                  |       | 2,396,000                                |       |
| Thomas A. Lovlien       |       | 400,000                                  |       | 851,000                                  |       |
| John W. Holleran        |       | —                                   |       | —                                   |       |

 

129

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***Incentive andPerformance Plan***

 

For 2005, each of our namedexecutive officers earned a cash bonus pursuant to our Incentive andPerformance Plan. These awards were based on the attainment of performancegoals related to earnings before interest, taxes, depreciation and amortization,and other business measures. Awards were calculated as a percentage of salary,based on the extent to which the performance goals were met during the year.For 2005, Messrs. Carlile, Holleran, Stephens, and Toeldte were eligibleto receive up to approximately 146% of the base salary they received from us. Messrs. Belland Lovlien were eligible to receive up to approximately 124% of the basesalary they received from us.

 

***Defined BenefitPension Plan***

 

We maintain a definedbenefit pension plan, which we refer to as the Salaried Pension Plan, forcertain salaried employees, including our named executive officers. Foremployees hired before November 2003, our Salaried Pension Plan entitleseach vested employee to receive a pension benefit at normal retirement equal to1.25% of the average of the highest five consecutive years of compensation outof the last ten years of employment, multiplied by the participant’s years ofservice through December 31, 2003, plus 1% of the average of the highestfive consecutive years of compensation out of the last ten years ofemployment multiplied by the participant’s years of service after December 31,2003. Under the Salaried Pension Plan, “compensation” is defined as theemployee’s base salary plus any amounts earned under our variable incentivecompensation programs.

 

The following tablereflects estimated annual benefits payable based on various compensation andyears of service combinations.

 
| ** **       | ** ** | **Salaried Pension Plan Table****Years of Service (1)** | ** ** |
|------------------|------------|---------------------------------------------------------|------------|
| **Remuneration** | ** ** | **15**                                                  | ** ** | **20** | ** ** | **25** | ** ** | **30** | ** ** | **35** | ** ** | **40** | ** ** |
| $                | 300,000    |                                                    | $          | 56,250 |   | $ | 75,000 |   | $ | 93,750 |   | $ | 112,500 |   | $ | 131,250 |   | $ | 150,000 |   |
| 400,000          |       | 75,000                                                  |       | 100,000 |   | 125,000 |   | 150,000 |   | 175,000 |   | 200,000 |   |
| 500,000          |       | 93,750                                                  |       | 125,000 |   | 156,250 |   | 187,500 |   | 218,750 |   | 250,000 |   |
| 600,000          |       | 112,500                                                 |       | 150,000 |   | 187,500 |   | 225,000 |   | 262,500 |   | 300,000 |   |
| 700,000          |       | 131,250                                                 |       | 175,000 |   | 218,750 |   | 262,500 |   | 306,250 |   | 350,000 |   |
| 800,000          |       | 150,000                                                 |       | 200,000 |   | 250,000 |   | 300,000 |   | 350,000 |   | 400,000 |   |
| 900,000          |       | 168,750                                                 |       | 225,000 |   | 281,250 |   | 337,500 |   | 393,750 |   | 450,000 |   |
| 1,000,000        |       | 187,500                                                 |       | 250,000 |   | 312,500 |   | 375,000 |   | 437,500 |   | 500,000 |   |
| 1,200,000        |       | 225,000                                                 |       | 300,000 |   | 375,000 |   | 450,000 |   | 525,000 |   | 600,000 |   |
| 1,400,000        |       | 262,500                                                 |       | 350,000 |   | 437,500 |   | 525,000 |   | 612,500 |   | 700,000 |   |
| 1,600,000        |       | 300,000                                                 |       | 400,000 |   | 500,000 |   | 600,000 |   | 700,000 |   | 800,000 |   |
|                  |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (1) | The numbers in  the table are based on a 1.25% crediting rate. In 2003, the crediting rate  was adjusted to 1.00% for years of service earned after 2003; however,  because any pension benefit under the Salaried Pension Plan will include some  portion of service credited at the 1.25% rate, we have used that rate in this  table. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As of December 31, 2005, the average of thehighest five consecutive years of compensation and the years of service foreach of the named executive officers are as follows:

 
| **Name**               | ** ** | **Compensation (1)** | ** ** | **Years of Service (1)** | ** ** |
|------------------------|------------|----------------------|------------|--------------------------|------------|
| W. Thomas Stephens (2) |       | $                    | —     |                     | —     |   |
| Alexander Toeldte (2)  |       | —               |       | —                   |       |
| Stanley R. Bell        |       | 466,611              |       | 35                       |       |
| Thomas E. Carlile      |       | 447,661              |       | 33                       |       |
| Thomas A. Lovlien      |       | 358,752              |       | 27                       |       |
| John W. Holleran (3)   |       | 779,836              |       | 29                       |       |
|                        |            |                      |            |                          |            |  |

 

----

| (1)    | Compensation and years of service include amounts attributable to  employment with OfficeMax prior to the Acquisition. |
|--------|------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                   |
| (2)    | Messrs. Stephens and Toeldte are not eligible to participate in  the Salaried Pension Plan.                       |

 

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| (3) | Mr. Holleran terminated employment on November 15,  2005.  The compensation and years of  service shown for Mr. Holleran were enhanced pursuant to his severance  arrangement with the company. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

As shown in the SalariedPension Plan table above, benefits are computed on a straight-life annuitybasis and are not offset by Social Security or other retirement-type benefits.An employee is 100% vested in his or her pension benefit after five years ofservice, except for breaks in service. If an employee is entitled to a greaterbenefit under the plan’s formula than the Internal Revenue Code allows fortax-qualified plans, the excess benefits will be paid from our general assetsunder the unfunded Supplemental Pension Plan. The Supplemental Pension Planwill also provide payments to the extent that participation in the deferredcompensation plans has the effect of reducing an individual’s pension benefitunder the qualified plan. Benefits payable under the Supplemental Pension Planare offset by benefits payable under a similar plan maintained by OfficeMax.

 

***Supplemental EarlyRetirement Plan for Executive Officers***

 

We maintain a Supplemental Early Retirement Planfor officers who were officers of OfficeMax immediately prior to theAcquisition, who are 55 years old or older (58 years old for officersappointed on or after June 1, 2004), have ten or more years of service,have served as an officer for at least five full years, and retire before theage of 65. Eligible officers receive an early retirement benefit prior to theage of 65 equal to the benefit calculated under the Salaried Pension Planwithout reduction due to the officer’s early retirement. Benefits payable underthis plan are offset by benefits payable under a similar plan maintained byOfficeMax.

 

***DeferredCompensation Plan***

 

Our Deferred Compensation Plan is an unfunded plan.Under the plan, officers may irrevocably elect to defer receipt of a portion oftheir base salary and bonus until termination of employment or beyond. Aparticipant’s account is credited with imputed interest at a rate equal to 130%of Moody’s Composite Average of Yields on Corporate Bonds. In addition,participants may elect to receive their company-matching contribution in our DeferredCompensation Plan in lieu of any matching contribution in our Savings Plan. Thematching contribution is equal to $0.70 on the dollar up to the first 6% ofeligible compensation, plus an additional discretionary match for eligibleparticipants that may vary from year to year. In 2005, the discretionary matchwas equal to $0.30 on the dollar up to the first 6% of eligible compensation. Withthe exception of Mr. Stephens, all of our named executive officersparticipated in the Deferred Compensation Plan during 2005.

 

***ITEM12.******             ******SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT***

 

The following table setsforth information as of January 31, 2006, regarding the beneficialownership of our equity units held by:

 

•                  Each person that is a beneficialowner of more than 5% of each series of our equity units;

 

•                  Each of our named executive officers;

 

•                  Each of our directors; and

 

•                  All directors and executive officersas a group.

 

Beneficialownership of the equity units listed in the table for Madison Dearborn Partnersand members of our management represents such persons’ proportional interest inour total outstanding equity units of the series shown. Except as noted in thepreceding sentence, beneficial ownership of the equity units listed in thetable has been determined in accordance with the applicable rules andregulations promulgated under the Exchange Act and generally includes voting orinvestment power over securities. Except in cases where community property lawsapply or as indicated in the footnotes to the table, we believe that eachequity holder identified in the table possesses sole voting and investmentpower over all equity units shown as beneficially owned by such equity holder.Percentage of beneficial ownership is based on our total equity unitsoutstanding of each series (547,499,475 Series B equity units and 32,173,830Series C equity units). Unless indicated otherwise in the footnotes, theaddress of each

 

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individual listed in the table is c/o Boise Cascade Holdings, L.L.C.,1111 West Jefferson Street, Boise, Idaho 83728.

 
| ** **                                                    | ** ** | **Series B  Equity Units** | ** ** | **Series C  Equity Units** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Name of Beneficial Owner**                                  | ** ** | **Number**                      | ** ** | **Percent  of Series**          | ** ** | **Number** | ** ** | **Percent  of Series** | ** ** |
| **Principal  Equity Holders:**                                |       |                            |       |                            |       |   |   |   |   |
| Forest Products  Holdings, L.L.C. (1)                         |       | 438,499,475                     |       | 80.1                            | %          | 32,173,830 |   | 100 | % |
| Madison Dearborn  Partners (1)                                |       | 419,556,601                     |       | 76.6                            |       | — |   | — |   |
| OfficeMax  Incorporated (2)                                   |       | 109,000,000                     |       | 19.9                            |       | — |   | — |   |
| **Named  Executive Officers and Directors:**                  |       |                            |       |                            |       |   |   |   |   |
| W. Thomas  Stephens                                           |       | 4,000,000                       |       | *                               |       | 11,183,000 |   | 34.8 |   |
| Alexander  Toeldte                                            |       | —                          |       | —                          |       | — |   | — |   |
| Stanley R. Bell                                               |       | 740,000                         |       | *                               |       | 1,917,000 |   | 6.0 |   |
| Thomas E.  Carlile                                            |       | 850,000                         |       | *                               |       | 2,396,000 |   | 7.4 |   |
| Thomas A.  Lovlien                                            |       | 400,000                         |       | *                               |       | 851,000 |   | 2.6 |   |
| John W. Holleran                                              |       | —                          |       | —                          |       | — |   | — |   |
| Zaid F. Alsikafi  (3)                                         |       | —                          |       | —                          |       | — |   | — |   |
| Hank Brown                                                    |       | —                          |       | —                          |       | — |   | — |   |
| Sam K. Duncan                                                 |       | —                          |       | —                          |       | — |   | — |   |
| William S.  Kirsch (4)                                        |       | 250,000                         |       | *                               |       | — |   | — |   |
| John W. Madigan  (5)                                          |       | 1,000,000                       |       | *                               |       | — |   | — |   |
| Duane C.  McDougall                                           |       | —                          |       | —                          |       | — |   | — |   |
| Christopher J.  McGowan (3)                                   |       | —                          |       | —                          |       | — |   | — |   |
| Samuel M.  Mencoff (6)                                        |       | 419,556,601                     |       | 76.6                            |       | — |   | — |   |
| Thomas S.  Souleles (6)                                       |       | 419,556,601                     |       | 76.6                            |       | — |   | — |   |
| All directors  and executive officers as a group (16 persons) |       | 427,606,601                     |       | 78.1                            | %          | 18,256,000 |   | 56.7 | % |

 

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*Less than 1%.

 
| (1)    | Forest Products Holdings, L.L.C. (FPH) is controlled by Madison  Dearborn Partners IV, L.P. (MDP IV). Madison Dearborn Partners, LLC (MDP  LLC) is the ultimate sole general partner of MDP IV and, as a result, may be  deemed to have voting and investment power over the units held by FPH. The  board of directors of FPH is comprised of Messrs. Alsikafi, McGowan,  Mencoff, Souleles, and Stephens. The address for FPH is c/o Boise Cascade Holdings,  L.L.C., 1111 West Jefferson Street, Boise, Idaho 83728. The address for MDP  IV and MDP LLC is c/o Madison Dearborn Partners, LLC, Three First National  Plaza, Suite 3800, 70 West Madison Street, Chicago, Illinois 60602. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    | The address for OfficeMax Incorporated is 150 Pierce Road, Itasca,  Illinois 60143.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (3)    | Messrs. Alsikafi and McGowan are employed by MDP LLC, and each  has a pecuniary interest in the units held by FPH. Messrs. Alsikafi and  McGowan expressly disclaim beneficial ownership except to the extent of their  pecuniary interest therein. The address of Messrs. Alsikafi and McGowan  is c/o Madison Dearborn Partners, LLC, Three First National Plaza,  Suite 3800, 70 West Madison Street, Chicago, Illinois 60602.                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (4)    | Mr. Kirsch holds units in FPH through Provident Mortgage  Partners, L.L.C., in which Mr. Kirsch and other family members are the  controlling shareholder. Mr. Kirsch’s address is c/o Conseco, Inc.,  222 Merchandise Mart Plaza, 19th Floor, Chicago, Illinois, 60654.                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (5)    | Mr. Madigan is an investor in FPH, and the units listed in the  table represent Mr. Madigan’s proportionate ownership interest in the  units held by FPH. Mr. Madigan does not exercise voting or investment  power over any of the units held by FPH. Mr. Madigan’s address is c/o  Tribune Company, 435 N. Michigan Avenue, Chicago, Illinois 60611.                                                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (6)    | Mr. Mencoff is a co-president, and Mr. Souleles is a  managing director of MDP LLC, which is the ultimate sole general partner of  MDP IV, which controls FPH. As a result, Messrs. Mencoff and Souleles  may be deemed to share beneficial ownership of the units owned by FPH.  Messrs. Mencoff and Souleles expressly disclaim beneficial ownership of  the units owned by FPH except to the extent of their pecuniary interest therein.  The address of Messrs. Mencoff and Souleles is c/o Madison Dearborn  Partners, LLC, Three First National Plaza, Suite 3800, 70 West Madison  Street, Chicago, Illinois 60602.                                                    |

 

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***ITEM13.******             ******CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS***

 

***OurPolicies***

 

Wehave established procedures for the review of transactions and relationshipsbetween us, our directors, our executive officers, and other affiliates. Ourboard of directors has charged the audit committee with the responsibility ofreviewing and investigating any conflicts of interest involving management andour board of directors. Further, the audit committee reviews and investigatesadherence to our Code of Ethics, which requires that our employees, officers, andagents be free from actual or apparent conflicts of interest with the company.The Code also prohibits employees, officers, and agents from competing with thecompany, using their positions for personal gain, or appropriating businessopportunities presented to the company.

 

***SECDisclosure***

 

TheSEC has specific disclosure requirements regarding transactions andrelationships between us and our directors, executive officers, or otherspecified parties. We have several relationships that require disclosure underthese SEC rules. These disclosures involve our relationships and transactionswith affiliates, such as OfficeMax and Boise Land & Timber, and wedescribe those relationships in further detail below.

 

# ***TheAcquisition***

# * *

In connection with theAcquisition from OfficeMax, FPH entered into an Asset Purchase Agreement withOfficeMax and other parties, as described below. FPH and/or its subsidiariesalso entered into a Paper Supply Agreement, an Additional ConsiderationAgreement, a Securityholders Agreement, and a Registration Rights Agreementswith OfficeMax.

 

Under the Asset PurchaseAgreement entered into in connection with the Acquisition, FPH acquired theforest products and timberland operations from OfficeMax for an aggregatepurchase price of $3.9 billion in cash and installment notes, includingfees and expenses. Of the purchase price, $1.7 billion was allocated tothe timberland operations, and $2.2 billion was allocated to the remainingassets. FPH owns and operates the forest products and paper businesses throughus. Boise Land & Timber Corp., a sister corporation that ismajority-owned by FPH, sold the timberland operations on February 4, 2005.

 

For five years after theclosing of the Acquisition, OfficeMax may not compete with us anywhere in theUnited States in the businesses purchased in the Acquisition, nor may OfficeMaxinduce or attempt to induce any customer to terminate or reduce itsrelationship with us.

 

Until October 29,2006, we must maintain health and welfare benefit plans, defined contributionretirement plans, and severance benefits that will provide transferredemployees with plans and benefits that are, in the aggregate, comparable tothose offered by OfficeMax prior to the closing of the Acquisition.

 

The Asset Purchase Agreementcontains customary representations, warranties, and covenants, including anobligation by OfficeMax to indemnify us for breaches of representatives,warranties, and covenants. OfficeMax’s indemnification obligations with respectto such breaches generally survive until April 26, 2009, withindemnification obligations with respect to breaches relating to employee andenvironmental law matters surviving until October 29, 2009. OfficeMax’sindemnification obligations for breaches of representations, warranties, andcovenants are, with certain exceptions, subject to a deductible of$20.7 million and an aggregate cap of $248.9 million. OfficeMax alsoindemnifies us for specified pre-Acquisition liabilities, includingenvironmental, asbestos, tax, benefits, and other legacy liabilities.

 

We currently indemnifyand hold harmless each of our present or former officers and directors againstall claims, losses, liabilities, damages, and other costs and expensespertaining to the fact that the indemnified party is or was an officer,director, or employee of ours or our subsidiaries for matters existing oroccurring before the completion of the Acquisition.

 

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***Purchase of EquityInterests in Us and Boise Land & Timber Holdings Corp.***

 

In connection with theAcquisition, FPH and OfficeMax capitalized us with approximately $338.9 millionin equity capital, which consisted of $302.5 million of Series Bequity units and $36.4 million of Series A equity units. Boise Land &Timber Holdings Corp. was capitalized with approximately $276.1 million inequity capital in the form of common stock, $246.5 million of Series Bcommon stock, and $29.6 million of Series A common stock.

 

FPH was issuedapproximately 80.1% of each of our Series B equity units and Boise Land &Timber Holdings Corp.’s Class B common stock in exchange for cashcontributions of approximately $242.4 million and $197.6 million,respectively. OfficeMax was issued approximately 19.9% of our Series Bequity units and all of our Series A equity units in exchange for cashcontributions of $60.1 million and $36.4 million, respectively.  An affiliate of OfficeMax was issuedapproximately 19.9% of Boise Land & Timber Holdings Corp.’s Series Bcommon stock and all of its Series A common stock in exchange for cashcontributions of $48.9 million and $29.6 million, respectively.

 

In addition, on December 12,2004, Boise Land & Timber Holdings Corp. and we each issued additionalequity securities to FPH so that both FPH and OfficeMax would proportionatelybear any dilution caused by the Class C units issued to 170 of our seniormanagers on such date. We issued 35,600,120 Class C units to FPH, andBoise Land & Timber Holdings Corp. issued 3,560 Class C units to FPH.

 

***Paper Supply Agreement***

 

In connection with theAcquisition, we entered into a 12-year paper supply contract with OfficeMaxunder which OfficeMax is required to purchase from us all of its North Americanrequirements for cut-size office paper, to the extent we choose to supply suchpaper to them, through December 2012. OfficeMax’s purchase obligationsunder the agreement will phase out over a four-year period beginning one yearafter the delivery of notice of termination, but not prior to December 31,2012.

 

***Additional ConsiderationAgreement***

 

In connection with theAcquisition, we entered into a six-year agreement with OfficeMax. Under theagreement, OfficeMax will pay us $710,000 for each dollar by which the averagemarket price per ton of a specified benchmark grade of cut-size office paperduring any 12-month period ending on the anniversary of the closing of theAcquisition, or the annual paper price, is less than $800 per ton. In addition,we will pay $710,000 to OfficeMax for each dollar by which the annual paperprice exceeds $920 per ton. Neither party will be obligated to makepayments under the agreement (i) in excess of $45.0 million in anyone year or (ii) in excess of $125.0 million in the aggregate duringthe first four years following the closing, $115.0 million in theaggregate if the determination is made during the fifth year following theclosing, and $105.0 million in the aggregate if the determination is madeduring the sixth year following the closing, in each case net of paymentsreceived (the Maximum Aggregate Consideration). If a party has paid the MaximumAggregate Consideration during the first four years following the closing, theparty will not be entitled to recoup in years five or six the amount previouslypaid in excess of the Maximum Aggregate Consideration applicable in years fiveand six. This agreement will expire as of the earliest of (i) six yearsafter the closing, (ii) the sale of 50% or more of the outstanding commonequity (as measured on October 29, 2004) of Boise Cascade, L.L.C., oursubsidiary, in an underwritten public offering, (iii) the sale or transferby Boise Cascade, L.L.C., of more than 50% of its common equity in Boise WhitePaper, L.L.C. (the subsidiary that operates our Paper business), and (iv) terminationby either party upon a payment default by the other party not cured within 30days.

 

After each anniversary ofthe closing, we review paper prices with the provisions of the AdditionalConsideration Agreement to determine whether any amounts are owed or receivableunder the agreement. For the first anniversary period ending October 29,2005, neither Boise nor OfficeMax owed additional consideration for thepurchase price.

 

***Securityholders Agreement***

 

In connection with the Acquisition, weentered into a Securityholders Agreement with OfficeMax. This agreementdescribes the rights and responsibilities regarding OfficeMax’s equityownership in Boise Holdings. Specifically, under the agreement, OfficeMax hasthe right to appoint one director to our board

 

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of directors. The agreement also requiresthat OfficeMax obtain our consent before transferring its equity interest inour company. The agreement grants “tag-along” rights, which entitle OfficeMaxto participate in sales of equity interests to third parties. In addition, theagreement grants “drag-along” rights, which entitle OfficeMax to require theother equity holders to participate in sales of all or substantially all of theequity interests in our company. If we propose to issue additional equitysecurities, we will generally be required to offer OfficeMax a pro rata portionof the securities issued in such a transaction. The agreement will terminate ina liquidation or dissolution of the company, in an initial public offering, orin a sale of all or substantially all of the company’s stock or assets.

 

***Registration RightsAgreement***

 

In connection with theAcquisition, we entered into a registration rights agreement with FPH andOfficeMax with respect to the equity interests they own in us. Under the RegistrationRights Agreement, (i) FPH has the right to demand that we effect anunlimited number of registrations of its equity interests, whether pursuant toa long-form registration statement or a short-form registration, and pay allexpenses, other than underwriting discounts and commissions, related to suchregistrations and (ii) after the earlier of the fifth anniversary of thecompletion of the Acquisition or completion of an initial public offering byus, OfficeMax has the right to demand that we effect (a) sevenregistrations of its equity interests on a long-form registration statement andpay all expenses, other than underwriting discounts and commissions, related toany two of such registrations (with OfficeMax paying all expenses relating tothe other five of such registrations) and (b) an unlimited number ofregistrations of its equity interests on a short-form registration statementand pay all expenses, other than underwriting discounts and commissions,related to such registrations. In addition, FPH and OfficeMax have the right toparticipate in registrations of our equity interests effected by us, whethersuch registrations relate to an offering by us or by our stockholders. FPH andOfficeMax have agreed not to effect any public sale or private placement of anyof our equity interests during the period beginning seven days prior to andending 180 days after the effective date of the registration statement forany underwritten public offering of our equity interests in which FPH and OfficeMaxparticipate.

 

***Amounts Paid toMadison Dearborn***

 

At the closing of theAcquisition, Madison Dearborn received a fee of $40 million. MadisonDearborn may be paid additional fees from time to time in the future forproviding management, consulting, or advisory services and will be reimbursedfor all future expenses incurred in connection with its investment in us.During 2005, FPH received payments from us of $16.3 million which they in turnpaid to MDP. These payments represented cash paid to fund their tax obligationsrelated to their investment in us.

 

***RelationshipBetween Us and Boise Land & Timber Holdings Corp.***

 

Prior to the TimberlandsSale, FPH operated our business and the timberland operations through twodirect, majority-owned subsidiaries. The timberland operations supplied timberto us at prices that approximated market prices. During the 12 monthsended December 31, 2005, our fiber purchases from Timber Holdings were$17.6 million and were reflected as ‘‘Fiber costs from related parties’’in our Consolidated Statement of Income. These sales, as well as the allocationof corporate overhead and labor costs, were reflected through the adjustment ofan intercompany note.

 

***Loans Between Usand Boise Land & Timber Corp.***

 

In connection with theAcquisition, our subsidiary, Boise Cascade, L.L.C., loaned $160.4 millionto Boise Land & Timber Corp., a subsidiary of Boise Land &Timber Holdings Corp., a sister corporation that is majority-owned by FPH. Thisnote bore interest at a rate of 6% per annum. The principal amount of the notewas adjusted from time to time to reflect the payments between these companiesfor allocated costs and expenses. This loan had a balance, including accruedinterest and other related-party activity, of $157.5 million on February 4,2005, and was repaid in connection with the Timberlands Sale.

 

In connection with theTimberlands Sale, Boise Land & Timber Corp. loaned Boise Cascade,L.L.C., $264.8 million of the proceeds from such sale to make a mandatoryrepayment of indebtedness under our senior credit facilities. This note bearsinterest at 8% per annum, compounded semiannually. The amount of the notefluctuates with related-party activity.

 

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***Timberlands Sale***

 

On February 4, 2005,we and Boise Land & Timber Corp., an indirect subsidiary of Boise Land &Timber Holdings Corp., completed the Timberlands Sale to entities controlled byForest Capital Partners, LLC, an unrelated party, for an aggregate purchaseprice of $1.65 billion, with net cash proceeds of $1.63 billion afterfees and expenses. The purchase and sale agreement entered into in connectionwith the Timberlands Sale contains customary representations, warranties, andcovenants including an obligation by us and Boise Land & Timber Corp.to indemnify the purchasers for breaches of representations, warranties, andcovenants. Our indemnification obligations, with certain exceptions, surviveuntil February 4, 2006, and are subject to a deductible of $16.5 millionand an aggregate cap of $100.0 million. In addition, the purchasers haveagreed that, if the events giving rise to an indemnification claim against usand Boise Land & Timber Corp. also give rise to an indemnificationclaim against OfficeMax under OfficeMax’s indemnification obligations arisingfrom its sale of the timberland operations, the purchasers will pursue remediesdirectly and exclusively against OfficeMax. In connection with the foregoing, FPHassigned to the purchasers all of its rights to indemnification by OfficeMaxwith respect to the timberland operations.

 

We received an aggregateof $407.5 million in connection with the Timberlands Sale, including $157.5 millionpaid by Boise Land & Timber Corp. in satisfaction of an intercompanynote issued to us concurrently with the Acquisition and $264.8 million inthe form of a loan from Boise Land & Timber Corp. We used all of theseamounts to reduce amounts outstanding under our Tranche B term loan. BoiseLand & Timber Corp. used $1,225.0 million of the proceeds torepay amounts in full under its Tranche C term loan.

 

***Other***

 

For a description ofother relationships the company has with its directors and executive officers,refer to “Item 10. Directors and Executive Officers of the Registrant” of thisForm 10-K.

 

***ITEM14.******             ******PRINCIPAL ACCOUNTING FEES AND SERVICES***

 

 

KPMGLLP (KPMG) provides our audit committee with an engagement letter outlining thescope of proposed audit services for the fiscal year. The audit committeereviews the engagement letter and, if agreed to by the committee members,accepts it at the committee’s February meeting.

 

Inaddition to its audit services for the annual financial statements, KPMGprovides the company with other audit-related and tax-related services (such asaudits of the company’s employee benefit plans and technical accountingresearch and consultation). Management submits to the audit committee a list ofproposed audit-related and other nonaudit services and associated fees that itrecommends be provided by KPMG for the fiscal year. Management and KPMG eachconfirm to the committee that all the services on the list are permissibleunder applicable legal requirements. The committee reviews the proposedservices and fees and, if agreed to by committee members, approves thoseservices and associated fees. KPMG periodically informs the audit committee ofthe services it provides pursuant to this approval process.

 

KPMGmust ensure that the audit committee has preapproved all audit and nonauditservices.  Our vice president andcontroller is responsible for tracking KPMG’s audit fees against the budget forsuch services and reports at least annually to the audit committee.

 

Thecompany has never used KPMG for any of the following nonaudit services:

 

•                  Bookkeeping or other services relatedto our accounting records or financial statements;

 

•                  Financial information systems designand implementation;

 

•                  Appraisal or valuation services,fairness opinions, or contribution-in-kind reports;

 

•                  Actuarial services;

 

•                  Internal audit outsourcing services;

 

•                  Management functions or humanresources;

 

•                  Broker or dealer, investment advisoror investment banking services; or

 

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•                  Legal services and expert servicesunrelated to the audit.

 

Basedon this review, the committee believes that KPMG’s provision of nonauditservices is compatible with maintaining its independence.

 

Thefollowing table sets out the various fees for services provided by KPMG.  The audit committee preapproved all of theseservices.

 

##### ***Fees Paid to the Independent Accountant***

 
| ** **             | ** ** | **Amounts** | ** ** |
|------------------------|------------|-------------|------------|
| **Description**        | ** ** | **2005**    | ** ** | **2004** | ** ** |
|                   |       |        |       |   |   |
| Audit fees (a)         |       | $           | 2,366,721  |   | $ | 950,000 |   |
| Audit-related fees (b) |       | 3,600       |       | 4,500 |   |
| Tax fees (c)           |       | 31,570      |       | — |   |
| All other fees (d)     |       | —      |       | — |   |
|                        |            |             |            |  |  |  |  |

 

----

(a)                                  Professional audit services, including KPMG’s audit of the company’s annualfinancial statements for 2004 and 2005; its review of the financial statementsincluded in the company’s Forms 10-Qs; its audit of the company’s subsidiaryannual financial statements; assistance with registration statements, comfortletters, consents, and other services pertaining to SEC matters; andconsultation on accounting standards.

 

(b)                                 Audit-related feesinclude attestation and other services traditionally performed by the registrants’independent accountants (such as certain agreed upon procedures reports forenvironmental assurance letters).

 

(c)                                  Fees for tax compliance services relate to facts already in existence andtransactions that have already occurred. We use these services to assist ourU.S. employees working in other countries.

 

(d)           None.

 

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**PART IV**

 

***ITEM15.******             ******EXHIBITS AND FINANCIAL STATEMENT SCHEDULES***

 

(a)           Thefollowing documents are filed as a part of this Form 10-K:

 

(1)           ConsolidatedFinancial Statements.

 

The Consolidated Financial Statements, the Notes toConsolidated Financial Statements, and the Report of Independent RegisteredPublic Accounting Firm are presented in “Item 8.  Consolidated Financial Statements andSupplementary Data” of this Form 10-K.

 

•                                          ConsolidatedBalance Sheets as of December 31, 2005 and 2004.

 

•                                          ConsolidatedStatements of Income (Loss) for the year ended December 31, 2005, theperiods of October 29 (inception) through December 31, 2004, andJanuary 1 through October 28, 2004, and the year endedDecember 31, 2003.

 

•                                          ConsolidatedStatements of Cash Flows for the year ended December 31, 2005, the periodsof October 29 (inception) through December 31, 2004, andJanuary 1 through October 28, 2004, and the year endedDecember 31, 2003.

 

•                                          ConsolidatedStatements of Capital for the year ended December 31, 2005, the period ofOctober 29 (inception) through December 31, 2004, and for the yearended December 31, 2003.

 

•                                          Notesto Consolidated Financial Statements.

 

•                                          Reportof Independent Registered Public Accounting Firm.

 

(2)           FinancialStatement Schedules.

 

All financial statement schedules have been omitted becausethey are inapplicable, not required, or shown in the consolidated financialstatements and notes in “Item 8. Consolidated Financial Statements and Supplementary Data” of thisForm 10-K.

 

(3)           Exhibits.

 

A list of the exhibits required to be filed as part of thisreport is set forth in the Index to Exhibits and is incorporated by reference.

 

(b)           SeeIndex to Exhibits.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | Boise Cascade  Holdings, L.L.C. |
|--------|---------------------------------|
|   |                            |
|   | By                              | /s/ W. Thomas  Stephens |   |
|   |                            | W. Thomas Stephens |
|   |                            | Chief Executive  Officer |

 

Dated:  March 1, 2006

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated, on March 1, 2006.

 
| **Signature** | ** **                        | **Capacity** |
|---------------|-----------------------------------|--------------|
|          |                              |         |   |
| **(i)**       | **Principal Executive Officer:**  | ** **   | ** ** |
|          |                              |         |   |
|          | /s/ W. Thomas  Stephens           |         | Chief Executive  Officer |
|          | W. Thomas Stephens                |         |   |
|          |                              |         |   |
| **(ii)**      | **Principal Financial Officer:**  | ** **   | ** ** |
|          |                              |         |   |
|          | /s/ Thomas E.  Carlile            |         | Senior Vice  President and Chief Financial Officer |
|          | Thomas E. Carlile                 |         |   |
|          |                              |         |   |
| **(iii)**     | **Principal Accounting Officer:** | ** **   | ** ** |
|          |                              |         |   |
|          | /s/ Samuel K.  Cotterell          |         | Vice President and  Controller |
|          | Samuel K. Cotterell               |         |   |
|          |                              |         |   |
| **(iv)**      | **Directors:**                    | ** **   | ** ** |
|          |                              |         |   |
|          | /s/ W. Thomas  Stephens           |         | /s/ John W. Madigan |   |
|          | W. Thomas Stephens                |         | John W. Madigan |
|          |                              |         |   |
|          | /s/ Zaid F. Alsikafi              |         | /s/ Duane C.  McDougall |   |
|          | Zaid F. Alsikafi                  |         | Duane C. McDougall |
|          |                              |         |   |
|          | /s/ Hank Brown                    |         | /s/ Christopher J.  McGowan |   |
|          | Hank Brown                        |         | Christopher J.  McGowan |
|          |                              |         |   |
|          | /s/ Sam K. Duncan                 |         | /s/ Samuel M.  Mencoff |   |
|          | Sam K. Duncan                     |         | Samuel M. Mencoff |
|          |                              |         |   |
|          | /s/ William S.  Kirsch            |         | /s/ Thomas S.  Souleles |   |
|          | William S. Kirsch                 |         | Thomas S. Souleles |

 

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**BOISE CASCADE HOLDINGS, L.L.C.**

 

**INDEXTO EXHIBITS**

 

Filed or Furnished With the Annual Report on Form 10-K for theYear Ended December 31, 2005

 
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 2.1                 |       | Asset Purchase  Agreement dated July 26, 2004, between Boise Cascade Corporation (now  OfficeMax Incorporated), Boise Southern Company, Minidoka Paper Company,  Forest Products Holdings, L.L.C., and Boise Land & Timber Corp., as  amended by First Amendment to Asset Purchase Agreement dated October 23,  2004, and as further amended by Second Amendment to Asset Purchase Agreement  dated October 28, 2004 |       | S-1 Amend. No. 3         |       | 333-122770      |   | 2.1 |   | 5/2/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 2.2                 |       | Purchase and  Sale Agreement dated December 21, 2004, between Boise Land &  Timber Corp., Boise Cascade, Meriwether Investments LLC, Forest Products  Holdings, L.L.C., and Forest Capital Partners, LLC                                                                                                                                                                                                                       |       | S-1 Amend. No. 3         |       | 333-122770      |   | 2.2 |   | 5/2/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 2.3                 |       | Form of  Exchange Agreement between Forest Products Holdings, L.L.C., and Boise  Cascade                                                                                                                                                                                                                                                                                                                                                |       | S-1 Amend. No. 6         |       | 333-122770      |   | 2.4 |   | 5/17/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 2.4                 |       | Certificate of  Conversion from a Domestic Corporation to a Limited Liability Company                                                                                                                                                                                                                                                                                                                                                        |       | 8-K                           |       | 333-122770      |   | 2.1 |   | 12/27/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.1                 |       | Certificate of  Formation of Boise Cascade Holdings, L.L.C., dated December 20, 2005                                                                                                                                                                                                                                                                                                                                                    |       | 8-K                           |       | 333-122770      |   | 3.1 |   | 12/27/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.2                 |       | Operating  Agreement of Boise Cascade Holdings, L.L.C.                                                                                                                                                                                                                                                                                                                                                                                       |       | 8-K                           |       | 333-122770      |   | 3.2 |   | 12/27/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.3                 |       | Certificate of  Formation of Boise Cascade, L.L.C., dated July 26, 2004                                                                                                                                                                                                                                                                                                                                                                 |       | S-4                           |       | 333-125768      |   | 3.3 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.4                 |       | Operating  Agreement of Boise Cascade, L.L.C., effective September 20, 2004                                                                                                                                                                                                                                                                                                                                                             |       | S-4                           |       | 333-125768      |   | 3.4 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.5                 |       | Certificate of  Incorporation of Boise Cascade Finance Corporation dated September 15,  2004                                                                                                                                                                                                                                                                                                                                            |       | S-4                           |       | 333-125768      |   | 3.5 |   | 6/13/05 |   |   |

 

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| ** **          | ** ** | ** **                                                                                                                     | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                   | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 3.6                 |       | Bylaws of Boise  Cascade Finance Corporation                                                                                   |       | S-4                           |       | 333-125768      |   | 3.6 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.7                 |       | Amended and  Restated Certificate of Incorporation of Boise Land & Timber  Holdings Corp. dated October 29, 2004 |       | S-4                           |       | 333-125768      |   | 3.7 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.8                 |       | Bylaws of Boise  Land & Timber Holdings Corp.                                                                         |       | S-4                           |       | 333-125768      |   | 3.8 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.9                 |       | Certificate of  Incorporation of Boise Land & Timber Corp. dated July 26, 2004                                   |       | S-4                           |       | 333-125768      |   | 3.9 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.10                |       | Bylaws of Boise  Land & Timber Corp.                                                                                  |       | S-4                           |       | 333-125768      |   | 3.10 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.11                |       | Certificate of  Formation of Boise White Paper, L.L.C.                                                                         |       | S-4                           |       | 333-125768      |   | 3.11 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.12                |       | Operating  Agreement of Boise White Paper, L.L.C., effective September 20, 2004                                           |       | S-4                           |       | 333-125768      |   | 3.12 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.13                |       | Certificate of  Formation of Boise Packaging & Newsprint, L.L.C., dated August 6,  2004                          |       | S-4                           |       | 333-125768      |   | 3.13 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.14                |       | Operating  Agreement of Boise Packaging & Newsprint, L.L.C., effective  September 20, 2004                       |       | S-4                           |       | 333-125768      |   | 3.14 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.15                |       | Certificate of  Formation of Boise Building Solutions Manufacturing, L.L.C., dated  August 6, 2004                        |       | S-4                           |       | 333-125768      |   | 3.15 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.16                |       | Operating  Agreement of Boise Building Solutions Manufacturing, L.L.C., effective  September 20, 2004                     |       | S-4                           |       | 333-125768      |   | 3.16 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.17                |       | Certificate of  Formation of Boise Building Solutions Distribution, L.L.C., dated  August 26, 2004                        |       | S-4                           |       | 333-125768      |   | 3.17 |   | 6/13/05 |   |   |
|                |       |                                                                                                                           |       |                          |       |            |   |   |   |   |   |   |
| 3.18                |       | Operating  Agreement of Boise Building Solutions Distribution, L.L.C., effective  September 20, 2004                      |       | S-4                           |       | 333-125768      |   | 3.18 |   | 6/13/05 |   |   |

 

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| ** **          | ** ** | ** **                                                                                                                                                                                                   | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                 | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 3.19                |       | Certificate of  Amendment to the Certificate of Incorporation of Boise Aviation  Holdings, Inc., dated September 8, 2004 (changing name to Boise  Building Solutions Manufacturing Holdings Corp.) |       | S-4                           |       | 333-125768      |   | 3.19 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.20                |       | Bylaws of Boise  Building Solutions Manufacturing Holdings Corp.                                                                                                                                             |       | S-4                           |       | 333-125768      |   | 3.20 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.21                |       | Amended and  Restated Certificate of Incorporation of BC Chile Investment Corporation  dated October 27, 2004                                                                                           |       | S-4                           |       | 333-125768      |   | 3.21 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.22                |       | Amended and  Restated Bylaws of BC Chile Investment Corporation                                                                                                                                              |       | S-4                           |       | 333-125768      |   | 3.22 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.23                |       | Amended and  Restated Certificate of Incorporation of BC Brazil Investment Corporation  dated October 27, 2004                                                                                          |       | S-4                           |       | 333-125768      |   | 3.23 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.24                |       | Amended and  Restated Bylaws of BC Brazil Investment Corporation                                                                                                                                             |       | S-4                           |       | 333-125768      |   | 3.24 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.25                |       | Certificate of  Amendment to the Certificate of Incorporation of Boise Cascade  Transportation, Inc., dated September 8, 2004 (changing name to  Boise White Paper Holdings Corp.)                 |       | S-4                           |       | 333-125768      |   | 3.25 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.26                |       | Bylaws of Boise  White Paper Holdings Corp.                                                                                                                                                                  |       | S-4                           |       | 333-125768      |   | 3.26 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.27                |       | Amended and  Restated Articles of Incorporation to the Certificate of Amendment of  Minnesota, Dakota & Western Railway Company dated October 27,  2004                                        |       | S-4                           |       | 333-125768      |   | 3.27 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.28                |       | Amended and  Restated Bylaws of Minnesota, Dakota & Western Railway Company                                                                                                                         |       | S-4                           |       | 333-125768      |   | 3.28 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.29                |       | Amended and  Restated Certificate of Incorporation of International Falls Power Company  dated October 27, 2004                                                                                         |       | S-4                           |       | 333-125768      |   | 3.29 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.30                |       | Amended and  Restated Bylaws of International Falls Power Company                                                                                                                                            |       | S-4                           |       | 333-125768      |   | 3.30 |   | 6/13/05 |   |   |

 

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| ** **          | ** ** | ** **                                                                                                                                                                                                                                   | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                 | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 3.31                |       | Amended and  Restated Certificate of Incorporation of BC China Corporation dated  October 27, 2004                                                                                                                                      |       | S-4                           |       | 333-125768      |   | 3.31 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.32                |       | Amended and  Restated Bylaws of BC China Corporation                                                                                                                                                                                         |       | S-4                           |       | 333-125768      |   | 3.32 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.33                |       | Certificate of  Incorporation of Boise Cascade Transportation Holdings Corp. dated  September 1, 2004                                                                                                                                   |       | S-4                           |       | 333-125768      |   | 3.33 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.34                |       | Bylaws of Boise  Cascade Transportation Holdings Corp.                                                                                                                                                                                       |       | S-4                           |       | 333-125768      |   | 3.34 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.35                |       | Amended and  Restated Certificate of Incorporation of BCT, Inc., dated  October 27, 2004                                                                                                                                           |       | S-4                           |       | 333-125768      |   | 3.35 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.36                |       | Amended and  Restated Bylaws of BCT, Inc.                                                                                                                                                                                               |       | S-4                           |       | 333-125768      |   | 3.36 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.37                |       | Certificate of  Formation of Boise Cascade Aviation, L.L.C., dated August 26, 2004                                                                                                                                                      |       | S-4                           |       | 333-125768      |   | 3.37 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 3.38                |       | Operating  Agreement of Boise Cascade Aviation, L.L.C., effective September 20,  2004                                                                                                                                                   |       | S-4                           |       | 333-125768      |   | 3.38 |   | 6/13/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 4.1                 |       | Indenture dated  October 29, 2004, between Boise Cascade, L.L.C., Boise Cascade Finance  Corporation, Boise Cascade Holdings, L.L.C., as Guarantor, the other  Guarantors named therein, and U.S. Bank National Association, as Trustee |       | S-1                           |       | 333-122770      |   | 4.3 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                         |       |                          |       |            |   |   |   |   |   |   |
| 4.2                 |       | Senior Note  Registration Rights Agreement dated October 29, 2004, between Boise  Cascade, Boise Cascade Finance Corporation, the Guarantors listed thereto,  and the Initial Purchasers named therein                                  |       | S-1                           |       | 333-122770      |   | 4.4 |   | 2/11/05 |   |   |

 

143

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| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 4.3                 |       | Senior  Subordinated Note Registration Rights Agreement dated October 29, 2004,  between Boise Cascade, Boise Cascade Finance Corporation, the Guarantors  listed thereto, and the Initial Purchasers named therein                                                                                                                                                                                                                  |       | S-1                           |       | 333-122770      |   | 4.5 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 9                   |       | None                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.1                |       | Additional  Consideration Agreement dated October 29, 2004, between Boise Cascade  Corporation (now OfficeMax Incorporated) and Boise Cascade                                                                                                                                                                                                                                                                                        |       | S-1                           |       | 333-122770      |   | 10.1 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.2 (a)            |       | Amended and  Restated Paper Purchase Agreement dated April 28, 2004, between Boise  White Paper, L.L.C., and Boise Cascade Corporation (now OfficeMax  Incorporated), together with the Assignment Assumption and Consent Agreement  dated October 29, 2004, between Boise Cascade Corporation (now OfficeMax  Incorporated), Boise White Paper, L.L.C., OfficeMax Contract, Inc., and  OfficeMax North America, Inc. |       | S-1 Amend. No. 1         |       | 333-122770      |   | 10.2 |   | 4/4/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.3                |       | Registration  Rights Agreement dated October 29, 2004, between Boise Cascade  Corporation (now OfficeMax Incorporated), Forest Products Holdings, L.L.C.,  and Boise Cascade                                                                                                                                                                                                                                                         |       | S-1                           |       | 333-122770      |   | 10.5 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.4                |       | Amended and  Restated Going Public Agreement dated May 17, 2005, between Boise  Cascade, Boise Land & Timber Holdings Corp., OfficeMax Incorporated,  Kooskia Investment Corporation, and Forest Products Holdings, L.L.C.                                                                                                                                                                                                  |       | S-1 Amend. No. 7         |       | 333-122770      |   | 10.26 |   | 5/18/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.5                |       | Rescission  Agreement dated December 20, 2005, between Boise Cascade, Boise  Land & Timber Holdings Corp., OfficeMax Incorporated, Kooskia Investment  Corporation, and Forest Products Holdings, L.L.C.                                                                                                                                                                                                                    |       | 8-K                           |       | 333-122770      |   | 99.1 |   | 12/27/05 |   |   |

 

144

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| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                          | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 10.6                |       | Credit Agreement  dated October 29, 2004, between Boise Cascade Holdings, L.L.C., Boise  Land & Timber Holdings Corp., Boise Cascade, L.L.C., Boise  Land & Timber Corp., the Lenders party thereto, and JPMorgan Chase  Bank, as Administrative Agent                                                                                                         |       | S-1                           |       | 333-122770      |   | 10.6 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |       |                          |       |            |   |   |   |   |   |   |
| 10.7                |       | Amendment and  Restatement Agreement dated April 18, 2005, between Boise Cascade  Holdings, L.L.C., Boise Land & Timber Holdings Corp., Boise Cascade,  L.L.C., Boise Land & Timber Corp., the Lenders party thereto, and  JPMorgan Chase Bank, N.A.                                                                                                           |       | S-1 Amend. No. 3         |       | 333-122770      |   | 10.7 |   | 5/2/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |       |                          |       |            |   |   |   |   |   |   |
| 10.8                |       | Reaffirmation  Agreement dated April 18, 2005, between Boise Cascade Holdings, L.L.C.,  Boise Land & Timber Holdings Corp., Boise Cascade, L.L.C., Boise  Land & Timber Corp., and JPMorgan Chase Bank, N.A.                                                                                                                                                   |       | S-1 Amend. No. 3         |       | 333-122770      |   | 10.8 |   | 5/2/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |       |                          |       |            |   |   |   |   |   |   |
| 10.9                |       | Guarantee and  Collateral Agreement dated October 29, 2004, between Boise Cascade  Holdings, L.L.C., Boise Land & Timber Holdings Corp., Boise Cascade,  L.L.C., Boise Land & Timber Corp., certain of the subsidiaries of  Boise Cascade, L.L.C., and Boise Land & Timber Corp. as identified  therein, and JPMorgan Chase Bank, as Collateral Agent |       | S-1                           |       | 333-122770      |   | 10.7 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |       |                          |       |            |   |   |   |   |   |   |
| 10.10               |       | Intercompany  Promissory Note dated October 29, 2004, in the original principal amount  of $218,670,457.08 made by Boise Land & Timber Corp. in favor of  Boise Cascade                                                                                                                                                                                                 |       | S-1                           |       | 333-122770      |   | 10.8 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                  |       |                          |       |            |   |   |   |   |   |   |
| 10.11               |       | Intercompany  Promissory Note dated February 4, 2005, in the original principal amount  of $264,798,660.05 made by Boise Cascade in favor of Boise Land &  Timber Corp.                                                                                                                                                                                                 |       | S-1                           |       | 333-122770      |   | 10.9 |   | 2/11/05 |   |   |

 

145

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| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                       | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                     | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 10.12               |       | Installment  Notes dated October 29, 2004, in original principal amounts totaling  $1,635,000,000 made by Boise Land & Timber, L.L.C., and Boise  Land & Timber II, L.L.C., each a wholly owned subsidiary of Boise  Land & Timber Corp., in favor of each of Boise Cascade Corporation  (now OfficeMax Incorporated) and Boise Southern Company |       | S-1                           |       | 333-122770      |   | 10.10 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.13               |       | Securityholders  Agreement dated October 29, 2004, between Boise Cascade Corporation (now  OfficeMax Incorporated), Forest Products Holdings, L.L.C., and Boise Cascade                                                                                                                                                                                                     |       | 8-K                           |       | 333-122770      |   | 10.2 |   | 8/2/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.14               |       | Transfer and  Administration Agreement (for securitization of receivables) dated  October 26, 2005, between Boise Cascade, several of its subsidiaries  including Birch Creek Investments, L.L.C., Bank of America, National  Association, Calyon New York Branch, and certain other investors named in  such Agreement                                                     |       | 8-K                           |       | 333-122770      |   | 10.1 |   | 11/1/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.15 +             |       | Employment  Agreement dated October 29, 2004, between Boise Cascade and W. Thomas  Stephens                                                                                                                                                                                                                                                                                 |       | S-1                           |       | 333-122770      |   | 10.11 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.16 +             |       | Form of  Executive Officer Severance Agreement by and between Boise Cascade  Corporation (now OfficeMax Incorporated) and each of Miles A. Hewitt, Karen  E. Gowland, Judith M. Lassa, Wayne M. Rancourt, and Robert E. Strenge                                                                                                                                             |       | S-1                           |       | 333-122770      |   | 10.12 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.17 +             |       | Form of  Executive Officer Severance Agreement by and between Boise Cascade  Corporation (now OfficeMax Incorporated) and each of John W. Holleran,  Stanley R. Bell, Thomas E. Carlile, and Thomas A. Lovlien                                                                                                                                                              |       | S-1                           |       | 333-122770      |   | 10.13 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                             |       |                          |       |            |   |   |   |   |   |   |
| 10.18 +             |       | Severance  Arrangement dated October 27, 2005, between Boise Cascade and John W.  Holleran                                                                                                                                                                                                                                                                                  |       | 8-K                           |       | 333-122770      |   | 99.3 |   | 11/2/05 |   |   |

 

146

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| ** **          | ** ** | ** **                                                                                                                                                                | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                              | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 10.19 +             |       | Offer of Future  Employment dated October 1, 2005, by Boise Cascade to Alexander Toeldte                                                                             |       | 8-K                           |       | 333-122770      |   | 10.1 |   | 10/6/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.20 +             |       | Foreign Service  Policy (Relocation) Agreement dated October 1, 2005, between Boise  Cascade and Alexander Toeldte                                                   |       | 8-K                           |       | 333-122770      |   | 10.2 |   | 10/6/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.21 +             |       | Severance  Agreement dated October 1, 2005, between Boise Cascade and Alexander  Toeldte                                                                             |       | 8-K                           |       | 333-122770      |   | 10.3 |   | 10/6/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.22 +             |       | Boise Cascade  Supplemental Pension Plan, as adopted on October 29, 2004                                                                                             |       | S-1                           |       | 333-122770      |   | 10.14 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.23 +             |       | Boise Cascade  Supplemental Early Retirement Plan for Executive Officers, as adopted on  October 29, 2004                                                            |       | S-1                           |       | 333-122770      |   | 10.15 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.24 +             |       | Boise Cascade  Supplemental Life Plan, effective October 29, 2004                                                                                                    |       | S-1                           |       | 333-122770      |   | 10.18 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.25 +             |       | Boise Cascade  Supplemental Healthcare Plan for Executive Officers, effective October 29,  2004                                                                      |       | S-1                           |       | 333-122770      |   | 10.19 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.26 +             |       | Boise Cascade  Incentive and Performance Plan, effective October 29, 2004                                                                                            |       | S-1                           |       | 333-122770      |   | 10.16 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.27 +             |       | Description of  2004 Annual Incentive Awards with respect to Boise Cascade Incentive and  Performance Plan                                                                |       | S-1                           |       | 333-122770      |   | 10.20 |   | 2/11/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.28 +             |       | Form of  2005 Annual Incentive Awards with respect to Boise Cascade Incentive and  Performance Plan                                                                  |       | S-1 Amend. No. 1         |       | 333-122770      |   | 10.22 |   | 4/4/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.29 +             |       | Boise Cascade  Deferred Compensation Plan, as amended through October 28, 2005                                                                                       |       | 8-K                           |       | 333-122770      |   | 99.2 |   | 11/2/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.30 +             |       | Boise Cascade  Directors Deferred Compensation Plan, effective January 1, 2006                                                                                       |       | 8-K                           |       | 333-122770      |   | 99.1 |   | 11/2/05 |   |   |
|                |       |                                                                                                                                                                      |       |                          |       |            |   |   |   |   |   |   |
| 10.31 +             |       | Management  Equity Agreement dated November 29, 2004, between Forest Products  Holdings, L.L.C., and each of the persons listed on the signature  pages thereto |       | S-1 Amend. No. 3         |       | 333-122770      |   | 10.25 |   | 5/2/05 |   |   |

 

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| ** **          | ** ** | ** **                                                                                                      | ** ** | **Incorporated by Reference** | ** ** | ** **      |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                    | ** ** | **Form**                      | ** ** | **File Number** | ** ** | **Exhibit  Number** | ** ** | **Filing  Date** | ** ** | **Filed  Herewith** |
| 10.32 +             |       | Form of  Indemnification Agreement between Boise Cascade and each of its executive  officers and directors |       | S-1 Amend. No. 4         |       | 333-122770      |   | 10.27 |   | 5/11/05 |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 10.33 +             |       | Directors  Compensation Summary Sheet                                                                           |       | 8-K                           |       | 333-122770      |   | 10.1 |   | 8/2/05 |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 11                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 12                  |       | Ratio of Earnings  to Fixed Charges                                                                             |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 13                  |       | None                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 14 (b)              |       | Boise Cascade  Code of Ethics                                                                                   |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 16                  |       | None                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 18                  |       | None                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 21                  |       | Boise Cascade  Subsidiaries                                                                                     |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 22                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 23                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 24                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 31.1                |       | CEO  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 31.2                |       | CFO  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 32                  |       | Section 906  Certifications of Chief Executive Officer and Chief Financial Officer of  Boise Cascade       |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 33                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 34                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 35                  |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 99                  |       | Financial  Statements of Boise Land & Timber Holdings Corp.                                            |       |                          |       |            |   |   |   |   |   | X |
|                |       |                                                                                                            |       |                          |       |            |   |   |   |   |   |   |
| 100                 |       | Inapplicable                                                                                                    |       |                          |       |            |   |   |   |   |   |   |

 

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+                                           Indicates exhibits that constitute managementcontracts or compensatory plans or arrangements.

 

148

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(a)            Confidential information in this exhibit hasbeen omitted and filed separately with the Securities and Exchange Commissionpursuant to a confidential treatment request under Rule 406 of theSecurities Act of 1933, as amended.

 

(b)            Our Code of Ethics can be found on our website(www.bc.com) by clicking on “About Boise” and then “Code of Ethics.”

 

149

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