** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

** **

**FORM10-Q**

** **
| ý                                                                                                                                                                                                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                              |
| **For the quarterly period ended March 31, 2006**                                                                                                                                                                                  |
| ** **                                                                                                                                                                                                                              |
| o                                                                                                                                                                                                                                       | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                    |       |                                                                                          |
| **For the transition period from                 to                  ** |

 

**Commission File Number:  333-122770**

 

**Boise CascadeHoldings, L.L.C.**

(Exact name of registrant as specified inits charter)

 
| **Delaware**                                                    | ** ** | **20-1478587**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **1111  West Jefferson Street**                                 |
| **P.O.  Box 50**                                                |
| **Boise,  Idaho 83728**                                         |
|                                                            |       |                                 |
| **(208)  384-6161**                                             |
| (Registrant’s telephone  number, including area code)      |

 

Securities registeredpursuant to Section 12(b) of the Act:  **None**

 

Securities registeredpursuant to Section 12(g) of the Act:  **None**

 

Indicate by check mark if registrant is a well-known seasoned issuer,as defined in Rule 405 of the SecuritiesAct.     Yes o     No ý

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.Yes ý     No o

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.     Yes o     No ý

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not becontained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of thisForm 10-Q or any amendment to this Form 10-Q.  ý

 

Indicate by check mark if the registrant is a large accelerated filer,an accelerated filer, or a non-accelerated filer:

Large accelerated filer  o                             Accelerated filer  o                          Non-acceleratedfiler  ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the ExchangeAct).      Yes o     No ý

 

As of April 30, 2006, the registrant did not have any voting ornonvoting equity held by nonaffiliates.

 

The registrant, a limited liability company, has no common stockoutstanding. Equity units issued and outstanding on March 31, 2006, wereas follows:

 
| **Series**                  | ** ** | **Units  Outstanding as of March 31, 2006** |
|-----------------------------|------------|---------------------------------------------|
| Series A Common  Units |       |   66,000,000                      |
| Series B Common  Units |       | 547,442,475                                 |
| Series C Common  Units |       |   31,910,860                      |

 

These units are neither registered norpublicly traded.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None.

 

** **

----

 

**Table of Contents**

 
| **PART I—FINANCIAL INFORMATION** |                                                                                        |
|---------------------------------------|---------------------------------------------------------------------------------------------|
|                                  |                                                                                        |   |
| Item  1.                              | Consolidated  Financial Statements                                                          | 1 |
|                                  | Notes  to Unaudited Quarterly Consolidated Financial Statements                             | 6 |
|                                  | 1.                                                                                          | Basis of  Presentation | 6 |
|                                  | 2.                                                                                          | Purchase  of OfficeMax’s Forest Products and Paper Assets | 6 |
|                                  | 3.                                                                                          | Purchase  of Central Texas Corrugated’s Assets | 7 |
|                                  | 4.                                                                                          | Transactions  With Related Parties | 8 |
|                                  | 5.                                                                                          | Vendor  and Customer Rebates and Allowances | 9 |
|                                  | 6.                                                                                          | Other  (Income) Expense, Net | 9 |
|                                  | 7.                                                                                          | Leases | 9 |
|                                  | 8.                                                                                          | Income Taxes | 10 |
|                                  | 9.                                                                                          | Receivables | 10 |
|                                  | 10.                                                                                         | Inventories | 11 |
|                                  | 11.                                                                                         | Goodwill  and Intangible Assets | 11 |
|                                  | 12.                                                                                         | Asset  Retirement Obligations | 12 |
|                                  | 13.                                                                                         | Debt | 13 |
|                                  | 14.                                                                                         | Financial  Instruments | 15 |
|                                  | 15.                                                                                         | Recently  Adopted Accounting Standards | 17 |
|                                  | 16.                                                                                         | Retirement  and Benefit Plans | 18 |
|                                  | 17.                                                                                         | Segment  Information | 18 |
|                                  | 18.                                                                                         | Commitments  and Guarantees | 20 |
|                                  | 19.                                                                                         | Consolidating  Guarantor and Nonguarantor Financial Information | 20 |
|                                  | 20.                                                                                         | Legal  Proceedings and Contingencies | 30 |
|                                  |                                                                                        |   |   |
| Item 2.                          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 30 |
|                                  | Acquisition  of Assets from OfficeMax                                                       | 30 |
|                                  | Effects of  the Forest Products Acquisition                                                 | 31 |
|                                  | Purchase of Central  Texas Corrugated’s Assets                                         | 31 |
|                                  | Our  Segments                                                                               | 32 |
|                                  | Factors That  Affect Our Operating Results                                                  | 33 |
|                                  | Results  of Operations                                                                      | 37 |
|                                  | Operational  Outlook                                                                        | 41 |
|                                  | Liquidity and  Capital Resources                                                            | 41 |
|                                  | Contractual Obligations                                                                     | 45 |
|                                  | Off-Balance-Sheet  Activities                                                               | 45 |
|                                  | Guarantees                                                                                  | 45 |
|                                  | Inflationary  and Seasonal Influences                                                       | 45 |
|                                  | Environmental                                                                               | 45 |
|                                  | Collective  Bargaining Agreements                                                           | 45 |
|                                  | Critical  Accounting Estimates                                                              | 46 |
|                                  |                                                                                        |   |
| Item 3.                          | Quantitative  and Qualitative Disclosures About Market Risks                                | 46 |
|                                  |                                                                                        |   |
| Item 4.                          | Controls and  Procedures                                                                    | 48 |
|                                  |                                                                                        |   |   |
| **PART II—OTHER  INFORMATION**   | **50**                                                                                      |
| Item 1.                          | Legal Proceedings                                                                           | 50 |
|                                  |                                                                                        |   |
| Item 1A.                         | Risk  Factors                                                                               | 50 |
|                                  |                                                                                        |   |
| Item 1B.                         | Unresolved  Staff Comments                                                                  | 50 |
|                                  |                                                                                        |   |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 51 |
|                                  |                                                                                        |   |
| Item 3.                               | Defaults Upon  Senior Securities                                                            | 51 |
|                                  |                                                                                        |   |
| Item 4.                               | Submission  of Matters to a Vote of Securityholders                                         | 51 |
|                                  |                                                                                        |   |
| Item 5.                               | Other Information                                                                           | 51 |
|                                  |                                                                                        |   |
| Item 6.                          | Exhibits                                                                                    | 51 |
|                                       |                                                                                             |  |  |  |

 

Allreports we file with the Securities and Exchange Commission (SEC) are availablefree of charge via Electronic Data Gathering Analysis and Retrieval (EDGAR)through the SEC website at www.sec.gov. We also provide copies of our SECfilings at no charge upon request and make electronic copies of our reportsavailable through our website at www.bc.com as soon as reasonably practicableafter filing such material with the SEC.

 

ii

----

 

**PART 1—FINANCIAL INFORMATION**

 

***ITEM 1.******               ******CONSOLIDATED FINANCIAL STATEMENTS***

 

**Boise Cascade Holdings, L.L.C.Consolidated Statements of Income**

**(unaudited)**

** **
| ** **                                      | ** ** | **Three Months Ended  March 31** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(thousands)**                  | ** ** |
| **Sales**                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                | 1,337,498  |   | $ | 1,281,935 |   |
| Related parties                                 |       | 132,765                          |       | 150,336 |   |
|                                            |       | 1,470,263                        |       | 1,432,271 |   |
|                                            |       |                             |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 1,312,722                        |       | 1,220,658 |   |
| Fiber costs from  related parties               |       | —                           |       | 17,609 |   |
| Depreciation,  amortization, and depletion      |       | 36,657                           |       | 30,637 |   |
| Selling and  distribution expenses              |       | 71,077                           |       | 62,336 |   |
| General and  administrative expenses            |       | 21,462                           |       | 19,204 |   |
| Other (income)  expense, net                    |       | (2,125                           | )          | 127 |   |
|                                            |       | 1,439,793                        |       | 1,350,571 |   |
|                                            |       |                             |       |   |   |
| **Income  from operations**                     |       | 30,470                           |       | 81,700 |   |
|                                            |       |                             |       |   |   |
| Foreign exchange  gain (loss)                   |       | 379                              |       | (793 | ) |
| Change in fair  value of interest rate swaps    |       | —                           |       | 15,200 |   |
| Interest expense                                |       | (30,176                          | )          | (32,079 | ) |
| Interest income                                 |       | 604                              |       | 1,350 |   |
|                                            |       | (29,193                          | )          | (16,322 | ) |
| ** **                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Income  before income taxes**                 |       | 1,277                            |       | 65,378 |   |
| Income tax  provision                           |       | (1,218                           | )          | (639 | ) |
| **Net  income**                                 | ** ** | **$**                            | **59**     | ** ** | **$** | **64,739** | ** ** |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

1

----

 

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

**ConsolidatedBalance Sheets**

(unaudited)

** **
| ** **                                        | ** ** | **March 31,  2006** | ** **    | **December 31,  2005** | ** ** |
|---------------------------------------------------|------------|---------------------|---------------|------------------------|------------|
| ** **                                        | ** ** | **(thousands)**     | ** **    |
| **ASSETS**                                        | ** ** | ** **          | ** **    | ** **             | ** ** |
| ** **                                        | ** ** | ** **          | ** **    | ** **             | ** ** |
| **Current**                                       | ** ** | ** **          | ** **    | ** **             | ** ** |
| Cash and cash  equivalents                        |       | $                   | 138,346       |                   | $          | 88,171 |   |
| Receivables                                       |       |                |          |                   |       |
| Trade, less  allowances of $2,192 and $1,947 |       | 408,965             |          | 338,821                |       |
| Related parties                                   |       | 43,984              |          | 43,010                 |       |
| Other                                             |       | 17,347              |          | 20,980                 |       |
| Inventories                                       |       | 655,683             |          | 633,783                |       |
| Other                                             |       | 11,854              |          | 10,694                 |       |
|                                              |       | 1,276,179           |          | 1,135,459              |       |
|                                              |       |                |          |                   |       |
| **Property**                                      | ** ** | ** **          | ** **    | ** **             | ** ** |
| Property and  equipment                           |       |                |          |                   |       |
| Land and land  improvements                       |       | 73,267              |          | 79,420                 |       |
| Buildings and  improvements                       |       | 224,761             |          | 226,232                |       |
| Machinery and  equipment                          |       | 1,347,500           |          | 1,331,292              |       |
|                                              |       | 1,645,528           |          | 1,636,944              |       |
|                                              |       |                |          |                   |       |
| Accumulated  depreciation                         |       | (173,119            | )             | (139,890               | )          |
|                                              |       | 1,472,409           |          | 1,497,054              |       |
| Fiber farms and  timber deposits                  |       | 40,183              |          | 52,236                 |       |
|                                              |       | 1,512,592           |          | 1,549,290              |       |
|                                              |       |                |          |                   |       |
| **Deferred  financing costs**                     |       | 36,078              |          | 37,778                 |       |
| **Goodwill**                                      |       | 22,147              |          | 15,101                 |       |
| **Intangible  assets**                            |       | 40,332              |          | 31,804                 |       |
| **Other  assets**                                 |       | 54,641              |          | 44,231                 |       |
| **Total  assets**                                 | ** ** | **$**               | **2,941,969** | ** **             | **$**      | **2,813,663** | ** ** |
|                                                   |            |                     |               |                        |            |  |  |  |  |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

2

----

 

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

**ConsolidatedBalance Sheets (Continued)**

(unaudited)

 
| ** **                                                                                                                                         | ** ** | **March 31,  2006**                 | ** **    | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                         | ** ** | **(thousands, except for equity units)** | ** **    |
| **LIABILITIES  AND CAPITAL**                                                                                                                       | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| ** **                                                                                                                                         | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| **Current**                                                                                                                                        | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| Accounts payable                                                                                                                                   |       | $                                        | 396,551       |                        | $          | 383,207 |   |
| Accrued  liabilities                                                                                                                               |       |                                     |          |                        |       |
| Compensation and  benefits                                                                                                                         |       | 98,629                                   |          | 106,289                     |       |
| Interest payable                                                                                                                                   |       | 17,870                                   |          | 10,630                      |       |
| Other                                                                                                                                              |       | 46,547                                   |          | 46,244                      |       |
|                                                                                                                                               |       | 559,597                                  |          | 546,370                     |       |
|                                                                                                                                               |       |                                     |          |                        |       |
| **Debt**                                                                                                                                           | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| Long-term debt                                                                                                                                     |       | 1,458,200                                |          | 1,365,800                   |       |
| Note payable to  related party, net                                                                                                                |       | 276,134                                  |          | 270,854                     |       |
|                                                                                                                                               |       | 1,734,334                                |          | 1,636,654                   |       |
| **Other**                                                                                                                                          | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| Compensation and  benefits                                                                                                                         |       | 126,588                                  |          | 121,269                     |       |
| Other long-term  liabilities                                                                                                                       |       | 35,176                                   |          | 31,937                      |       |
|                                                                                                                                               |       | 161,764                                  |          | 153,206                     |       |
|                                                                                                                                               |       |                                     |          |                        |       |
| **Redeemable  equity units**                                                                                                                       | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| Series B  equity units – 17,085,874 and 17,296,624 units outstanding                                                                     |       | 9,383                                    |          | 9,508                       |       |
| Series C  equity units – 31,910,860 and 32,173,830 units outstanding                                                                     |       | 3,838                                    |          | 2,904                       |       |
|                                                                                                                                               |       | 13,221                                   |          | 12,412                      |       |
| ** **                                                                                                                                         | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| **Commitments  and contingent liabilities**                                                                                                        |       |                                     |          |                        |       |
|                                                                                                                                               |       |                                     |          |                        |       |
| **Capital**                                                                                                                                        | ** ** | ** **                               | ** **    | ** **                  | ** ** |
| Series A  equity units – no par value; 66,000,000 units authorized and outstanding                                                       |       | 40,672                                   |          | 39,885                      |       |
| Series B  equity units – no par value; 550,000,000 and 549,000,000 units  authorized; 530,356,601 and 530,356,601 units outstanding |       | 424,451                                  |          | 417,601                     |       |
| Series C  equity units – no par value; 44,000,000 and 38,165,775 units authorized                                                   |       | 7,930                                    |          | 7,535                       |       |
| **Total  capital**                                                                                                                                 |       | 473,053                                  |          | 465,021                     |       |
| **Total  liabilities and capital**                                                                                                                 | ** ** | **$**                                    | **2,941,969** | ** **                  | **$**      | **2,813,663** | ** ** |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

3

----

 

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

**ConsolidatedStatements of Cash Flows**

(unaudited)

** **
| ** **                                                                             | ** ** | **Three Months Ended  March 31** | ** **  |
|----------------------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                             | ** ** | **2006**                         | ** **  | **2005** | ** ** |
| ** **                                                                             | ** ** | **(thousands)**                  | ** **  |
| **Cash  provided by (used for) operations**                                            | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Net income                                                                             |       | $                                | 59          |   | $ | 64,739 |   |
| Items in net  income not using (providing) cash                                        |       |                             |        |   |   |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | 38,380                           |        | 34,159 |   |
| Related-party  interest expense                                                        |       | 5,417                            |        | 3,123 |   |
| Pension and  other postretirement benefit expense                                      |       | 7,417                            |        | 7,130 |   |
| Gain on changes  in retiree healthcare programs                                        |       | (3,741                           | )           | — |   |
| Change in fair  value of interest rate swaps                                           |       | —                           |        | (15,200 | ) |
| Management  equity units expense                                                       |       | 934                              |        | 782 |   |
| Loss on sale of  assets                                                                |       | 1,618                            |        | — |   |
| Other                                                                                  |       | 576                              |        | 793 |   |
| Decrease  (increase) in working capital, net of acquisitions                           |       |                             |        |   |   |
| Receivables                                                                            |       | (55,939                          | )           | (91,490 | ) |
| Inventories                                                                            |       | (16,041                          | )           | (52,836 | ) |
| Accounts payable  and accrued liabilities                                              |       | 27,965                           |        | 73,732 |   |
| Pension and  other postretirement benefit payments                                     |       | (346                             | )           | (145 | ) |
| Other                                                                                  |       | 5,003                            |        | 922 |   |
| Cash provided by  operations                                                           |       | 11,302                           |        | 25,709 |   |
|                                                                                   |       |                             |        |   |   |
| **Cash  provided by (used for) investment**                                            | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Expenditures for  property and equipment                                               |       | (36,508                          | )           | (33,532 | ) |
| Acquisitions of  businesses and facilities                                             |       | (42,589                          | )           | — |   |
| Sales of assets                                                                        |       | 27,249                           |        | — |   |
| Repayment of  note receivable from related party, net                                  |       | —                           |        | 157,509 |   |
| Other                                                                                  |       | (1,394                           | )           | (1,991 | ) |
| Cash provided by  (used for) investment                                                |       | (53,242                          | )           | 121,986 |   |
|                                                                                   |       |                             |        |   |   |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                       | ** **  | ** ** | ** ** |
| Issuances of  long-term debt                                                           |       | 150,000                          |        | — |   |
| Payments of  long-term debt                                                            |       | (57,600                          | )           | (412,000 | ) |
| Tax  distributions to members                                                          |       | —                           |        | (9,425 | ) |
| Note payable to  related party, net                                                    |       | (137                             | )           | 253,000 |   |
| Other                                                                                  |       | (148                             | )           | (541 | ) |
| Cash provided by  (used for) financing                                                 |       | 92,115                           |        | (168,966 | ) |
|                                                                                   |       |                             |        |   |   |
| **Increase  (decrease) in cash and cash equivalents**                                  |       | 50,175                           |        | (21,271 | ) |
|                                                                                   |       |                             |        |   |   |
| **Balance  at beginning of the period**                                                |       | 88,171                           |        | 163,345 |   |
|                                                                                   |       |                             |        |   |   |
| **Balance  at end of the period**                                                      | ** ** | **$**                            | **138,346** | ** ** | **$** | **142,074** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

4

----

 

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

**ConsolidatedStatements of Capital**

(unaudited)

 
| ** **                                                   | ** ** | **Series A  Equity Units** | ** ** | **Series B  Equity Units** | ** ** | **Series C  Equity Units** | ** **  | **Total**  | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|-------------|------------|------------|
| ** **                                                   | ** ** | **Units**                       | ** ** | **Amount**                      | ** ** | **Units**                       | ** **  | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| ** **                                                   | ** ** | **(thousands)**                 | ** ** |
| ** **                                                   | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2004                           |       | 66,000                          |       | $                               | 36,868     |                            | 530,357     |       | $          | 322,718 |   | — |   | $ | — |   | $ | 359,586 |   |
| ** **                                                   | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                          |       | —                          |       | —                          |        | 121,367    |       | — |   | — |   | 121,367 |   |
| Other  comprehensive income (a) (b)                |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| 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 (c)                  |       | 66,000                          |       | 39,885                          |       | 530,357                         |        | 417,601    |       | — |   | 7,535 |   | 465,021 |   |
| ** **                                                   | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                               |       | —                          |       | —                          |       | —                          |        | 59         |       | — |   | — |   | 59 |   |
| Other comprehensive  income (a) (b)                |       |                            |       |                            |       |                            |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                             |       | —                          |       | —                          |       | —                          |        | 7,973      |       | — |   | — |   | 7,973 |   |
| Paid-in-kind  dividend                                       |       | —                          |       | 787                             |       | —                          |        | (787       | )          | — |   | — |   | — |   |
| Allocation of  profit interest to Series C equity units |       | —                          |       | —                          |       | —                          |        | (395       | )          | — |   | 395 |   | — |   |
| **Balance  at March 31, 2006 (c)**                 | ** ** | **66,000**                      | ** ** | **$**                           | **40,672** | ** **                      | **530,357** | ** ** | **$**      | **424,451** | ** ** | **—** | ** ** | **$** | **7,930** | ** ** | **$** | **473,053** | ** ** |

 

----

(a)           Total comprehensive income for the three months ended March 31,2006 and 2005, was $8.0 million and $65.9 million, respectively.

 

(b)           Total other comprehensive income for the three months endedMarch 31, 2006 and 2005, was $8.0 million and $1.2 million,respectively.

 

(c)           Accumulated other comprehensive income at March 31, 2006, andDecember 31, 2005, was $21.4 million and $13.5 million,respectively.

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

5

----

 

***Notes to Unaudited Quarterly Consolidated FinancialStatements***

 

***1.******             Basisof Presentation***

 

As used in these consolidated financial statements,the terms “Boise” and “we” refer to Boise Cascade Holdings, L.L.C., and itsconsolidated subsidiaries and their predecessors in interest. Our operationsbegan on October 29, 2004, when we acquired the forest products and paperassets of OfficeMax (the Forest Products Acquisition). Before the ForestProducts Acquisition, OfficeMax was known as Boise Cascade Corporation. Weacquired the names “Boise” and “Boise Cascade” as part of the Forest Products Acquisition.We acquired OfficeMax’s forest products and paper assets, other than itstimberland operations, for an aggregate purchase price of $2.2 billion,including approximately $140 million of related fees and expenses.Concurrently with the Forest Products Acquisition, Boise Land & TimberHoldings Corp. (Timber Holdings), an entity that is majority-owned by ourmajority owner, Forest Products Holdings, L.L.C. (FPH), acquired OfficeMax’stimberland operations.

 

We are a diversified North American paper and forestproducts company headquartered in Boise, Idaho. We operate our business in thefollowing five reportable segments: Building Materials Distribution, WoodProducts, Paper, Packaging & Newsprint, and Corporate and Other. SeeNote 17, Segment Information, for additional information about our reportablesegments.

 

The quarterly consolidated financial statements havenot been audited by an independent registered public accounting firm but, inthe opinion of management, include all adjustments, consisting only of normal,recurring adjustments, necessary to present fairly the results for the periodspresented. Net income for the three months ended March 31, 2006 and 2005,involved estimates and accruals. Actual results may vary from those estimates.Quarterly results are not necessarily indicative of results that may beexpected for the full year.

 

Certain amounts in prior years’ consolidated financialstatements have been reclassified to conform with the current period’spresentation. These reclassifications did not affect net income.

 

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

 

On October 29, 2004, we acquired OfficeMax’sforest products 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 Forest Products Acquisition).See Note 2, Purchase of OfficeMax’s Forest Products and Paper Assets, ofthe Notes to Consolidated Financial Statements in “Item 8. ConsolidatedFinancial Statements and Supplementary Data” of our 2005 Annual Report onForm 10-K for more information about our purchase of OfficeMax’s forestproducts and paper assets.

 

We accounted for the Forest Products Acquisition using thepurchase method of accounting. We allocated the assets acquired and liabilitiesassumed based on their estimated fair values at the acquisition date. Theexcess of the purchase price over the fair value of assets acquired andliabilities assumed was allocated to goodwill. See Note 11, Goodwill andIntangible Assets, for more information.

 

# *RestructuringActivities*

 

In connection with the ForestProducts Acquisition, we evaluated the acquired facilities and organizationalstructure. In accordance with the provisions of Emerging Issues Task Force (EITF) 95-3,Recognition of Liabilities in Connection With a Purchase Business Combination,exit activities related to the Forest Products Acquisition increased goodwill.We had one year from the acquisition date to develop our restructuring plansand adjust goodwill.

 

At March 31, 2006, approximately $2.7 millionof the restructuring reserve was related to severance costs and was included in“Accrued liabilities, Compensation and benefits,” and $0.1 million wasincluded in “Accrued liabilities, Other.” Most of the severance costs relatedto costs for 350 employees. At March 31, 2006, we had terminatedapproximately 320 employees. Of the $2.8 million remainingrestructuring reserve, $1.7 million is recorded in our Paper segment, and$1.1 million is in Corporate and Other. Most of the remaining costs willbe paid during 2006. Restructuring reserve liability account activity relatedto these charges is as follows:

 

6

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| ** **                                       | ** ** | **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     |       |
|                                             |       |            |       |       |       |      |       |
| Charges against  reserve                         |       | (870            | )          | (10        | )          | (880      | )          |
| Restructuring  reserve at March 31, 2006    | ** ** | **$**           | **2,637**  | ** ** | **$**      | **118**   | ** ** | **$** | **2,755** | ** ** |

 

***3.******                                     ******Purchase of Central Texas Corrugated’s Assets***

 

On February 1, 2006, we purchased the assets of Central TexasCorrugated (CTC) in Waco, Texas, for an aggregate purchase price of $43.8 million,including fees and expenses, but before working capital adjustments. InFebruary 2006, we paid $42.6 million of cash for the acquisition, which isnet of a $2.0 million holdback that is payable in five years. We recordedthe $1.2 million discounted holdback in “Other long-term liabilities” onour Consolidated Balance Sheet. CTC manufactures corrugated sheets that itsells 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 accounted for the acquisition using the purchasemethod of accounting. As a result, the purchase price was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirrespective fair values as of the date of the acquisition. The following tablesummarizes the estimated fair value of the assets acquired and liabilitiesassumed as of February 1, 2006. The initial purchase price allocations maybe adjusted within one year of the purchase date for changes in estimates ofthe fair value of assets acquired and liabilities assumed.

 
| ** **              | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **(thousands)**       | ** ** |
|                    |       |                  |       |
| Current assets          |       | $                     | 16,407     |   |
| Property and  equipment |       | 15,368                |       |
| Goodwill                |       | 7,046                 |       |
| Intangible  assets      |       | 9,400                 |       |
| Other assets            |       | 66                    |       |
| Assets acquired         |       | 48,287                |       |
|                    |       |                  |       |
| Current  liabilities    |       | 4,438                 |       |
| Liabilities  assumed    |       | 4,438                 |       |
|                    |       |                  |       |
| Net assets  acquired    | ** ** | **$**                 | **43,849** | ** ** |

 

Theexcess of the purchase price over the fair value of assets acquired andliabilities assumed was allocated to goodwill. We recorded $7.0 million ofgoodwill in our Packaging & Newsprint segment.

 

7

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The amount allocated to intangible assets wasattributed to the following categories of intangibles:

 
| ** **              | ** ** | **February 1,  2006** | ** ** |
|-------------------------|------------|-----------------------|------------|
| ** **              | ** ** | **(thousands)**       | ** ** |
|                    |       |                  |       |
| Trade names             |       | $                     | 1,800      |   |
| Customer  relationships |       | 6,400                 |       |
| Noncompete  agreements  |       | 1,200                 |       |
|                    | ** ** | **$**                 | **9,400**  | ** ** |

 

Intangible assets are amortized over their expected useful lives. The tradename asset represents the fair value of the Central Texas Corrugated name andis amortized over five years. Customer relationships are amortized over ten years,and the noncompete agreements are amortized over four years.

 

Pro forma results ofoperations have not been presented because the effects of the acquisition werenot material.

 

***4.******             TransactionsWith Related Parties***

 

At March 31, 2006,and December 31, 2005, we had a $276.1 million and a $270.9 millionnote payable to a subsidiary of Timber Holdings recorded as “Note payable torelated party, net” on the Consolidated Balance Sheets. For more information,see Note 13, Debt. Also included in “Note payable to related party, net”was $24.3 million and $18.9 million of accrued interest expense atMarch 31, 2006, and December 31, 2005.

 

During each of theperiods presented, we sold paper and paper products to OfficeMax at salesprices that were designed to approximate market prices. For the three monthsended March 31, 2006 and 2005, sales to OfficeMax were $132.8 millionand $150.3 million, respectively. These sales are included in “Sales,Related parties” in the Consolidated Statements of Income. Sales to OfficeMaxrepresent a concentration in the volume of business transacted and the revenuegenerated from these transactions. Apart from these sales, concentration ofcredit risks with respect to trade receivables is limited due to the widevariety of customers and channels to and through which our products are sold,as well as their dispersion across many geographic areas.

 

Forthe three months ended March 31, 2005, we purchased fiber from relatedparties at prices that approximated market prices. During the three monthsended March 31, 2005, fiber purchases from Boise Land & Timber Corp.,a subsidiary of Timber Holdings, were $17.6 million. The costs associatedwith these purchases are recorded as “Fiber costs from related parties” in theConsolidated Statement of Income. On February 4, 2005, Timber Holdingssold all of its timberlands.

 

The asset purchase agreement entered into inconnection with the purchase of OfficeMax’s forest products and paper assets containscustomary representations, warranties, and covenants, including an obligationby OfficeMax to indemnify us for breaches of representations, warranties, andcovenants. OfficeMax’s indemnification obligations with respect to suchbreaches generally survive until April 29, 2006, with indemnificationobligations with respect to breaches relating to employee and environmental lawmatters surviving until October 29, 2009. OfficeMax’s indemnificationobligations for breaches of representations, warranties, and covenants are,with certain exceptions, subject to a deductible of $20.7 million and anaggregate cap of $248.9 million. We are also indemnified with respect tocertain pre-Forest Products Acquisition liabilities, including environmental,asbestos, tax, benefits, and other legacy liabilities.

 

Duringthe three months ended March 31, 2006 and 2005, we paid FPH zero and $7.5 million.In 2005, FPH in turn paid $6.7 million to Madison Dearborn Partners (MDP),our equity sponsor, and $0.8 million to management investors. We also paid$1.9 million to OfficeMax. These payments represented cash paid to fundtheir tax obligations related to their investments in us.

 

8

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***5.******             Vendor and CustomerRebates and Allowances***

 

We receive rebates and allowances from our vendorsunder a number of different programs, including vendor marketing programs. AtMarch 31, 2006, and December 31, 2005, we had $2.4 million and$3.6 million, respectively, of vendor rebates and allowances recorded in “Receivables,Other” on the Consolidated Balance Sheets. These rebates and allowances areaccounted for in accordance with EITF 02-16, Accounting by a Customer(Including a Reseller) for Certain Consideration Received From a Vendor.Rebates and allowances received from our vendors are recognized as a reductionof “Materials, labor, and other operating expenses” when the product is sold,unless the rebates and allowances are linked to a specific incremental cost tosell a vendor’s product. Amounts received from vendors that are linked tospecific selling and distribution expenses are recognized as a reduction of “Sellingand distribution expenses” in the period the expense is incurred.

 

Included in the vendor rebate programs referred toabove are various volume purchase rebate programs. These programs generallyinclude annual purchase targets and may offer increasing tiered rebates basedon our reaching defined purchase levels. For such tiered rebate programs, thecompany calculates an estimated consideration based on the probability of therebate being earned during the year. We review sales projections and relatedpurchases on a quarterly basis and adjust the estimated considerationaccordingly. We record consideration received for these programs as a reductionof “Materials, labor, and other operating expenses” as the related inventory issold.

 

We also provide rebates to our customers based on thevolume of their purchases. We provide the rebates to increase the sell-throughof our products. The rebates provided to our customers are accounted for inaccordance with EITF 01-09, Accounting for Consideration Given by a Vendorto a Customer. At March 31, 2006, and December 31, 2005, we had $19.2 millionand $23.7 million, respectively, of rebates payable to our customersrecorded in “Accrued liabilities, Other” on the Consolidated Balance Sheets.

 

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

 

“Other(income) expense, net” includes miscellaneous income and expense items. Thecomponents of “Other (income) expense, net” in the Consolidated Statements ofIncome are as follows:

 
| ** **                                  | ** ** | **Three Months Ended   March 31** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|
| ** **                                  | ** ** | **2006**                          | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(thousands)**                   | ** ** |
|                                        |       |                              |       |   |   |
| Changes in  retiree healthcare programs (a) |       | $                                 | (3,741     | ) | $ | — |   |
| Loss on sales of  assets, net (b)           |       | 1,585                             |       | 219 |   |
| Other, net                                  |       | 31                                |       | (92 | ) |
| ** **                                  | ** ** | **$**                             | **(2,125** | **)** | **$** | **127** | ** ** |

 

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(a)                                  During the three months ended March 31, 2006, we communicated to ourhourly employees at our St. Helens, Oregon, pulp and paper mill, and our Salem,Oregon, converting operations, changes to our retiree healthcare programs. Wediscontinued healthcare coverage for post-65 retirees and eliminated thecompany subsidy for some of our pre-65 hourly retirees. As a result of thischange, we recorded a $3.7 million gain in our Consolidated Statement ofIncome for the three months ended March 31, 2006.

 

(b)                                 Includes a $1.6 million loss related tothe sale of our headquarters building in Boise, Idaho.

 

***7.******             Leases***

 

We did not have anycapital leases during any of the periods presented. We lease a portion of ourdistribution centers as well as other property and equipment under operatingleases. For purposes of determining straight-line rent expense, the lease termis calculated from the date we first take possession

 

9

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of the facility, including any periods of free rentand any option periods we are reasonably assured of exercising. Straight-linerent expense is also adjusted to reflect any allowances or reimbursementsprovided by the lessor. Rental expense for operating leases was as follows:

 
| ** **     | ** ** | **Three Months Ended  March 31** | ** ** |
|----------------|------------|----------------------------------|------------|
| ** **     | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|           |       | **(thousands)**                  |       |
|           |       |                             |       |   |   |
| Rental expense |       | $                                | 5,045      |   | $ | 4,393 |   |
|                |            |                                  |            |  |  |  |  |

 

Sublease rental incomewas not material in any of the periods presented. For operating leases withremaining terms of more than one year, the minimum lease payment requirementsare $11.8 million for the remainder of 2006, $15.1 million in 2007, $13.7 millionin 2008, $12.5 million in 2009, and $12.2 million in 2010, with totalpayments thereafter of $63.5 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 first quarter 2006, we sold our headquarters building in Boise, Idaho,for $27.2 million, net of related fees and expenses, and recognized a $1.6million loss recorded in “Other (income) expense, net” in our ConsolidatedStatement of Income. The proceeds were used to pay down our Tranche D termloan, which decreased payments due in 2011 by that amount. In connection withthe sale, we leased back 65% of the building over a staggered lease term of tento 12 years. The lease is accounted for as an operating lease. The minimumlease payment requirements related to the transaction are included in theminimum lease payments disclosed above.

 

Substantially all leaseagreements have fixed payment terms based on the passage of time. Some leaseagreements provide us with the option to purchase the leased property.Additionally, some agreements contain renewal options averagingeight years, with fixed payment terms similar to those in the originallease agreements.

 

***8.******             IncomeTaxes***

 

The majority of our businesses and assets are held andoperated by limited liability companies, which are not subject to entity-levelfederal income taxation. The taxes in respect to these operations are payableby our equity holders in accordance with their respective ownership percentages.We make cash distributions to permit the members of Boise and affiliates to paythese taxes. For the three months ended March 31, 2006 and 2005, we made zeroand $9.4 million of cash distributions, respectively, to permit our equityholders to pay these taxes. Of the $9.4 million of tax distributions paidin 2005, we paid $7.5 million to FPH. FPH in turn paid $6.7 millionto MDP, our equity sponsor who controls FPH, and $0.8 million tomanagement investors. We also paid $1.9 million to OfficeMax. Both oursenior credit facilities and the indenture governing our notes permit thesedistributions.

 

For the three monthsended March 31, 2006, we received $5.7 million of federal and state incometax refunds as a result of rescinding our C corporation status in fourthquarter 2005. The refunds received were offset in part by $1.3 million oftaxes paid by our taxable corporations. For the same period in 2005, incometaxes paid, net of refunds received, by our taxable corporations were $187,000.

 

During the three monthsended March 31, 2006 and 2005, our effective tax rates for our taxablecorporations were 42.0% and 44.1%.

 

***9.******             Receivables***

 

We have a large, diversified customer base. A large portion of our uncoatedfree sheet and office paper sales volume is to OfficeMax. We market ournewsprint 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. Sales to OfficeMax and Abitibi-

 

10

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Consolidated represent concentrations inthe volumes of business transacted and concentrations of credit risk.

 

A large portion of our receivables are used to secure our borrowings underthe accounts receivable securitization program described in Note 13, Debt.

 

***10.******          Inventories***

 

Inventories include thefollowing:

 
| ** **                          | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------|------------|---------------------|-------------|------------------------|------------|
| ** **                          | ** ** | **(thousands)**     | ** **  |
| ** **                          | ** ** | ** **          | ** **  | ** **             | ** ** |
| Finished goods  and work in process |       | $                   | 441,748     |                   | $          | 414,035 |   |
| Logs                                |       | 38,214              |        | 62,839                 |       |
| Other raw  materials and supplies   |       | 175,721             |        | 156,909                |       |
| ** **                          | ** ** | **$**               | **655,683** | ** **             | **$**      | **633,783** | ** ** |

 

***11.******          Goodwill and IntangibleAssets***

 

Goodwill represents theexcess of purchase price and related costs over the value assigned to the nettangible and intangible assets of businesses acquired. We account for goodwillin accordance with the provisions of Statement of Financial AccountingStandards (SFAS) No. 142, Goodwill and Other Intangible Assets, whichrequires 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.These intangible assets are discussed in detail below. We completed our annualassessment in accordance with SFAS No. 142 in fourth quarter 2005 anddetermined that there was no impairment.

 

We account foracquisitions using the purchase method of accounting. As a result, we allocatethe purchase price to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date ofacquisition. In accordance with SFAS No. 141, Business Combinations, we haveone year from the purchase date to record changes in estimates of the fairvalue of assets acquired and liabilities assumed.

 

Changesin the carrying amount of our goodwill by segment are as follows:

 
| ** **                                         | ** ** | **Building  Materials  Distribution** | ** ** | **Wood   Products** | ** ** | **Paper** | ** ** | **Packaging**** ****&  Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|---------------------|------------|-----------|------------|---------------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                         | ** ** | **(thousands)**                       | ** ** |
|                                               |       |                                  |       |                |       |      |       |                                        |       |                      |       |      |       |
| Balance at  December 31, 2005                 |       | $                                     | 5,593      |                | $          | 6,577     |       | $                                           | 1,341      |                      | $          | 1,590     |       | $ | — |   | $ | 15,101 |   |
|                                               |       |                                  |       |                |       |      |       |                                        |       |                      |       |      |       |
| Goodwill  acquired during the period (Note 3) |       | —                                |       | —              |       | —    |       | 7,046                                       |       | —                    |       | 7,046     |       |
| Balance at  March 31, 2006                    | ** ** | **$**                                 | **5,593**  | ** **          | **$**      | **6,577** | ** ** | **$**                                       | **1,341**  | ** **                | **$**      | **8,636** | ** ** | **$** | **—** | ** ** | **$** | **22,147** | ** ** |

 

Intangibleassets represent the values assigned to trade names and trademarks, customerrelationships, noncompete agreements, and technology. The Central TexasCorrugated trade name is amortized over five years. All other trade namesand trademark assets have an indefinite life and are not amortized. Customerrelationships are amortized over five to ten years, noncompete agreements areamortized over four years, and technology is amortized over three to fiveyears. Intangible assets consisted of the following:

 

11

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| ** **                  | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**       | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | **(thousands)**                       | ** ** |
|                        |       |                                  |       |   |   |   |   |
| Trade names and  trademarks |       | $                                     | 24,600     |   | $ | (60 | ) | $ | 24,540 |   |
| Customer  relationships     |       | 13,200                                |       | (2,082 | ) | 11,118 |   |
| Noncompete  agreements      |       | 1,200                                 |       | (51 | ) | 1,149 |   |
| Technology                  |       | 5,080                                 |       | (1,555 | ) | 3,525 |   |
|                        | ** ** | **$**                                 | **44,080** | ** ** | **$** | **(3,748** | **)** | **$** | **40,332** | ** ** |

 
| ** **                  | ** ** | **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** | ** ** |

 

Intangible asset amortization expense was $0.9 millionand $0.6 million for the three months ended March 31, 2006 and 2005,respectively. The estimated amortization expense is $3.0 million for theremainder of 2006, $4.5 million, $4.3 million, $3.3 million, $0.9 million,and $0.5 million in 2007, 2008, 2009, 2010, and 2011, respectively.

 

***12.******          AssetRetirement Obligations***

 

We account for asset retirement obligations in accordance with SFASNo. 143, Accounting for Asset Retirement Obligations, and FASBInterpretation (FIN) No. 47, Accounting for Conditional Asset RetirementObligations — An Interpretation of Financial Accounting Standards Board (FASB)Statement No. 143. We accrue for asset retirement obligations in theperiod in which they are incurred if sufficient information is available toreasonably estimate the fair value of the obligation. When we record theliability, 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. On a pro forma basis, if the provisions of FIN No. 47 hadbeen in effect during all of 2005, our net income would not have changedmaterially.

 

At March 31, 2006, and December 31, 2005, we had $12.6 millionand $11.5 million of asset retirement obligations recorded in “Other, Otherlong-term liabilities,” on our Consolidated Balance Sheets. These liabilitiesrelated primarily to landfill closure and closed-site monitoring costs. Theliabilities are based on the best estimate of current costs and are updatedperiodically to reflect current technology, laws and regulations, inflation,and other economic factors. We do not have any assets legally restricted forpurposes of settling asset retirement obligations. The table below describeschanges to our asset retirement obligations for the three months endedMarch 31, 2006, and for the year ended December 31, 2005:

 

12

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| ** **                                          | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|------------------------|------------|
| ** **                                          | ** ** | **(thousands)**     | ** ** |
| ** **                                          | ** ** | ** **          | ** ** | ** **             | ** ** |
| Asset retirement  obligation at beginning of period |       | $                   | 11,484     |                   | $          | 10,286 |   |
| Liabilities  incurred                               |       | 859                 |       | —                 |       |
| Net transition  adjustment                          |       | —              |       | 485                    |       |
| Accretion  expense                                  |       | 259                 |       | 789                    |       |
| Payments                                            |       | (32                 | )          | (76                    | )          |
| Asset retirement  obligation at end of year         | ** ** | **$**               | **12,570** | ** **             | **$**      | **11,484** | ** ** |

 

We have additional asset retirement obligations with indeterminatesettlement dates. The fair value of these asset retirement obligations cannotbe estimated due to the lack of sufficient information to estimate thesettlement dates of the obligations. These asset retirement obligationsinclude, for example, (i) removal and disposal of potentially hazardousmaterials on equipment and/or an operating facility if the equipment and/orfacilities 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 informationbecomes available to reasonably estimate the fair value of these obligations.

 

***13.******          Debt***

 

At March 31, 2006, and December 31, 2005,our long-term debt consisted of the following:

 
| ** **                                      | ** ** | **March 31,  2006** | ** **    | **December 31, 2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|---------------|---------------------------------|------------|
| ** **                                      | ** ** | **(thousands)**          | ** **    |
| ** **                                      | ** ** | ** **               | ** **    | ** **                      | ** ** |
| Revolving credit  facility, due 2010            |       | $                        | —        |                            | $          | — |   |
| Tranche D  term loan, due 2011             |       | 608,200                  |          | 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              |       | 200,000                  |          | 80,000                          |       |
|                                            |       | 1,458,200                |          | 1,365,800                       |       |
| Note payable to  related party, net, due 2015   |       | 276,134                  |          | 270,854                         |       |
| ** **                                      | ** ** | **$**                    | **1,734,334** | ** **                      | **$**      | **1,636,654** | ** ** |

 

*SeniorSecured Credit Facilities*

 

Boise Cascade, L.L.C. (Boise LLC) and affiliates have a $475.0 millionsenior secured revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). Theseborrowings represent our senior secured credit facilities (the Facilities).

 

Our revolving credit facility agreement permits us toborrow up to $475.0 million for general corporate purposes. At March 31,2006, we had no borrowings outstanding under our revolving credit facility;however, $60.4 million of letters of credit were considered a draw on therevolver, reducing our borrowing capacity to $414.6 million. Borrowingsunder our revolving credit facility are based on the prime rate, the federalfunds effective rate, or the London Interbank Offered Rate (LIBOR).Pricing is subject to quarterly adjustment based on the ratio of our totalindebtedness to our last four quarters of consolidated earnings beforeinterest, taxes, depreciation, and amortization (EBITDA). The range ofborrowing costs under the pricing grid is: (i) the higher of prime plus 0.50% to 1.25% or the federal fundseffective rate plus 1.00% to 1.75% or (ii) LIBOR plus 1.50% to 2.25%.For the three months ended March 31, 2006, and the year ended December 31,2005, the average interest rate for our borrowings under the revolver was 6.1%and 5.1%. Letters of credit are subject to a 0.25% fronting fee payable to theissuing bank and a fee payable to the lenders equal to the product of theinterest rate spread applicable to LIBOR borrowings under our revolvingcredit facility and the daily average amount available for drawing under theoutstanding letters of credit. The minimum and maximum borrowings under therevolver were zero

 

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and $30.0 millionduring the three months ended March 31, 2006. During the three monthsended March 31, 2005, we had no borrowings on the revolver. The weightedaverage amounts of borrowings outstanding under the revolver during the threemonths ended March 31, 2006 and 2005, were $2.3 million and zero. Therevolving credit facility provides for a commitment fee of 0.50% per annumpayable to the lenders on the average daily unused portion of the revolvingcredit facility. We also have a swingline option under the revolver, whichallows us to borrow at negotiated rates up to an aggregate of $40.0 millionfrom individual banks that are parties to the agreement. Swingline borrowingsare considered borrowings under the revolving credit facility agreement.

 

At March 31, 2006, and December 31, 2005, wehad $608.2 million and $635.8 million outstanding under theTranche D term loan, and our borrowing rates were 6.7% and 5.8%.Borrowings under the Tranche D term loan are based on (i) the higher ofthe 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 inOctober 2005, we are not required to make scheduled principal payments on theTranche D term loan until 2011, at which time the principal balance of $608.2 millionis due. However, during the three months ended March 31, 2006, we prepaid$27.6 million on our Tranche D term loan, primarily with the proceedsfrom the sale of our headquarters building in Boise, Idaho.

 

Borrowings under the Facilities are subject tofinancial covenants and restrictions, including a minimum interest expensecoverage ratio, maximum leverage ratio, and limitations on capitalexpenditures.

 

*SeniorNotes*

 

In October 2004, we issued $250.0 million ofsenior unsecured floating-rate notes due in 2012 and $400.0 million of7.125% senior subordinated notes due in 2014. Net proceeds from the notes wereused to fund a portion of the purchase price for the Forest Products Acquisition.In July 2005, we completed an exchange offer whereby all of our seniorunsecured floating-rate notes and senior subordinated notes were exchanged forpublicly traded, registered securities with identical terms (other than termsrelating to registration rights) to the notes issued in October 2004. We mayredeem all 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 March 31, 2006, and December 31, 2005, our borrowing rates for the$250.0 million senior unsecured floating-rate notes were 7.5% and 7.0%.

 

*Borrowings Secured by Receivables*

 

On October 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). Under thisthree-year program, Boise LLC sells its interest in a defined pool of accountsreceivable generated by its domestic operations on a revolving basis to BirchCreek, a fully consolidated, wholly owned, special-purpose subsidiary. In turn,Birch Creek sells the receivables to the affiliates of the Investors. BecauseBoise LLC has the right to repurchase the sold receivables, sales ofreceivables under the program are accounted for as a secured borrowing. AtMarch 31, 2006, and December 31, 2005, we had $200.0 million and$80.0 million outstanding under our accounts receivable securitizationprogram. The receivables outstanding and the corresponding debt are included as“Receivables” and “Long-term debt,” respectively, on our Consolidated BalanceSheets. We record the financing costs associated with the program in “Interestexpense” in our Consolidated Statements of Income. The cost of funds under thisprogram varies based on changes in interest rates. At March 31, 2006, andDecember 31, 2005, the interest rates for borrowings secured byreceivables were 4.8% and 4.3%.

 

Under the accounts receivable securitization program, the maximum borrowingamount is subject to change based on the level of eligible receivables andrestrictions on concentrations of receivables and cannot exceed $250 million.The accounts receivable securitization program contains the same financialcovenants as our senior secured credit facilities.

 

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*NotePayable to Related Party, Net*

 

At March 31, 2006, we had a $276.1 million note payable to asubsidiary of Timber Holdings recorded as “Note payable to related party, net”on our Consolidated Balance Sheet. The amount of this note payable was$270.9 million at December 31, 2005. The note is subject toadjustment based on transactions between the subsidiary and us. Our borrowingrate under the note is 8%, and the note matures February 4, 2015. Includedin “Note payable to related party, net” was $24.3 million and$18.9 million of accrued interest expense related to the note atMarch 31, 2006, and December 31, 2005, respectively. Timber Holdingsis a guarantor of our debt, see Note 19, Consolidating Guarantor andNonguarantor Financial Information.

 

*Other*

 

We have entered into interest rate swaps to hedge themajority of the cash flow risk from the variable interest payments on ourvariable-rate debt. These swaps gave us an effective interest rate on all ofour variable-rate debt of 5.5% and 5.3% at March 31, 2006, and December 31,2005, respectively. For additional information on our interest rate swaps, seeNote 14, Financial Instruments.

 

We paid approximately $85.9 million of fees andexpenses associated with our senior secured credit facilities, our seniorunsecured floating-rate notes, and our senior subordinated notes, which weentered into in October 2004. The fees are being amortized over the terms ofthe loans, which range from six to ten years. At March 31, 2006, andDecember 31, 2005, we had $36.1 million and $37.8 million ofcosts recorded in “Deferred financing costs” on our Consolidated BalanceSheets. In connection with the repayment of the Tranche B term loan, insecond quarter 2005, we recorded a $43.0 million charge for the write-offof the deferred financing costs.

 

At March 31, 2006, and December 31, 2005,our average 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 6.0% and 5.8%.

 

Forthe three months ended March 31, 2006 and 2005, cash payments forinterest, net of interest capitalized, were $15.8 million and $18.9 million,respectively.

 

***14.******          FinancialInstruments***

 

We are exposed to risks such as changes in interestrates, energy prices, and foreign currency exchange rates. We employ a varietyof practices to manage these risks, including operating and financingactivities and, where deemed appropriate, the use of derivative instruments.Derivative instruments are used only for risk management purposes and not forspeculation or trading. Derivatives are such that a specific debt instrument,contract, or anticipated purchase determines the amount, maturity, and otherspecifics of the hedge. If a derivative contract is entered into, we eitherdetermine that it is an economic hedge or we designate the derivative as a cashflow or fair value hedge. We formally document all relationships betweenhedging instruments and the hedged item, as well as our risk managementobjectives and strategy for undertaking various hedged transactions. For thosederivatives designated as cash flow or fair value hedges, we formally assess,both at the hedge’s inception and on an ongoing basis, whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in the hedged items. The ineffective portion of hedging transactions isrecognized in current income (loss).

 

In accordance with SFAS No. 133, Accounting for Derivative Instruments andHedging Activities, as amended, we record all derivative instruments asassets or liabilities on our Consolidated Balance Sheets at fair value. Fairvalue of these instruments is determined through our use of valuationprofessionals. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income,” as appropriate. The gain orloss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income. The gain or loss on derivatives designatedas fair value hedges and the offsetting gain or loss on the hedged itemattributable to the hedged risk are included in current income (loss) in theperiod in which changes in fair value occur.

 

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The gain or loss on derivatives that have not been designatedas hedging instruments is included in current income (loss) in the period inwhich changes in fair value occur.

 

*Interest Rate Risk*

 

Our debt is predominantly variable-rate. We manageinterest rate risk on our variable-rate debt by entering into interest rateswaps. At March 31, 2006, the estimated current market value of ourfixed-rate debt, including our note payable to related party, based onthen-current interest rates for similar obligations with like maturities, wasapproximately $21.8 million less than the amount reported on ourConsolidated Balance Sheet.

 

Our obligations under our senior secured creditfacilities and senior notes expose us to changes in short-term interest ratessince interest rates on this debt are variable. In November 2004, weentered into four interest rate swaps with a total notional amount of$550 million to hedge the exposure to interest rate fluctuationsassociated with our Tranche B term loan (which was paid in full in April2005). The swaps on $300 million of our Tranche B term loan werefixed at an average pay rate of 3.3% and expire in December 2007, while theswaps on $250 million of our Tranche B term loan were fixed at anaverage pay rate of 3.5% and expire in December 2008. With the anticipatedrepayment of the Tranche B term loan, these interest rate swaps were nolonger considered hedges of the variable interest payments on that loan. As aresult, during first quarter 2005, we recorded the fair value of the interestrate swaps, or $15.2 million, in “Change in fair value of interest rateswaps” 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 the Facilities, and prior to the redesignation, recognized$5.3 million of noncash expense in “Change in fair value of interest rateswaps” in our Consolidated Statement of Loss. The net $9.9 million ofvalue that was recorded in “Other assets” on our Consolidated Balance Sheetresults in higher interest expense over the remaining life of the interest rateswaps. The four interest rate swaps with a total notional amount of$550 million gave us effective interest rates of 5.3% and 4.9% on thatdebt at March 31, 2006, and December 31, 2005, respectively. Changesin the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt. Ineffectivenessrelated to the redesignated hedges was not significant. At March 31, 2006,and December 31, 2005, the fair market values of these instruments were $20.0 millionand $16.9 million, respectively, which we recorded in “Other assets” onour Consolidated Balance Sheets.

 

In November 2004, we also entered into two 3.7%interest rate swaps with an aggregate notional amount of $250 million tohedge the exposure to floating-rate interest rate risks associated with oursenior unsecured floating-rate notes, which gave us effective interest rates onthat debt of 6.6% at both March 31, 2006, and December 31, 2005.These swaps expire in October 2009. These swaps were designated as cash flowhedges. Accordingly, changes in the fair value of the interest rate swaps wererecorded in “Other comprehensive income.” Amounts realized during the periodwere reclassified to “Interest expense” as interest expense was recognized onthe LIBOR-based debt. There was no ineffectiveness related to thesehedges. At March 31, 2006, and December 31, 2005, the fair marketvalues of these instruments were $12.2 million and $9.3 million,which we recorded in “Other assets” on our Consolidated Balance Sheets.

 

For the three months ended March 31, 2006,amounts reclassified to “Interest expense” for all of our cash flow hedges decreased interest expense $2.1 million,compared with a $1.9 million increase in interest expense for the sameperiod in 2005. At March 31, 2006, assuming no change in interest rates, $7.1 millionwould be reclassified as a decrease in interest expense during the remainder of2006.

 

In April 2006, weunwound our 3.3% $300 million interest rate swap agreements that hedgedour exposure to interest rate fluctuations associated with our Facilities. Inaddition, we reset the fixed interest rate we pay on the remaining$250 million of interest rate swap agreements under our Facilities from3.5% to 4.75%, and reset the fixed interest rate we pay on $250 million ofinterest rate swap agreements related to our senior unsecured floating-ratenotes to 4.75%, up from the previous 3.7% rate. In exchange for suchterminations and rate resets, we received $25.6 million, which will be used forgeneral corporate purposes. We will reclassify the $25.6 million out of “Accumulatedother comprehensive income” as a reduction of interest expense over the periodsthe previously hedged interest payments affect earnings.

 

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*Energy Risk*

 

We enter into natural gas swaps to hedge the variablecash flow risk of natural gas purchases to a fixed price. As of March 31,2006, we had entered into swap agreements to hedge the variable cash flow riskof natural gas purchases for the period of April 2006 through February 2007. Wedesignated all of the swaps as cash flow hedges. Accordingly, changes in thefair value of these swaps were recorded in “Other comprehensive income.”Amounts realized during the period were reclassified to “Materials, labor, andother operating expenses” in our Consolidated Statement of Income as naturalgas was consumed. Amounts reclassified in the three months ended March 31,2006, increased “Materials, labor, and other operating expenses” $0.2 million.Assuming no change in natural gas prices, $0.2 million would bereclassified as an increase in “Materials,labor, and other operating expenses” during the remainder of 2006. AtMarch 31, 2006, we recorded the $1.0 million fair market value ofthese instruments in “Receivables, Other” on our Consolidated Balance Sheet. AtDecember 31, 2005, we recorded a $0.1 million liability related tothese instruments in “Accrued liabilities, Other.” Ineffectiveness related tothese hedges was not significant.

 

*Foreign CurrencyRisk*

 

We occasionally enter into foreign exchange contracts to hedge againstfluctuations in foreign currency exchange rates. These contracts allow us tohedge certain transactions, including purchases denominated in foreigncurrencies, which allows us to manage the volatility associated with thesetransactions and to protect us from currency fluctuations between the contractdate and ultimate settlement of the hedged transaction. As of March 31,2006, we had no foreign exchange contracts outstanding.

 

In April 2006, we entered into a series of forward foreign exchangecontracts to hedge our commitment to purchase capital equipment denominated in euros. These contracts are for a totalamount of 12.4 million euros with settlement dates beginning in April 2006and extending through April 2007. We are accounting for this as a fair valuehedge, and we will recognize any gains or losses from remeasuring the forwardcontract at fair value in the Consolidated Statement of Income (Loss). We willalso adjust the commitment for the capital equipment purchase for any gains orlosses attributable to fluctuations in foreign currency exchange rates.

 

**15.****          *Recently Adopted Accounting Standards***

 

*Recently Adopted Accounting Standards*

 

In February 2006, the FASB issued FASB Staff Position (FSP)No. SFAS 123(R)-4, Classification of Options and Similar InstrumentsIssued as Employee Compensation That Allow for Cash Settlement upon theOccurrence of a Contingent Event. SFAS 123(R)-4 requires companies to assessthe probability that a contingent cash settlement event will occur when itdetermines the classification of options or other similar instruments issued aspart of employee compensation arrangements. Because Forest Products Holdings,our equity sponsor’s, redemption and the expected parallel redemptions of theSeries B and Series C equity units granted to our employees under theManagement Equity Agreement are a contingent event outside employees’ controland not currently deemed probable of occurring, we account for the units usingequity plan accounting in accordance with SFAS 123(R)-4.

 

In September 2005, the FASB’s EITF reached a consensuson EITF 04-13, Accounting for Purchases and Sales of Inventory With theSame Counterparty. The consensus identifies circumstances under which two ormore transactions involving inventory with the same counterparty should beviewed as a single nonmonetary transaction within the scope of AccountingPrinciples Board (APB) Opinion No. 29, Accounting for NonmonetaryTransactions. We adopted this standard effective January 2006, and it requiredus to report our inventory buy/sell transactions in our Packaging &Newsprint and Paper segments on a net basis in our Consolidated Statement ofIncome. Previously, in accordance with EITF 99-19, Reporting Revenue Gross as aPrincipal Versus Net as an Agent*,*and Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, werecorded sales and purchases related to our inventory buy/sell arrangements ona gross basis. This consensus had no impact on net income. Had this consensuspreviously been in effect, it would have reduced sales $21.1 million forthe three months ended March 31, 2005, and would have reduced “Materials,labor, and other operating expenses” by about the same

 

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amount. In accordance with the provisions of EITF 04-13, priorperiod financial information has not been reclassified to conform with the currentperiod’s presentation.

 

In March 2005, the FASB issued FIN No. 47, Accounting for ConditionalAsset Retirement Obligations — An Interpretation of FASB StatementNo. 143. FIN No. 47 clarifies that the term “conditional assetretirement obligation,” as used in SFAS No. 143, Accounting for AssetRetirement Obligations, refers to a legal obligation to perform an assetretirement activity in which the timing and/or method of settlement isconditional on a future event that may or may not be within the control of theentity. FIN No. 47 also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of an asset retirementobligation. We adopted FIN No. 47 in December 2005, and it did nothave a material impact on our financial position or results of operations. Formore information, see Note 12, Asset Retirement Obligations.

 

In November 2004, the FASB issued SFAS No. 151, Inventory Costs — AnAmendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4.SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage).Among other provisions, the new rule requires that items such as idle facilityexpense, excessive spoilage, double freight, and rehandling costs be recognizedas current-period charges regardless of whether they meet the criterion of “soabnormal” as stated in ARB No. 43. Additionally, SFAS No. 151requires that the allocation of fixed production overheads to the costs ofconversions be based on normal capacity of the production facilities. Theprovisions of SFAS No. 151 are effective for inventory costs incurredduring fiscal years beginning after September 15, 2005. We adopted thisstandard effective January 1, 2006, and it did not have a material impacton our financial position or results of operations.

 

***16.******          Retirementand Benefit Plans***

 

The following tablepresents the components of net periodic pension and postretirement benefitcosts in accordance with revised SFAS No. 132, Employers’ DisclosuresAbout Pensions and Other Postretirement Benefits:

 
| ** **                                     | ** ** | **Pension Benefits**             | ** ** | **Other Benefits**               | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended  March 31** | ** ** | **Three Months Ended  March 31** | ** ** |
| ** **                                     | ** ** | **2006**                         | ** ** | **2005**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                     | ** ** | **(thousands)**                  | ** ** |
|                                           |       |                             |       |                             |       |   |   |   |   |
| Service cost                                   |       | $                                | 6,219      |                             | $          | 6,363 |   | $ | 53 |   | $ | 159 |   |
| Interest cost                                  |       | 8,446                            |       | 7,703                            |       | 95 |   | 269 |   |
| Expected return  on plan assets                |       | (8,555                           | )          | (7,585                           | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 69                               |       | 94                               |       | — |   | — |   |
| Amortization of  prior service costs and other |       | 112                              |       | —                           |       | — |   | — |   |
| Plan  settlement/curtailment expense           |       | 821                              |       | —                           |       | — |   | — |   |
| Company-sponsored  plans                       |       | 7,112                            |       | 6,575                            |       | 148 |   | 428 |   |
| Multiemployer  pension plans                   |       | 157                              |       | 127                              |       | — |   | — |   |
| Net periodic  benefit cost                     | ** ** | **$**                            | **7,269**  | ** **                       | **$**      | **6,702** | ** ** | **$** | **148** | ** ** | **$** | **428** | ** ** |

 

In 2006, we are not required to make a minimumcontribution to our pension plans; however, we may elect to make voluntarycontributions.

 

***17.******         ******Segment Information***

 

There are no differencesin our basis of segmentation or in our basis of measurement of segment profitor loss from those disclosed in Note 16 of “Item 8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K.

 

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An analysis of ouroperations by segment is as follows:

 
| **Three Months Ended  March 31, 2006** | ** ** | **Sales**            | ** **  | **Income  (Loss)  Before  Taxes** | ** ** | **Depreciation,  Amortization,  and  Depletion** | ** ** | **EBITDA  (d)** | ** ** |
|---------------------------------------------|------------|----------------------|-------------|-----------------------------------|------------|--------------------------------------------------|------------|-----------------|------------|
| **Trade**                                   | ** ** | **Related  Parties** | ** **  | **Intersegment**                  | ** ** | **Total**                                        |
| ** **                                  | ** ** | **(millions)**       | ** **  |
| ** **                                  | ** ** | ** **           | ** **  | ** **                        | ** ** | ** **                                       | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution            |       | $                    | 761.8       |                              | $          | —                                           |       | $               | —     |   | $ | 761.8 |   | $ | 18.6 |   | $ | 2.4 |   | $ | 20.9 |   |
| Wood Products                               |       | 186.0                |        | —                            |       | 126.6                                            |       | 312.6           |       | 18.8 |   | 6.3 |   | 25.1 |   |
| Paper                                       |       | 225.8                |        | 132.8                             |       | 11.8                                             |       | 370.4           |       | (2.6 | ) | 14.6 |   | 12.1 |   |
| Packaging &  Newsprint             |       | 159.0                |        | —                            |       | 19.8                                             |       | 178.8           | (a)        | 2.3 |   | 12.1 |   | 14.4 |   |
| Corporate and  Other                        |       | 4.9                  |        | —                            |       | 11.0                                             |       | 15.9            |       | (6.2 | ) (b) | 1.3 |   | (5.0 | )(b) |
|                                        |       | 1,337.5              |        | 132.8                             |       | 169.2                                            |       | 1,639.5         |       | 30.9 |   | 36.7 |   | 67.5 |   |
| Intersegment  eliminations                  |       | —               |        | —                            |       | (169.2                                           | )          | (169.2          | )          | — |   | — |   | — |   |
| Interest expense                            |       | —               |        | —                            |       | —                                           |       | —          |       | (30.2 | ) | — |   | — |   |
| Interest income                             |       | —               |        | —                            |       | —                                           |       | —          |       | 0.6 |   | — |   | — |   |
| ** **                                  | ** ** | **$**                | **1,337.5** | ** **                        | **$**      | **132.8**                                        | ** ** | **$**           | **—** | ** ** | **$** | **1,470.3** | ** ** | **$** | **1.3** | ** ** | **$** | **36.7** | ** ** | **$** | **67.5** | ** ** |

 
| **Three Months Ended  March 31, 2005** | ** ** | **Sales**            | ** **  | **Income  (Loss)  Before  Taxes** | ** ** | **Depreciation,  Amortization,  and  Depletion** | ** ** | **EBITDA  (d)** | ** ** |
|------------------------------------------------------------|------------|----------------------|-------------|-----------------------------------|------------|--------------------------------------------------|------------|-----------------|------------|
| **Trade**                                                  | ** ** | **Related  Parties** | ** **  | **Intersegment**                  | ** ** | **Total**                                        |
| ** **                                                 | ** ** | **(millions)**       | ** **  |
| ** **                                                 | ** ** | ** **           | ** **  | ** **                        | ** ** | ** **                                       | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building  Materials Distribution                           |       | $                    | 696.2       |                              | $          | —                                           |       | $               | —     |   | $ | 696.2 |   | $ | 24.4 |   | $ | 2.0 |   | $ | 26.4 |   |
| Wood Products                                              |       | 207.8                |        | —                            |       | 114.6                                            |       | 322.4           |       | 33.1 |   | 5.3 |   | 38.4 |   |
| Paper                                                      |       | 195.8                |        | 150.3                             |       | 11.7                                             |       | 357.8           |       | 29.2 |   | 13.0 |   | 42.2 |   |
| Packaging &  Newsprint                            |       | 174.5                |        | —                            |       | 19.3                                             |       | 193.8           |       | 4.5 |   | 9.2 |   | 13.7 |   |
| Corporate and  Other                                       |       | 7.7                  |        | —                            |       | 11.7                                             |       | 19.4            |       | (10.3 | ) | 1.1 |   | (9.2 | ) |
|                                                       |       | 1,282.0              |        | 150.3                             |       | 157.3                                            |       | 1,589.6         |       | 80.9 |   | 30.6 |   | 111.5 |   |
| Intersegment  eliminations                                 |       | —               |        | —                            |       | (157.3                                           | )          | (157.3          | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate swaps (c)      |       | —               |        | —                            |       | —                                           |       | —          |       | 15.2 |   | — |   | — |   |
| Interest expense                                           |       | —               |        | —                            |       | —                                           |       | —          |       | (32.1 | ) | — |   | — |   |
| Interest income                                            |       | —               |        | —                            |       | —                                           |       | —          |       | 1.4 |   | — |   | — |   |
| ** **                                                 | ** ** | **$**                | **1,282.0** | ** **                        | **$**      | **150.3**                                        | ** ** | **$**           | **—** | ** ** | **$** | **1,432.3** | ** ** | **$** | **65.4** | ** ** | **$** | **30.6** | ** ** | **$** | **111.5** | ** ** |

 

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(a)                                  Includes the impact of adopting EITF 04-13 effectiveJanuary 1, 2006, which required us to report our inventory buy/selltransactions with the same counterparty on a net basis. See Note 15,Recently Adopted Accounting Standards.

 

(b)                                 Includes a $3.7 million gain for changes in our retireehealthcare programs and a $1.6 million loss related to the sale of ourheadquarters building.

 

(c)           Represents a $15.2 million gain for the change in thefair value of our interest rate swaps.

 

(d)                                 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

 

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assessand view the core operating trends in our segments. EBITDA, however, is not ameasure of our liquidity or financial performance under generally acceptedaccounting practices (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.

 

The following is areconciliation of net income to EBITDA:

 
| ** **                                   | ** ** | **Three Months Ended  March 31** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                   | ** ** | **(millions)**                   | ** ** |
|                                         |       |                             |       |   |   |
| Net income                                   |       | $                                | 0.1        |   | $ | 64.7 |   |
| Change in fair  value of interest rate swaps |       | —                           |       | (15.2 | ) |
| Interest expense                             |       | 30.2                             |       | 32.1 |   |
| Interest income                              |       | (0.6                             | )          | (1.4 | ) |
| Income tax  provision                        |       | 1.2                              |       | 0.7 |   |
| Depreciation,  amortization, and depletion   |       | 36.7                             |       | 30.6 |   |
| EBITDA                                       | ** ** | **$**                            | **67.5**   | ** ** | **$** | **111.5** | ** ** |

 

***18.******          Commitmentsand Guarantees***

 

*Commitments*

 

As discussed in Notes 1, 6, and 11 of “Item 8.  Consolidated Financial Statements andSupplementary Data” in our 2005 Annual Report on Form 10-K, we have commitmentsfor timber contracts, leases, and long-term debt. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business. Except as disclosed below, atMarch 31, 2006, there have been no material changes to our contractualobligations outside the normal course of business.

 

During the three months ended March 31, 2006, we increased the amount ofborrowings secured under our accounts receivable securitization program from$80.0 million at December 31, 2005, to $200.0 million atMarch 31, 2006. Additionally, we paid $27.6 million on ourTranche D term loan, primarily with the proceeds from the sale of ourheadquarters building.

 

# *Guarantees*

 

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FINNo. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others. Note 17,Commitments and Guarantees, of “Item 8. Consolidated Financial Statements and Supplementary Data” in our 2005Annual Report on Form 10-K, describes the nature of our guarantees, includingthe approximate terms of the guarantees, how the guarantees arose, the eventsor circumstances that would require us to perform under the guarantees, and themaximum potential undiscounted amounts of future payments we could be requiredto make. There have been no material changes to the guarantees disclosed in our2005 Annual Report on Form 10-K.

 

***19.******         ******Consolidating Guarantor and Nonguarantor Financial Information***

 

The following consolidating financial informationpresents the Statements of Income (Loss), Balance Sheets, and Cash Flowsrelated to our business. The senior notes are guaranteed on a senior basis, andthe senior subordinated notes are guaranteed on a senior subordinated basis, ineach case

 

20

----

 

jointly and severally by Boise, Timber Holdings, and each of theirexisting and future subsidiaries (other than the co-issuers, Boise LLC andBoise Cascade Finance Corporation). The nonguarantors include our foreignsubsidiaries and Birch Creek. Other than the consolidated financial statementsand footnotes for Boise Cascade Holdings, L.L.C., and Boise Land &Timber Holdings Corp., financial statements and other disclosures concerning theguarantors have not been presented because management believes that suchinformation is not material to investors. See Exhibit 99 of thisForm 10-Q for Boise Land & Timber Holdings Corp. consolidatedfinancial statements and notes to consolidated financial statements.

 

21

----

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Three Months Ended March 31, 2006**

** **
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                               | —     |                        | $          | —                      |       | $                                 | 1,326,299  |             | $          | 11,199           |       | $ | — |   | $ | 1,337,498 |   |
| Intercompany                                                                         |       | —                                          |       | 856                         |       | 1,233                       |       | 19,689                            |       | (21,778          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                      |       | 132,765                     |       | —                            |       | —           |       | 132,765          |       |
|                                                                                 |       | —                                          |       | 856                         |       | 1,460,297                   |       | 30,888                            |       | (21,778          | )          | 1,470,263        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                          |       | (385                        | )          | 1,302,400                   |       | 26,470                            |       | (15,763          | )          | 1,312,722        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 966                         |       | 34,686                      |       | 1,005                             |       | —           |       | 36,657           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                      |       | 70,468                      |       | 609                               |       | —           |       | 71,077           |       |
| General and  administrative expenses                                            |       | —                                          |       | 9,093                       |       | 17,817                      |       | 567                               |       | (6,015           | )          | 21,462           |       |
| Other (income)  expense, net                                                         |       | —                                          |       | (2,062                      | )          | (940                        | )          | 877                               |       | —           |       | (2,125           | )          |
|                                                                                 |       | —                                          |       | 7,612                       |       | 1,424,431                   |       | 29,528                            |       | (21,778          | )          | 1,439,793        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |       | (6,756                      | )          | 35,866                      |       | 1,360                             |       | —           |       | 30,470           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |       | (742                        | )          | (23                         | )          | 1,144                             |       | —           |       | 379              |       |
| Interest expense                                                                     |       | —                                          |       | (28,169                     | )          | —                      |       | (2,007                            | )          | —           |       | (30,176          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (109                        | )          | —                      |       | (4,409                            | )          | 4,518            |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 533                         |       | 58                          |       | 13                                |       | —           |       | 604              |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 47                          |       | 4,471                       |       | —                            |       | (4,518           | )          | —           |       |
|                                                                                 |       | —                                          |       | (28,440                     | )          | 4,506                       |       | (5,259                            | )          | —           |       | (29,193          | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (35,196                     | )          | 40,372                      |       | (3,899                            | )          | —           |       | 1,277            |       |
| Income tax  (provision) benefit                                                      |       | —                                          |       | (2                          | )          | (1,216                      | )          | —                            |       | —           |       | (1,218           | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                          |       | (35,198                     | )          | 39,156                      |       | (3,899                            | )          | —           |       | 59               |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 59                                              |       | 35,257                      |       | —                      |       | —                            |       | (35,316          | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **59**     | ** **                  | **$**      | **59**                      | ** ** | **$**                             | **39,156** | ** **       | **$**      | **(3,899**       | **)**      | **$** | **(35,316** | **)** | **$** | **59** | ** ** |

 

22

----

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Three Months Ended March 31, 2005**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| **Sales**                                                                            | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                               | —     |                        | $          | —                      |       | $                                 | 1,269,964  |             | $          | 11,971           |       | $ | — |   | $ | 1,281,935 |   |
| Intercompany                                                                         |       | —                                          |       | —                      |       | —                      |       | 12,603                            |       | (12,603          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                      |       | 150,336                     |       | —                            |       | —           |       | 150,336          |       |
|                                                                                 |       | —                                          |       | —                      |       | 1,420,300                   |       | 24,574                            |       | (12,603          | )          | 1,432,271        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials, labor,  and other operating expenses                                      |       | —                                          |       | —                      |       | 1,208,355                   |       | 24,906                            |       | (12,603          | )          | 1,220,658        |       |
| Fiber costs from  related parties                                                    |       | —                                          |       | —                      |       | 17,609                      |       | —                            |       | —           |       | 17,609           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 722                         |       | 29,147                      |       | 768                               |       | —           |       | 30,637           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                      |       | 61,869                      |       | 467                               |       | —           |       | 62,336           |       |
| General and  administrative expenses                                            |       | —                                          |       | 9,128                       |       | 10,076                      |       | —                            |       | —           |       | 19,204           |       |
| Other (income)  expense, net                                                         |       | —                                          |       | 40                          |       | (782                        | )          | 869                               |       | —           |       | 127              |       |
|                                                                                 |       | —                                          |       | 9,890                       |       | 1,326,274                   |       | 27,010                            |       | (12,603          | )          | 1,350,571        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |       | (9,890                      | )          | 94,026                      |       | (2,436                            | )          | —           |       | 81,700           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |       | 200                         |       | (104                        | )          | (889                              | )          | —           |       | (793             | )          |
| Change in fair  value of interest rate swaps                                         |       | —                                          |       | 15,200                      |       | —                      |       | —                            |       | —           |       | 15,200           |       |
| Interest expense                                                                     |       | —                                          |       | (32,078                     | )          | —                      |       | (1                                | )          | —           |       | (32,079          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (3                          | )          | —                      |       | (114                              | )          | 117              |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 1,272                       |       | 68                          |       | 10                                |       | —           |       | 1,350            |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 100                         |       | 17                          |       | —                            |       | (117             | )          | —           |       |
|                                                                                 |       | —                                          |       | (15,309                     | )          | (19                         | )          | (994                              | )          | —           |       | (16,322          | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (25,199                     | )          | 94,007                      |       | (3,430                            | )          | —           |       | 65,378           |       |
| Income tax  provision                                                                |       | —                                          |       | (12                         | )          | (597                        | )          | (30                               | )          | —           |       | (639             | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                          |       | (25,211                     | )          | 93,410                      |       | (3,460                            | )          | —           |       | 64,739           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 64,739                                          |       | 89,950                      |       | —                      |       | —                            |       | (154,689         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **64,739** | ** **                  | **$**      | **64,739**                  | ** ** | **$**                             | **93,410** | ** **       | **$**      | **(3,460**       | **)**      | **$** | **(154,689** | **)** | **$** | **64,739** | ** ** |

 

23

----

 

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

**ConsolidatingBalance Sheets at March 31, 2006**

 
| ** **                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **(thousands)**                                 | ** **  |
| **ASSETS**                       | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                      | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents       |       | $                                               | —      |                        | $          | 136,345                     |       | $                                 | 33            |             | $          | 1,968            |       | $ | — |   | $ | 138,346 |   |
| Receivables                      |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade, less  allowances          |       | —                                          |        | —                      |       | 34,880                      |       | 374,085                           |          | —           |       | 408,965          |       |
| Intercompany                     |       | —                                          |        | —                      |       | 1,204                       |       | 365                               |          | (1,569           | )          | —           |       |
| Related parties                  |       | —                                          |        | —                      |       | 4,674                       |       | 39,310                            |          | —           |       | 43,984           |       |
| Other                            |       | —                                          |        | 2,833                       |       | 12,041                      |       | 2,473                             |          | —           |       | 17,347           |       |
| Inventories                      |       | —                                          |        | 17                          |       | 633,277                     |       | 22,389                            |          | —           |       | 655,683          |       |
| Other                            |       | —                                          |        | 11,683                      |       | (673                        | )          | 844                               |          | —           |       | 11,854           |       |
|                             |       | —                                          |        | 150,878                     |       | 685,436                     |       | 441,434                           |          | (1,569           | )          | 1,276,179        |       |
|                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Property**                     | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment          |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Land and land  improvements      |       | —                                          |        | 304                         |       | 72,295                      |       | 668                               |          | —           |       | 73,267           |       |
| Buildings and  improvements      |       | —                                          |        | 1,104                       |       | 215,286                     |       | 8,371                             |          | —           |       | 224,761          |       |
| Machinery and  equipment         |       | —                                          |        | 9,599                       |       | 1,302,928                   |       | 34,973                            |          | —           |       | 1,347,500        |       |
|                             |       | —                                          |        | 11,007                      |       | 1,590,509                   |       | 44,012                            |          | —           |       | 1,645,528        |       |
|                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Accumulated  depreciation        |       | —                                          |        | (2,203                      | )          | (159,487                    | )          | (11,429                           | )             | —           |       | (173,119         | )          |
|                             |       | —                                          |        | 8,804                       |       | 1,431,022                   |       | 32,583                            |          | —           |       | 1,472,409        |       |
|                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Fiber farms and  timber deposits |       | —                                          |        | —                      |       | 28,684                      |       | 11,499                            |          | —           |       | 40,183           |       |
|                             |       | —                                          |        | 8,804                       |       | 1,459,706                   |       | 44,082                            |          | —           |       | 1,512,592        |       |
| ** **                       | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Deferred  financing costs**    |       | —                                          |        | 35,630                      |       | —                      |       | 448                               |          | —           |       | 36,078           |       |
| **Goodwill**                     |       | —                                          |        | —                      |       | 22,147                      |       | —                            |          | —           |       | 22,147           |       |
| **Intangible  assets**           |       | —                                          |        | —                      |       | 40,332                      |       | —                            |          | —           |       | 40,332           |       |
| **Investments  in affiliates**   |       | 486,274                                         |        | 505,844                     |       | —                      |       | —                            |          | (992,118         | )          | —           |       |
| **Other  assets**                |       | —                                          |        | 39,213                      |       | 12,249                      |       | 3,179                             |          | —           |       | 54,641           |       |
| **Total  assets**                | ** ** | **$**                                           | **486,274** | ** **                  | **$**      | **740,369**                 | ** ** | **$**                             | **2,219,870** | ** **       | **$**      | **489,143**      | ** ** | **$** | **(993,687** | **)** | **$** | **2,941,969** | ** ** |

 

24

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

**ConsolidatingBalance Sheets at March 31, 2006 (Continued)**

 
| ** **                          | ** ** | **Boise  Cascade  Holdings, L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------|------------|------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                          | ** ** | **(thousands)**                                | ** **  |
| **LIABILITIES  AND CAPITAL**        | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                         | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Accounts payable                    |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                               |       | $                                              | —      |                        | $          | 28,785                      |       | $                                 | 363,893       |             | $          | 3,873            |       | $ | — |   | $ | 396,551 |   |
| Intercompany                        |       | —                                         |        | —                      |       | 365                         |       | 1,204                             |          | (1,569           | )          | —           |       |
| Accrued  liabilities                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and  benefits          |       | —                                         |        | 46,414                      |       | 51,219                      |       | 996                               |          | —           |       | 98,629           |       |
| Interest payable                    |       | —                                         |        | 17,086                      |       | —                      |       | 784                               |          | —           |       | 17,870           |       |
| Other                               |       | —                                         |        | 4,892                       |       | 36,601                      |       | 5,054                             |          | —           |       | 46,547           |       |
|                                |       | —                                         |        | 97,177                      |       | 452,078                     |       | 11,911                            |          | (1,569           | )          | 559,597          |       |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                            | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Long-term debt                      |       | —                                         |        | 1,258,200                   |       | —                      |       | 200,000                           |          | —           |       | 1,458,200        |       |
| Note payable to  related party, net |       | —                                         |        | 276,134                     |       | —                      |       | —                            |          | —           |       | 276,134          |       |
|                                |       | —                                         |        | 1,534,334                   |       | —                      |       | 200,000                           |          | —           |       | 1,734,334        |       |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                           | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits          |       | —                                         |        | 126,588                     |       | —                      |       | —                            |          | —           |       | 126,588          |       |
| Other long-term  liabilities        |       | —                                         |        | 22,525                      |       | 12,651                      |       | —                            |          | —           |       | 35,176           |       |
|                                |       | —                                         |        | 149,113                     |       | 12,651                      |       | —                            |          | —           |       | 161,764          |       |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**       |       | —                                         |        | (1,526,529                  | )          | 1,340,715                   |       | 185,814                           |          | —           |       | —           |       |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**        | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series B  equity units         |       | 9,383                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 9,383            |       |
| Series C  equity units         |       | 3,838                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 3,838            |       |
| Redeemable  equity units            |       | —                                         |        | 13,221                      |       | —                      |       | —                            |          | (13,221          | )          | —           |       |
|                                |       | 13,221                                         |        | 13,221                      |       | —                      |       | —                            |          | (13,221          | )          | 13,221           |       |
|                                |       |                                           |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Capital**                         | ** ** | ** **                                     | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity  units              |       | 40,672                                         |        | —                      |       | —                      |       | —                            |          | —           |       | 40,672           |       |
| Series B equity  units              |       | 424,451                                        |        | —                      |       | —                      |       | —                            |          | —           |       | 424,451          |       |
| Series C equity  units              |       | 7,930                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 7,930            |       |
| Subsidiary  equity                  |       | —                                         |        | 473,053                     |       | 414,426                     |       | 91,418                            |          | (978,897         | )          | —           |       |
| **Total  capital**                  |       | 473,053                                        |        | 473,053                     |       | 414,426                     |       | 91,418                            |          | (978,897         | )          | 473,053          |       |
| **Total  liabilities and capital**  | ** ** | **$**                                          | **486,274** | ** **                  | **$**      | **740,369**                 | ** ** | **$**                             | **2,219,870** | ** **       | **$**      | **489,143**      | ** ** | **$** | **(993,687** | **)** | **$** | **2,941,969** | ** ** |

 

25

----

 

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

**ConsolidatingBalance Sheets at December 31, 2005**

 
| ** **                       | ** ** | **Boise   Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,   L.L.C.** | ** ** | **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** | ** ** |

 

26

----

 

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

**ConsolidatingBalance Sheets at December 31, 2005 (Continued)**

 
| ** **                          | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **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                      |       | —                                          |        | 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** | ** ** |

 

27

----

 

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

**ConsolidatingStatements of Cash Flows**

**Forthe Three Months Ended March 31, 2006**

 
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                     |       | $                                               | 59         |                              | $          | 59                         |       | $                                 | 40,591     |             | $          | (5,334           | )          | $ | (35,316 | ) | $ | 59 |   |
| Items in net  income (loss) not using (providing) cash                                 |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Equity in net  (income) loss of affiliates                                             |       | (59                                             | )          | (35,257                           | )          | —                     |       | —                            |       | 35,316           |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | —                                          |       | 2,689                             |       | 34,686                     |       | 1,005                             |       | —           |       | 38,380           |       |
| Related-party  interest expense                                                        |       | —                                          |       | 5,417                             |       | —                     |       | —                            |       | —           |       | 5,417            |       |
| Pension and  other postretirement benefit expense                                      |       | —                                          |       | 7,417                             |       | —                     |       | —                            |       | —           |       | 7,417            |       |
| Gain on changes  in retiree healthcare programs                                        |       | —                                          |       | (3,741                            | )          | —                     |       | —                            |       | —           |       | (3,741           | )          |
| Management  equity units expense                                                  |       | —                                          |       | 934                               |       | —                     |       | —                            |       | —           |       | 934              |       |
| Loss on sale of  assets                                                                |       | —                                          |       | 1,618                             |       | —                     |       | —                            |       | —           |       | 1,618            |       |
| Other                                                                                  |       | —                                          |       | 1,697                             |       | 23                         |       | (1,144                            | )          | —           |       | 576              |       |
| Decrease  (increase) in working capital, net of acquisitions                           |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                          |       | (38,373                           | )          | 19,477                     |       | (37,043                           | )          | —           |       | (55,939          | )          |
| Inventories                                                                            |       | —                                          |       | 5,966                             |       | (22,858                    | )          | 851                               |       | —           |       | (16,041          | )          |
| Accounts payable  and accrued liabilities                                         |       | —                                          |       | 57,158                            |       | (25,311                    | )          | (3,882                            | )          | —           |       | 27,965           |       |
| Pension and  other postretirement benefit payments                                     |       | —                                          |       | (346                              | )          | —                     |       | —                            |       | —           |       | (346             | )          |
| Other                                                                                  |       | —                                          |       | (822                              | )          | 6,138                      |       | (313                              | )          | —           |       | 5,003            |       |
| Cash provided by  (used for) operations                                                |       | —                                          |       | 4,416                             |       | 52,746                     |       | (45,860                           | )          | —           |       | 11,302           |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                          |       | —                                          |       | (652                              | )          | (35,605                    | )          | (251                              | )          | —           |       | (36,508          | )          |
| Acquisitions of  businesses and facilities                                             |       | —                                          |       | —                            |       | (42,589                    | )          | —                            |       | —           |       | (42,589          | )          |
| Sales of assets                                                                        |       | —                                          |       | 27,249                            |       | —                     |       | —                            |       | —           |       | 27,249           |       |
| Investments in  related parties                                                        |       | 125                                             |       | 35,316                            |       | —                     |       | —                            |       | (35,441          | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 13,927                            |       | (19,241                    | )          | 3,920                             |       | —           |       | (1,394           | )          |
| Cash provided by  (used for) investment                                           |       | 125                                             |       | 75,840                            |       | (97,435                    | )          | 3,669                             |       | (35,441          | )          | (53,242          | )          |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                           |       | —                                          |       | 30,000                            |       | —                     |       | 120,000                           |       | —           |       | 150,000          |       |
| Payments of  long-term debt                                                            |       | —                                          |       | (57,600                           | )          | —                     |       | —                            |       | —           |       | (57,600          | )          |
| Note payable to  related party, net                                                    |       | —                                          |       | (137                              | )          | —                     |       | —                            |       | —           |       | (137             | )          |
| Purchases of  equity units                                                             |       | (125                                            | )          | —                            |       | —                     |       | —                            |       | 125              |       | —           |       |
| Other                                                                                  |       | —                                          |       | (1,148                            | )          | —                     |       | 1,000                             |       | —           |       | (148             | )          |
| Cash provided by  (used for) financing                                            |       | (125                                            | )          | (28,885                           | )          | —                     |       | 121,000                           |       | 125              |       | 92,115           |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                                          |       | (495                              | )          | 44,688                     |       | (79,509                           | )          | 35,316           |       | —           |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                             |       | —                                          |       | 50,876                            |       | (1                         | )          | (700                              | )          | —           |       | 50,175           |       |
| **Balance  at beginning of the period**                                                |       | —                                          |       | 85,469                            |       | 34                         |       | 2,668                             |       | —           |       | 88,171           |       |
| **Balance  at end of the period**                                                      | ** ** | **$**                                           | **—** | ** **                        | **$**      | **136,345**                | ** ** | **$**                             | **33**     | ** **       | **$**      | **1,968**        | ** ** | **$** | **—** | ** ** | **$** | **138,346** | ** ** |

 

28

----

 

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

**ConsolidatingStatements of Cash Flows**

**Forthe Three Months Ended March 31, 2005**

 
| ** **                                                                             | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                             | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income  (loss)                                                                     |       | $                                               | 64,739     |                              | $          | 64,739                     |       | $                                 | 93,410     |             | $          | (3,460           | )          | $ | (154,689 | ) | $ | 64,739 |   |
| Items in net  income (loss) not using (providing) cash                                 |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Equity in net  (income) loss of affiliates                                             |       | (64,739                                         | )          | (89,950                           | )          | —                     |       | —                            |       | 154,689          |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | —                                          |       | 4,246                             |       | 29,145                     |       | 768                               |       | —           |       | 34,159           |       |
| Related-party  interest expense                                                        |       | —                                          |       | 3,123                             |       | —                     |       | —                            |       | —           |       | 3,123            |       |
| Pension and  other postretirement benefit expense                                      |       | —                                          |       | 929                               |       | 6,201                      |       | —                            |       | —           |       | 7,130            |       |
| Change in fair  value of interest rate swaps                                           |       | —                                          |       | (15,200                           | )          | —                     |       | —                            |       | —           |       | (15,200          | )          |
| Management  equity units expense                                                  |       | —                                          |       | 782                               |       | —                     |       | —                            |       | —           |       | 782              |       |
| Other                                                                                  |       | —                                          |       | (200                              | )          | 104                        |       | 889                               |       | —           |       | 793              |       |
| Decrease  (increase) in working capital                                                |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                          |       | 2,253                             |       | (91,322                    | )          | (6,086                            | )          | 3,665            |       | (91,490          | )          |
| Inventories                                                                            |       | —                                          |       | 1                                 |       | (48,711                    | )          | (4,126                            | )          | —           |       | (52,836          | )          |
| Accounts payable  and accrued liabilities                                         |       | —                                          |       | 8,847                             |       | 65,645                     |       | 2,905                             |       | (3,665           | )          | 73,732           |       |
| Pension and  other postretirement benefit payments                                     |       | —                                          |       | (145                              | )          | —                     |       | —                            |       | —           |       | (145             | )          |
| Other                                                                                  |       | —                                          |       | 271                               |       | 716                        |       | (65                               | )          | —           |       | 922              |       |
| Cash provided by  (used for) operations                                                |       | —                                          |       | (20,304                           | )          | 55,188                     |       | (9,175                            | )          | —           |       | 25,709           |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                          |       | —                                          |       | (2,993                            | )          | (26,353                    | )          | (4,186                            | )          | —           |       | (33,532          | )          |
| Repayment of  note receivable from related party, net                                  |       | —                                          |       | 157,509                           |       | —                     |       | ­—                      |       | —           |       | 157,509          |       |
| Investments in  related parties                                                        |       | 9,464                                           |       | 154,689                           |       | ­—               |       | —                            |       | (164,153         | )          | —           |       |
| Other                                                                                  |       | —                                          |       | 90                                |       | (1,236                     | )          | (845                              | )          | —           |       | (1,991           | )          |
| Cash provided by  (used for) investment                                           |       | 9,464                                           |       | 309,295                           |       | (27,589                    | )          | (5,031                            | )          | (164,153         | )          | 121,986          |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                             | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                 | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Payments of  long-term debt                                                            |       | —                                          |       | (412,000                          | )          | —                     |       | —                            |       | —           |       | (412,000         | )          |
| Tax  distributions to members                                                          |       | (9,425                                          | )          | —                            |       | —                     |       | —                            |       | —           |       | (9,425           | )          |
| Tax distribution  to Boise Cascade    Holdings, L.L.C.                  |       | —                                          |       | (9,425                            | )          | ­—               |       | —                            |       | 9,425            |       | —           |       |
| Note payable to  related party, net                                                    |       | —                                          |       | 253,000                           |       | —                     |       | —                            |       | —           |       | 253,000          |       |
| Purchases of  equity units                                                             |       | (39                                             | )          | —                            |       | —                     |       | —                            |       | 39               |       | —           |       |
| Other                                                                                  |       | —                                          |       | (1,541                            | )          | ­—               |       | 1,000                             |       | —           |       | (541             | )          |
| Cash provided by  (used for) financing                                            |       | (9,464                                          | )          | (169,966                          | )          | —                     |       | 1,000                             |       | 9,464            |       | (168,966         | )          |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                              |       | —                                          |       | (139,852                          | )          | (27,603                    | )          | 12,766                            |       | 154,689          |       | —           |       |
|                                                                                   |       |                                            |       |                              |       |                       |       |                              |       |             |       |             |       |
| **Decrease  in cash and cash equivalents**                                        |       | —                                          |       | (20,827                           | )          | (4                         | )          | (440                              | )          | —           |       | (21,271          | )          |
| **Balance  at beginning of the period**                                                |       | —                                          |       | 160,559                           |       | 39                         |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance  at end of the period**                                                      | ** ** | **$**                                           | **—** | ** **                        | **$**      | **139,732**                | ** ** | **$**                             | **35**     | ** **       | **$**      | **2,307**        | ** ** | **$** | **—** | ** ** | **$** | **142,074** | ** ** |

 

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***20.******          LegalProceedings and Contingencies***

 

*Legal Proceedings*

 

OfficeMax agreed to retain responsibility foressentially all legal proceedings related to our businesses that arose beforeOctober 29, 2004. We did, however, assume responsibility for a smallnumber of legal proceedings that arose before this date. We are also a party toroutine legal proceedings that have arisen in our businesses afterOctober 29, 2004. Management does not believe any of the legal proceedingsfor which we have responsibility will have a material adverse effect on ourfinancial position, results of operations, or cash flows.

 

*EnvironmentalMatters*

 

We are not currently involved in any materialenvironmental proceedings. OfficeMax retained responsibility for environmentalclaims and liabilities related to businesses, facilities, and other assets notpurchased by us in the Forest Products Acquisition. In addition, OfficeMaxindemnifies us for hazardous substance releases and other environmentalregulatory violations that relate to the businesses we purchased and thatoccurred before the Forest Products Acquisition or arose from pre-ForestProducts 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 2.******                                                ******MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS***

 

This Management’s Discussion and Analysis of Financial Condition andResults of Operations includes statements regarding our expectations withrespect to our performance, liquidity, and capital resources. Such statements,along with any other nonhistorical statements in the discussion, areforward-looking. These forward-looking statements are subject to numerous risksand uncertainties, including, but not limited to, the risks and uncertaintiesdescribed in “Item 1A.  Risk Factors”of our 2005 Annual Report on Form 10-K, as well as those factors listed inother documents we file with the Securities and Exchange Commission (SEC).There have been no material changes to our risk factors for the three monthsended March 31, 2006, from those listed in our 2005 Annual Report. We donot assume an obligation to update any forward-looking statement. Our actualresults may differ materially from those contained in or implied by any ofthese forward-looking statements.

 

***Acquisition of Assets from OfficeMax***

 

Our operations began on October 29, 2004, when weacquired the forest products and paper assets of OfficeMax (the Forest ProductsAcquisition). Before the Forest Products Acquisition, OfficeMax was known asBoise Cascade Corporation. We acquired the names “Boise” and “Boise Cascade” aspart of the Forest Products Acquisition. 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. Concurrently with the ForestProducts Acquisition, Boise Land & Timber Holdings Corp. (TimberHoldings), an entity that is majority-owned by our majority owner, ForestProducts Holdings, L.L.C. (FPH), acquired OfficeMax’s timberlandoperations.

 

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***Effects of the Forest Products Acquisition***

 

*Purchase Accounting*

 

We accounted for the Forest Products Acquisition usingthe purchase 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 Forest Products Acquisition. The purchase price was determined based onnegotiations between OfficeMax and Madison Dearborn Partners (MDP), our equitysponsor who controls FPH. The excess of the purchase price over the fair valueof assets acquired and liabilities assumed was allocated to goodwill.

 

*Restructuring Activities*

 

In connection with the Forest Products 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 Forest Products Acquisition increased goodwill. Wehad one year from the acquisition date to develop our restructuring plans andadjust goodwill.

 

At March 31, 2006, approximately$2.7 million of the restructuring reserve was related to severance costsand was included in “Accrued liabilities, Compensation and benefits,” and$0.1 million was included in “Accrued liabilities, Other.” Most of theseverance costs related to costs for 350 employees. At March 31,2006, we had terminated approximately 320 employees. Of the$2.8 million remaining restructuring reserve, $1.7 million isrecorded in our Paper segment and $1.1 million is in Corporate and Other.Most of the remaining costs will be paid during 2006. Restructuring reserveliability account activity related to these charges is 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       |       |
|                                             |       |           |       |       |       |      |       |
| Charges against  reserve                         |       | (0.8           | )          | —     |       | (0.8      | )          |
| Restructuring  reserve at March 31, 2006         | ** ** | **$**          | **2.7**    | ** ** | **$**      | **0.1**   | ** ** | **$** | **2.8** | ** ** |

 

*Forest Products Acquisition Financing*

 

To finance the Forest Products Acquisition, weincurred $2.0 billion of debt. At March 31, 2006, we had $1.7 billionof long-term debt, including a $276.1 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 March 31, 2006, 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-Q for moreinformation.

 

***Purchase of Central Texas Corrugated’s Assets***

 

On February 1, 2006, we purchased the assets of Central TexasCorrugated (CTC) in Waco, Texas, for an aggregate purchase price of$43.8 million, including fees and expenses, but before working capitaladjustments. In February 2006, we paid $42.6 million of cash for theacquisition, which is net of a $2.0 million holdback that is payable infive years. We recorded the $1.2 million discounted holdback in “Otherlong-term liabilities” on our Consolidated Balance Sheet. CTC manufacturescorrugated sheets that it sells primarily to regional independents andfull-line container plants in Texas, Louisiana, Arkansas,

 

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and Mexico. CTC is located close to ourmill in DeRidder, Louisiana, which produces linerboard used in CTC’smanufacturing processes. Over time we expect the acquisition to increase ourPackaging & Newsprint segment’s containerboard integration from 55% to77%.

 

We accounted for the acquisition using the purchasemethod of accounting. As a result, the purchase price was allocated to thetangible and intangible assets acquired and liabilities assumed based on theirrespective fair values as of the date of the acquisition. For more information,see Note 3, Purchase of Central Texas Corrugated’s Assets, in “Item 1.  Consolidated Financial Statements” of thisForm 10-Q.

 

***Our Segments***

 

Weare a diversified North American paper and forest products companyheadquartered in Boise, Idaho. 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.

 

*Building Materials Distribution. *Our Building MaterialsDistribution segment is a leading national inventory-carrying wholesaledistributor of building materials. We distribute a broad line of buildingmaterials, including engineered wood products (EWP), oriented strand board(OSB), plywood, lumber, and general line items such as framing accessories,composite decking, roofing, siding, and insulation. We purchase most of thesebuilding materials from third-party suppliers and market them primarily tocustomers that resell building materials to professional builders in theresidential, light commercial construction, and repair-and-remodeling markets.

 

*WoodProducts. *Our Wood Products segment manufactures and sells EWP, consisting oflaminated veneer lumber (LVL), a high-strength engineered lumber often used inbeams; I-joists, a structural support typically used in floors and roofs; andlaminated beams. We also produce plywood, particleboard, dimension lumber, andhigh-quality ponderosa pine lumber, a premium lumber grade sold primarily tomanufacturers of specialty wood windows, moldings, and doors. Our wood productsare used in new residential and light commercial construction and in residentialrepair and remodeling. Most of these products are sold to wholesalers, majorretailers, and industrial converters or through our own wholesale buildingmaterials distribution outlets. During 2005, approximately 36% of our overallsales, including approximately 60% of our EWP sales, 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. We sellto end-users both directly from our mills and through distribution centers. In2005, approximately 47% of our uncoated free sheet sales volume, includingabout 82% of our office papers sales volume, was sold to OfficeMax.

 

*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 and a sheet feeder plant in Waco, Texas which we acquired inFebruary 2006. Our corrugated containers are used in the packaging of freshfruit and vegetables, processed food, beverages, and other industrial andconsumer products. Our Waco plant, known as Central Texas Corrugated, or CTC,produces corrugated sheets that are sold to sheet plants in the region wherethey are converted into corrugated containers for a variety of customers.  Our containerboard and corrugated productsare sold 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.

 

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

 

Our results of operations and financial performanceare influenced by a variety of factors, including the following:

 

•                  Generaleconomic conditions including but not limited to housing starts, repair-and-remodelactivity, white-collar employment, and durable goods production;

 

•                  Pricingvolatility in our distribution business;

 

•                  Thecommodity nature of our products and our ability to maintain margins;

 

•                  Industrycycles and capacity utilization rates;

 

•                  Volatilityin raw material and energy prices;

 

•                  Actionsof suppliers, customers, and competitors; and

 

•                  Theother factors described in “Item 1A. Risk Factors” in our 2005 Annual Report on Form 10-K.

 

*Commodity and Value-Added Products and ProductMargins*

 

Many of the products we manufacture and distribute arewidely available and can be readily produced by our competitors. Becausecommodity products have few distinguishing qualities from producer to producer,competition for these products is primarily based on price, which is determinedby supply relative to demand. Generally, market conditions beyond our controldetermine the price for our commodity products, and the price for any one ormore of these products may fall below our cash production costs. Therefore, ourprofitability with respect to these products depends on managing our coststructure, particularly raw materials and energy prices, which also exhibitcommodity characteristics.

 

Not all of our products are commodities. Our EWP andvalue-added papers are differentiated from competing products based on qualityand product design, as well as related customer service. In the case of thesevalue-added products, we are generally able to influence price based on thestrength of differentiation and levels of customer service and are generallyable to sell these products at higher margins than our commodity products. Inorder to reduce our sensitivity to the cyclicality of our industry, afundamental component of our strategy is to increase production of EWP andvalue-added papers, which we believe are less susceptible to commoditydynamics. Comparing the first quarter of 2006 with the first quarter of 2005,we increased sales of EWP from our Wood Products segment 13% and increasedsales of specialty and premium papers from our Paper segment 22%. The increasein EWP production capacity we implemented in 2005 has allowed us to continue togrow this business, and the recently approved project to convert our Wallula #3 papermachine to enable it to produce pressure-sensitive grades is a key step toproviding us with the capacity to increase production of specialty and premiumpaper grades.

 

*Demand*

 

The overall level of demand for the products we makeand distribute, and consequently our financial results, are affected by, amongother things, construction activity, manufacturing activity, 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 respectiveindustries. For example:

 

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•                  Demandfor building 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 correlated positively with general economicactivity. More recently, demand for some paper grades has decreased as the useof electronic transmission and document storage alternatives has become morewidespread.

 

•                  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.

 

•                  Demandfor newsprint 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 substitution towarduncoated groundwood grades.

 

*Supply*

 

Industry supply of commodity wood products and paperis affected by the number of operational or idled facilities, the building ofnew capacity, and the shutting down of existing capacity. Capacity also tendsto increase gradually over time without significant capital expenditures, asmanufacturers improve production efficiencies. Generally, more capacity isadded or employed when supply is tight and margins are relatively high, andcapacity is idled or eliminated when supply significantly exceeds demand andmargins are poor. Margins tend to decrease with lower capacity utilizationbecause of downward price pressure and because fixed costs attributable to aproduct are spread across lower volumes.

 

While new capacity additions are constrained by thehigh capital investment and long lead times required to plan, obtain regulatoryapprovals for, and build a new mill, a favorable pricing environment may promptmanufacturers to initiate expansion projects. Currently, a number of producersof oriented strand board, a substitute for plywood (which we produce), arestarting up or building new capacity. This increase in supply is likely to havea negative impact on the price of all structural panel products, includingplywood.

 

In 2005, faced with declining demand, rising costs (especially energycosts), ongoing dissatisfaction with financial performance, and in some cases,a rising Canadian dollar, several North American paper producers announced millclosures that decreased or will decrease supply. From 2001 to 2005,North American uncoated free sheet, containerboard, and newsprint capacitiesdeclined by 5%, 2%, and 15%, respectively, according to RISI.

 

Industry supply of commodity wood products and papersis also influenced by the level of imports and overseas production capacity,which has grown in recent years. While the weakness of the U.S. dollar hasmitigated the level of imports in recent years, a strengthening in the U.S.dollar would potentially lead to increased imports of commodity wood productsand papers from overseas, thereby offsetting domestic capacity rationalizationand putting downward pressure on prices.

* *

*Recent Trends*

 

In general, commodity wood products prices were lower and less volatile infirst quarter 2006, compared with first quarter 2005 levels. Warm weather inparts of the country in January got the 2006 housing construction market off toa strong start. However, many economists are anticipating that housing startsfor the full year 2006 will be lower than the exceptionally high levels of2005. If the housing market weakens during the year, wood products marketswould be expected to trend lower as well.

 

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Uncoated free sheet prices rose in first quarter 2006 from fourth quarter2005 levels amid strong demand. While energy costs were lower in first quarter2006, compared with fourth quarter 2005, both energy and chemical costs remainhigh by historical standards. Mill operating rates rose in first quarter 2006,compared with fourth quarter 2005.

 

The market supply of containerboard (linerboard and corrugating medium) hasrecently decreased due to maintenance outages by some of our large competitors,customer restocking, and higher customer demand.  In response, we have announced a priceincrease of $50 per ton, which we plan to implement in May.  There is, however, no guarantee that we willbe able to implement or sustain this price increase.

 

While newsprint prices have continued to exhibit strength, we believe thesecular trend for newsprint consumption in the United States continues to benegative. In addition, press rooms are moving to lower basis weight paper whichmay reduce productivity on our newsprint machines.

 

*Operating Costs*

 

Our major costs of production are labor, wood fiber,energy, and chemicals. The relative importance of these costs varies by segment.Given the significance of raw material and energy costs to our total operatingexpenses and our limited ability to control these costs, compared with otheroperating costs, volatility in these costs can materially affect our margins.In addition, the timing and degree of price cycles of raw materials and energydiffer with respect to each type of raw material and energy we use.

 

*Labor.*  Our labor coststend to increase steadily due to inflation in healthcare as well as wage costs.Labor costs are not as volatile as our energy and wood fiber costs.

 

*Wood fiber.*  Ourprimary raw material is wood fiber, which represents the following percentagesof materials, labor, and other operating expenses, including fiber costs, forour Wood Products, Paper, and Packaging & Newsprint segments:

 
| ** **                 | ** ** | **Three Months  Ended March 31** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                       |       |                             |       |   |   |
| Wood Products              |       | 32                               | %          | 34 | % |
| Paper                      |       | 16                               | %          | 16 | % |
| Packaging &  Newsprint |       | 13                               | %          | 13 | % |

 

Our primary sources of logs and wood fiber are timberand byproducts of timber, such as wood chips, wood shavings, and sawdust. Afterthe timberlands sale in February 2005, we have acquired substantially all ofour fiber from outside sources, including pursuant to supply agreements withthe buyer of the timberland operations. In our Wood Products segment, weconvert logs into lumber and into veneer, which we convert into engineered woodproducts and plywood. Logs are a lower percentage of the total cost ofmaterials, labor and other operating expenses in producing engineered wood thancommodity products such as lumber and plywood. While log costs are still asignificant component of costs, as we continue to produce more engineered woodrelative to commodity products, direct log costs decline as a percent of thetotal cost of materials, labor and other operating expenses. We alsoconvert residual wood fiber, from our operations as well as from third parties,into particleboard. In our Paper and Packaging & Newsprint segments,we convert logs and wood chips into pulp, which we sell or use at our papermills to produce paper. On an aggregate basis, we are able to produce all ofour pulp needs, generally purchasing and selling similar amounts on the openmarket. Logs and wood fiber are commodities, and prices for logs and wood fiberhave historically been cyclical due to changing levels of demand. As the amountof logs and 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, timber supply may be limited by publicpolicy or government regulation as well as fire, insect infestation, disease,ice storms, windstorms, hurricanes, flooding, other weather conditions, andother natural and man-made causes. In recent years, declines in timber supply,driven primarily by changes in public policy and government regulation, havebeen severe enough to cause the closure of numerous facilities in some of theregions in which we operate. Any sustained undersupply and resulting

 

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increase in woodfiber prices would increase our operating costs. Prices for our products mightnot reflect increases in log and wood fiber prices, and as a result, ouroperating margins would decrease. Our sensitivity to these fluctuationsincreased after the timberlands sale.

* *

*Other raw materials and energy purchasing andpricing.*  We purchase other 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.

 

Our costs willrise if prices for our raw materials or energy rise, and our margins areimpacted by how much and how quickly we can pass such price increases throughto our customers. Specifically, some of our key chemicals, including glues andresins consumed in our wood products operations, are heavily influenced byenergy costs. We anticipate that as these contracts come up for renegotiation,our suppliers will request price increases tied to their increased energycosts. Our ability to pass through price increases depends on several 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 did in the third and fourth quarters of 2005, our fuelcosts increase, leading to higher costs and lower margins. Energy costs representedthe following percentages of materials, labor, and other operating expenses,including fiber costs, for our Wood Products, Paper, and Packaging &Newsprint segments:

 
| ** **                 | ** ** | **Three Months  Ended March 31** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                       |       |                             |       |   |   |
| Wood Products              |       | 4                                | %          | 3 | % |
| Paper                      |       | 17                               | %          | 15 | % |
| Packaging &  Newsprint |       | 16                               | %          | 12 | % |

 

We reduced consumption of purchased fossil fuel perunit of production in our paper mills by approximately 10% during the periodbetween first quarter 2005 and 2006. This reduction was achieved with a varietyof consumption reduction and fuel switching activities, including the use ofmore purchased biomass fuel to replace purchased fossil fuels. We have limitedflexibility to further switch between fuel sources in the short term;accordingly, we have significant exposure to natural gas and fuel oil priceincreases. To reduce our exposure to price increases, we have entered into avariety of contracts to limit our susceptibility to increases in energy costs. Asof May 2, 2006, we have mitigated our risk through hedging approximately 85% to95% of our exposure to natural gas price increases for the period of August 2006through February 2007. At March 31, 2006, the fair market value of our energyswaps was $1.0 million, which we recorded in “Receivables,Other” on our Consolidated Balance Sheet.

 

While energy prices in early first quarter 2006 weregenerally lower than levels in fourth quarter 2005, pricing remains high byhistorical standards. In addition, increased demand (which could be driven byweather), further supply constraints, or other factors could drive priceshigher. In the event the current fuel prices persist and we are unable to passthese increases on to our customers in the form of higher prices, we willlikely experience a negative financial impact relative to our 2005 performance.In addition, the rates we are charged by our electrical suppliers are affectedby the increase in natural gas prices, although the degree of impact depends oneach utility’s mix of energy resources and regulatory situation.

 

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

 

36

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| ** **                 | ** ** | **Three Months  Ended March 31** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
|                       |       |                             |       |   |   |
| Wood Products              |       | 6                                | %          | 6 | % |
| Paper                      |       | 13                               | %          | 12 | % |
| Packaging &  Newsprint |       | 5                                | %          | 3 | % |

 

We haveexperienced higher chemical costs during first quarter 2006, compared with thesame period in 2005, in part due to increases in energy costs sustained by ourchemical suppliers, which they have partly passed through to us. Recentlynegotiated contracts for certain chemicals used in our paper productionresulted in a 9% increase in first quarter 2006 in our chemical cost per ton ofpaper produced by our Paper segment relative to fourth quarter 2005.

*** ***

***Resultsof Operations***

 

The following tables set forth the results ofoperations in dollars and as a percentage of sales for the three months endedMarch 31, 2006 and 2005:

 
| ** **                                      | ** ** | **Three Months Ended  March 31** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2006**                              | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(millions)**                        | ** ** |
| **Sales**                                       | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                     | 1,337.5    |   | $ | 1,282.0 |   |
| Related parties                                 |       | 132.8                                 |       | 150.3 |   |
|                                            |       | 1,470.3                               |       | 1,432.3 |   |
|                                            |       |                                  |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 1,312.7                               |       | 1,220.7 |   |
| Fiber costs from  related parties               |       | —                                |       | 17.6 |   |
| Depreciation,  amortization, and depletion      |       | 36.7                                  |       | 30.6 |   |
| Selling and distribution  expenses              |       | 71.1                                  |       | 62.4 |   |
| General and  administrative expenses            |       | 21.4                                  |       | 19.2 |   |
| Other (income)  expense, net                    |       | (2.1                                  | )          | 0.1 |   |
|                                            |       | 1,439.8                               |       | 1,350.6 |   |
|                                            |       |                                  |       |   |   |
| **Income  from operations**                     | ** ** | **$**                                 | **30.5**   | ** ** | **$** | **81.7** | ** ** |

 
| ** **                                                                           |       | **(percentage  of sales)** |       |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Sales**                                                                            | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Trade                                                                                |       | 91.0                       | %          | 89.5 | % |
| Related parties                                                                      |       | 9.0                        |       | 10.5 |   |
|                                                                                 |       | 100.0                      | %          | 100.0 | % |
|                                                                                 |       |                       |       |   |   |
| **Costs  and expenses**                                                              | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses and fiber costs from related parties |       | 89.3                       | %          | 86.4 | % |
| Depreciation,  amortization, and depletion                                           |       | 2.5                        |       | 2.2 |   |
| Selling and  distribution expenses                                                   |       | 4.8                        |       | 4.4 |   |
| General and  administrative expenses                                                 |       | 1.5                        |       | 1.3 |   |
| Other (income)  expense, net                                                         |       | (0.2                       | )          | — |   |
|                                                                                 |       | 97.9                       | %          | 94.3 | % |
|                                                                                 |       |                       |       |   |   |
| **Income  from operations**                                                          | ** ** | **2.1**                    | **%**      | **5.7** | **%** |

 

37

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***Sales Volumes and Prices***

 

Set forth below are our segment sales volumes and averagenet selling prices for our principal products for the three months endedMarch 31, 2006 and 2005.

 
| ** **                                  | ** ** | **Three Months  Ended March 31** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                  | ** ** | **(millions)**                   | ** ** |
| **Building  Materials Distribution**        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Sales dollars                               |       | $                                | 761.8      |   | $ | 696.2 |   |
| ** **                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Sales  Volumes**                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Wood  Products**                          | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (cubic feet) |       | 3.5                              |       | 3.2 |   |
| I-joists  (equivalent lineal feet)          |       | 59                               |       | 57 |   |
| Plywood (sq.  ft.) (3/8” basis)        |       | 315                              |       | 327 |   |
| Lumber (board  feet)                        |       | 74                               |       | 87 |   |
| Particleboard  (sq. ft.) (3/4” basis)  |       | 38                               |       | 39 |   |
|                                        |       |                             |       |   |   |
|                                             |            |                                  |            |  |  |  |  |

 
| ** **                               | ** ** | **(thousands of short tons, except  corrugated containers)** | ** ** |
|------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **Paper**                                | ** ** | ** **                                                                            | ** ** | ** ** | ** ** |
| Uncoated free  sheet                     |       | 393                                                                                   |       | 376 |   |
| Containerboard  (medium)                 |       | 33                                                                                    |       | 31 |   |
| Market pulp and  other                   |       | 35                                                                                    |       | 30 |   |
| ** **                               | ** ** | **461**                                                                               | ** ** | **437** | ** ** |
| ** **                               | ** ** | ** **                                                                            | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**      | ** ** | ** **                                                                            | ** ** | ** ** | ** ** |
| Containerboard  (linerboard) (a)    |       | 76                                                                                    |       | 114 |   |
| Newsprint                                |       | 101                                                                                   |       | 97 |   |
| Corrugated  containers and sheets (mmsf) |       | 1,504                                                                                 |       | 1,142 |   |
|                                     |       |                                                                                  |       |   |   |

 
| ** **                                       | ** ** | **(dollars per unit)** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| **Average  Net Selling Prices**                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Wood  Products**                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet)  |       | $                                | 1,902      |   | $ | 1,860 |   |
| I-joists (1,000  equivalent lineal feet)         |       | 1,097                            |       | 1,052 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)       |       | 278                              |       | 290 |   |
| Lumber (1,000  board feet)                       |       | 509                              |       | 519 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 272                              |       | 270 |   |
| ** **                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
|                                                  |            |                                  |            |  |  |  |  |

 
| ** **                                | ** ** | **(dollars per short ton, except  corrugated containers)** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Paper**                                 | ** ** | ** **                                                                          | ** ** | ** ** | ** ** |
| Uncoated free  sheet                      |       | $                                                                                   | 747        |   | $ | 752 |   |
| Containerboard  (medium)                  |       | 343                                                                                 |       | 364 |   |
| Market pulp and  other                    |       | 386                                                                                 |       | 419 |   |
| ** **                                | ** ** | ** **                                                                          | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**       | ** ** | ** **                                                                          | ** ** | ** ** | ** ** |
| Containerboard  (linerboard) (a)     |       | $                                                                                   | 318        |   | $ | 384 |   |
| Newsprint                                 |       | 529                                                                                 |       | 456 |   |
| Corrugated  containers and sheets ($/msf) |       | 47                                                                                  |       | 50 |   |

 

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(a)                                  Includes the impact of adopting EITF 04-13, Accountingfor Purchases and Sales of Inventory With the Same Counterparty, effectiveJanuary 1, 2006, which required us to report our inventory buy/selltransactions on a net basis. In accordance with the provisions of EITF 04-13,prior-period financial information has not been reclassified to conform withthe current period’s presentation. See Note 15, Recently AdoptedAccounting Standards, for more information.

 

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***Operating Results***

 

# ***Sales***

 

Forthe three months ended March 31, 2006, total sales increased $38.0 million, or 3%, to $1.5 billion,compared with the three months ended March 31, 2005. The increase wasprimarily driven by increased sales in our Building Materials Distribution andPaper segments which were offset, in part, by decreased sales in our WoodProducts and Packaging & Newsprint segments.

 

*Building Materials Distribution.*  Sales increased$65.6 million, or 9%, to $761.8 million for the three months endedMarch 31, 2006, from $696.2 million for the three months endedMarch 31, 2005. The increase in sales was driven by increased sales volumeand price increases for engineered wood products and general line items. Salesvolumes also increased in commodity products, although these increases weremore than offset by lower commodity prices. Our product mix continued toimprove as we increased sales of engineered wood products and general lineitems from 45% of total sales in first quarter 2005 to 51% of total sales infirst quarter 2006. Engineered wood products and general line items tend to havehigher and more stable margins over time.

 

*WoodProducts.* Sales decreased $9.8 million, or 3%, to$312.6 million for the three months ended March 31, 2006, from$322.4 million for the three months ended March 31, 2005. Thedecrease was driven by lower commodity sales volumes and prices which werepartially offset by higher engineered wood products volumes and prices.Engineered wood products sales increased $16.4 million in first quarter2006, compared with the same period in the prior year. Relative to the threemonths ended March 31, 2005, plywood and lumber sales volumes decreased 4%and 15%, while prices for plywood and lumber decreased 4% and 2%.

 

*Paper.*  Sales increased$12.6 million, or 3%, to $370.4 million for the three months endedMarch 31, 2006, from $357.8 million for the three months endedMarch 31, 2005. The increase was driven by higher specialty and premiumpaper, pulp, and corrugating medium sales volumes, offset in part by lowercommodity paper sales volumes and lower prices for all products. For the threemonths ended March 31, 2006, specialty and premium paper sales volumesincreased 22%, compared with the same period in 2005, as we continued toexecute our strategy to grow sales of these grades. Sales of pulp for the threemonths ended March 31, 2006, were 17% higher than the same period in 2005 dueto increased market demand. For the three months ended March 31, 2006, commodityuncoated free sheet sales volume was 2% lower than the same period in 2005, aswe continued to move more of our production capacity to specialty and premiumpaper grades.

 

*Packaging & Newsprint. *Sales decreased $15.0 million, or 8%,to $178.8 million for the three months ended March 31, 2006, from$193.8 million for the three months ended March 31, 2005. The decreasewas driven primarily by our adoption of EITF 04-13 in January 2006. Theconsensus required us to report our inventory buy/sell transactions with thesame counterparty on a net basis in the Consolidated Statements of Income. Hadthis consensus been in effect in 2005, it would have reduced sales$19.0 million. During the three months ended March 31, 2006, salesvolumes for our corrugated container operations increased 32%, compared withthe same period a year ago, reflecting the impact of the CTC plant we acquiredearly in the quarter. Container operations sales prices were down 6%, in partdue to the acquisition of the CTC plant, where we produce corrugated sheets thatsell at a lower price than finished containers. For the three months endedMarch 31, 2006, newsprint sales volumes and prices increased 4% and 16%, respectively,compared with the same period a year ago. Excluding the impact ofEITF 04-13, linerboard sales volumes decreased 2% as we absorbed more ofour linerboard production into our own converting facilities. As we transfermore of our DeRidder linerboard to CTC, we expect to increase the percentage oflinerboard converted at our plants (either directly or through board trades)from 55% in 2005 to 77%.

 

##### ***Costsand Expenses***

 

Materials, labor, and other operating expenses,including fiber costs, increased$74.4 million, or 6%, to $1.3 billion for the three months endedMarch 31, 2006, compared with $1.2 billion during the same period inthe prior year. Increased volumes in our Building Materials Distributionsegment, increased pulp sales in our Paper segment, and increased newsprint andcontainer volumes in our Packaging & Newsprint segment drove thesecosts up, along with increased fiber and energy costs per unit of input. As apercentage of sales, these costs increased to 89.3% in first quarter 2006 from86.4% in

 

39

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first quarter 2005. The increase as a percent of sales was drivenprimarily by higher energy, wood, and chemical costs in our manufacturingoperations, coupled with lower prices in a number of product areas as describedabove. Relative to first quarter 2005, as a percentage of sales, materials,labor, and other operating expenses in the Building Materials Distributionsegment were relatively flat. Wood products incurred higher delivered-log andenergy costs, compared with first quarter 2005. Paper and Packaging &Newsprint experienced higher variable costs, including energy and chemicalcosts.

 

Depreciation, amortization, and depletion expenses increased $6.1 million, or 20%,to $36.7 million for the three months ended March 31, 2006, comparedwith $30.6 million for the same period in the prior year. This increasewas driven largely by higher levels of capital investment in all of ourbusinesses.

 

Selling and distribution expenses increased $8.7 million, or 14%, to$71.1 million for the three months ended March 31, 2006, comparedwith $62.4 million for the same period in the prior year. As a percentageof sales, selling and distribution expenses increased to 4.8% for the three months ended March 31, 2006,from 4.4% in the same period in 2005, due to increased compensation and benefitcosts and a $2.3 million write-off of bad debt related to the bankruptcyof a customer.

 

General and administrative expenses increased $2.2 million, or 12%,to $21.4 million for the three months ended March 31, 2006, comparedwith $19.2 million for the same period in the prior year. General andadministrative expenses as a percentage of sales increased 0.2% to 1.5% for the three months ended March 31,2006, from 1.3% for the three months ended March 31, 2005. Relative to thethree months ended March 31, 2005, the increase related primarily tohigher compensation and training costs and increased lease expense after thesale of our headquarters building.

 

Other (income) expense, net, increased to $2.1 million of income for the three monthsended March 31, 2006, compared with $0.1 million of expense for thesame period in the prior year. Other (income) expense, net, for the threemonths ended March 31, 2006, primarily included $3.7 million ofincome for changes in our retiree healthcare programs, offset in part by$1.6 million of expense for the loss on the sale of our headquartersbuilding.

 

***Income (Loss) From Operations***

 

Incomefrom operations decreased$51.2 million, or 63%, for the three months ended March 31, 2006,compared with the same period in the prior year. Relative to first quarter2005, segment income decreased in all of our operating segments.

 

*BuildingMaterials Distribution.* Segment income decreased $5.8 million, or 24%, to$18.6 million for the three months ended March 31, 2006, from$24.4 million for the three months ended March 31, 2005. While salesincreased and our product mix improved, the decrease in commodity marginsresulted in a net reduction in segment income for the three months ended March 31,2006, compared with the same period in 2005. The lower commodity margins weredriven by flat pricing for the quarter, relative to first quarter 2005.

 

*WoodProducts. *Segment income decreased $14.3 million, or 43%, to $18.8 million forthe three months ended March 31, 2006, compared with $33.1 million for the three months endedMarch 31, 2005. While engineeredwood products volumes and prices increased, operating results were negatively affectedby higher log and energy costs and lower commodity sales volumes and prices.

 

*Paper.*  Segment loss was $2.6 million for thethree months ended March 31, 2006, compared with $29.2 million ofincome for the three months ended March 31, 2005. While specialty andpremium papers and pulp volumes increased, prices for all of our paper productswere down, and costs, especially energy, chemical, and fiber costs, increasedsignificantly.

 

*Packaging &Newsprint. *Segment income decreased**$2.2 million, or 48%, to$2.3 million of income for the three months ended March 31,2006, compared with $4.5 millionfor the three months ended March 31, 2005. While newsprint and container volumes increased and newsprint pricesincreased, lower linerboard sales prices and higher costs, especially forenergy and chemicals, had a negative impact on operating income.

 

40

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*Other*

 

*Change in fair value of interest rate swaps.*  For the three months ended March 31,2005, we recorded $15.2 million of income in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Income for the change inthe fair value of interest rate swaps related to our amended and restatedcredit facilities. In connection with the anticipated repayment of theTranche B term loan, the interest rate swaps associated with this debtwere no longer considered hedges of the variable interest payments on thatloan. As a result, during first quarter 2005, we recorded the fair value of theinterest rate swaps, or $15.2 million of income, in “Change in fair valueof interest rate swaps” in our Consolidated Statement of Income.

 

*Interest expense.*  For the three months ended March 31,2006, interest expense was $30.2 million, compared with $32.1 millionin the same period a year ago. The decrease in interest expense is primarilyattributed to an $89.8 million decrease in long-term debt. AtMarch 31, 2006, our long-term debt was $1.7 billion, compared with $1.8 billionin the prior year.

 

***Operational Outlook***

 

Wehad a strong first quarter in our Building Materials Distribution and WoodProducts segments; however, many economists are anticipating a slowdown inhousing activity. Recent increases in new home inventory, relative to the rateof sales of new homes, have been cited as an indication that a slowdown in thehousing market will occur. In addition, a number of competitors are adding OSBcapacity, which will likely drive structural panel prices, including plywoodprices, down.

 

While increases in paper prices have recently been announced, it isuncertain whether these price increases will be realized or maintained.Similarly, linerboard prices have increased in recent months, and an additionalprice increase has been announced. There is no assurance that these priceincreases will be realized or maintained or that these containerboard priceincreases will be passed along to our corrugated container customers.

 

The integration of CTC into our Packaging & Newsprint business isproceeding. Over time, we anticipate that the addition of CTC will result in anincrease in the level of integration between our containerboard manufacturingoperations and our converting facilities from 55% in 2005 to approximately 77%.

 

Whileenergy costs have declined since the high levels of fourth quarter 2005, theyare still above historical levels and there is a risk that energy prices mayincrease further. We have implemented natural gas hedges to help protect us againstupward energy price movements. Since March 31, 2006, we have continued toincrease our hedge position, and as of May 2, 2006, we have mitigated our riskthrough hedging approximately 85% to 95% of our expected natural gas usage toreduce our exposure to price increases for the period of August 2006 throughFebruary 2007.

 

***Liquidity and Capital Resources***

 

We believe that funds generated from operations andavailable borrowing capacity will be adequate to fund debt servicerequirements, capital expenditures, and working capital requirements for thenext 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 financial position andfinancing plans will provide flexibility in financing activities and permit usto respond to changing conditions in credit markets. We cannot assure, however,that our business will generate sufficient cash flow from operations or thatfuture borrowings will be available for use under our revolving credit facilityin an amount sufficient to enable us to pay our indebtedness or to fund ourother liquidity needs.

 

***Operating Activities***

 

We operate in a cyclical industry, and our operating cash flows varyaccordingly. Our principal operating cash expenditures are for compensation,fiber, energy, and interest. For the three months ended March 31, 2006 and2005, our operating activities provided $11.3 million and $25.7 millionof cash. In 2006, items included in net income provided $50.7 million of cash. Unfavorable changes in working

 

41

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capital andother items used $39.4 million of cash from operations. Working capital issubject to cyclical operating needs, the timing of collection of receivables,the payment of payables and expenses, and to a lesser extent, seasonalfluctuations in our operations. The 2006 increase in working capital wasprimarily attributable to higher receivables in Building Materials Distributionand, to a lesser extent, increased company inventory levels. These increaseswere partially offset by higher overall accounts payable and accruedliabilities. Higher receivables in Building Materials Distribution reflectedincreased sales when comparing March 2006 with December 2005 sales. For thethree months ended March 31, 2005, items included in net income provided $95.5 million of cash,and increases in working capital and other items used $69.8 million ofcash from operations.

 

***Investment Activities***

 

Cash investing activities used $53.2 million for the three months ended March 31,2006, compared with $122.0 million provided during the same period in2005. In 2006, investing activities included $42.6 million of cash paid forthe purchase of CTC’s assets in Waco, Texas, offset by $27.2 million ofproceeds from the sale of our headquarters building in Boise, Idaho. Inconnection with the sale, we leased back 65% of the building over a staggeredlease term of ten to 12 years. Purchases of property, plant, and equipmentalso used $36.5 million during first quarter 2006. Capital expenditures for property andequipment consisted primarily of quality and efficiency projects, replacementprojects, and ongoing environmental compliance.

 

For the three months ended March 31, 2005,investing activities included $157.5 million for the collection of arelated-party note received from a subsidiary of Timber Holdings, partiallyoffset by $33.5 million used for the purchase of property and equipment. Capital expenditures for property and equipmentconsisted primarily of quality and efficiency projects, replacement projects,and ongoing environmental compliance.

 

We expect capital investments in 2006 to totalapproximately $170 million, excluding acquisitions. This level of capitalexpenditures could increase or decrease as a result of a number of factors,including our financial results and future economic conditions. Our capitalspending in 2006 will be for quality and efficiency projects, replacementprojects, ongoing environmental compliance, as well as the project describedbelow. During 2005, we spent $17 million on environmental compliance. Weexpect to spend approximately $10 million in 2006 for this purpose.

 

In April 2006, we announced that we will expand our production ofpressure-sensitive papers by reconfiguring an existing paper machine at ourpulp and paper mill in Wallula, Washington, to produce both pressure sensitivepaper and commodity uncoated free sheet. We estimate approximately$70 million of capital spending for the project. We expect to spendapproximately one-half of this amount in 2006 with the remainder in 2007.

 

***Financing Activities***

 

Cash provided by financing activities was $92.1 million for the threemonths ended March 31, 2006, compared with $169.0 million used forthe same period in 2005. In 2006, the $92.1 million of cashprovided by financing activities includes a $120.0 million increase in ourborrowings under our accounts receivable securitization program, partiallyoffset by a $27.6 million prepayment on our Tranche D term loan, whichwas primarily paid with the proceeds from the sale of our headquartersbuilding.

 

Cash used for financing activities in the first three months of 2005included $412.0 million of debt prepayments related to our Tranche Bterm loan, which was primarily paid down with proceeds from the related-partyloan received from a subsidiary of Timber Holdings. Additionally,$9.4 million of cash was used to pay our equity investors amounts to fundtheir 2004 tax obligation related to their investment in us.

 

The following discussion describes our debttransactions in more detail. At March 31, 2006, and December 31,2005, our long-term debt consisted of the following:

 

42

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| ** **                                      | ** ** | **March 31,  2006** | ** **  | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|-------------|-----------------------------|------------|
| ** **                                      | ** ** | **(millions)**           | ** **  |
|                                            |       |                     |        |                        |       |
| Revolving credit  facility, due 2010            |       | $                        | —      |                        | $          | — |   |
| Tranche D  term loan, due 2011             |       | 608.2                    |        | 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              |       | 200.0                    |        | 80.0                        |       |
|                                            |       | 1,458.2                  |        | 1,365.8                     |       |
| Note payable to  related party, net, due 2015   |       | 276.1                    |        | 270.9                       |       |
| ** **                                      | ** ** | **$**                    | **1,734.3** | ** **                  | **$**      | **1,636.7** | ** ** |

 

*Senior Secured**Credit Facilities*

 

Boise Cascade, L.L.C. (Boise LLC) and affiliates have a $475.0 millionsenior secured revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). Theseborrowings represent our senior secured credit facilities (the Facilities).

 

Our revolving credit facility agreement permits us toborrow up to $475.0 million for general corporate purposes. AtMarch 31, 2006, we had no borrowings outstanding under our revolvingcredit facility; however, $60.4 million of letters of credit wereconsidered a draw on the revolver, reducing our borrowing capacity to$414.6 million. Borrowings under our revolving credit facility are basedon the prime rate, the federal funds effective rate, or the LondonInterbank Offered Rate (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) LIBOR plus 1.50% to 2.25%. For the three months endedMarch 31, 2006, and the year ended December 31, 2005, the averageinterest rate for our borrowings under the revolver was 6.1% and 5.1%. Lettersof credit are subject to a 0.25% fronting fee payable to the issuing bank and afee payable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under our revolving credit facility and thedaily average amount available for drawing under the outstanding letters ofcredit. The minimum and maximum borrowings under the revolver were zero and$30.0 million during the three months ended March 31, 2006. Duringthe three months ended March 31, 2005, we had no borrowings on the revolver.The weighted average amounts of borrowings outstanding under the revolverduring the three months ended March 31, 2006 and 2005, were$2.3 million and zero. 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 $40.0 million from individual banks that are parties tothe agreement. Swingline borrowings are considered borrowings under therevolving credit facility agreement.

 

At March 31, 2006, and December 31, 2005, wehad $608.2 million and $635.8 million outstanding under theTranche D term loan, and our borrowing rates were 6.7% and 5.8%.Borrowings under the Tranche D term loan are based on (i) the higher ofthe 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 inOctober 2005, we are not required to make scheduled principal payments on theTranche D term loan until 2011, at which time the principal balance of$608.2 million is due. However, during the three months endedMarch 31, 2006, we prepaid $27.6 million on our Tranche D term loan,primarily with the proceeds from the sale of our headquarters building inBoise, Idaho.

 

Borrowings under the Facilities are subject tofinancial covenants and restrictions, including a minimum interest expensecoverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At March 31, 2006, and December 31, 2005, we were incompliance with these covenants.

 

*SeniorNotes*

 

In October 2004, we issued $250.0 million ofsenior unsecured floating-rate notes due in 2012 and $400.0 million of7.125% senior subordinated notes due in 2014. Net proceeds from the notes wereused to fund a portion of the purchase price for the Forest ProductsAcquisition. In July 2005, we

 

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completed anexchange offer whereby all of our senior unsecured floating-rate notes andsenior subordinated notes were exchanged for publicly traded, registeredsecurities with identical terms (other than terms relating to registrationrights) to the notes issued in October 2004. We may redeem all or part of thenotes at any time at redemption prices defined in the indenture. If we sellspecific assets or experience specific kinds of changes in control, we mustoffer to purchase the notes. The senior unsecured floating-rate notes bearinterest at a floating rate equal to LIBOR plus 2.9%. At March 31, 2006,and December 31, 2005, our borrowing rates for the $250.0 millionsenior unsecured floating-rate notes were 7.5% and 7.0%.

 

*Borrowings Secured by Receivables*

 

On October 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). Under thisthree-year program, Boise LLC sells its interest in a defined pool of accountsreceivable generated by its domestic operations on a revolving basis to BirchCreek, a fully consolidated, wholly owned, special-purpose subsidiary. In turn,Birch Creek sells the receivables to the affiliates of the Investors. BecauseBoise LLC has the right to repurchase the sold receivables, sales ofreceivables under the program are accounted for as a secured borrowing. AtMarch 31, 2006, and December 31, 2005, we had $200.0 million and$80.0 million outstanding under our accounts receivable securitizationprogram. The receivables outstanding and the corresponding debt are included as“Receivables” and “Long-term debt,” respectively, on our Consolidated BalanceSheets. We record the financing costs associated with the program in “Interestexpense” in our Consolidated Statements of Income. The cost of funds under thisprogram varies based on changes in interest rates. At March 31, 2006, andDecember 31, 2005, the interest rates for borrowings secured byreceivables were 4.8% and 4.3%.

 

Under the accounts receivable securitization program, the maximum borrowingamount is subject to change based on the level of eligible receivables andrestrictions on concentrations of receivables and cannot exceed $250 million.The accounts receivable securitization program contains the same financialcovenants as our senior secured credit facilities.

 

*NotePayable to Related Party, Net*

 

At March 31, 2006, we had a $276.1 million note payable to asubsidiary of Timber Holdings recorded as “Note payable to related party, net”on our Consolidated Balance Sheet. The amount of this note payable was$270.9 million at December 31, 2005. The note is subject toadjustment based on transactions between the subsidiary and us. Our borrowingrate under the note is 8%, and the note matures February 4, 2015. Includedin “Note payable to related party, net” was $24.3 million and$18.9 million of accrued interest expense related to the note atMarch 31, 2006, and December 31, 2005, respectively. Timber Holdingsis a guarantor of our debt, see Note 19, Consolidating Guarantor andNonguarantor Financial Information, in “Item 1. Consolidated Financial Statements” of thisForm 10-Q.

 

*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 5.5% and 5.3% atMarch 31, 2006, and December 31, 2005, respectively. For additionalinformation on our interest rate swaps, see Note 14, Financial Instruments, in “Item 1.Consolidated Financial Statements” of this Form 10-Q.

 

We paid approximately $85.9 million of fees andexpenses associated with our senior secured credit facilities, our seniorunsecured floating-rate notes, and our senior subordinated notes, which weentered into in October 2004. The fees are being amortized over the terms ofthe loans, which range from six to ten years. At March 31, 2006, andDecember 31, 2005, we had $36.1 million and $37.8 million ofcosts recorded in “Deferred financing costs” on our Consolidated BalanceSheets. In connection with the repayment of the Tranche B term loan, insecond quarter 2005, we recorded a $43.0 million charge for the write-offof the deferred financing costs.

 

At March 31, 2006, and December 31, 2005,our average 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 6.0% and 5.8%.

 

Forthe three months ended March 31, 2006 and 2005, cash payments forinterest, net of interest capitalized, were $15.8 million and$18.9 million, respectively.

 

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***Contractual Obligations***

 

For information on contractual obligations, see ContractualObligations in “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations” in our2005 Annual Report on Form 10-K. Except as disclosed below, at March 31,2006, there have been no material changes to our contractual obligationsoutside the normal course of business.

 

During the three months ended March 31, 2006, we increased the amount ofborrowings secured under our accounts receivable securitization program from$80.0 million at December 31, 2005, to $200.0 million atMarch 31, 2006. Additionally, we paid $27.6 million on ourTranche D term loan, primarily with the proceeds from the sale of ourheadquarters building. For more information, see “Financing Activities” in theLiquidity and Capital Resources section of this Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

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

 

At March 31, 2006, and December 31, 2005, wehad no off-balance-sheet arrangements with unconsolidated entities.

 

***Guarantees***

 

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FinancialAccounting Standards Board (FASB) Interpretation No. 45, Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others. Note 17, Commitments and Guarantees,of “Item 8.  Consolidated FinancialStatements and Supplementary Data” in our 2005 Annual Report on Form 10-Kdescribes the nature of our guarantees, including the approximate terms of theguarantees, how the guarantees arose, the events or circumstances that wouldrequire us to perform under the guarantees, and the maximum potential undiscountedamounts of future payments we could be required to make. There have been nomaterial changes to the guarantees disclosed in our 2005 Annual Report onForm 10-K.

 

***Inflationary and Seasonal Influences***

 

Other than the effects of higher energy costs, whichwe discuss in this Form 10-Q, we believe inflation has not had a materialeffect on our financial condition or results of operations. However, there canbe no assurance that we will not be affected by inflation in the future.Seasonal changes in levels of building activity affect our building productsbusinesses. We typically have higher sales and working capital in the secondand third quarters because of warmer weather. To a lesser degree, our paperbusinesses also experience some seasonality based primarily on buying patternsassociated with particular products. For example, the demand for our corrugatedcontainers is influenced by agricultural demand in the Pacific Northwest. Inaddition, seasonally cold weather increases costs, especially energyconsumption, at all of our manufacturing facilities.

 

***Environmental***

 

For information on environmental issues, seeEnvironmental in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in our 2005 Annual Report on Form 10-K.

 

***Collective Bargaining Agreements***

 

Approximately 5,030, or 49%, of our employees work pursuant to collectivebargaining agreements. Several of these agreements have recently expired orwill expire in 2006, although the parties are generally continuing theagreements while bargaining. In March 2005, the agreements coveringapproximately 510 workers at our paper facilities in Salem, Oregon;St. Helens, Oregon; and Vancouver, Washington, expired. In February 2006,we reached a five-year agreement at the Salem facility, and in March 2006, wereached a five-year agreement at our St. Helens facility. In June 2005, weannounced the permanent closure of our Vancouver, Washington, facility and donot currently intend to extend that agreement beyond the May 2006 expectedclosure. We are currently bargaining the effects of that decision with theunion. We are in current negotiations regarding a collective bargainingagreement at

 

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our DeRidder, Louisiana, paper millcovering approximately 440 employees. That agreement expiredFebruary 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 the second, third, and fourth quarters of2006, respectively. We are also currently in negotiations for a new contract atour veneer and plywood facility in Brazil. We do not currently expect materialwork interruptions or increases in our costs during the course of thenegotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

 

***Critical Accounting Estimates***

 

Critical accounting estimates are those that are mostimportant to the portrayal of our financial condition and results. Theseestimates require management’s most difficult, subjective, or complexjudgments, often as a result of the need to estimate matters that areinherently uncertain. We review the development, selection, and disclosure ofour critical accounting estimates with the Audit Committee of our board ofdirectors. For information about critical accounting estimates, see CriticalAccounting Estimates in “Item 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in our 2005 Annual Report on Form 10-K.

 

***ITEM 3.******                                                ******QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISKS***

 

We are exposed to risks such as changes in interestrates, energy prices, and foreign currency exchange rates. We employ a varietyof practices to manage these risks, including operating and financingactivities and, where deemed appropriate, the use of derivative instruments.Derivative instruments are used only for risk management purposes and not forspeculation or trading. Derivatives are such that a specific debt instrument,contract, or anticipated purchase determines the amount, maturity, and otherspecifics of the hedge. If a derivative contract is entered into, we eitherdetermine that it is an economic hedge or we designate the derivative as a cashflow or fair value hedge. We formally document all relationships betweenhedging instruments and the hedged item, as well as our risk managementobjectives and strategy for undertaking various hedged transactions. For thosederivatives designated as cash flow or fair value hedges, we formally assess,both at the hedge’s inception and on an ongoing basis, whether the derivativesthat are used in hedging transactions are highly effective in offsettingchanges in the hedged items. The ineffective portion of hedging transactions isrecognized in current income (loss).

 

In accordance with Statement of Financial AccountingStandards (SFAS) No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheets 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 “Net 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. We manageinterest rate risk on our variable-rate debt by entering into interest rateswaps. At March 31, 2006, the estimated current market value of ourfixed-rate debt, including our note payable to related party, based onthen-current interest rates for similar obligations with like maturities, wasapproximately $21.8 million less than the amount reported on ourConsolidated Balance Sheet.

 

Our obligations under our senior secured creditfacilities and senior notes expose us to changes in short-term interest ratessince interest rates on this debt are variable. In November 2004, weentered

 

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into four interest rate swaps with a total notional amount of$550 million to hedge the exposure to interest rate fluctuationsassociated with our Tranche B term loan (which was paid in full in April2005). The swaps on $300 million of our Tranche B term loan werefixed at an average pay rate of 3.3% and expire in December 2007, while theswaps on $250 million of our Tranche B term loan were fixed at anaverage pay rate of 3.5% and expire in December 2008. With the anticipatedrepayment of 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 the Facilities, and prior to the redesignation, recognized$5.3 million of noncash expense in “Change in fair value of interest rateswaps” in our Consolidated Statement of Loss. The net $9.9 million ofvalue that was recorded in “Other assets” on our Consolidated Balance Sheetresults in higher interest expense over the remaining life of the interest rateswaps. The four interest rate swaps with a total notional amount of$550 million gave us effective interest rates of 5.3% and 4.9% on thatdebt at March 31, 2006, and December 31, 2005, respectively. Changesin the fair value of the interest rate swaps were recorded in “Othercomprehensive income.” Amounts realized during the period were reclassified to “Interestexpense” as interest expense was recognized on the LIBOR-based debt. Ineffectivenessrelated to the redesignated hedges was not significant. At March 31, 2006,and December 31, 2005, the fair market values of these instruments were$20.0 million and $16.9 million, respectively, which we recorded in “Otherassets” on our Consolidated Balance Sheets.

 

In November 2004, we also entered into two 3.7%interest rate swaps with an aggregate notional amount of $250 million tohedge the exposure to floating-rate interest rate risks associated with oursenior unsecured floating-rate notes, which gave us effective interest rates onthat debt of 6.6% at both March 31, 2006, and December 31, 2005.These swaps expire in October 2009. These swaps were designated as cash flowhedges. Accordingly, changes in the fair value of the interest rate swaps wererecorded in “Other comprehensive income.” Amounts realized during the periodwere reclassified to “Interest expense” as interest expense was recognized onthe LIBOR-based debt. There was no ineffectiveness related to thesehedges. At March 31, 2006, and December 31, 2005, the fair market valuesof these instruments were $12.2 million and $9.3 million, which werecorded in “Other assets” on our Consolidated Balance Sheets.

 

For the three months ended March 31, 2006,amounts reclassified to “Interest expense” for all of our cash flow hedges decreased interest expense$2.1 million, compared with a $1.9 million increase in interestexpense for the same period in 2005. At March 31, 2006, assuming no changein interest rates, $7.1 million would be reclassified as a decrease ininterest expense during the remainder of 2006.

 

In April 2006, weunwound our 3.3% $300 million interest rate swap agreements that hedgedour exposure to interest rate fluctuations associated with our Facilities. Inaddition, we reset the fixed interest rate we pay on the remaining$250 million of interest rate swap agreements under our Facilities from3.5% to 4.75%, and reset the fixed interest rate we pay on $250 million ofinterest rate swap agreements related to our senior unsecured floating-ratenotes to 4.75%, up from the previous 3.7% rate. In exchange for suchterminations and rate resets, we received $25.6 million, which will beused for general corporate purposes. We will reclassify the $25.6 millionout of “Accumulated other comprehensive income” as a reduction of interestexpense over the periods the previously hedged interest payments affectearnings.

 

*Energy Risk*

 

We enter into natural gas swaps to hedge the variablecash flow risk of natural gas purchases to a fixed price. As of March 31,2006, we had entered into swap agreements to hedge the variable cash flow riskof natural gas purchases for the period of April 2006 through February 2007. Wedesignated all of the swaps as cash flow hedges. Accordingly, changes in thefair value of these swaps were recorded in “Other comprehensive income.”Amounts realized during the period were reclassified to “Materials, labor, andother operating expenses” in our Consolidated Statement of Income as naturalgas was consumed. Amounts reclassified in the three months ended March 31,2006, increased “Materials, labor, and other operating expenses”$0.2 million. Assuming no change in natural gas prices, $0.2 millionwould be reclassified as an increasein “Materials, labor, and other operating expenses” during the remainder of2006. At March 31, 2006, we recorded the $1.0 million fair marketvalue of these instruments in “Receivables, Other” on our Consolidated BalanceSheet. At December 31, 2005, we recorded a

 

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$0.1 million liability related tothese instruments in “Accrued liabilities, Other.” Ineffectiveness related tothese hedges was not significant.

 

*ForeignCurrency Risk*

 

We occasionally enter into foreign exchange contracts to hedge againstfluctuations in foreign currency exchange rates. These contracts allow us tohedge certain transactions, including purchases denominated in foreigncurrencies, which allows us to manage the volatility associated with thesetransactions and to protect us from currency fluctuations between the contractdate and ultimate settlement of the hedged transaction. As of March 31,2006, we had no foreign exchange contracts outstanding.

 

In April 2006, we entered into a series of forward foreign exchangecontracts to hedge our commitment to purchase capital equipment denominated ineuros. These contracts are for atotal amount of 12.4 million euros with settlement dates beginning inApril 2006 and extending through April 2007. We are accounting for this as afair value hedge, and we will recognize any gains or losses from remeasuringthe forward contract at fair value in the Consolidated Statement of Income(Loss). We will also adjust the commitment for the capital equipment purchasefor any gains or losses attributable to fluctuations in foreign currency exchangerates.

 

***ITEM 4.******               ******CONTROLS AND PROCEDURES***

 

Attached asexhibits to this Form 10-Q are certifications of our chief executive officerand chief financial officer. This Controls and Procedures section includesinformation concerning the disclosure controls and procedures referred to inthe attached certifications. You should read this section in conjunction withthe certifications.

 

*Evaluation ofDisclosure Controls and Procedures*

 

We maintain “disclosurecontrols and procedures,” as Rule 13a-15(e) under the Securities and ExchangeAct of 1934, as amended, defines such term. We have designed these controls andprocedures to reasonably assure that information required to be disclosed inour reports filed under the Exchange Act, such as this Form 10-Q, is recorded,processed, summarized, and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. We have also designed ourdisclosure controls to provide reasonable assurance that such information isaccumulated and communicated to our senior management, including the chiefexecutive officer (CEO) and chief financial officer (CFO), as appropriate, toallow them to make timely decisions regarding our required disclosures.

 

We evaluate theeffectiveness of our disclosure controls and procedures on at least a quarterlybasis. A number of key components in our internal control system assist us inthese evaluations. Since the company’s inception, we have had a disclosurecommittee. The committee meets regularly and includes input from our seniormanagement, general counsel, internal audit staff, and independent accountants.This committee is charged with considering and evaluating the materiality ofinformation and reviewing the company’s disclosure obligations on a timelybasis. Our internal audit department also evaluates components of our internalcontrols on an ongoing basis. Our intent is to maintain disclosure controls andprocedures as dynamic processes that change as our business and workingenvironments change.

 

Our management,with the participation of our CEO and CFO, has evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the fiscal quarter covered by the quarterly report on this Form 10-Q.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 first quarter of fiscal 2006 that materiallyaffected, or would be reasonably likely to materially affect, the company’sinternal control over financial reporting.

 

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*Limitations on theEffectiveness of Controls and Procedures*

 

In designing andevaluating our disclosure controls and procedures, we recognized thatdisclosure controls and procedures, no matter how well-conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thedisclosure controls and procedures are met. Additionally, in designingdisclosure controls and procedures, our management necessarily was required toapply its judgment in evaluating the cost-benefit relationship of possibledisclosure controls and procedures. We have also designed our disclosurecontrols and procedures based in part upon assumptions about the likelihood offuture events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions.

 

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**PART II—OTHER INFORMATION**

*** ***

***ITEM 1.******                                                ******LEGAL PROCEEDINGS***

 

*LegalProceedings*

 

OfficeMax agreed to retain responsibility foressentially all legal proceedings related to our businesses that arose beforeOctober 29, 2004. We did, however, assume responsibility for a smallnumber of legal proceedings that arose before this date. We are also a party toroutine legal proceedings that have arisen in our businesses afterOctober 29, 2004. Management does not believe any of the legal proceedingsfor which we have responsibility will have a material adverse effect on ourfinancial position, results of operations, or cash flows.

 

*EnvironmentalMatters*

 

We are not currently involved in any materialenvironmental proceedings. OfficeMax retained responsibility for environmentalclaims and liabilities related to businesses, facilities, and other assets notpurchased by us in the Forest Products Acquisition. In addition, OfficeMaxindemnifies us for hazardous substance releases and other environmentalregulatory violations that relate to the businesses we purchased and thatoccurred before the Forest Products Acquisition or arose from pre-ForestProducts 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 1A.******                                       ******RISK FACTORS***

 

This Quarterly Report on Form 10-Q containsforward-looking statements. Statements that are not historical or currentfacts, including statements about our expectations, anticipated financialresults, projected capital expenditures, and future business prospects, areforward-looking statements. You can identify these statements by our use ofwords such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,”and other similar expressions. You can find examples of these statementsthroughout this report, including the Operational Outlook section of Management’sDiscussion and Analysis of Financial Condition and Results of Operations. Wecannot guarantee that our actual results will be consistent with theforward-looking statements we make in this report. You should review carefullythe risk factors listed in “Item 1A. Risk Factors” of our 2005 Annual Report on Form 10-K, as well asthose factors listed in other documents we file with the SEC. There have beenno material changes to our risk factors for the three months endedMarch 31, 2006, from those listed in our 2005 Annual Report onForm 10-K.

 

***ITEM 1B.******                                       ******UNRESOLVED STAFF COMMENTS***

 

None.

 

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***ITEM 2.******                                                ******UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS***

 

On April 3, 2006, our parent company, FPH, sold 335,000 of its Series Bcommon units to two members of management for a total purchase price of$670,000. On the same day, FPH granted a total of 7,900,000 Series C commonunits, at no cost, to four members of management and to the four nonaffiliatedmembers of our board of directors. We issued 335,000 Series B common unitsand 7,900,000 Series C common units in our company to FPH to reflectmanagement’s equity interest in the newly issued FPH units. The proceedsfrom this issuance were used for general corporate purposes. After theseissuances, our equity units issued and outstanding were as follows:

 
| Series A Common Units |   | 66,000,000  |
|-----------------------|--------|-------------|
| Series B Common Units |   | 547,777,475 |
| Series C Common Units |   | 39,810,860  |

 

As of April 3, 2006, OfficeMax owned all of the Series A equity units.FPH and OfficeMax owned 438,777,475 and 109,000,000 Series B equity units,respectively. FPH holds all 39,810,860 Series C equity units. Because weare a limited liability company, our equity units are neither listed norpublicly traded in any market.

 

***ITEM 3.******                                                ******DEFAULTS UPON SENIOR SECURITIES***

 

None.

*** ***

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

 

Not applicable.

 

***ITEM 5.******                                                ******OTHER INFORMATION***

 

None.

 

***ITEM 6.******                                                ******EXHIBITS***

 

Required exhibits are listed in the Index to Exhibitsand are incorporated by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|              | BOISE CASCADE HOLDINGS,  L.L.C.       |
|-------------------|---------------------------------------|
|              |                                  |
|              | /s/ Samuel K. Cotterell               |
|              | Samuel K. Cotterell                   |
|              | Vice President and Controller         |
|              | (As Duly Authorized Officer and Chief |
|              | Accounting Officer)                   |
|              |                                  |
| Date: May 4, 2006 |                                  |

 

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**BOISECASCADE HOLDINGS, L.L.C.**

** **

**INDEX TOEXHIBITS**

 

Filed With the QuarterlyReport on Form 10-Q for the Quarter Ended March 31, 2006

 
| **Number** | ** ** | **Description**                                                                                     |
|------------|------------|-----------------------------------------------------------------------------------------------------|
| 3          |       | Second Amended and Restated Certificate of  Incorporation of Boise Land & Timber Holdings Corp. |
| 12         |       | Ratio of Earnings to Fixed Charges                                                                  |
| 31.1       |       | CEO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                        |
| 31.2       |       | CFO Certification Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                        |
| 99         |       | Financial Statements of Boise Land & Timber  Holdings Corp.                                     |

 

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