**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **
| ý | **QUARTERLY REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|----------------------------------------------------------------------------------------------|

 

**For the quarterly period endedJune 30, 2005**

 
| o | **TRANSITION REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

 

**For thetransition period from ________________ to ________________**

 

**CommissionFile Number:   333-122770**

 

**BOISECASCADE COMPANY**(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | **20-2807265**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (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**                             |
| (Address of principal  executive offices)                       | (Zip Code)                            |
|                                                            |                                  |
| **(208)  384-6161**                                             |
| (Registrant’s telephone  number, including area code)      |

 

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 whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Securities Exchange Act of 1934).      Yes o     No ý

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                                   | ** ** | **Shares Outstanding as of July 31, 2005** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| Class A common  stock, $0.01 par value |       | 0                                               |       |
| Class B common  stock, $0.01 par value |       | 41,304,647                                      |       |
| Class C common  stock, $0.01 par value |       | 2,671,329                                       |       |

 

----

** **

**Table ofContents**

 
| **PART  I—FINANCIAL INFORMATION** |   |
|----------------------------------------|--------|
|                                   |   |   |   |   |
| Item  1.                               |   | Consolidated  Financial Statements |   |   |
|                                   |   | Notes  to Unaudited Quarterly Consolidated Financial Statements |   |   |
|                                   |   | 1. | Basis of  Presentation |   |   |
|                                   |   | 2. | Purchase  of OfficeMax’s Paper and Forest Products Assets |   |   |
|                                   |   | 3. | Transactions  With Related Parties |   |   |
|                                   |   | 4. | Vendor  and Customer Rebates and Allowances |   |   |
|                                   |   | 5. | Other  (Income) Expense, Net |   |   |
|                                   |   | 6. | Income Taxes |   |   |
|                                   |   | 7. | Leases |   |   |
|                                   |   | 8. | Investments  in Equity Affiliates |   |   |
|                                   |   | 9. | Inventories |   |   |
|                                   |   | 10. | Goodwill  and Intangible Assets |   |   |
|                                   |   | 11. | Debt |   |   |
|                                   |   | 12. | Financial  Instruments |   |   |
|                                   |   | 13. | New  and Recently Adopted Accounting Standards |   |   |
|                                   |   | 14. | Retirement  and Benefit Plans |   |   |
|                                   |   | 15. | Segment  Information |   |   |
|                                   |   | 16. | Commitments  and Guarantees |   |   |
|                                   |   | 17. | Consolidating  Guarantor and Non-Guarantor Financial Information |   |   |
|                                   |   | 18. | Legal  Proceedings and Contingencies |   |   |
|                                   |   | 19. | Pro Forma  Adjustments |   |   |
|                                   |   |   |   |   |   |
| Item  2.                               |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
|                                   |   | Purchase  of OfficeMax’s Paper and Forest Products Assets |   |   |
|                                   |   | Our Segments |   |   |
|                                   |   | Results of  Operations |   |   |
|                                   |   | Outlook |   |   |
|                                   |   | Liquidity  and Capital Resources |   |   |
|                                   |   | Inflationary  and Seasonal Influences |   |   |
|                                   |   | Environmental |   |   |
|                                   |   | Critical  Accounting Estimates |   |   |
|                                   |   | Cautionary  and Forward-Looking Statements |   |   |
|                                   |   |   |   |   |   |
| Item 3.                           |   | Quantitative and Qualitative  Disclosures About Market Risk |   |
|                                   |   |   |   |   |
| Item 4.                           |   | Controls and Procedures |   |
|                                   |   |   |   |   |
| **PART II—OTHER INFORMATION**     |
|                                   |   |   |   |   |
| Item 1.                           |   | Legal Proceedings |   |
|                                   |   |   |   |   |
| Item 6.                           |   | Exhibits |   |
|                                        |        |  |  |  |  |  |

 

ii

 

----

 

**PART 1—FINANCIALINFORMATION**

 

***ITEM 1.   CONSOLIDATED FINANCIALSTATEMENTS***

 

**Boise Cascade Company**

**Consolidated Statements of Income(Loss)**

(unaudited,in thousands)

** **
| ** **                                    | ** ** | **Boise**                      | ** **  | **Predecessor** | ** ** |
|-----------------------------------------------|------------|--------------------------------|-------------|-----------------|------------|
| ** **                                    | ** ** | **Three Months Ended June 30** | ** **  |
| ** **                                    | ** ** | **2005**                       | ** **  | **2004**        | ** ** |
| **Sales**                                     |       |                           |        |            |       |
| Trade                                         |       | $                              | 1,352,466   |            | $          | 1,396,090 |   |
| Related parties                               |       | 142,145                        |        | 135,496         |       |
|                                          |       | 1,494,611                      |        | 1,531,586       |       |
|                                          |       |                           |        |            |       |
| **Costs and expenses**                        |       |                           |        |            |       |
| Materials, labor and other operating expenses |       | 1,299,409                      |        | 1,303,439       |       |
| Fiber costs from related parties              |       | —                         |        | 28,217          |       |
| Depreciation, amortization and depletion      |       | 31,712                         |        | 58,912          |       |
| Selling and distribution expenses             |       | 64,426                         |        | 63,549          |       |
| General and administrative expenses           |       | 18,036                         |        | 22,590          |       |
| Other (income) expense, net                   |       | 3,661                          |        | 3,469           |       |
|                                          |       | 1,417,244                      |        | 1,480,176       |       |
|                                          |       |                           |        |            |       |
| **Income from operations**                    |       | 77,367                         |        | 51,410          |       |
|                                          |       |                           |        |            |       |
| Equity in net income of affiliate             |       | —                         |        | 1,244           |       |
| Gain on sale of equity affiliate              |       | —                         |        | 46,498          |       |
| Foreign exchange loss                         |       | (248                           | )           | (556            | )          |
| Change in fair value of interest rate swaps   |       | (5,314                         | )           | —          |       |
| Interest expense                              |       | (74,365                        | )           | (22,845         | )          |
| Interest income                               |       | 434                            |        | 168             |       |
|                                          |       | (79,493                        | )           | 24,509          |       |
|                                          |       |                           |        |            |       |
| **Income (loss) before income taxes**         |       | (2,126                         | )           | 75,919          |       |
| Income tax provision                          |       | (12,343                        | )           | (29,426         | )          |
| **Net income (loss)**                         | ** ** | **$**                          | **(14,469** | **)**           | **$**      | **46,493** | ** ** |
|                                          |       |                           |        |            |       |
| **Pro forma income data—Note 19**        |       |                           |        |            |       |
| Net loss as reported                          |       | $                              | (14,469     | )               |       |   |
| Pro forma income taxes                        |       | 12,508                         |        |            |       |
| Pro forma net loss                            | ** ** | **$**                          | **(1,961**  | )               |       |   |
|                                          |       |                           |        |            |       |

 

 

See accompanying notes to unaudited quarterly consolidated financial statements.

 

1

----

 

**Boise Cascade Company**

**Consolidated Statements of Income**

(unaudited,in thousands)

** **
| ** **                                    | ** ** | **Boise**                    | ** ** | **Predecessor** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------|------------|
| ** **                                    | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                    | ** ** | **2005**                     | ** ** | **2004**        | ** ** |
| **Sales**                                     |       |                         |       |            |       |
| Trade                                         |       | $                            | 2,634,401  |            | $          | 2,583,528 |   |
| Related parties                               |       | 292,481                      |       | 256,093         |       |
|                                          |       | 2,926,882                    |       | 2,839,621       |       |
|                                          |       |                         |       |            |       |
| **Costs and expenses**                        |       |                         |       |            |       |
| Materials, labor and other operating expenses |       | 2,520,067                    |       | 2,418,586       |       |
| Fiber costs from related parties              |       | 17,609                       |       | 56,059          |       |
| Depreciation, amortization and depletion      |       | 62,349                       |       | 116,648         |       |
| Selling and distribution expenses             |       | 126,762                      |       | 123,604         |       |
| General and administrative expenses           |       | 37,240                       |       | 42,057          |       |
| Other (income) expense, net                   |       | 3,788                        |       | 12,633          |       |
|                                          |       | 2,767,815                    |       | 2,769,587       |       |
|                                          |       |                         |       |            |       |
| **Income from operations**                    |       | 159,067                      |       | 70,034          |       |
|                                          |       |                         |       |            |       |
| Equity in net income of affiliate             |       | —                       |       | 6,308           |       |
| Gain on sale of equity affiliate              |       | —                       |       | 46,498          |       |
| Foreign exchange loss                         |       | (1,041                       | )          | (415            | )          |
| Change in fair value of interest rate swaps   |       | 9,886                        |       | —          |       |
| Interest expense                              |       | (106,444                     | )          | (43,449         | )          |
| Interest income                               |       | 1,784                        |       | 325             |       |
|                                          |       | (95,815                      | )          | 9,267           |       |
|                                          |       |                         |       |            |       |
| **Income before income taxes**                |       | 63,252                       |       | 79,301          |       |
| Income tax provision                          |       | (12,982                      | )          | (30,701         | )          |
| **Net income**                                | ** ** | **$**                        | **50,270** | ** **      | **$**      | **48,600** | ** ** |
|                                          |       |                         |       |            |       |
|                                          |       |                         |       |            |       |
| **Pro forma income data—Note 19**        | ** ** | ** **                   | ** ** | ** **      | ** ** |
| Net income as reported                        |       | $                            | 50,270     |            |       |   |
| Pro forma income taxes                        |       | (13,331                      | )          |            |       |
| Pro forma net income                          | ** ** | **$**                        | **36,939** |            |       |   |
|                                          |       |                         |       |            |       |

** **

 

See accompanying notes to unaudited quarterly consolidated financial statements.

 

2

----

 

**BoiseCascade Company**

#### **Consolidated Balance Sheets**

(unaudited,in thousands)

 
| ** **                                        | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------|------------|--------------|---------------|------------------|------------|
| ** **                                        | ** ** | **2005**     | ** **    | **2004**         | ** ** |
| **ASSETS**                                        | ** ** | ** **   | ** **    | ** **       | ** ** |
|                                              |       |         |          |             |       |
| **Current**                                       |       |         |          |             |       |
| Cash and cash equivalents                         |       | $            | 129,198       |             | $          | 163,345 |   |
| Receivables                                       |       |         |          |             |       |
| Trade, less  allowances of $1,932 and $2,323 |       | 370,180      |          | 276,668          |       |
| Related parties                                   |       | 40,690       |          | 42,055           |       |
| Other                                             |       | 16,397       |          | 19,174           |       |
| Inventories                                       |       | 628,878      |          | 594,869          |       |
| Deferred income taxes                             |       | 36,734       |          | —           |       |
| Other                                             |       | 19,615       |          | 15,621           |       |
|                                              |       | 1,241,692    |          | 1,111,732        |       |
|                                              |       |         |          |             |       |
| **Property**                                      |       |         |          |             |       |
| Property and equipment                            |       |         |          |             |       |
| Land and land  improvements                       |       | 82,843       |          | 83,123           |       |
| Buildings and  improvements                       |       | 211,514      |          | 204,704          |       |
| Machinery and  equipment                          |       | 1,259,509    |          | 1,196,978        |       |
|                                              |       | 1,553,866    |          | 1,484,805        |       |
|                                              |       |         |          |             |       |
| Accumulated depreciation                          |       | (77,972      | )             | (18,956          | )          |
|                                              |       | 1,475,894    |          | 1,465,849        |       |
| Fiber farms and timber deposits                   |       | 50,154       |          | 44,646           |       |
|                                              |       | 1,526,048    |          | 1,510,495        |       |
|                                              |       |         |          |             |       |
| **Note receivable from related party**            |       | —       |          | 157,509          |       |
| **Deferred financing costs**                      |       | 38,211       |          | 84,054           |       |
| **Goodwill**                                      |       | 7,486        |          | 18,390           |       |
| **Intangible assets**                             |       | 33,030       |          | 34,357           |       |
| **Other assets**                                  |       | 22,642       |          | 15,532           |       |
| **Total assets**                                  | ** ** | **$**        | **2,869,109** | ** **       | **$**      | **2,932,069** | ** ** |

 

 

See accompanying notes to unaudited quarterly consolidated financial statements.

3

----

 

**Boise Cascade Company**

**Consolidated Balance Sheets(continued)**

(unaudited, in thousandsexcept for equity units and shares)

 
| ** **                                                                                                                           | ** ** | **June 30,** | ** **    | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|---------------|------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**     | ** **    | **2004**         | ** ** |
| **LIABILITIES  AND CAPITAL**                                                                                                         |       |         |          |             |       |
|                                                                                                                                 |       |         |          |             |       |
| **Current**                                                                                                                          |       |         |          |             |       |
| Current portion  of long-term debt                                                                                                   |       | $            | 8,400         |             | $          | 13,300 |   |
| Income taxes  payable                                                                                                                |       | 3,591        |          | 272              |       |
| Accounts payable                                                                                                                     |       |         |          |             |       |
| Trade                                                                                                                                |       | 358,019      |          | 310,148          |       |
| Related parties                                                                                                                      |       | 172          |          | 150              |       |
| Accrued  liabilities                                                                                                                 |       |         |          |             |       |
| Compensation and  benefits                                                                                                           |       | 85,381       |          | 62,495           |       |
| Interest payable                                                                                                                     |       | 9,175        |          | 8,584            |       |
| Other                                                                                                                                |       | 49,007       |          | 43,359           |       |
|                                                                                                                                 |       | 513,745      |          | 438,308          |       |
|                                                                                                                                 |       |         |          |             |       |
| **Debt**                                                                                                                             |       |         |          |             |       |
| Long-term debt,  less current portion                                                                                                |       | 1,479,500    |          | 1,966,700        |       |
| Note payable to  related party                                                                                                       |       | 261,286      |          | —           |       |
|                                                                                                                                 |       | 1,740,786    |          | 1,966,700        |       |
|                                                                                                                                 |       |         |          |             |       |
| **Other**                                                                                                                            |       |         |          |             |       |
| Deferred income  taxes                                                                                                               |       | 44,100       |          | —           |       |
| Compensation and  benefits                                                                                                           |       | 143,207      |          | 133,648          |       |
| Other long-term  liabilities                                                                                                         |       | 31,928       |          | 23,573           |       |
|                                                                                                                                 |       | 219,235      |          | 157,221          |       |
|                                                                                                                                 |       |         |          |             |       |
| **Commitments  and contingent liabilities**                                                                                          |       |         |          |             |       |
|                                                                                                                                 |       |         |          |             |       |
| **Capital**                                                                                                                          |       |         |          |             |       |
| Series A  equity units—no par value; 66,000,000 units authorized; 0 and  66,000,000 outstanding                  |       | —       |          | 36,868           |       |
| Series B  equity units—no par value; 549,000,000 units authorized; 0 and  549,000,000 outstanding                     |       | —       |          | 332,972          |       |
| Series C  equity units—no par value; 38,165,775 units authorized; 0 and  35,600,120 outstanding                       |       | —       |          | —           |       |
| Series A  preferred stock—$0.01 par value; 66,000,000 shares authorized; 66,000,000 and  0 shares issued and outstanding   |       | 38,339       |          | —           |       |
| Class A  common stock—$0.01 par value; 150,000,000 shares authorized; 0 and  0 shares issued and outstanding     |       | —       |          | —           |       |
| Class B common  stock—$0.01 par value; 100,000,000 shares authorized; 41,304,647 and  0 shares issued and outstanding |       | 413          |          | —           |       |
| Class C common  stock—$0.01 par value; 10,000,000 shares authorized; 2,671,329 and  0 shares issued and outstanding        |       | 27           |          | —           |       |
| Additional  paid-in capital                                                                                                          |       | 335,587      |          | —           |       |
| Retained  earnings                                                                                                                   |       | 17,582       |          | —           |       |
| Accumulated  other comprehensive income                                                                                              |       | 3,395        |          | —           |       |
| **Total  capital**                                                                                                                   |       | 395,343      |          | 369,840          |       |
|                                                                                                                                 |       |         |          |             |       |
| **Total  liabilities and capital**                                                                                                   | ** ** | **$**        | **2,869,109** | ** **       | **$**      | **2,932,069** | ** ** |
|                                                                                                                                 |       |         |          |             |       |

** **

 

See accompanying notes to unaudited quarterly consolidated financial statements.

 

4

----

 

**Boise Cascade Company**

**Consolidated Statements of CashFlows**

(unaudited,in thousands)

** **
| ** **                                                                            | ** ** | **Boise**                    | ** **  | **Predecessor** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------|------------|
| ** **                                                                            | ** ** | **Six Months Ended June 30** | ** **  |
| ** **                                                                            | ** ** | **2005**                     | ** **  | **2004**        | ** ** |
| **Cash  provided by (used for) operations**                                           |       |                         |        |            |       |
| Net income                                                                            |       | $                            | 50,270      |            | $          | 48,600 |   |
| Items in net income  not using (providing) cash                                       |       |                         |        |            |       |
| Equity in net  income of affiliate                                                    |       | —                       |        | (6,308          | )          |
| Depreciation,  depletion and amortization of deferred financing costs and other costs |       | 110,845                      |        | 116,648         |       |
| Related-party  interest expense                                                       |       | 8,315                        |        | —          |       |
| Deferred income  tax provision                                                        |       | 8,681                        |        | 2,729           |       |
| Pension and  other postretirement benefit expense                                     |       | 14,266                       |        | 42,087          |       |
| Change in fair  value of interest rate swaps                                          |       | (9,886                       | )           | —          |       |
| Management  equity units expense                                                      |       | 1,562                        |        | —          |       |
| Gain on sales of  assets                                                              |       | —                       |        | (46,745         | )          |
| Other                                                                                 |       | 1,636                        |        | 415             |       |
| Decrease  (increase) in working capital                                               |       |                         |        |            |       |
| Receivables                                                                           |       | (89,370                      | )           | (98,972         | )          |
| Inventories                                                                           |       | (34,009                      | )           | (25,948         | )          |
| Accounts payable  and accrued liabilities                                             |       | 67,184                       |        | 76,835          |       |
| Pension and  other postretirement benefit payments                                    |       | (315                         | )           | (42,087         | )          |
| Income taxes  payable                                                                 |       | 3,591                        |        | 1               |       |
| Other                                                                                 |       | 561                          |        | (1,525          | )          |
| Cash provided by  operations                                                          |       | 133,331                      |        | 65,730          |       |
|                                                                                  |       |                         |        |            |       |
| **Cash  provided by (used for) investment**                                           |       |                         |        |            |       |
| Expenditures for  property and equipment                                              |       | (73,289                      | )           | (82,260         | )          |
| Repayment of  note receivable from related party                                      |       | 157,509                      |        | —          |       |
| Sales of assets                                                                       |       | 11,672                       |        | 103,229         |       |
| Other                                                                                 |       | (251                         | )           | (7,343          | )          |
| Cash provided by  investment                                                          |       | 95,641                       |        | 13,626          |       |
|                                                                                  |       |                         |        |            |       |
| **Cash  provided by (used for) financing**                                            |       |                         |        |            |       |
| Tax  distributions to members                                                         |       | (19,604                      | )           | —          |       |
| Note payable to  related party                                                        |       | 251,312                      |        | —          |       |
| Payments of  long-term debt                                                           |       | (1,332,100                   | )           | —          |       |
| Issuances of  long-term debt                                                          |       | 840,000                      |        | —          |       |
| Net equity  transactions with OfficeMax                                               |       | —                       |        | (45,191         | )          |
| Net debt  payments to OfficeMax                                                       |       | —                       |        | (34,165         | )          |
| Other                                                                                 |       | (2,727                       | )           | —          |       |
| Cash used for  financing                                                              |       | (263,119                     | )           | (79,356         | )          |
|                                                                                  |       |                         |        |            |       |
| **Decrease  in cash and cash equivalents**                                            |       | (34,147                      | )           | —          |       |
|                                                                                  |       |                         |        |            |       |
| **Balance  at beginning of the period**                                               |       | 163,345                      |        | —          |       |
|                                                                                  |       |                         |        |            |       |
| **Balance  at end of the period**                                                     | ** ** | **$**                        | **129,198** | ** **      | **$**      | **—** | ** ** |
|                                                                                  |       |                         |        |            |       |

** **

 

See accompanying notes tounaudited quarterly consolidatedfinancial statements.

 

5

----

 

**Boise Cascade Company**

**Consolidated Statements ofCapital**

(unaudited, in thousands)

 
| ** **                                                      | ** ** | **Series A Equity Units** | ** ** | **Series B Equity Units** | ** ** | **Series C Equity Units** | ** ** | **Total Capital** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|-------------------|------------|
| ** **                                                      | ** ** | **Units**                      | ** ** | **Amount**                     | ** ** | **Units**                      | ** ** | **Amount**        | ** ** | **Units** | ** ** | **Amount** | ** ** | ** ** |
| Balance at  December 31, 2004                         |       | 66,000                         |       | $                              | 36,868     |                           | 549,000    |              | $          | 332,972 |   | 35,600 |   | $ | — |   | $ | 369,840 |   |
|                                                            |       |                           |       |                           |       |                           |       |              |       |   |   |   |   |   |   |
| Net income                                                      |       | —                         |       | —                         |       | —                         |       | 29,153            |       | — |   | 3,099 |   | 32,252 |   |
| Management  equity units expense                                |       | —                         |       | —                         |       | —                         |       | 1,041             |       | — |   | — |   | 1,041 |   |
| Other  comprehensive income (a)                            |       |                           |       |                           |       |                           |       |              |       |   |   |   |   |   |   |
| Cash flow hedges                                                |       | —                         |       | —                         |       | —                         |       | (310              | )          | — |   | — |   | (310 | ) |
| Paid-in-kind  dividend                                          |       | —                         |       | 1,035                          |       | —                         |       | (1,035            | )          | — |   | — |   | — |   |
| Tax  distributions to members                                   |       | —                         |       | —                         |       | —                         |       | (21,966           | )          | — |   | (1,423 | ) | (23,389 | ) |
| Repurchase of  equity units                                     |       | —                         |       | —                         |       | (100                           | )          | (55               | )          | (60 | ) | — |   | (55 | ) |
| Equity units  exchanged for preferred and common stock (b) |       | (66,000                        | )          | (37,903                        | )          | (548,900                       | )          | (339,800          | )          | (35,540 | ) | (1,676 | ) | (379,379 | ) |
| **Balance  at May 9, 2005**                           | ** ** | **—**                     | ** ** | **$**                          | **—** | ** **                     | **—** | ** **        | **$**      | **—** | ** ** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 
| ** **                                | ** ** | **Series A Preferred Stock** | ** ** | **Class B Common Stock** | ** ** | **Class C Common Stock** | ** ** | **Additional Paid-in** | ** ** | **Retained** | ** ** | **Accumulated Other Comprehensive** | ** ** | **Total**   | ** ** |
|-------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|-------------------------------|------------|------------------------|------------|--------------|------------|-------------------------------------|------------|-------------|------------|
| ** **                                | ** ** | **Shares**                        | ** ** | **Amount**                         | ** ** | **Shares**                    | ** ** | **Amount**             | ** ** | **Shares**   | ** ** | **Amount**                          | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Income** | ** ** | **Capital** | ** ** |
| Balance at May 9, 2005 (b) |       | 66,000                            |       | $                                  | 37,903     |                          | 41,307     |                   | $          | 413          |       | 2,675                               |       | $           | 27         |   | $ | 335,085 |   | $ | — |   | $ | 5,951 |   | $ | 379,379 |   |
|                                      |       |                              |       |                               |       |                          |       |                   |       |         |       |                                |       |        |       |   |   |   |   |   |   |
| Net income                                |       | —                            |       | —                             |       | —                        |       | —                 |       | —       |       | —                              |       | —      |       | 18,018 |   | — |   | 18,018 |   |
| Management  equity units expense          |       | —                            |       | —                             |       | —                        |       | —                 |       | —       |       | —                              |       | 521         |       | — |   | — |   | 521 |   |
| Paid-in-kind  dividend                    |       | —                            |       | 436                                |       | —                        |       | —                 |       | —       |       | —                              |       | —      |       | (436 | ) | — |   | — |   |
| Other  comprehensive income (a)           |       |                              |       |                               |       |                          |       |                   |       |         |       |                                |       |        |       |   |   |   |   |   |   |
| Cash flow hedges                          |       | —                            |       | —                             |       | —                        |       | —                 |       | —       |       | —                              |       | —      |       | — |   | (2,556 | ) | (2,556 | ) |
| Repurchase of  common stock               |       | —                            |       | —                             |       | (2                            | )          | —                 |       | (4           | )          | —                              |       | (19         | )          | — |   | — |   | (19 | ) |
| **Balance  at June 30, 2005**   | ** ** | **66,000**                        | ** ** | **$**                              | **38,339** | ** **                    | **41,305** | ** **             | **$**      | **413**      | ** ** | **2,671**                           | ** ** | **$**       | **27**     | ** ** | **$** | **335,587** | ** ** | **$** | **17,582** | ** ** | **$** | **3,395** | ** ** | **$** | **395,343** | ** ** |
|                                      |       |                              |       |                               |       |                          |       |                   |       |         |       |                                |       |        |       |   |   |   |   |   |   |

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(a)                                  Comprehensiveincome (loss), net of taxes for the three and six months ended June 30,2005, was a loss of $18.5 million and income of $47.4 million.

 

(b)                                 On May 9, 2005, we converted to acorporation from a limited liability company. In connection with converting toa corporation, the Series A equity units were exchanged for shares of Series Apreferred stock, the Series B equity units were exchanged for shares ofClass B common stock, and the Series C equity units were exchangedfor shares of Class C common stock. The Series A equity units wereexchanged at a 1:1 ratio for shares of Series A preferred stock, andthe Series B and C equity units were exchanged at a .075:1 ratio forshares of Class B and C common stock. The balance at May 9, 2005,reflects this conversion.

 

See accompanying notes to unaudited quarterly consolidated financial statements.

 

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***Notes to Unaudited Quarterly Consolidated Financial Statements***

***1.             Basis ofPresentation***

                OnMay 9, 2005, we converted to a corporation from a limited liabilitycompany and changed our name from Boise Cascade Holdings, L.L.C., to BoiseCascade Company. In connection with converting to a corporation, the equityunits held by our owners on May 9 were exchanged for shares of preferredand common stock (see Consolidated Statements of Capital), and we became ataxable entity (see Note 6, Income Taxes).

On May 19, 2005, the Securities and ExchangeCommission (SEC) declared our registration statement, filed on Form S-1(Registration No. 333-122770) as amended, under the Securities Act of 1933,effective. Although we have not issued shares under this registrationstatement, we became a registrant with the SEC, and accordingly, began filing periodicreports with them. These quarterly consolidated financial statements and notesshould be read together with the consolidated financial statements and notesfiled with the SEC in our registration statement on Form S-1, as amended,on May 18, 2005 (Registration Statement).

                Asused in these consolidated financial statements, the terms “Boise” and “we”refer to Boise Cascade Company and its consolidated subsidiaries and theirpredecessors in interest. The terms “Boise Forest Products Operations” and “predecessor”refer to the paper and forest products assets of OfficeMax Incorporated(OfficeMax) that we acquired on October 29, 2004, from OfficeMax. OfficeMaxwas formerly known as Boise Cascade Corporation. See Note 2, Purchase ofOfficeMax’s Paper and Forest Products Assets, of the Notes to ConsolidatedFinancial Statements, in our Registration Statement.

                We are a diversified, North American, paper andforest products company. We are headquartered in Boise, Idaho. The unauditedquarterly consolidated financial statements present the financial results ofBoise for the three and six months ended June 30, 2005, and the results ofBoise Forest Products Operations for the three and six months ended June 30,2004. We have five reportable segments: Paper, Packaging & Newsprint, Wood Products, Building MaterialsDistribution, and Corporate and Other. Historically, OfficeMax conducted BoiseForest Products Operations in three segments: Boise Paper Solutions, Boise Building Solutions, and Corporate and Other.We have recast the financial statements of our predecessor included herein toconform to our current segment presentation. See Note 15, SegmentInformation, for additional information on our reportable segments.

                The predecessor financial statements include accountsspecifically attributed to Boise Forest Products Operations and a portion ofOfficeMax’s shared corporate general and administrative expenses. These sharedservices included, but were not limited to, finance, accounting, legal,information technology, and human resource functions. Some of OfficeMax’scorporate costs related solely to Boise Forest Products Operations and wereallocated in full to these operations. Shared corporate general andadministrative expenses not specifically identifiable to Boise Forest ProductsOperations have been allocated based on sales, assets, and labor costs. Thepredecessor financial statements also include an allocation of OfficeMax’sinterest expense based on average asset balances (see Note 11, Debt). Thepredecessor’s results have been or will be included in OfficeMax’s consolidatedtax returns. Income taxes in the predecessor periods of these consolidatedfinancial statements have been calculated as if Boise Forest ProductsOperations had been a separate taxable entity (see Note 6, Income Taxes). Informationon the allocations and related-party transactions is included in Note 3,Transactions With Related Parties.

                The predecessor financial information may not reflectwhat our results of operations would have been had we operated as a separatestand-alone company and may not be indicative of our future results ofoperations. In addition, the predecessor financial information is notcomparable to our results of operations due to the impact of purchaseaccounting.

The quarterly consolidated financial statements havenot been audited by an independent registered public accounting firm but in theopinion of management include all adjustments, consisting only of normal,recurring adjustments, necessary to present fairly the results for the periodspresented. Net income (loss) for the three and six months ended June 30,2005 and 2004, involved estimates and accruals. Actual results may vary fromthose estimates. Quarterly results are not necessarily indicative of resultsthat may be expected for the year.

 

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                Certain amounts in prioryears’ consolidated financial statements have been reclassified to conform withthe current year’s presentation. These reclassifications did not affect netincome (loss).

***2.***             ***Purchase of OfficeMax’s Paperand Forest Products Assets***

                On October 29, 2004, weacquired OfficeMax’s paper and forest products assets, other than itstimberlands operations, for an aggregate purchase price of $2,196.5 million,including approximately $140 million of related fees and expenses (theAcquisition). For more information about our purchase of OfficeMax’s paper andforest products assets, see Note 2, Purchase of OfficeMax’s Paper andForest Products Assets, of the Notes to Consolidated Financial Statements, inour Registration Statement.

                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 excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill.

                Theinitial purchase price allocations may be adjusted within one year of thepurchase date for changes in estimates of the fair value of assets acquired andliabilities assumed. During the six months ended June 30, 2005, we recorded$10.9 million of purchase price adjustments that decreased the recordedamount of goodwill (see Note 10, Goodwill and Intangible Assets). Theadjustments were related to fair value adjustments, liability accruals, andpension and other severance adjustments.

# *RestructuringActivities*

In connection with theAcquisition, we are evaluating 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 PurchaseBusiness Combination, exit activities related to the Acquisition will increasegoodwill. We have one year from the acquisition date to develop ourrestructuring plans and adjust goodwill. At December 31, 2004, we hadfinalized a portion of our plans in sufficient detail to meet the requirementsof EITF 95-3 to record a liability. During the six months ended June 30,2005, we recorded an additional restructuring reserve of $1.0 million. Thesecharges reflect additional severance costs and increase the total restructuringreserve recorded since the Acquisition to $15.3 million. Most of theseverance cost adjustments relate to severance costs for 330 employees. AtJune 30, 2005, we had terminated approximately 290 employees. Most ofthese costs will be paid during 2005.

At June 30, 2005,approximately $5.7 million of the 2004 restructuring reserves was includedin “Accrued liabilities, Compensation and benefits,” and $0.2 million wasincluded in “Accrued liabilities, Other.” Of the $5.9 millionrestructuring reserve, $3.2 million was recorded in our Paper segment,$2.5 million in Corporate and Other, and $0.2 million in WoodProducts. Restructuring reserve liability account activity related to thesecharges is as follows (in thousands):
| ** **                                      | ** ** | **Severance** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------------|------------|------------|------------|-----------|------------|
| 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    |       |
|                                            |       |          |       |       |       |      |       |
| Charges against reserve                         |       | (7,897        | )          | (506       | )          | (8,403    | )          |
| Costs incurred and charged to goodwill          |       | 854           |       | 188        |       | 1,042     |       |
| Restructuring reserve at June 30, 2005     |       | **$**         | **5,713**  | ** ** | **$**      | **182**   | ** ** | **$** | **5,895** |   |

 

                Wehave not completed our restructuring plans for the acquired businesses. We willcomplete our plans before the anniversary date of the Acquisition. When thoseplans are finalized, we may record additional restructuring liabilities andincrease goodwill.

 

8

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***3.             TransactionsWith Related Parties***

                Duringthe predecessor periods presented, our predecessor participated in OfficeMax’scash management system. Cash receipts attributable to our predecessor’soperations were collected by OfficeMax, and cash disbursements were funded byOfficeMax. The net effect of these transactions has been reflected as “Netequity transactions with OfficeMax” in the Consolidated Statement of Cash Flow.The following table includes the components of net equity transactions withOfficeMax (in thousands):

 
|                                            |       | **Predecessor**                      |        |
|-------------------------------------------------|------------|--------------------------------------|-------------|
| ** **                                      | ** ** | **Six  Months Ended  June 30, 2004** | ** **  |
| Cash collections                                |       | $                                    | (2,844,203  | ) |
| Payment of accounts payable                     |       | 2,628,842                            |        |
| Capital expenditures and acquisitions           |       | 82,260                               |        |
| Income taxes                                    |       | 27,972                               |        |
| Net debt payments                               |       | 34,165                               |        |
| Corporate general and administrative allocation |       | 24,794                               |        |
| Other                                           |       | 979                                  |        |
| Net equity transactions with OfficeMax          | ** ** | **$**                                | **(45,191** | **)** |

 

                During the predecessor periods presented, ourpredecessor used services and administrative staff of OfficeMax. These servicesincluded, but were not limited to, finance, accounting, legal, informationtechnology, and human resource functions. The costs not specificallyidentifiable to Boise Forest Products Operations were allocated based onaverage sales, assets, and labor costs. For the predecessor six months ended June 30,2004, the allocated costs amounted to $24.8 million. These costs areincluded in “General and administrative expenses” in the Consolidated Statementsof Income. Management believes these allocations are a reasonable reflection ofour predecessor’s use of such services. However, they may not necessarily beindicative of costs to be incurred by us in the future.

                At June 30, 2005, we had a $261.3 millionnote payable to a subsidiary of Boise Land & Timber HoldingsCorp. (Timber Holdings), recorded as “Note payable to related party” in theConsolidated Balance Sheet. For more information, see Note 11, Debt.

                At December 31, 2004, we had a $157.5 millionnote receivable from a subsidiary of Timber Holdings recorded as “Notereceivable from related party” on our Consolidated Balance Sheet. The note wasrepaid in February 2005. The note accrued interest at 6%. For the six monthsended June 30, 2005, we recorded $0.9 million of interest income fromthe note.

During each of theperiods presented, we sold paper and paper products to OfficeMax at salesprices that were designed to approximate market prices. During the three andsix months ended June 30, 2005, sales to OfficeMax were $142.1 millionand $292.5 million. For the three and six months ended June 30, 2004,sales to OfficeMax were $134.6 million and $253.6 million. Thesesales are included in “Sales, Related parties” in the Consolidated Statementsof Income (Loss). Sales to OfficeMax represent a concentration in the volume ofbusiness transacted and the revenue generated from these transactions. Apartfrom these sales, concentration of credit risks with respect to tradereceivables is limited due to the wide variety of customers and channels to andthrough which our products are sold, as well as their dispersion across manygeographic areas.

                During the periods presented, we purchased fiber fromrelated parties at prices that approximated market prices. During the three andsix months ended June 30, 2005, fiber purchases from Boise Land &Timber Corp., a subsidiary of Timber Holdings, were $0 and $17.6 million.For the three and six months ended June 30, 2004, fiber purchases fromOfficeMax’s timberlands operations were $28.2 million and $56.1 million.The costs associated with these purchases are recorded as “Fiber costs fromrelated parties” in the Consolidated Statements of Income (Loss).

                During the predecessor periods,most Boise Forest Products Operations employees, along with some employees ofOfficeMax, participated in OfficeMax’s defined benefit pension plans. Inaddition, most employees of Boise Forest Products Operations were eligible forparticipation in OfficeMax’s defined contribution plans. For the three and six monthsended June 30, 2004, the Consolidated Statements of 

 

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Incomeincluded $21.6 million and $47.9 million of expenses attributable toour participation in OfficeMax’s defined benefit and defined contributionplans.

                Boise Forest Products Operations employees and formeremployees also participated in OfficeMax’s other postretirement benefit plans. Allof the postretirement benefit plans are unfunded (see Note 14, Retirementand Benefit Plans). In addition, employees participated in OfficeMax’s stockcompensation programs.

For more information, see Note 13, Retirement andBenefit Plans, of the Notes to Consolidated Financial Statements, in ourRegistration Statement.

***4.             Vendor and Customer Rebates andAllowances***

                We receive rebates andallowances from our vendors under a number of different programs, includingvendor marketing programs. At June 30, 2005, and December 31, 2004,we had $2.3 million and $2.0 million, respectively, of vendor rebatesand allowances recorded in “Receivables, Other” on the Consolidated BalanceSheets. These rebates and allowances are accounted for in accordance withEITF 02-16, Accounting by a Customer (Including a Reseller) forCertain Consideration Received From a Vendor. Rebates and allowances receivedfrom our vendors are recognized as a reduction of “Materials, labor and otheroperating expenses” when the product is sold, unless the rebates and allowancesare linked to a specific incremental cost to sell a vendor’s product. Amountsreceived from vendors that are linked to specific selling and distributionexpenses are recognized as a reduction of “Selling and distribution expenses”in the period the expense is incurred.

                Includedin the vendor rebate programs referred to above are various volume purchaserebate programs. These programs generally include annual purchase targets andmay offer increasing tiered rebates based on our reaching defined purchaselevels. For such tiered rebate programs, the company calculates an estimatedconsideration based on the probability of the rebate being earned during theyear. We review sales projections and related purchases on a quarterly basisand adjust the estimated consideration accordingly. We record considerationreceived for these programs as a reduction of “Materials, labor and otheroperating expenses” as the related inventory is sold.

                Wealso provide rebates to our customers based on the volume of their purchases. Weprovide the rebates to increase the sell-through of our products. The rebatesprovided to our customers are accounted for in accordance with EITF 01-09,Accounting for Consideration Given by a Vendor to a Customer. At June 30,2005, and December 31, 2004, we had $20.7 million and $20.4 million,respectively, of rebates payable to our customers, recorded in “Accruedliabilities, Other” on the Consolidated Balance Sheets.

***5.             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 (Loss) are as follows (in thousands):

 
| ** **                                | ** ** | **Boise**                      | ** ** | **Predecessor**              | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|-------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                                | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| Sale of plywood and lumber operations (a) |       | $                              | —     |                         | $          | —    |       | $               | —     |   | $ | 7,123 |   |
| Sale of receivables (b)                   |       | —                         |       | 621                          |       | —    |       | 1,243           |       |
| Loss on sales of assets                   |       | 67                             |       | 320                          |       | 286       |       | 1,894           |       |
| Write-off of offering costs (c)           |       | 3,600                          |       | —                       |       | 3,600     |       | —          |       |
| Other, net                                |       | (6                             | )          | 2,528                        |       | (98       | )          | 2,373           |       |
| ** **                                | ** ** | **$**                          | **3,661**  | ** **                   | **$**      | **3,469** | ** ** | **$**           | **3,788**  | ** ** | **$** | **12,633** | ** ** |

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(a)                                  In February 2004, Boise Forest ProductsOperations sold its plywood and lumber facilities in Yakima, Washington. Inconnection with the sale, it recorded $7.1 million of costs in “Other(income) expense, net” 

 

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in its Consolidated Statement of Income forthe six months ended June 30, 2004. However, the sale also resulted in a$7.4 million reduction in the estimated LIFO reserve, which wasrecorded in “Materials, labor and other operating expenses.”

(b)                                 In the predecessor periods presented, BoiseForest Products Operations participated in OfficeMax’s receivable sales program.The program consisted of a revolving sale of receivables for 364 days andwas subject to renewal.

(c)                                  This represents $3.6 million for thewrite-off of costs incurred in connection with the canceled initial publicoffering.

***6.******                                      IncomeTaxes***

***               ***OnMay 9, 2005, we converted to a corporation from a limited liability company. Priorto the conversion, we were a limited liability company, and not subject toentity-level income taxation. Thetaxes with respect to these operations were payable by our equity holders inaccordance with their respective ownership percentages. During the three andsix months ended June 30, 2005, we made $10.2 million and $19.6 millionof cash distributions to permit our equity holders to pay the taxes. Both oursenior secured credit facilities and the indenture governing our notespermitted these distributions.

                Tax expenses and benefits related to operations priorto May 9 were recognized by the partners of the limited liability company.For the period of May 9 through June 30, 2005, we recorded income taxexpense at an estimated annual effective tax provision rate of 41%. The effectof establishing deferred taxes upon conversion to a corporation was notmaterial to income tax expense.

                In the predecessor periodspresented, Boise Forest Products Operations results were included in theconsolidated income tax returns of OfficeMax. However, in the predecessorfinancial statements, income taxes were provided based on a calculation of theincome tax expense that would have been incurred if our predecessor hadoperated as a separate taxpayer. Income taxes have been provided for all itemsincluded in the Consolidated Statements of Income, regardless of when suchitems were reported for tax purposes or when the taxes were actually paid orrefunded.

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

                Wedid not have any capital leases during any of the periods presented. We lease aportion of our distribution centers, as well as other property and equipment,under operating leases. For purposes of determining straight-line rent expense,the lease term is calculated from the date we first take possession of thefacility, including any periods of free rent and any option periods we arereasonably assured of exercising. Straight-line rent expense is also adjustedto reflect any allowances or reimbursements provided by the lessor. Rentalexpense for operating leases and sublease rental income received was as follows(in thousands):
| ** **             | ** ** | **Boise**                      | ** ** | **Predecessor**              | ** ** | **Boise**  | ** ** | **Predecessor** | ** ** |
|------------------------|------------|--------------------------------|------------|------------------------------|------------|------------|------------|-----------------|------------|
| ** **             | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **             | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005**   | ** ** | **2004**        | ** ** |
| ** **             | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **      | ** ** |
| Rental expense         |       | $                              | 4,239      |                         | $          | 4,479      |       | $               | 8,298      |   | $ | 8,652 |   |
| Sublease rental income |       | 61                             |       | 13                           |       | 132        |       | 18              |       |
|                        |            |                                |            |                              |            |            |            |                 |            |  |  |  |  |

 

                For the operating leases with remaining terms of morethan one year, the minimum lease payment requirements are $5.6 million forthe second half of 2005, $9.6 million for 2006, $8.7 million for2007, $7.5 million for 2008, and $7.2 million for 2009, with totalpayments thereafter of $30.6 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.

                Substantially all lease agreements have fixed paymentterms based on the passage of time. Some lease agreements provide us with theoption to purchase the leased property. Additionally, some 

 

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agreements containrenewal options, averaging 8.3 years, with fixed payment terms similar tothose in the original lease agreements.

***8.******                                      Investmentsin Equity Affiliates***

                In May 2004, Boise ForestProducts Operations sold its 47% interest in Voyageur Panel, which owned anoriented strand board plant in Barwick, Ontario, Canada,  and recorded a $46.5 million gain on thesale in “Gain on sale of equity affiliate” in the Consolidated Statements ofIncome for the three and six months ended June 30, 2004.

                Prior to the sale, Boise Forest Products Operationsaccounted for the joint venture under the equity method. Accordingly, theresults do not include the joint venture’s sales but do include $1.2 millionand $6.3 million of equity in earnings for the three and six months ended June 30,2004.

***9.******                                      Inventories***

Inventoriesinclude the following (in thousands):
| ** **                         | ** ** | **June 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| Finished goods and work in process |       | $                 | 435,718     |                  | $          | 384,772 |   |
| Logs                               |       | 29,322            |        | 62,406                |       |
| Other raw materials and supplies   |       | 163,838           |        | 147,691               |       |
| ** **                         | ** ** | **$**             | **628,878** | ** **            | **$**      | **594,869** | ** ** |

 

***10.******                               Goodwilland Intangible Assets***

                Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and intangible assets of businesses acquired. Weaccount for goodwill in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 142, Goodwill and OtherIntangible Assets, which requires us to assess our acquired goodwill andintangible assets with indefinite lives for impairment at least annually in theabsence of an indicator of possible impairment and immediately upon anindicator of possible impairment. We will assess goodwill and intangible assetswith indefinite lives in the fourth quarter of each year using a fair-value-basedapproach. We will also evaluate the remaining useful lives of our finite-livedpurchased intangible assets to determine whether any adjustments to the usefullives are necessary. The finite-lived purchased intangible assets consist ofcustomer relationships and technology. These intangible assets are discussed inmore detail below.

                Changes in the carrying amountof our goodwill by segment are as follows (in thousands):
| ** **                               | ** ** | **Paper** | ** ** | **Packaging & Newsprint** | ** ** | **Wood Products** | ** ** | **Building Materials Distribution** | ** ** | **Corporate and Other** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|-----------|------------|-------------------------------|------------|-------------------|------------|-------------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance at December 31, 2004        |       | $         | 8,776      |                          | $          | 1,510             |       | $                                   | 3,198      |                    | $          | 348       |       | $ | 4,558 |   | $ | 18,390 |   |
| Purchase price adjustments (Note 2) |       | (6,028    | )          | 80                            |       | (398              | )          | —                              |       | (4,558                  | )          | (10,904   | )          |
| Balance at June 30, 2005            | ** ** | **$**     | **2,748**  | ** **                    | **$**      | **1,590**         | ** ** | **$**                               | **2,800**  | ** **              | **$**      | **348**   | ** ** | **$** | **—** | ** ** | **$** | **7,486** | ** ** |

 

                Intangible assets represent the values assigned totrade names and trademarks, customer relationships, and technology. The tradenames and trademarks assets have an indefinite life and are not amortized. Allother intangible assets are amortized over their expected useful lives.Customer relationships are amortized over five years, and technology isamortized over three to five years. Intangible assets consist of the following(in thousands):

 

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| ** **                 | ** ** | **Six Months Ended June 30, 2005**  | ** ** |
|----------------------------|------------|------------------------------------------|------------|
|                       |       | **Gross Carrying Amount**           | ** ** | **Accumulated Amortization** | ** ** | **Net Carrying Amount** |   |
| Trade names and trademarks |       | $                                        | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer relationships     |       | 6,800                                    |       | (908 | ) | 5,892 |   |
| Technology                 |       | 5,080                                    |       | (742 | ) | 4,338 |   |
| ** **                 | ** ** | **$**                                    | **34,680** | ** ** | **$** | **(1,650** | **)** | **$** | **33,030** |   |
|                       |       |                                     |       |   |   |   |   |
| ** **                 |       | **Period  Ended December 31, 2004** |       |
| ** **                 | ** ** | **Gross Carrying  Amount**          | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** |   |
|                       |       |                                     |       |   |   |   |   |
| Trade names and trademarks |       | $                                        | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer relationships     |       | 6,800                                    |       | (227 | ) | 6,573 |   |
| Technology                 |       | 5,080                                    |       | (96 | ) | 4,984 |   |
| ** **                 | ** ** | **$**                                    | **34,680** | ** ** | **$** | **(323** | **)** | **$** | **34,357** |   |

 

Intangible assetamortization expense was $0.7 million and $1.3 million for the three andsix months ended June 30, 2005, and $0.01 million and $0.03 millionfor the three and six months ended June 30, 2004. The estimatedamortization expense is $2.6 million in 2005, $2.5 million in 2006and 2007; $2.3 million in 2008; and $1.8 million in 2009.

***11.          Debt***

                At June 30, 2005, andDecember 31, 2004, our long-term debt consisted of the following (inthousands):
| ** **                                 | ** ** | **June 30, 2005** | ** **    | **December 31, 2004** | ** ** |
|--------------------------------------------|------------|------------------------|---------------|----------------------------|------------|
| Revolving credit  facility, due 2010       |       | $                      | —        |                       | $          | — |   |
| Tranche B term loan, due 2011         |       | —                 |          | 1,330,000                  |       |
| Tranche D term loan, due 2011         |       | 837,900                |          | —                     |       |
| Senior floating-rate notes, due 2012       |       | 250,000                |          | 250,000                    |       |
| 7.125% senior subordinated notes, due 2014 |       | 400,000                |          | 400,000                    |       |
| Note payable to related party, due 2015    |       | 261,286                |          | —                     |       |
|                                       |       | 1,749,186              |          | 1,980,000                  |       |
| Less current portion                       |       | (8,400                 | )             | (13,300                    | )          |
| ** **                                 | ** ** | **$**                  | **1,740,786** | ** **                 | **$**      | **1,966,700** | ** ** |

 

*Amended and Restated Credit Facilities*

                On April 18, 2005, we amended and restated our seniorsecured credit facilities (the Facilities), which consisted of a six-year$400.0 million senior secured revolving credit facility and a seven-yearsenior secured Tranche B term loan (used to fund the Acquisition and forgeneral corporate purposes). Our amended and restated Facilities consisted of a$475.0 million revolving credit facility (due in 2010) and an $840.0 millionTranche D term loan (due in 2011). In connection with our amendment andrestatement, we repaid all amounts outstanding under our Tranche B termloan.

**               **Ouramended revolving credit facility agreement permits us to borrow up to $475.0 millionfor general corporate purposes. At June 30, 2005, we had no borrowingsoutstanding under our revolving credit facility. Borrowings under our revolvingcredit facility are based on either the prime rate, the federal funds effectiverate, or the London Interbank Offered Rate (LIBOR). Pricing is subject toquarterly adjustment based on the ratio of our total indebtedness to our lastfour quarters consolidated EBITDA. The range of borrowing spreads under thepricing grid is prime plus 0.50% to 1.25%, federal funds plus 1.00% to 1.75%,and LIBOR plus 1.50% to 2.25%. As of June 30, 2005, our leverageratio allowed us to borrow at the lowest rates. During the three and six monthsended June 30, 2005, the average interest 

 

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rates for our borrowings under the revolver was 5.1%. Lettersof credit are subject to a 0.25% fronting fee, payable to the issuing bank, anda fee 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. At June 30, 2005, $62.2 million of letters of credit wereconsidered a draw on the revolver, thus reducing our borrowing capacity to$412.8 million. The revolving credit facility provides for a commitmentfee of 0.50% per annum, payable to the lenders on the average daily unusedportion of the revolving credit facility. We also have a swingline option underthe revolver which allows us to borrow up to an aggregate of $40 million fromindividual banks that are parties to the agreement at negotiated rates. Swinglineborrowings do not increase our borrowing availability under the revolvingcredit agreement. Borrowings under the revolving credit facility are subject tocertain financial covenants and restrictions including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures.

At June 30, 2005, $837.9 millionwas outstanding under the Tranche D term loan amended and restated creditfacility, and our borrowing rate was 5.2%. Borrowings under the Tranche Dterm loan are based on the prime rate plus 0.75%, the federal funds effectiverate plus 1.25%, or the LIBOR plus 1.75%. We are required to makescheduled principal payments on the Tranche D term loan in the amounts of$4.2 million for the remainder of 2005, $8.4 million in each of 2006through 2009, and $6.3 million in 2010.

*Senior Notes*

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Acquisition. In July 2005, we completed an exchange offer whereby allof our senior unsecured floating-rate notes and senior subordinated notes wereexchanged for publicly traded, registered securities with identical terms(other than terms relating to registrations rights) to the notes issued inOctober 2004. We may redeem all or part of the notes at any time at redemptionprices defined in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. AtJune 30, 2005, our borrowing rate for the $250.0 million senior floating-ratenotes was 6.0%. Including the effect of the swaps, the interest rate on thesenior floating-rate notes was 6.6% at June 30, 2005.

*Note Payable to Related Party*

At June 30, 2005, we had a $261.3 million notepayable to a subsidiary of Timber Holdings, recorded as “Note payable torelated party” on our Consolidated Balance Sheet. The note is subject toadjustment based on transactions between the subsidiary and us. Our borrowingrate under the note is 8%, and it matures February 4**,**2015. For the three and six months ended June 30, 2005, we recorded $5.2 millionand $8.3 million of interest expense related to the note. Timber Holdingsis a guarantor of our debt (see Note 17, Consolidating Guarantor andNon-Guarantor Financial Information).

*Other*

We have entered into interest rate swaps to hedge the majorityof the cash flow risk from the variable interest payments on our variable-rate debt,which gave us an effective interest rate, on all of our variable-rate debt, of 5.5%at June 30, 2005. For additional information on our interest rate swaps,see Note 12, Financial Instruments.

                Wepaid approximately $85.9 million of fees and expenses associated with oursenior secured credit facilities, our senior unsecured floating-rate notes, andour senior subordinated notes, which we entered into in October 2004. The feesare being amortized over the shorter of the call period or the terms of theloans, which range from three to eight years. At June 30, 2005, andDecember 31, 2004, we had $38.2 million and $84.1 million ofcosts recorded in “Deferred financing costs” on our Consolidated Balance Sheets.In connection with the repayment of the Tranche B term loan, we recorded a$43.0 million charge for the write-off of the deferred financing costs. Werecorded the $43.0 million charge in “Interest Expense” in ourConsolidated Statements of Income (Loss) for the three and six months endedJune 30, 2005.

 

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                At June 30, 2005, our average effective interestrate, including the effect of our interest rate swaps, on all of our debt, exceptfor our note payable to related party, was 5.9%.

# *Predecessor Periods*

                In the predecessor periodspresented, our predecessor participated in OfficeMax’s centralized cashmanagement system. Cash advances necessary to fund Boise Forest ProductsOperations’ major improvements to, and replacements of, property, as well asacquisitions and expansion, to the extent not provided through internallygenerated funds, were provided by OfficeMax’s cash or funded with debt. In thepredecessor periods presented, interest costs were allocated to our predecessorbased on its average asset balances. The interest expense attributable to thedebt allocated from OfficeMax is included in our Consolidated Statements ofIncome. We believe the allocation of interest is a reasonable reflection ofBoise Forest Products Operations’ interest costs.

                Cash payments for interest, net of interestcapitalized, were $48.9 million and $43.4 million for the six monthsended June 30, 2005 and 2004.

***12.          Financial Instruments***

At June 30, 2005,the estimated current market value of our debt, based on then-current interestrates for similar obligations with like maturities, was approximately $9.4 millionless than the amount reported in our Consolidated Balance Sheet. The estimatedfair values of our other financial instruments, cash and cash equivalents, andreceivables were the same as their carrying values.

                Changes in interest and currency rates expose us tofinancial market risk. We use derivative financial instruments, such asinterest rate swaps, rate hedge agreements, forward purchase contracts, andforward exchange contracts, to hedge underlying debt obligations or anticipatedtransactions. We do not use them for trading purposes. For qualifying interesthedges, the interest rate differential is reflected as an adjustment tointerest expense over the life of the swap or underlying debt.

                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 millionto hedge the exposure to interest rate fluctuations associated with ourTranche B term loan. The swaps on $300 million of our Tranche Bterm loan were fixed at an average pay rate of 3.3% and expire in December2007, while the swaps on $250 million of our Tranche B term loan werefixed at an average pay rate of 3.5% and expire in December 2008. With theanticipated repayment of the Tranche B term loan, these interest rateswaps were no longer considered hedges of the variable interest payments onthat loan. As a result, during first quarter 2005, we recorded the fair valueof the interest rate swaps, or $15.2 million, in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Income. On April 28,2005, we redesignated the $550 million of interest rate swaps as hedges ofthe cash flow from the LIBOR-based variable interest payments on amountsborrowed under our Facilities. We recognized $5.3 million of non-cashexpense in “Change in fair value of interest rate swaps” in our ConsolidatedStatement of Loss during the three months ended June 30, 2005. Thenet $9.9 million of value that was recorded in “Other assets” in ourConsolidated Balance Sheet will result in higher interest expense over theremaining life of the interest rate swaps. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rateon that debt of 5.1% at June 30, 2005.

                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 floating-rate notes, which gave us an effective interest rate on thatdebt of 6.6% at June 30, 2005. These swaps expire in October 2009.

                All of the swaps were designated as cash flow hedges.Accordingly, changes in the fair value of the interest rate swaps, net oftaxes, were recorded in “Series B equity units” prior to our conversion toa corporation and in “Accumulated other comprehensive income” subsequent to ourconversion and were reclassified to “Interest expense” as interest expense wasrecognized on the LIBOR-based debt.

                As described in Note 11, Debt, in thepredecessor periods presented, OfficeMax allocated debt and interest costs toBoise Forest Products Operations based on its average asset balances. OfficeMax

 

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occasionally usedderivative financial instruments, such as interest rate swaps, rate hedgeagreements, and forward exchange contracts, to hedge underlying debtobligations or anticipated transactions. The effects of these financial instrumentsare not included in the predecessor financial statements other than throughOfficeMax’s allocations to our predecessor.

***13.******                               Newand Recently Adopted Accounting Standards***

*New Accounting Standards*

                In May 2005, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 154, Accounting Changes and Error Corrections—areplacement of Accounting Principles Board (APB) Opinion No. 20 and FASBStatement No. 3 (SFAS 154). This statement applies to all voluntarychanges in accounting principle and changes required by an accountingpronouncement where no specific transition provisions are included. SFAS 154requires retrospective application to prior periods’ financial statements ofchanges in accounting principle, unless it is impracticable to determine eitherthe period-specific effects or the cumulative effect of the change. We do notexpect SFAS 154 to have a material impact on our financial position orresults of operations.

                InMarch 2005, the FASB issued Interpretation No. 47, Accounting forConditional Asset Retirement Obligations (Interpretation 47). Interpretation 47clarifies that a liability must be recognized for a legal obligation to performan asset retirement activity when the timing or method of settlement areconditional on future events that may or may not be within the control of thecompany if the fair value of the liability can be reasonably estimated. Interpretation47 also clarifies when sufficient information to reasonably estimate the fairvalue of an asset retirement obligation exists. We will adopt Interpretation 47in December 2005. We do not expect it to have a material impact on ourfinancial position or results of operations.

                InNovember 2004, the FASB issued SFAS No. 151, Inventory Costs—An Amendmentof ARB No. 43, Chapter 4 (SFAS 151). SFAS 151 amends theguidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,Inventory Pricing, to clarify the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage). Amongother 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 151 requiresthat the allocation of fixed production overheads to the costs of conversionsbe based on normal capacity of the production facilities. The provisions ofSFAS 151 are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. We do not expect SFAS 151 to have amaterial impact on our financial position or results of operations.

*RecentlyAdopted Accounting Standards*

                In December 2004, the FASBissued SFAS No. 123 (revised 2004), Share-Based Payment. This statementrequires an entity to use the fair-value method to recognize in the incomestatement the fair value of stock options and other equity-based compensationissued to employees on the grant date and eliminates an entity’s ability toaccount for share-based compensation transactions using the intrinsic-valuemethod of accounting in APB Opinion No. 25, Accounting for Stock Issued toEmployees, which was permitted under SFAS No. 123 as originally issued. Weadopted this statement effective October 29, 2004. We account for awardsunder our management equity agreement using the fair value method.

                In November 2004, the FASB’s EITF reached a consensuson EITF 03-13, Applying the Conditions in Paragraph 42 of FASB StatementNo. 144, Accounting for Impairment or Disposal of Long-Lived Assets,in Determining Whether to Report Discontinued Operations. We adopted EITF 03-13on January 1, 2005, and it did not have a material impact on our financialposition or results of operations.

                In September 2004, the SEC staff made an announcementat the EITF meeting prohibiting the use of the residual method to valueacquired assets other than goodwill. SEC Staff Announcement, Topic No. D-108,Use of the Residual Method to Value Acquired Assets Other Than Goodwill,requires registrants to apply the guidance to business combinations completedafter September 29, 2004. We did not use the residual method to value theassets we acquired from OfficeMax.

 

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On December 8, 2003,the President signed into law the Medicare Prescription Drug, Improvement andModernization Act of 2003 (the Act). The Act introduced a Medicare prescriptiondrug benefit as well as a federal subsidy to sponsors of retiree healthcarebenefit plans that provide a benefit that is at least actuarially equivalent tothe Medicare benefit. In May 2004, the FASB issued FASB Staff Position(FSP) 106-2, which supersedes FSP 106-1 and provides guidanceon the accounting of the effects of the Act. We adopted FSP 106-2 onOctober 29, 2004, and it did not have a material impact on our financialposition or results of operations.

***14.          Retirement and Benefit Plans***

                Thefollowing represents the components of net periodic pension and postretirementbenefit costs in accordance with revised SFAS No. 132, Employers’Disclosures About Pensions and Other Postretirement Benefits. The components ofnet periodic benefit costs are as follows (in thousands):

 
| ** **                                    | ** ** | **Pension Benefits**           | ** ** | **Other Benefits**             | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **Boise**                      | ** ** | **Predecessor**                | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                    | ** ** | **Three Months Ended June 30** | ** ** | **Three Months Ended June 30** | ** ** |
| ** **                                    | ** ** | **2005**                       | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  |       | $                              | 6,363      |                           | $          | 7,476 |   | $ | 162 |   | $ | 297 |   |
| Interest cost                                 |       | 7,703                          |       | 19,790                         |       | 266 |   | 1,373 |   |
| Expected return on plan assets                |       | (7,585                         | )          | (18,923                        | )          | — |   | — |   |
| Recognized actuarial loss                     |       | 94                             |       | 7,184                          |       | — |   | 291 |   |
| Amortization of prior service costs and other |       | —                         |       | 1,270                          |       | — |   | (251 | ) |
| Company-sponsored plans                       |       | 6,575                          |       | 16,797                         |       | 428 |   | 1,710 |   |
| Multiemployer pension plans                   |       | 133                            |       | 139                            |       | — |   | — |   |
| Net periodic benefit cost                     | ** ** | **$**                          | **6,708**  | ** **                     | **$**      | **16,936** | ** ** | **$** | **428** | ** ** | **$** | **1,710** | ** ** |
| ** **                                    | ** ** | ** **                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **                     | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Pension  Benefits**          | ** ** | **Other  Benefits**            | ** ** |
| ** **                                    | ** ** | **Boise**                      | ** ** | **Predecessor**                | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                    | ** ** | **Six  Months Ended June 30**  | ** ** | **Six  Months Ended June 30**  | ** ** |
| ** **                                    | ** ** | **2005**                       | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  |       | $                              | 12,725     |                           | $          | 15,199 |   | $ | 321 |   | $ | 595 |   |
| Interest cost                                 |       | 15,407                         |       | 39,980                         |       | 535 |   | 2,747 |   |
| Expected return on plan assets                |       | (15,169                        | )          | (38,274                        | )          | — |   | — |   |
| Recognized actuarial loss                     |       | 187                            |       | 14,519                         |       | — |   | 582 |   |
| Amortization of prior service costs and other |       | —                         |       | 6,954                          |       | — |   | (503 | ) |
| Company-sponsored plans                       |       | 13,150                         |       | 38,378                         |       | 856 |   | 3,421 |   |
| Multiemployer pension plans                   |       | 260                            |       | 288                            |       | — |   | — |   |
| Net periodic benefit cost                     | ** ** | **$**                          | **13,410** | ** **                     | **$**      | **38,666** | ** ** | **$** | **856** | ** ** | **$** | **3,421** | ** ** |

 

Under the terms of the Acquisition,OfficeMax retained all pension costs related to its employees who retired orwere terminated on or before July 31, 2004 and all postretirement benefitscosts related to its employees who retired or were terminated before theAcquisition. In addition, OfficeMax transferred sufficient assets from itsemployee defined benefit pension plans to fund our accumulated benefitobligation for the employees of the acquired businesses at a 6.25% discountrate, which improved the funded position of the pension plans. The reducedliability and increased funding reduced expense for pension and other benefitsin the three and six months ended June 30, 2005, compared with thepredecessor period a year ago.

In 2005, there is norequired minimum contribution to our pension plans; however, we may decide to makevoluntary contributions.

 

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***15.          Segment Information***

                There are no differences in our basis of segmentationor in our basis of measurement of segment profit or loss from those disclosedin Note 16, Segment Information, of the Notes to Consolidated FinancialStatements, in our Registration Statement.

                Ananalysis of our operations by segment follows (in millions):
| ** **                                       | ** ** | **Boise**       | ** **  | ** **         | ** ** |
|--------------------------------------------------|------------|-----------------|-------------|--------------------|------------|
| ** **                                       | ** ** | **Sales**       | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **      | ** **  | **Related**        | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Trade**       | ** **  | **Parties**        | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (c)** | ** ** | **Depletion** | ** ** | **(c) (d)** | ** ** | ** ** | ** ** |
| **Three  months ended June 30, 2005**  | ** ** | ** **      | ** **  | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                            |       | $               | 198.9       |               | $          | 142.1 |   | $ | 11.7 |   | $ | 352.7 |   | $ | 27.1 |   | $ | 13.3 |   | $ | 40.5 |   |   |   |
| Packaging &  Newsprint                  |       | 147.5           |        | —             |       | 20.3 |   | 167.8 |   | 10.1 |   | 9.3 |   | 19.3 |   |   |   |
| Wood Products                                    |       | 206.3           |        | —             |       | 128.7 |   | 335.0 |   | 31.3 |   | 5.3 |   | 36.7 |   |   |   |
| Building  Materials Distribution                 |       | 795.7           |        | —             |       | 0.3 |   | 796.0 |   | 21.0 |   | 2.3 |   | 23.3 |   |   |   |
| Corporate and  Other                             |       | 4.1             |        | —             |       | 12.2 |   | 16.3 |   | (12.4 | ) | 1.5 |   | (11.0 | ) |   |   |
|                                             |       | 1,352.5         |        | 142.1              |       | 173.2 |   | 1,667.8 |   | 77.1 |   | 31.7 |   | 108.8 |   |   |   |
| Intersegment  eliminations                       |       | —          |        | —             |       | (173.2 | ) | (173.2 | ) | — |   | — |   | — |   |   |   |
| Change in fair  value of interest rate swaps (a) |       | —          |        | —             |       | — |   | — |   | (5.3 | ) | — |   | — |   |   |   |
| Interest expense  (b)                            |       | —          |        | —             |       | — |   | — |   | (74.3 | ) | — |   | — |   |   |   |
| Interest income                                  |       | —          |        | —             |       | — |   | — |   | 0.4 |   | — |   | — |   |   |   |
| ** **                                       | ** ** | **$**           | **1,352.5** | ** **         | **$**      | **142.1** | ** ** | **$** | **—** | ** ** | **$** | **1,494.6** | ** ** | **$** | **(2.1** | **)** | **$** | **31.7** | ** ** | **$** | **108.8** | ** ** | ** ** | ** ** |
|                                             |       |            |        |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                             |       |            |        |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                       | ** ** | **Predecessor** | ** **  |
| ** **                                       | ** ** | **Sales**       | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization** | ** ** | ** ** | ** ** | **Equity  in Net** | ** ** |
| ** **                                       | ** ** | ** **      | ** **  | **Related**        | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** | **Income  of** | ** ** |
| ** **                                       | ** ** | **Trade**       | ** **  | **Parties**        | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (e)** | ** ** | **Depletion** | ** ** | **(d) (e)** | ** ** | **Affiliate** | ** ** |
| **Three  months ended June 30, 2004**  | ** ** | ** **      | ** **  | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                            |       | $               | 191.5       |               | $          | 134.6 |   | $ | 14.5 |   | $ | 340.6 |   | $ | (9.2 | ) | $ | 35.8 |   | $ | 26.7 |   | $ | — |   |
| Packaging &  Newsprint                  |       | 149.0           |        | —             | ** ** | 17.2 |   | 166.2 |   | 1.9 |   | 10.6 |   | 12.4 |   | — |   |
| Wood Products                                    |       | 253.0           |        | 0.9                | ** ** | 116.3 |   | 370.2 |   | 102.6 |   | 7.3 |   | 109.9 |   | 1.2 |   |
| Building  Materials Distribution                 |       | 793.8           |        | —             | ** ** | — |   | 793.8 |   | 23.7 |   | 1.8 |   | 25.6 |   | — |   |
| Corporate and  Other                             |       | 8.8             |        | —             | ** ** | 30.9 |   | 39.7 |   | (20.4 | ) | 3.4 |   | (17.1 | ) | — |   |
|                                             |       | 1,396.1         |        | 135.5              | ** ** | 178.9 |   | 1,710.5 |   | 98.6 |   | 58.9 |   | 157.5 |   | 1.2 |   |
| Intersegment  eliminations                       |       | —          |        | —             | ** ** | (178.9 | ) | (178.9 | ) | — |   | — |   | — |   | — |   |
| Interest expense                                 |       | —          |        | —             | ** ** | — |   | — |   | (22.8 | ) | — |   | — |   | — |   |
| Interest income                                  |       | —          |        | —             | ** ** | **—** |   | — |   | 0.1 |   | — |   | — |   | — |   |
| ** **                                       | ** ** | **$**           | **1,396.1** | ** **         | **$**      | **135.5** | ** ** | **$** | **—** | ** ** | **$** | **1,531.6** | ** ** | **$** | **75.9** | ** ** | **$** | **58.9** | ** ** | **$** | **157.5** | ** ** | **$** | **1.2** | ** ** |

 

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| ** **                                       | ** ** | **Boise**       |        |               |       |
|--------------------------------------------------|------------|-----------------|-------------|--------------------|------------|
| ** **                                       | ** ** | **Sales**       | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **      | ** **  | **Related**        | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Trade**       | ** **  | **Parties**        | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (c)** | ** ** | **Depletion** | ** ** | **(c) (d)** | ** ** | ** ** | ** ** |
| **Six  months ended June 30, 2005**    | ** ** | ** **      | ** **  | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                            |       | $               | 394.7       |               | $          | 292.5 |   | $ | 23.4 |   | $ | 710.6 |   | $ | 56.4 |   | $ | 26.3 |   | $ | 82.7 |   |   |   |
| Packaging &  Newsprint                  |       | 321.9           |        | —             |       | 39.6 |   | 361.5 |   | 14.6 |   | 18.5 |   | 33.0 |   |   |   |
| Wood Products                                    |       | 414.1           |        | —             |       | 243.3 |   | 657.4 |   | 64.4 |   | 10.6 |   | 75.0 |   |   |   |
| Building  Materials Distribution                 |       | 1,491.9         |        | —             |       | 0.3 |   | 1,492.2 |   | 45.4 |   | 4.3 |   | 49.7 |   |   |   |
| Corporate and  Other                             |       | 11.8            |        | —             |       | 23.9 |   | 35.7 |   | (22.8 | ) | 2.6 |   | (20.0 | ) |   |   |
|                                             |       | 2,634.4         |        | 292.5              |       | 330.5 |   | 3,257.4 |   | 158.0 |   | 62.3 |   | 220.4 |   |   |   |
| Intersegment  eliminations                       |       | —          |        | —             |       | (330.5 | ) | (330.5 | ) | — |   | — |   | — |   |   |   |
| Change in fair  value of interest rate swaps (a) |       | —          |        | —             |       | — |   | — |   | 9.9 |   | — |   | — |   |   |   |
| Interest expense  (b)                            |       | —          |        | —             |       | — |   | — |   | (106.4 | ) | — |   | — |   |   |   |
| Interest income                                  |       | —          |        | —             |       | — |   | — |   | 1.8 |   | — |   | — |   |   |   |
| ** **                                       | ** ** | **$**           | **2,634.4** | ** **         | **$**      | **292.5** | ** ** | **$** | **—** | ** ** | **$** | **2,926.9** | ** ** | **$** | **63.3** | ** ** | **$** | **62.3** | ** ** | **$** | **220.4** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | ** **      | ** **  | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |            |        |               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                       | ** ** | **Predecessor** | ** **  |
| ** **                                       | ** ** | **Sales**       | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization** | ** ** | ** ** | ** ** | **Equity  in Net** | ** ** |
| ** **                                       | ** ** | ** **      | ** **  | **Related**        | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** | **Income  of** | ** ** |
| ** **                                       | ** ** | **Trade**       | ** **  | **Parties**        | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (e)** | ** ** | **Depletion** | ** ** | **(d) (e)** | ** ** | **Affiliate** | ** ** |
| **Six  months ended June 30, 2004**    | ** ** | ** **      | ** **  | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                            |       | $               | 391.1       |               | $          | 253.6 |   | $ | 26.6 |   | $ | 671.3 |   | $ | (35.0 | ) | $ | 71.3 |   | $ | 36.4 |   | $ | — |   |
| Packaging &  Newsprint                  |       | 287.0           |        | —             |       | 32.9 |   | 319.9 |   | (10.5 | ) | 20.9 |   | 10.3 |   | — |   |
| Wood Products                                    |       | 475.9           |        | 2.5                |       | 213.1 |   | 691.5 |   | 146.7 |   | 14.0 |   | 160.7 |   | 6.3 |   |
| Building  Materials Distribution                 |       | 1,413.0         |        | —             |       | — |   | 1,413.0 |   | 48.6 |   | 3.7 |   | 52.3 |   | — |   |
| Corporate and  Other                             |       | 16.5            |        | —             |       | 45.3 |   | 61.8 |   | (27.4 | ) | 6.7 |   | (20.6 | ) | — |   |
|                                             |       | 2,583.5         |        | 256.1              |       | 317.9 |   | 3,157.5 |   | 122.4 |   | 116.6 |   | 239.1 |   | 6.3 |   |
| Intersegment  eliminations                       |       | —          |        | —             |       | (317.9 | ) | (317.9 | ) | — |   | — |   | — |   | — |   |
| Interest expense                                 |       | —          |        | —             |       | — |   | — |   | (43.4 | ) | — |   | — |   | — |   |
| Interest income                                  |       | —          |        | —             |       | — |   | — |   | 0.3 |   | — |   | — |   | — |   |
| ** **                                       | ** ** | **$**           | **2,583.5** | ** **         | **$**      | **256.1** | ** ** | **$** | **—** | ** ** | **$** | **2,839.6** | ** ** | **$** | **79.3** | ** ** | **$** | **116.6** | ** ** | **$** | **239.1** | ** ** | **$** | **6.3** | ** ** |

----

(a)                                  Includes the change in the fair value ofinterest rate swaps related to our amended and restated senior creditfacilities.

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

(c)           Includes $3.6 million for the write-off of costsincurred in connection with the canceled initial public offering.

(d)                                 EBITDA represents income (loss) beforeinterest (interest expense, interest income and changes 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 is used byour internal decision makers and because it is frequently used by investors andother 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 andidentify strategies to improve operating performance. For example, we believethat the inclusion of items such as taxes, interest expense and interest incomedistorts management’s ability to assess and view the core operating trends inour segments. EBITDA, however, is not a measure of our liquidity or financialperformance under GAAP and should not be considered as an alternative to netincome (loss), income (loss) from operations or any other performance measurederived 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 

 

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inability to determine profitability, theexclusion of interest expense, interest income, changes in the fair value ofinterest rate swaps and associated significant cash requirements and theexclusion of depreciation, amortization and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying primarily on our GAAPresults and by using EBITDA only supplementally. Our measures of EBITDA are notnecessarily comparable to other similarly titled captions of other companiesdue to potential inconsistencies in the methods of calculation.

(e)                                  Income (loss) before taxes and EBITDA for thethree and six months ended June 30, 2004, include a $46.5 millionpretax gain for the sale of our predecessor’s 47% interest in Voyageur Panel inMay 2004 and $1.2 million and $6.3 million of equity in earnings fromthe investment in Voyageur Panel.

                Thefollowing is a reconciliation of net income (loss) to EBITDA (in millions):
| ** **                                  | ** ** | **Boise**                      | ** ** | **Predecessor**              | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|---------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                                  | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                  | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| Net income (loss)                           |       | $                              | (14.5      | )                            | $          | 46.5      |       | $               | 50.3       |   | $ | 48.6 |   |
| Change in fair value of interest rate swaps |       | 5.3                            |       | —                       |       | (9.9      | )          | —          |       |
| Interest expense                            |       | 74.3                           |       | 22.8                         |       | 106.4     |       | 43.4            |       |
| Interest income                             |       | (0.4                           | )          | (0.1                         | )          | (1.8      | )          | (0.3            | )          |
| Income tax provision                        |       | 12.3                           |       | 29.4                         |       | 13.0      |       | 30.7            |       |
| Depreciation, amortization and depletion    |       | 31.7                           |       | 58.9                         |       | 62.3      |       | 116.6           |       |
| EBITDA                                      | ** ** | **$**                          | **108.8**  | ** **                   | **$**      | **157.5** | ** ** | **$**           | **220.4**  | ** ** | **$** | **239.1** | ** ** |

 

***16.          Commitments and Guarantees***

*Commitments*

Our commitment information presented below is as ofDecember 31, 2004, unless otherwise noted. At June 30, 2005, there hadbeen no material changes to our commitments outside the ordinary course ofbusiness.

We have commitments for leases and long-term debt thatare discussed further in Note 7, Leases, and Note 11, Debt. Wehave commitments for raw materials and utilities. Most of our raw materialcommitments are for contracts to purchase timber. On February 4, 2005,Timber Holdings sold all of its timberlands to Forest Capital Partners, LLC,of Boston, Massachusetts, for $1.65 billion in cash (Timberlands Sale). Weestimate that we have a contractual obligation for approximately$1.0 billion to purchase timber. This includes the obligations related tothe long-term supply agreements entered into in February 2005 in connectionwith the Timberlands Sale. Under most of these supply contracts, we have theright to cancel or reduce our commitment in the event of a mill curtailment orshutdown. The prices under these contracts are set quarterly or semiannuallybased on regional market prices. The $1.0 billion estimate is based oncontract terms or first quarter 2005 pricing. Our timber obligations aresubject to change based on, among other things, the effect of governmental lawsand regulations, our manufacturing operations not operating in the normalcourse of business, timber availability and the status of environmental appeals.Except for deposits required pursuant to wood supply contracts, theseobligations are not recorded in our financial statements until contract paymentterms take effect.

We enter into utility contracts for the purchase ofelectricity and natural gas. We also purchase these services under utilitytariffs. The contractual and tariff arrangements include multiple-yearcommitments and minimum annual purchase requirements. At December 31,2004, we estimate that we had approximately $118.2 million of utilitypurchase commitments. These payment obligations were valued at prices in effecton December 31, 2004, or contract language, if available. Theseobligations represent the face value of the contracts and do not considerresale value as we use the energy to manufacture our products.

                Pursuantto an Additional Consideration Agreement between us and OfficeMax, we may berequired to make substantial cash payments to, or receive substantial cashpayments from, OfficeMax. Under the Additional Consideration Agreement, thepurchase price paid for the paper and forest products 

 

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assetsmay be adjusted upward or downward based on paper prices during the six yearsfollowing the closing date, subject to annual and aggregate caps. Neither partywill be obligated to make a payment under the Additional ConsiderationAgreement in excess of $45 million in any one year. Payments are alsosubject to an aggregate cap of $125 million that declines to $115 millionin the fifth year and $105 million in the sixth year. If the payment wasbased on average paper prices for the period of October 2004 throughJune 30, 2005, neither party would be required to make payment to theother.

# *Guarantees*

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under FASB Interpretation No. 45, Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.

Boise Cascade Company andTimber Holdings (collectively, The Companies) and their respective direct andindirect domestic subsidiaries, excluding foreign subsidiaries, are parties toan amended and restated Credit Agreement dated as of April 18, 2005, withJPMorgan Chase Bank, as Administrative Agent, and certain Lenders namedtherein and to a related Guarantee and Collateral Agreement of the same date(collectively the Bank Credit Agreements). Boise Cascade LLC (Boise LLC),a wholly owned direct subsidiary of Boise Cascade Company, acts as borrowerunder the Bank Credit Agreements for the $837.9 million Tranche Dterm loan and a $475.0 million revolving credit facility that had nooutstanding balance at June 30, 2005, other than reimbursement obligationsin respect to $62.2 million of standby letters of credit issued under therevolving facility. In addition, Boise Land & Timber Corp., awholly owned direct subsidiary of Timber Holdings, acted as borrower under the originalBank Credit Agreements for the $1,225.0 million Tranche C term loan,which was paid in full in February 2005 with the proceeds of the TimberlandsSale. Boise LLC’s loans and reimbursement obligations are guaranteed byThe Companies and each of their domestic subsidiaries (other than Boise LLC).Prior to the repayment by Boise Land & Timber Corp. of theTranche C term loan, The Companies and each of their domestic subsidiaries(other than Boise Land & Timber Corp.) also guaranteed such loan.

Boise LLC and its wholly owned subsidiary, BoiseCascade Finance Corporation, have jointly issued $250.0 million of seniorfloating-rate notes due in 2012 and $400.0 million of 7.125% seniorsubordinated notes due in 2014. The senior notes are guaranteed on a seniorbasis and the subordinated notes on a subordinated basis by The Companies andeach of the domestic subsidiaries, excluding foreign subsidiaries, of TheCompanies, other than Boise LLC and Boise Cascade Finance Corporation,which are the issuers of the notes. In July 2005, we completed an exchangeoffer whereby all of our senior unsecured floating-rate notes and seniorsubordinated notes were exchanged for publicly traded, registered securitieswith identical terms (other than terms relating to registration rights) to the$250.0 million senior unsecured floating-rate notes and the $400.0 millionsenior subordinated notes issued in October 2004. We may redeem all orpart of the notes at any time at redemption prices defined in the indenture. Ifwe sell specific assets or experience specific kinds of changes in control, wemust offer to purchase the notes.

Boise LLC guarantees the obligations andperformance of its wholly owned subsidiary, Boise Cascade do Brasil Ltda.,under the terms of timber and stumpage purchase agreements in Brazil. Theseagreements extend through 2014. Boise LLC’s exposure is effectivelylimited to the loss of its investment in Boise Cascade do Brasil Ltda.,which was approximately $36.6 million at June 30, 2005.

Boise LLC has issued guarantees to a limitednumber of trade creditors of one or more of its principal operatingsubsidiaries, Boise Building Solutions Manufacturing, L.L.C.; BoiseBuilding Solutions Distribution, L.L.C.; Boise White Paper, L.L.C.;and Boise Packaging & Newsprint, L.L.C., for trade creditobligations arising in the ordinary course of the business of such operatingsubsidiaries. This includes guarantees of the obligations of both Boise WhitePaper, L.L.C., and Boise Building Solutions Manufacturing, L.L.C., inrespect to present and future timber sale agreements and several facilityleases entered into by such subsidiaries. We also enter into guarantees ofvarious raw material or energy supply contracts arising in the ordinary courseof business.

Boise LLC provides credit support for itsprincipal operating subsidiaries in the form of reimbursement or indemnityobligations to the issuers of surety bonds and standby letters of creditsupporting obligations of its operating subsidiaries, arising in the ordinarycourse of business to suppliers of goods and services and to governmententities regulating such subsidiaries’ environmental obligations.

 

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                We enter into a wide range ofindemnification arrangements in the ordinary course of business. These includetort indemnifications, tax indemnifications, financing transactions,indemnifications against third-party claims arising out of arrangements toprovide services to us and indemnifications in merger and acquisitionagreements. It is impossible to quantify the maximum potential liability underthese indemnifications. At June 30, 2005, we were not aware of anymaterial liabilities arising from these indemnifications.

In connection with the Timberlands Sale, Boise CascadeCompany and Timber Holdings have agreed to indemnify the purchasers for anybreach of representation or warranty or covenant contained in the purchaseagreement. Our indemnification obligations, with certain exceptions, surviveuntil February 4, 2006, and are subject to a deductible of $16.5 millionand an aggregate cap of $100.0 million. In addition, the purchasers haveagreed that, if the events giving rise to an indemnification claim against usand Timber Holdings also give rise to an indemnification claim againstOfficeMax under OfficeMax’s indemnification obligations arising from its saleof the timberlands operations, the purchasers will pursue remedies directly andexclusively against OfficeMax. In connection with the foregoing, ForestProducts Holdings, L.L.C., an entity controlled by Madison DearbornPartners, LLC, assigned to the purchasers all of its rights toindemnification by OfficeMax with respect to the timberlands operations.

***17.          Consolidating Guarantor andNon-Guarantor Financial Information***

The following consolidating financial informationpresents balance sheets, statements of income (loss), and cash flow informationrelated 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 jointly and severally by Boise Cascade Company, by Timber Holdings,and by each of their existing and future subsidiaries (other than theco-issuers, Boise LLC and Boise Cascade Finance Corporation). The non-guarantorsincluded our foreign subsidiaries. Other than the consolidated financialstatements and footnotes for Boise Cascade Company and Boise Land &Timber Holdings Corp., financial statements and other disclosures concerningthe guarantors have not been presented because management believes that suchinformation is not material to investors.

 

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** **

**Boise Cascade Company and Subsidiaries****ConsolidatingStatements of Income (Loss)****for the Three Months Ended June 30, 2005**(in thousands)

** **
| ** **                                                                           | ** ** | **Boise Cascade Company (Parent)** | ** **  | **Boise Cascade LLC** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------|-------------|----------------------------|------------|----------------------------|------------|--------------------------------|------------|------------------|------------|------------------|------------|
| **Sales**                                                                            |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| Trade                                                                                |       | $                                  | —      |                       | $          | —                     |       | $                              | 1,330,476  |             | $          | 21,990           |       | $ | — |   | $ | 1,352,466 |   |
| Intercompany                                                                         |       | —                             |        | —                     |       | 4,477                      |       | 15,661                         |       | (20,138          | )          | —           |       |
| Related parties                                                                      |       | —                             |        | —                     |       | 142,145                    |       | —                         |       | —           |       | 142,145          |       |
|                                                                                 |       | —                             |        | —                     |       | 1,477,098                  |       | 37,651                         |       | (20,138          | )          | 1,494,611        |       |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| Materials, labor  and other operating expenses                                       |       | —                             |        | 88                         |       | 1,281,651                  |       | 37,808                         |       | (20,138          | )          | 1,299,409        |       |
| Depreciation,  amortization and depletion                                            |       | —                             |        | 1,114                      |       | 29,780                     |       | 818                            |       | —           |       | 31,712           |       |
| Selling and  distribution expenses                                                   |       | —                             |        | —                     |       | 63,913                     |       | 513                            |       | —           |       | 64,426           |       |
| General and  administrative expenses                                            |       | —                             |        | 8,215                      |       | 9,793                      |       | 28                             |       | —           |       | 18,036           |       |
| Other (income)  expense, net                                                         |       | —                             |        | 3,610                      |       | (1,140                     | )          | 1,191                          |       | —           |       | 3,661            |       |
|                                                                                 |       | —                             |        | 13,027                     |       | 1,383,997                  |       | 40,358                         |       | (20,138          | )          | 1,417,244        |       |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                             |        | (13,027                    | )          | 93,101                     |       | (2,707                         | )          | —           |       | 77,367           |       |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                             |        | (160                       | )          | (127                       | )          | 39                             |       | —           |       | (248             | )          |
| Change in fair  value of interest rate swaps                                         |       | —                             |        | (5,314                     | )          | —                     |       | —                         |       | —           |       | (5,314           | )          |
| Interest expense                                                                     |       | —                             |        | (74,363                    | )          | —                     |       | (2                             | )          | —           |       | (74,365          | )          |
| Interest  expense—intercompany                                                  |       | —                             |        | (52                        | )          | —                     |       | (267                           | )          | 319              |       | —           |       |
| Interest income                                                                      |       | —                             |        | 346                        |       | 71                         |       | 17                             |       | —           |       | 434              |       |
| Interest  income—intercompany                                                   |       | —                             |        | 281                        |       | 38                         |       | —                         |       | (319             | )          | —           |       |
|                                                                                 |       | —                             |        | (79,262                    | )          | (18                        | )          | (213                           | )          | —           |       | (79,493          | )          |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                             |        | (92,289                    | )          | 93,083                     |       | (2,920                         | )          | —           |       | (2,126           | )          |
| Income tax  provision                                                                |       | (11,859                            | )           | (82                        | )          | (383                       | )          | (19                            | )          | —           |       | (12,343          | )          |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (11,859                            | )           | (92,371                    | )          | 92,700                     |       | (2,939                         | )          | —           |       | (14,469          | )          |
|                                                                                 |       |                               |        |                       |       |                       |       |                           |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | (2,610                             | )           | 89,761                     |       | —                     |       | —                         |       | (87,151          | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                              | **(14,469** | **)**                      | **$**      | **(2,610**                 | **)**      | **$**                          | **92,700** | ** **       | **$**      | **(2,939**       | **)**      | **$** | **(87,151** | **)** | **$** | **(14,469** | **)** |
| ** **                                                                           | ** ** | ** **                         | ** **  | ** **                 | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** **       | ** ** | ** **       | ** ** |

 

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**BoiseCascade Company and SubsidiariesConsolidating Statementsof Income (Loss)for the Six Months Ended June 30, 2005**(in thousands)

 
| ** **                                                                           | ** ** | **Boise  Cascade Company (Parent)** | ** ** | **Boise Cascade LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------------|-------------|------------------|------------|------------------|------------|
| **Sales**                                                                            |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| Trade                                                                                |       | $                                   | —     |                       | $          | —                      |       | $                               | 2,600,440   |             | $          | 33,961           |       | $ | — |   | $ | 2,634,401 |   |
| Intercompany                                                                         |       | —                              |       | —                     |       | 4,477                       |       | 28,264                          |        | (32,741          | )          | —           |       |
| Related parties                                                                      |       | —                              |       | —                     |       | 292,481                     |       | —                          |        | —           |       | 292,481          |       |
|                                                                                 |       | —                              |       | —                     |       | 2,897,398                   |       | 62,225                          |        | (32,741          | )          | 2,926,882        |       |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| Materials, labor  and other operating expenses                                       |       | —                              |       | 88                         |       | 2,490,006                   |       | 62,714                          |        | (32,741          | )          | 2,520,067        |       |
| Fiber costs from  related parties                                                    |       | —                              |       | —                     |       | 17,609                      |       | —                          |        | —           |       | 17,609           |       |
| Depreciation,  amortization and depletion                                            |       | —                              |       | 1,836                      |       | 58,927                      |       | 1,586                           |        | —           |       | 62,349           |       |
| Selling and  distribution expenses                                                   |       | —                              |       | —                     |       | 125,782                     |       | 980                             |        | —           |       | 126,762          |       |
| General and  administrative expenses                                            |       | —                              |       | 17,343                     |       | 19,869                      |       | 28                              |        | —           |       | 37,240           |       |
| Other (income)  expense, net                                                         |       | —                              |       | 3,650                      |       | (1,922                      | )          | 2,060                           |        | —           |       | 3,788            |       |
|                                                                                 |       | —                              |       | 22,917                     |       | 2,710,271                   |       | 67,368                          |        | (32,741          | )          | 2,767,815        |       |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                              |       | (22,917                    | )          | 187,127                     |       | (5,143                          | )           | —           |       | 159,067          |       |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                              |       | 40                         |       | (231                        | )          | (850                            | )           | —           |       | (1,041           | )          |
| Change in fair  value of interest rate swaps                                         |       | —                              |       | 9,886                      |       | —                      |       | —                          |        | —           |       | 9,886            |       |
| Interest expense                                                                     |       | —                              |       | (106,441                   | )          | —                      |       | (3                              | )           | —           |       | (106,444         | )          |
| Interest expense—intercompany                                                   |       | —                              |       | (55                        | )          | —                      |       | (381                            | )           | 436              |       | —           |       |
| Interest income                                                                      |       | —                              |       | 1,618                      |       | 139                         |       | 27                              |        | —           |       | 1,784            |       |
| Interest  income—intercompany                                                   |       | —                              |       | 381                        |       | 55                          |       | —                          |        | (436             | )          | —           |       |
|                                                                                 |       | —                              |       | (94,571                    | )          | (37                         | )          | (1,207                          | )           | —           |       | (95,815          | )          |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                              |       | (117,488                   | )          | 187,090                     |       | (6,350                          | )           | —           |       | 63,252           |       |
| Income tax  provision                                                                |       | (11,859                             | )          | (94                        | )          | (980                        | )          | (49                             | )           | —           |       | (12,982          | )          |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (11,859                             | )          | (117,582                   | )          | 186,110                     |       | (6,399                          | )           | —           |       | 50,270           |       |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 62,129                              |       | 179,711                    |       | —                      |       | —                          |        | (241,840         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                               | **50,270** | ** **                 | **$**      | **62,129**                  | ** ** | **$**                           | **186,110** | ** **       | **$**      | **(6,399**       | **)**      | **$** | **(241,840** | **)** | **$** | **50,270** | ** ** |
|                                                                                 |       |                                |       |                       |       |                        |       |                            |        |             |       |             |       |

 

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**Boise CascadeCompany and SubsidiariesConsolidating BalanceSheets at June 30, 2005**(in thousands)

 
| ** **                       | ** ** | **Boise  Cascade Company (Parent)** | ** **  | **Boise Cascade LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------------------|-------------|----------------------------|------------|-----------------------------|------------|---------------------------------|---------------|------------------|------------|------------------|------------|
| **ASSETS**                       | ** ** | ** **                          | ** **  | ** **                 | ** ** | ** **                  | ** ** | ** **                      | ** **    | ** **       | ** ** | ** **       | ** ** |
|                             |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| **Current**                      |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| Cash and cash  equivalents       |       | $                                   | —      |                       | $          | 127,367                     |       | $                               | 35            |             | $          | 1,796            |       | $ | — |   | $ | 129,198 |   |
| Receivables                      |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| Trade, less  allowances          |       | —                              |        | —                     |       | 364,378                     |       | 5,802                           |          | —           |       | 370,180          |       |
| Intercompany                     |       | —                              |        | —                     |       | 3,501                       |       | 2,754                           |          | (6,255           | )          | —           |       |
| Related parties                  |       | —                              |        | —                     |       | 40,690                      |       | —                          |          | —           |       | 40,690           |       |
| Other                            |       | —                              |        | 2,316                      |       | 9,060                       |       | 5,021                           |          | —           |       | 16,397           |       |
| Inventories                      |       | —                              |        | 31                         |       | 607,565                     |       | 21,282                          |          | —           |       | 628,878          |       |
| Deferred income  taxes           |       | 36,734                              |        | —                     |       | —                      |       | —                          |          | —           |       | 36,734           |       |
| Other                            |       | —                              |        | 6,628                      |       | 12,294                      |       | 693                             |          | —           |       | 19,615           |       |
|                             |       | 36,734                              |        | 136,342                    |       | 1,037,523                   |       | 37,348                          |          | (6,255           | )          | 1,241,692        |       |
|                             |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| **Property**                     |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| Property and  equipment          |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |
| Land and land  improvements      |       | —                              |        | 7,600                      |       | 74,578                      |       | 665                             |          | —           |       | 82,843           |       |
| Buildings and  improvements      |       | —                              |        | 24,446                     |       | 180,041                     |       | 7,027                           |          | —           |       | 211,514          |       |
| Machinery and  equipment         |       | —                              |        | 5,267                      |       | 1,219,492                   |       | 34,750                          |          | —           |       | 1,259,509        |       |
|                             |       | —                              |        | 37,313                     |       | 1,474,111                   |       | 42,442                          |          | —           |       | 1,553,866        |       |
| Accumulated  depreciation        |       | —                              |        | (1,293                     | )          | (67,821                     | )          | (8,858                          | )             | —           |       | (77,972          | )          |
|                             |       | —                              |        | 36,020                     |       | 1,406,290                   |       | 33,584                          |          | —           |       | 1,475,894        |       |
| Fiber farms and  timber deposits |       | —                              |        | —                     |       | 38,503                      |       | 11,651                          |          | —           |       | 50,154           |       |
|                             |       | —                              |        | 36,020                     |       | 1,444,793                   |       | 45,235                          |          | —           |       | 1,526,048        |       |
| **Deferred  financing costs**    |       | —                              |        | 38,211                     |       | —                      |       | —                          |          | —           |       | 38,211           |       |
| **Goodwill**                     |       | —                              |        | —                     |       | 7,486                       |       | —                          |          | —           |       | 7,486            |       |
| **Intangible  assets**           |       | —                              |        | —                     |       | 33,030                      |       | —                          |          | —           |       | 33,030           |       |
| **Investments  in affiliates**   |       | 404,188                             |        | 244,596                    |       | —                      |       | —                          |          | (648,784         | )          | —           |       |
| **Other  assets**                |       | —                              |        | 16,162                     |       | 6,021                       |       | 459                             |          | —           |       | 22,642           |       |
| **Total  assets**                | ** ** | **$**                               | **440,922** | ** **                 | **$**      | **471,331**                 | ** ** | **$**                           | **2,528,853** | ** **       | **$**      | **83,042**       | ** ** | **$** | **(655,039** | **)** | **$** | **2,869,109** | ** ** |
|                             |       |                                |        |                       |       |                        |       |                            |          |             |       |             |       |

 

25

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**BoiseCascade Company and Subsidiaries Consolidating BalanceSheets at June 30, 2005**(in thousands)

 
| ** **                                 | ** ** | **Boise  Cascade Company (Parent)** | ** **  | **Boise  Cascade LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|-------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|---------------|------------------|------------|------------------|------------|
| **LIABILITIES  AND CAPITAL**               | ** ** | ** **                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                      | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Current**                                |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| Current portion  of long-term debt         |       | $                                   | —      |                        | $          | 8,400                       |       | $                               | —        |             | $          | —           |       | $ | — |   | $ | 8,400 |   |
| Income taxes  payable                      |       | 2,724                               |        | —                      |       | 861                         |       | 6                               |          | —           |       | 3,591            |       |
| Accounts payable                           |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| Trade                                      |       | —                              |        | 32,052                      |       | 321,574                     |       | 4,393                           |          | —           |       | 358,019          |       |
| Intercompany                               |       | —                              |        | —                      |       | 2,754                       |       | 3,501                           |          | (6,255           | )          | —           |       |
| Related parties                            |       | —                              |        | —                      |       | 172                         |       | —                          |          | —           |       | 172              |       |
| Accrued  liabilities                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| Compensation and  benefits                 |       | —                              |        | 30,269                      |       | 54,291                      |       | 821                             |          | —           |       | 85,381           |       |
| Interest payable                           |       | —                              |        | 9,175                       |       | —                      |       | —                          |          | —           |       | 9,175            |       |
| Other                                      |       | —                              |        | 10,562                      |       | 35,770                      |       | 2,675                           |          | —           |       | 49,007           |       |
|                                       |       | 2,724                               |        | 90,458                      |       | 415,422                     |       | 11,396                          |          | (6,255           | )          | 513,745          |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Debt**                                   |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| Long-term debt,  less current portion |       | —                              |        | 1,479,500                   |       | —                      |       | —                          |          | —           |       | 1,479,500        |       |
| Note payable to  related party             |       | —                              |        | 261,286                     |       | —                      |       | —                          |          | —           |       | 261,286          |       |
|                                       |       | —                              |        | 1,740,786                   |       | —                      |       | —                          |          | —           |       | 1,740,786        |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Other**                                  | ** ** | ** **                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                      | ** **    | ** **       | ** ** | ** **       | ** ** |
| Deferred income  taxes                     |       | 44,100                              |        | —                      |       | —                      |       | —                          |          | —           |       | 44,100           |       |
| Compensation and  benefits                 |       | —                              |        | 143,207                     |       | —                      |       | —                          |          | —           |       | 143,207          |       |
| Other long-term  liabilities               |       | —                              |        | 21,070                      |       | 10,858                      |       | —                          |          | —           |       | 31,928           |       |
|                                       |       | 44,100                              |        | 164,277                     |       | 10,858                      |       | —                          |          | —           |       | 219,235          |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Due to  (from) affiliates**              |       | (1,245                              | )           | (1,928,378                  | )          | 1,912,567                   |       | 17,056                          |          | —           |       | —           |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Capital**                                | ** ** | ** **                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                      | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A  preferred stock                  |       | 38,339                              |        | —                      |       | —                      |       | —                          |          | —           |       | 38,339           |       |
| Class A  common stock                 |       | —                              |        | —                      |       | —                      |       | —                          |          | —           |       | —           |       |
| Class B  common stock                 |       | 413                                 |        | —                      |       | —                      |       | —                          |          | —           |       | 413              |       |
| Class C  common stock                 |       | 27                                  |        | —                      |       | —                      |       | —                          |          | —           |       | 27               |       |
| Additional  paid-in capital                |       | 335,587                             |        | —                      |       | —                      |       | —                          |          | —           |       | 335,587          |       |
| Retained  earnings                         |       | 17,582                              |        | —                      |       | —                      |       | —                          |          | —           |       | 17,582           |       |
| Accumulated  other comprehensive income    |       | 3,395                               |        | —                      |       | —                      |       | —                          |          | —           |       | 3,395            |       |
| Subsidiary  equity                         |       | —                              |        | 404,188                     |       | 190,006                     |       | 54,590                          |          | (648,784         | )          | —           |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Total  capital**                         |       | 395,343                             |        | 404,188                     |       | 190,006                     |       | 54,590                          |          | (648,784         | )          | 395,343          |       |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |
| **Total  liabilities and capital**         | ** ** | **$**                               | **440,922** | ** **                  | **$**      | **471,331**                 | ** ** | **$**                           | **2,528,853** | ** **       | **$**      | **83,042**       | ** ** | **$** | **(655,039** | **)** | **$** | **2,869,109** | ** ** |
|                                       |       |                                |        |                        |       |                        |       |                            |          |             |       |             |       |

 

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**BoiseCascade Company and SubsidiariesConsolidating Statementsof Cash Flowsfor the Six Months Ended June 30, 2005**(in thousands)

 
| ** **                                                                            | ** ** | **Boise  Cascade Company (Parent)** | ** ** | **Boise Cascade LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------|------------|----------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| **Cash  provided by (used for) operations**                                      |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| Net income  (loss)                                                                    |       | $                                   | (11,859    | )                          | $          | (117,582                    | )          | $                               | 186,110    |             | $          | (6,399           | )          | $ | — |   | $ | 50,270 |   |
| Equity in net  income (loss) of affiliates                                            |       | 62,129                              |       | 179,711                    |       | —                      |       | —                          |       | (241,840         | )          | —           |       |
| Items in net  income not using (providing) cash                                       |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| Depreciation,  depletion and amortization of deferred financing costs and other costs |       | —                              |       | 50,332                     |       | 58,927                      |       | 1,586                           |       | —           |       | 110,845          |       |
| Related-party  interest expense                                                       |       | —                              |       | 8,315                      |       | —                      |       | —                          |       | —           |       | 8,315            |       |
| Deferred income  tax provision                                                        |       | 8,681                               |       | —                     |       | —                      |       | —                          |       | —           |       | 8,681            |       |
| Pension and  other postretirement benefit expense                                     |       | —                              |       | 14,266                     |       | —                      |       | —                          |       | —           |       | 14,266           |       |
| Change in fair  value of interest rate swaps                                          |       | —                              |       | (9,886                     | )          | —                      |       | —                          |       | —           |       | (9,886           | )          |
| Management  equity units expense                                                 |       | —                              |       | 1,562                      |       | —                      |       | —                          |       | —           |       | 1,562            |       |
| Other                                                                                 |       | —                              |       | 555                        |       | 231                         |       | 850                             |       | —           |       | 1,636            |       |
| Decrease  (increase) in working capital                                               |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| Receivables                                                                           |       | —                              |       | (45,194                    | )          | (39,187                     | )          | (4,989                          | )          | —           |       | (89,370          | )          |
| Inventories                                                                           |       | —                              |       | (5,126                     | )          | (24,705                     | )          | (4,178                          | )          | —           |       | (34,009          | )          |
| Accounts payable  and accrued liabilities                                        |       | —                              |       | 40,160                     |       | 23,824                      |       | 3,200                           |       | —           |       | 67,184           |       |
| Pension and  other postretirement benefit payments                                    |       | —                              |       | (315                       | )          | —                      |       | —                          |       | —           |       | (315             | )          |
| Income taxes  payable                                                                 |       | 2,724                               |       | —                     |       | 861                         |       | 6                               |       | —           |       | 3,591            |       |
| Other                                                                                 |       | —                              |       | 2,570                      |       | (1,680                      | )          | (329                            | )          | —           |       | 561              |       |
| Cash provided by  (used for) operations                                               |       | 61,675                              |       | 119,368                    |       | 204,381                     |       | (10,253                         | )          | (241,840         | )          | 133,331          |       |
|                                                                                  |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                      |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| Expenditures for  property and equipment                                         |       | —                              |       | (3,247                     | )          | (64,929                     | )          | (5,113                          | )          | —           |       | (73,289          | )          |
| Repayment of  note receivable from related party                                      |       | —                              |       | 157,509                    |       | —                      |       | —                          |       | —           |       | 157,509          |       |
| Sales of assets                                                                       |       | —                              |       | —                     |       | 11,672                      |       | —                          |       | —           |       | 11,672           |       |
| Other                                                                                 |       |                                |       | (142                       | )          | 407                         |       | (516                            | )          | —           |       | (251             | )          |
| Cash provided by  (used for) investment                                          |       | —                              |       | 154,120                    |       | (52,850                     | )          | (5,629                          | )          | —           |       | 95,641           |       |
|                                                                                  |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                            | ** ** | ** **                          | ** ** | ** **                 | ** ** | ** **                  | ** ** | ** **                      | ** ** | ** **       | ** ** | ** **       | ** ** |
| Tax  distributions to members                                                         |       | —                              |       | (19,604                    | )          | —                      |       | —                          |       | —           |       | (19,604          | )          |
| Note payable to  related party                                                        |       | —                              |       | 251,312                    |       | —                      |       | —                          |       | —           |       | 251,312          |       |
| Payments of  long-term debt                                                           |       | —                              |       | (1,332,100                 | )          | —                      |       | —                          |       | —           |       | (1,332,100       | )          |
| Issuances of  long-term debt                                                          |       | —                              |       | 840,000                    |       | —                      |       | —                          |       | —           |       | 840,000          |       |
| Other                                                                                 |       | —                              |       | (2,727                     | )          | —                      |       | —                          |       | —           |       | (2,727           | )          |
| Cash used  for financing                                                         |       | —                              |       | (263,119                   | )          | —                      |       | —                          |       | —           |       | (263,119         | )          |
|                                                                                  |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| Due to (from)  affiliates                                                             |       | (61,675                             | )          | (43,561                    | )          | (151,535                    | )          | 14,931                          |       | 241,840          |       | —           |       |
|                                                                                  |       |                                |       |                       |       |                        |       |                            |       |             |       |             |       |
| **Decrease  in cash and cash equivalents**                                       |       | —                              |       | (33,192                    | )          | (4                          | )          | (951                            | )          | —           |       | (34,147          | )          |
| **Balance  at beginning of the period**                                               |       | —                              |       | 160,559                    |       | 39                          |       | 2,747                           |       | —           |       | 163,345          |       |
| **Balance  at end of the period**                                                     | ** ** | **$**                               | **—** | ** **                 | **$**      | **127,367**                 | ** ** | **$**                           | **35**     | ** **       | **$**      | **1,796**        | ** ** | **$** | **—** | ** ** | **$** | **129,198** | ** ** |

 

27

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***18.          Legal Proceedings and Contingencies***

*Legal Proceedings*

                Weare a party to various legal proceedings arising in the normal course of ourbusiness. We have also assumed responsibility for a small number of legalproceedings that arose before we acquired our assets from OfficeMax. Managementdoes not believe these proceedings, either individually or in the aggregate,will have a material adverse effect on our financial position or results ofoperations. OfficeMax agreed to retain responsibility for all legal proceedingsnot explicitly assumed by us.

*Environmental Matters*

                Weare not currently involved in any material environmental proceedings. OfficeMaxretained responsibility for environmental claims and liabilities related tobusinesses, facilities, and other assets not purchased by us in the Acquisition.In addition, OfficeMax indemnifies us for hazardous substance releases andother environmental regulatory violations that relate to the businesses we didpurchase and that occurred before the Acquisition or arose from pre-Acquisitionoperations. OfficeMax, however, may not have sufficient funds to satisfy infull its indemnification obligations and, in some cases, we may not be entitledto indemnification. Management does not believe that the potential exposure tothe company for environmental matters would have a material adverse effect onour financial position or results of operations, even if OfficeMax failed tofulfill its indemnification responsibilities.

***19.******                               ProForma Adjustments***

                For the period October 29, 2004 (inception), throughMay 9, 2005, we operated as a limited liability company. The unaudited proforma income data assumes we operated as a corporation. The unaudited pro formaincome data presents the pro forma effects of applying income taxes tohistorical net income (loss). Such benefit (provision) reflects the incometaxes that would have applied had we been taxed as a corporation for the threeand six months ended June 30, 2005. The pro forma estimated effective taxrate was 41.6% for the six months ended June 30, 2005. The pro formaprovision for income taxes varies from the amount that would be provided byapplying the statutory federal rate. The primary reason for the difference isthe effect of state income taxes. The predecessor financial statements werealready taxed at rates applicable to a corporation, and no pro formaadjustments are required.

 

28

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***ITEM 2.                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS***

 

                OnMay 9, 2005, we converted to a corporation from a limited liabilitycompany and changed our name from Boise Cascade Holdings, L.L.C., to BoiseCascade Company. In connection with converting to a corporation, the equityunits held by our owners on May 9 were exchanged for shares of preferredand common stock and we became a taxable entity. The Series A equity unitswere exchanged for shares of Series A preferred stock, the Series Bequity units were exchanged for shares of Class B common stock, and theSeries C equity units were exchanged for shares of Class C commonstock. The Series A equity units were exchanged at a 1:1 ratio forshares of Series A preferred stock, and the Series B and C equityunits were exchanged at a .075:1 ratio for shares of common stock.

**               **As used in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations, the terms “Boise”and “we” refer to Boise Cascade Company and its consolidated subsidiaries and,where the context relates to periods prior to the Acquisition, theirpredecessor in interest. The terms “Boise Forest Products Operations” and “predecessor”refer to the paper and forest products assets of OfficeMax Incorporated(OfficeMax) that we acquired on October 29, 2004.

OnMay 19, 2005, the Securities and Exchange Commission (SEC) declared ourregistration statement, filed on Form S-1 (Registration No. 333-122770) asamended, under the Securities Act of 1933, effective. Although we have notissued shares under this registration statement, we became a registrant withthe SEC and, accordingly, began filing periodic reports with them. Thesequarterly consolidated financial statements and notes should be read togetherwith the consolidated financial statements and notes filed with the SEC in ourregistration statement on Form S-1, as amended, on May 18, 2005(Registration Statement).

The following discussion,including the Outlook, contains statements about our future financialperformance. These statements are subject to numerous risks and uncertainties,including, but not limited to, the risks and uncertainties described in “Cautionaryand Forward-Looking Statements.”  Ouractual results may differ materially from those contained in or implied by anyof the forward-looking statements.

***Purchase of OfficeMax’s Paper and Forest Products Assets***

                On October 29, 2004, we acquired OfficeMax’spaper and forest products assets, other than its timberlands operations, for anaggregate purchase price of $2,196.5 million, including approximately $140 millionof related fees and expenses (the Acquisition). For more information about ourpurchase of OfficeMax’s paper and forest products assets, see Note 2,Purchase of OfficeMax’s Paper and Forest Products Assets, of the Notes toConsolidated Financial Statements, in our Registration Statement.

                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 excess of thepurchase price over the fair value of assets acquired and liabilities assumedwas allocated to goodwill.

                Theinitial purchase price allocations may be adjusted within one year of thepurchase date for changes in estimates of the fair value of assets acquired andliabilities assumed. During the six months ended June 30, 2005, werecorded $10.9 million of purchase price adjustments that decreased therecorded amount of goodwill. The adjustments were related to fair valueadjustments, liability accruals, and pension and other severance adjustments.

# *RestructuringActivities*

In connection with theAcquisition, we are evaluating 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 PurchaseBusiness Combination, exit activities related to the Acquisition will increasegoodwill. We have one year from the acquisition date to develop ourrestructuring plans and adjust goodwill. At December 31, 2004, we hadfinalized a portion of our plans in sufficient detail to meet 

 

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the requirements of EITF95-3 to record a liability. During the six months ended June 30, 2005, we recordedan additional restructuring reserve of $1.0 million. These charges reflectadditional severance costs and increase the total restructuring reserverecorded since the Acquisition to $15.3 million. Most of the severancecost adjustments relate to severance costs for 330 employees. AtJune 30, 2005, we had terminated approximately 290 employees. Most ofthese costs will be paid during 2005.

At June 30, 2005,approximately $5.7 million of the 2004 restructuring reserves was includedin “Accrued liabilities, Compensation and benefits,” and $0.2 million wasincluded in “Accrued liabilities, Other.” Of the $5.9 million restructuring reserve, $3.2 million wasrecorded in our Paper segment, $2.5 million in Corporate and Other, and$0.2 million in Wood Products. Restructuring reserve liability accountactivity related to these charges is as follows (in millions):
| ** **                                      | ** ** | **Severance** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|---------------|------------|------------|------------|-----------|------------|
| 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      |       |
|                                            |       |          |       |       |       |      |       |
| Charges against reserve                         |       | (7.9          | )          | (0.5       | )          | (8.4      | )          |
| Costs incurred and charged to goodwill          |       | 0.8           |       | 0.2        |       | 1.0       |       |
| Restructuring reserve at June 30, 2005     | ** ** | **$**         | **5.7**    | ** ** | **$**      | **0.2**   | ** ** | **$** | **5.9** | ** ** |

 

                Wehave not completed our restructuring plans for the acquired businesses. We willcomplete our plans before the anniversary date of the Acquisition. When thoseplans are finalized, we may record additional restructuring liabilities andincrease goodwill.

***Our Segments***

                We operate our business usingfive reportable segments:  Paper,Packaging & Newsprint, Wood Products, Building Materials Distributionand Corporate and Other. These segments represent distinct businesses that aremanaged separately because of differing products and services. Each of thesebusinesses requires distinct operating and marketing strategies. Managementreviews the performance of the company based on these segments.

                Historically, OfficeMax conducted the businessesacquired in the Acquisition in three reportable segments:  Boise Paper Solutions (which included boththe paper and the packaging and newsprint businesses), Boise BuildingSolutions (which included both the building products manufacturing and buildingmaterials distribution businesses), and Corporate and Other. We have recast thefinancial information of our predecessor in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations to conform to ourcurrent segment presentation. OfficeMax historically allocated the results ofits timberlands operations to each of its Boise Paper Solutions and BoiseBuilding Solutions segments. Since we did not acquire the timberlandsoperations from OfficeMax, they are not included in the predecessor financialinformation in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations.

 

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##### ***Results of Operations***

Thefollowing tables set forth the results of operations of Boise and Boise ForestProducts Operations in dollars and as a percentage of sales for the three andsix months ended June 30, 2005 and 2004 (in millions):
| ** **                                     | ** ** | **Boise**                      | ** ** | **Predecessor**                   | ** ** | **Boise**  | ** ** | **Predecessor** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|-----------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                     | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                     | ** ** | **2005**                       | ** ** | **2004**                          | ** ** | **2005**   | ** ** | **2004**        | ** ** |
| **Sales**

** **                          |       |                           |       |                              |       |       |       |            |       |
| Trade                                          |       | $1,352.5                       |       | $1,396.1                          |       | $2,634.4   |       | $2,583.5        |       |
| Related parties                                |       | 142.1                          |       | 135.5                             |       | 292.5      |       | 256.1           |       |
|                                           |       | 1,494.6                        |       | 1,531.6                           |       | 2,926.9    |       | 2,839.6         |       |
|                                           |       |                           |       |                              |       |       |       |            |       |
| **Costs  and expenses**                        |       |                           |       |                              |       |       |       |            |       |
| Materials, labor  and other operating expenses |       | 1,299.4                        |       | 1,303.4                           |       | 2,520.1    |       | 2,418.6         |       |
| Fiber costs from  related parties              |       | —                         |       | 28.2                              |       | 17.6       |       | 56.1            |       |
| Depreciation,  amortization and depletion      |       | 31.7                           |       | 58.9                              |       | 62.3       |       | 116.6           |       |
| Selling and  distribution expenses             |       | 64.4                           |       | 63.6                              |       | 126.8      |       | 123.6           |       |
| General and  administrative expenses           |       | 18.0                           |       | 22.6                              |       | 37.2       |       | 42.1            |       |
| Other (income)  expense, net                   |       | 3.7                            |       | 3.5                               |       | 3.8        |       | 12.6            |       |
| * *                                       |       | 1,417.2                        |       | 1,480.2                           |       | 2,767.8    |       | 2,769.6         |       |
|                                           |       |                           |       |                              |       |       |       |            |       |
| **Income  from operations**                    | ** ** | **$77.4**                      | ** ** | **$51.4**                         | ** ** | **$159.1** | ** ** | **$70.0**       | ** ** |
|                                           |       |                           |       |                              |       |       |       |            |       |
|                                           |       | **(percentage of sales)**      |       |
| **Sales**                                      |       |                           |       |                              |       |       |       |            |       |
| Trade                                          |       | 90.5                           | %          | 91.2                              | %          | 90.0       | %          | 91.0            | %          |
| Related parties                                |       | 9.5                            |       | 8.8                               |       | 10.0       |       | 9.0             |       |
|                                           |       | 100.0                          | %          | 100.0                             | %          | 100.0      | %          | 100.0           | %          |
|                                           |       |                           |       |                              |       |       |       |            |       |
| **Costs  and expenses**                        |       |                           |       |                              |       |       |       |            |       |
| Materials, labor  and other operating expenses |       | 86.9                           | %          | 85.1                              | %          | 86.1       | %          | 85.2            | %          |
| Fiber costs from  related parties              |       | —                         |       | 1.8                               |       | 0.6        |       | 2.0             |       |
| Depreciation,  amortization and depletion      |       | 2.1                            |       | 3.9                               |       | 2.1        |       | 4.1             |       |
| Selling and  distribution expenses             |       | 4.3                            |       | 4.1                               |       | 4.3        |       | 4.3             |       |
| General and  administrative expenses           |       | 1.2                            |       | 1.5                               |       | 1.3        |       | 1.5             |       |
| Other (income)  expense, net                   |       | 0.3                            |       | 0.2                               |       | 0.2        |       | 0.4             |       |
|                                           |       | 94.8                           | %          | 96.6                              | %          | 94.6       | %          | 97.5            | %          |
|                                           |       |                           |       |                              |       |       |       |            |       |
| **Income  from operations**                    | ** ** | **5.2**                        | **%**      | **3.4**                           | **%**      | **5.4**    | **%**      | **2.5**         | **%**      |

 

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***Sales Volumes and Prices***

                Setforth below are our sales volumes and average net selling prices for ourprincipal products for the three and six months ended June 30, 2005 and2004:
| ** **                                       | ** ** | **Boise**                                                   | ** ** | **Predecessor**              | ** ** | **Boise**  | ** ** | **Predecessor** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|------------|------------|-----------------|------------|
| ** **                                       | ** ** | **Three Months Ended June 30**                              | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                                       | ** ** | **2005**                                                    | ** ** | **2004**                     | ** ** | **2005**   | ** ** | **2004**        | ** ** |
| ** **                                       | ** ** | **(thousands of short tons, except corrugated containers)** | ** ** |
| **Sales  Volumes:**                              |       |                                                        |       |                         |       |       |       |            |       |
| **Paper**                                        | ** ** | ** **                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **      | ** ** |
| Uncoated free  sheet                             |       | 374                                                         |       | 374                          |       | 750        |       | 760             |       |
| Containerboard  (medium)                         |       | 33                                                          |       | 33                           |       | 64         |       | 65              |       |
| Market pulp and  other                           |       | 27                                                          |       | 40                           |       | 57         |       | 78              |       |
|                                             |       | 434                                                         |       | 447                          |       | 871        |       | 903             |       |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
| **Packaging &  Newsprint**              |       |                                                        |       |                         |       |       |       |            |       |
| Containerboard  (linerboard)                     |       | 114                                                         |       | 124                          |       | 228        |       | 224             |       |
| Newsprint                                        |       | 105                                                         |       | 105                          |       | 202        |       | 209             |       |
| **Corrugated  containers (mmsf)**                |       | 1,147                                                       |       | 1,081                        |       | 2,289      |       | 2,227           |       |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
|                                             |       | **(millions)**                                              |       |
| **Wood  Products**                               |       |                                                        |       |                         |       |       |       |            |       |
| Laminated veneer  lumber (LVL) (cubic feet)      |       | 3.3                                                         |       | 3.1                          |       | 6.4        |       | 5.8             |       |
| I-joists  (equivalent lineal feet)               |       | 64                                                          |       | 62                           |       | 121        |       | 112             |       |
| Plywood (sq.  ft.) (3/8” basis)             |       | 326                                                         |       | 370                          |       | 653        |       | 768             |       |
| Lumber (board  feet)                             |       | 86                                                          |       | 88                           |       | 173        |       | 178             |       |
| Particleboard  (sq. ft.) (3/4” basis)       |       | 44                                                          |       | 47                           |       | 83         |       | 87              |       |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
| **Building  Materials Distribution**             | ** ** | ** **                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **      | ** ** |
| Sales dollars                                    |       | $                                                           | 796.0      |                         | $          | 793.8      |       | $               | 1,492.2    |   | $ | 1,413.0 |   |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
| ** **                                       | ** ** | **(dollars  per short ton, except corrugated containers)**  | ** ** |
| **Average  Net Selling Prices:**                 | ** ** | ** **                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **      | ** ** |
| **Paper**                                        |       |                                                        |       |                         |       |       |       |            |       |
| Uncoated free  sheet                             |       | $                                                           | 759        |                         | $          | 710        |       | $               | 755        |   | $ | 699 |   |
| Containerboard  (medium)                         |       | 342                                                         |       | 371                          |       | 352        |       | 354             |       |
| Market pulp and  other                           |       | 408                                                         |       | 417                          |       | 414        |       | 394             |       |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
| **Packaging &  Newsprint**              |       |                                                        |       |                         |       |       |       |            |       |
| Containerboard  (linerboard)                     |       | 370                                                         |       | 342                          |       | 377        |       | 329             |       |
| Newsprint                                        |       | 483                                                         |       | 432                          |       | 470        |       | 431             |       |
| Corrugated  containers ($/mmsf)                  |       | 51                                                          |       | 46                           |       | 50         |       | 45              |       |
|                                             |       |                                                        |       |                         |       |       |       |            |       |
| ** **                                       | ** ** | **(dollars  per unit)**                                     | ** ** |
| **Wood  Products**                               | ** ** | ** **                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **      | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet)  |       | $                                                           | 2,009      |                         | $          | 1,618      |       | $               | 1,936      |   | $ | 1,580 |   |
| I-joists  (1,000 equivalent lineal feet)         |       | 1,112                                                       |       | 973                          |       | 1,084      |       | 943             |       |
| Plywood (1,000  sq. ft.) (3/8” basis)       |       | 285                                                         |       | 367                          |       | 288        |       | 344             |       |
| Lumber (1,000  board feet)                       |       | 493                                                         |       | 566                          |       | 506        |       | 541             |       |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 267                                                         |       | 320                          |       | 268        |       | 299             |       |

 

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***OperatingResults***

***               ***Theconsolidated financial statements present the financial results of BoiseCascade Company for the three and six months ended June 30, 2005, and theresults of Boise Forest Products Operations for the three and six months ended June 30,2004.

# ***Sales***

Forthe three months ended June 30, 2005, total sales decreased slightly, or2%, compared with the same period a year ago. For the six months endedJune 30, 2005, total sales increased $87.3 million, or 3%. In bothperiods, sales in Paper, Packaging & Newsprint, and Building MaterialsDistribution increased, while sales in Wood Products declined, compared withthe same periods a year ago.

*Paper.*    Sales increased $12.1 million,or 4%, to $352.7 million for the three months ended June 30, 2005,from $340.6 million for the three months ended June 30, 2004. Duringthe six months ended June 30, 2005, sales increased $39.3 million, or6%, to $710.6 million from $671.3 million in the same period a yearago. The increase in both periods was due to higher weighted average paper prices,primarily uncoated free sheet. Compared with the three and six months endedJune 30, 2004, average prices for uncoated free sheet increased 7% and 8%during the three and six months ended June 30, 2005, compared with pricesin the same periods in 2004. Relative to the three and six months endedJune 30, 2004, total sales volume decreased 3% and 4%, respectively. Duringthe three months ended June 30, 2005, sales volume sold to OfficeMaxdecreased slightly, or 1%, to approximately 177,000 tons. During the sixmonths ended June 30, 2005, the volume of our office papers sold toOfficeMax increased 4% to approximately 364,000 tons. We experienced less market-relatedcurtailment during the three and six months ended June 30, 2005, than incomparison periods. We experienced no market-related curtailment during thethree months ended June 30, 2005, compared with 6,000 tons in thesame period a year ago. During the six months ended June 30, 2005, we took5,000 tons of market-related curtailment, compared with 21,000 tonsin the comparable period.

*                Packaging &Newsprint.*   Forthe three months ended June 30, 2005, sales increased $1.6 million,or 1%, to $167.8 million from $166.2 million in the prior year. Duringthe six months ended June 30, 2005, sales increased $41.6 million, or13%, to $361.5 million from $319.9 million in the prior year. In bothperiods, the increase was primarily due to higher average selling prices. Averagenewsprint prices increased 12% and 9%, respectively, during the three and six monthsended June 30, 2005. Linerboard prices increased 8% compared with thethree months ended June 30, 2004, and increased 15% relative to the sixmonths ended June 30, 2004. Relative to the three and six months endedJune 30, 2004, corrugated container prices increased 11%. Compared to thethree and six months ended June 30, 2004, linerboard sales volumesdecreased 8% and increased 2%, respectively. The decreased sales volume during thethree months ended June 30, 2005, was primarily a result of decreasedmarket demand. Linerboard sales volumes increased for the six months endedJune 30, 2005, as a result of selling our increased production. Weincreased linerboard production volumes as a result of a decrease inmaintenance downtime, to 4,000 tons during the six months endedJune 30, 2005, compared with 24,000 tons during the same period inthe prior year. This decrease was the result of the planned replacement of thelinerboard machine dryer hood at our mill in DeRidder, Louisiana, in 2004.Relative to the comparable periods in the prior year, newsprint sales volumeswere flat and decreased 3% for the three and six months ended June 30,2005, primarily as a result of an increased lightweight sales mix in 2005,which lowered our amount of tons sold. We experienced less market-relatedcurtailment for newsprint during the three and six months ended June 30,2005. We experienced 4,000 tons and 11,000 tons during the three andsix months ended June 30, 2005, compared with 7,000 tons and14,000 tons in the same periods a year ago. Corrugated container salesvolumes increased 6% and 3% compared with the three and six months endedJune 30, 2004. The increase in sales volume was primarily attributable toan increase in customer demand during the second quarter.

*Wood Products.*   Sales decreased $35.2 million,or 10%, to $335.0 million for the three months ended June 30, 2005,from $370.2 million for the three months ended June 30, 2004. Duringthe six months ended June 30, 2005, sales decreased $34.1 million, or5%, to $657.4 million from $691.5 million in the same period a yearago. The decrease in both periods was primarily due to decreased sales pricesand, to a lesser extent, decreased sales volumes of plywood and lumber. Relativeto the three and six months ended June 30, 2004, average plywood pricesdeclined 22% and 16%, and average lumber prices declined 13% and 6%. For bothperiods, the decrease in plywood and lumber selling prices was primarily aresult of an imbalance of supply and demand in the market. At the same time, unitsales 

 

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volume for plywood decreased 12% and 15% and lumberdecreased 2% and 3%, respectively, for the three and six months endedJune 30, 2005, compared with the same periods in 2004. The decrease in thevolume of our plywood sales was partially due to management’s strategic shiftaway from commodities and increased focus on value-added engineered woodproducts. Management’s dedication to increasing capacity for our value-addedproducts was evidenced in the recently completed expansion of our engineeredwood facility in Louisiana, which is expected to increase overall capacityby approximately 40%. Sales of our engineered wood products increased 27% and33% for the three and six months ended June 30, 2005, compared with thesame periods in 2004. The increase was primarily due to 4% and 10% volumeincreases and 24% and 23% price increases for LVL, and 3% and 8% volumeincreases and 14% and 15% price increases for I-joists for the three and sixmonths ended June 30, 2005.

*BuildingMaterials Distribution.*   Sales increased $2.2 million to $796.0 millionfor the three months ended June 30, 2005, from $793.8 million in theprior year. During the six months ended June 30, 2005, sales increased$79.2 million, or 6%, to $1,492.2 million from $1,413.0 millionin the prior year. Compared with the three months ended June 30, 2004, pricesand volume were relatively flat. Relative to the six months ended June 30,2004, sales volume increased 5% and prices were flat. Building activity remainedstrong as new home construction continued to be robust. Engineered woodproducts as a percent of our sales mix continued to increase during bothperiods, to about 16% during both the three and six months ended June 30,2005, from about 13% in the same periods a year ago.

##### ***Costs and Expenses***

For the three monthsended June 30, 2005, the combination of materials, labor and otheroperating expenses and fiber costs from related parties as a percentage ofsales were flat compared with the three months ended June 30, 2004. Forthe six months ended June 30, 2005, these expenses and costs as apercentage of sales decreased slightly from the same period a year ago. In bothperiods, lower fixed costs in our Paper and Packaging & Newsprintsegments were partially offset by increased energy, chemical and fiber costs. Comparedwith 2004, Wood Products incurred higher delivered log costs during 2005. Relativeto the three and six months ended June 30, 2004, as a percentage of sales,Building Materials Distribution materials, labor and other operating expenses wererelatively flat. The decrease in commodity selling prices was offset bydecreases in material costs.

                Depreciation, amortization and depletion expensesdecreased $27.2 million, or 46%, to $31.7 million, for the threemonths ended June 30, 2005, compared with $58.9 million for the threemonths ended June 30, 2004. For the six months ended June 30, 2005,depreciation, amortization and depletion expenses decreased $54.3 million,or 47%, to $62.3 million compared with $116.6 million a year ago. Thisdecrease was a result of the reduction in the value of property and equipmentdue to the application of purchase accounting for the Acquisition. As apercentage of sales, depreciation, amortization and depletion expensesdecreased to 2.1% in both the three and six months ended June 30, 2005,from 3.9% and 4.1% in the same periods in the prior year.

For the three and sixmonths ended June 30, 2005, selling and distribution expenses increased 1%and 3% compared with the same periods a year ago. As a percentage of sales,selling and distribution expenses were relatively flat.

General andadministrative expenses decreased $4.6 million, or 20%, to $18.0 millionfor the three months ended June 30, 2005, compared with $22.6 millionfor the three months ended June 30, 2004. For the six months endedJune 30, 2005, general and administrative expenses decreased $4.9 million,or 11% to $37.2 million compared with $42.1 million a year ago. Inboth periods, the decrease was primarily due to decreased compensation expenseand professional fees. As a percentage of sales, general and administrativeexpenses decreased slightly.

Reflected in the costsand expenses discussed above is the positive impact of the reduced benefitcosts we realized as a result of the Acquisition, due to OfficeMax retainingthe benefit obligation for all of its former employees. For the three and sixmonths ended June 30, 2005, our pension and other postretirement benefitexpense decreased $11.5 million and $27.8 million, or 62% and 66%, to$7.1 million and $14.3 million, respectively, from $18.6 millionand $42.1 million for the three and six months ended June 30, 2004.

 

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                Other (income) expense, net, includes miscellaneousincome and expense items as detailed in the table below. Included in the threeand six months ended June 30, 2005, was $3.6 million for thewrite-off of costs incurred in connection with the canceled initial publicoffering. Included in the six months ended June 30, 2004, was $7.1 millionof costs related to our predecessor’s sale of its plywood and lumber facilitiesin Yakima, Washington, and $1.2 million of expense related to our predecessor’sparticipation in OfficeMax’s receivable sales program. The components of Other(income) expense, net, in the Consolidated Statements of Income (Loss) are asfollows (in millions):
| ** **                            | ** ** | **Boise**                      | ** ** | **Predecessor**              | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|---------------------------------------|------------|--------------------------------|------------|------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                            | ** ** | **Three Months Ended June 30** | ** ** | **Six Months Ended June 30** | ** ** |
| ** **                            | ** ** | **2005**                       | ** ** | **2004**                     | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| Sale of plywood and lumber operations |       | $                              | —     |                         | $          | —    |       | $               | —     |   | $ | 7.1 |   |
| Sale of receivables                   |       | —                         |       | 0.6                          |       | —    |       | 1.2             |       |
| Loss on sales of assets               |       | 0.1                            |       | 0.3                          |       | 0.3       |       | 1.9             |       |
| Write-off of offering costs           |       | 3.6                            |       | —                       |       | 3.6       |       | —          |       |
| Other, net                            |       | —                         |       | 2.6                          |       | (0.1      | )          | 2.4             |       |
| ** **                            | ** ** | **$**                          | **3.7**    | ** **                   | **$**      | **3.5**   | ** ** | **$**           | **3.8**    | ** ** | **$** | **12.6** | ** ** |

 

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

                Forthe three months ended June 30, 2005, income from operations increased$26.0 million, or 50%, to $77.4 million compared with $51.4 millionin the same period a year ago. Income from operations increased $89.1 million,or 127%, from $70.0 million for the six months ended June 30, 2004, to$159.1 million for the six months ended June 30, 2005. In bothperiods, Paper and Packaging & Newsprint reported increased segment incomewhile Wood Products and Building Materials Distribution income decreased.

*Paper.*   Segment income increased $36.3 millionto $27.1 million for the three months ended June 30, 2005, comparedwith a loss of $9.2 million for the three months ended June 30, 2004.During the six months ended June 30, 2005, segment income increased $91.4 million,to income of $56.4 million, compared with a loss of $35.0 million inthe same period a year ago. The improved results for both periods wereprimarily attributable to 7% and 8% increases in average prices for uncoatedfree sheet and 5% and 6% decreases in total unit manufacturing costs. Lowerfixed costs were partially offset by increased energy, chemical and fiber costs.Compared with the prior periods, depreciation expense decreased approximately$22.5 million and $45.0 million for the three and six months,respectively, due to reducing the value of property and equipment as part ofthe purchase price allocation that occurred as a result of the Acquisition.

*                Packaging &Newsprint.*   Segment income increased $8.2 million,or 436%, to $10.1 million for the three months ended June 30,2005, compared with $1.9 million ofincome for the three months ended June 30, 2004. During the six months endedJune 30, 2005, segment income was $14.6 million, compared with a lossof $10.5 million in the same period a year ago. For the three months endedJune 30, 2005, income increased primarily because of overall priceincreases. For the six months endedJune 30, 2005, income increased primarily due to increased prices forlinerboard, newsprint and corrugated containers. Partially offsetting thefavorable price increases were increased energy, chemical and fiber costs.

*                WoodProducts.*   Segment income decreased $71.3 million,or 69%, to $31.3 million for the three months ended June 30,2005, compared with $102.6 millionfor the three months ended June 30, 2004. During the six months ended June 30, 2005, segment incomedecreased $82.3 million, or 56%, to $64.4 million compared with$146.7 million in the same period a year ago. For both periods, thedecrease in income was primarily due to recording a $46.5 million gain on thesale of Voyageur Panel in May 2004. Priorto the sale of our predecessor’s interest in Voyageur Panel, our predecessoraccounted for the joint venture under the equity method. Accordingly, segmentresults do not include the joint venture’s operating results but do include$1.2 million and $6.3 million of equity in earnings for the three andsix months ended June 30, 2004. Also contributing to decreased 2005results were decreased prices for plywood, particleboard, and lumber, andhigher delivered log costs, offset in part by increased prices in ourengineered wood products business.

 

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*                BuildingMaterials Distribution.*   Segment incomedecreased $2.7 million, or 11%, to $21.0 million for the threemonths ended June 30, 2005, from $23.7 million for the three monthsended June 30, 2004. During the six months ended June 30, 2005,segment income decreased $3.2 million, or 7%, to $45.4 million from$48.6 million in the same period a year ago. In both periods, income wasdown primarily due to lower margins on commodity products, coupled withincreased labor costs.

*                Corporate and Other.*   Segment loss decreased $8.0 million,or 39%, to a $12.4 million loss for the three months ended June 30,2005, compared with a $20.4 million loss in the prior year. During the sixmonths ended June 30, 2005, segment loss decreased $4.6 million, or17%, to a $22.8 million loss from a $27.4 million loss in the sameperiod a year ago. In both periods the decrease was due in part to lowergeneral and administrative expenses. For the three and six months endedJune 30, 2005, general and administrative expenses decreased $2.9 million,or 29%, and $1.4 million, or 8%, respectively. The decreases wereprimarily attributable to decreased compensation costs and professional fees fromthe same periods a year ago. Partially offsetting the cost decreases during thethree and six months ended June 30, 2005, was a $3.6 million chargefor the write-off of costs incurred in connection with our canceled initialpublic offering.

***Other***

*                Changein fair value of interest rate swaps.*   For the three and six months ended June 30, 2005, werecorded $5.3 million of expense and $9.9 million of income in “Changein fair value of interest swaps” in our Consolidated Statements of Income(Loss) for the change in the fair value of interest rate swaps related to ouramended and restated credit facilities (see Liquidity and CapitalResources discussion below). In connection with the amendment and restatementand the anticipated repayment of the Tranche B term loan, the interestrate swaps associated with this debt were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter 2005,we recorded the fair value of the interest rate swaps, or $15.2 million ofincome, in “Change in fair value of interest rate swaps” in our ConsolidatedStatement of Income. On April 28, 2005, we redesignated the $550 millionof interest rate swaps as hedges of the cash flow from the LIBOR-basedvariable interest payments on amounts borrowed under our Facilities and recognized$5.3 million of non-cash expense in “Change in fair value of interest rateswaps” in our Consolidated Statement of Loss during the three months endedJune 30, 2005. The net $9.9 million of value that was recorded in “Otherassets” in our Consolidated Balance Sheet will result in higher interestexpense over the remaining life of the interest rate swaps.

*                Interestexpense.*   Forthe three and six months ended June 30, 2005, interest expense was $74.3 millionand $106.4 million, compared with $22.8 million and $43.4 millionin the same periods a year ago. The expense recorded for the three and sixmonths ended June 30, 2005, includes a $43.0 million charge for thewrite-off of deferred financing costs resulting from the repayment of theTranche B term loan. It also includes $5.2 million and $8.3 million,respectively, of interest expense related to a note payable to a subsidiary ofBoise Land & Timber Holdings Corp. (Timber Holdings). In thepredecessor periods presented, OfficeMax allocated interest costs to BoiseForest Products Operations based on its average asset balances.

*                Incometax provision.*   Forthe three and six months ended June 30, 2005 income tax expense was $12.3 millionand $13.0 million, compared with $29.4 million and $30.7 millionfor the same periods a year ago. On May 9, 2005, we converted to acorporation from a limited liability company. Tax expenses and benefits relatedto operations prior to May 9 were recognized by the partners of thelimited liability company. For the period of May 9 through June 30,2005, we recorded income tax expense at an estimated annual effective taxprovision rate of 41%. The effect of establishing deferred taxes uponconversion to a corporation was not material to income tax expense. In thepredecessor financial statements, income taxes were provided based on acalculation of the income tax expense that would have been incurred if ourpredecessor had operated as a separate taxpayer.

***Outlook***

                Demand for many grades ofuncoated free sheet paper has been declining in recent years. While we havepositioned ourselves in what we believe will be growing product areas, it ispossible that prices will come under pressure if capacity continues to exceeddemand.

 

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                While demand for newsprint has been declining inNorth America for the past several years, prices for newsprint have recentlyimproved, reflecting reduced production as the large competitors in thissegment shut down capacity or move machines to other paper grades.

Linerboard and containerdemand are driven by overall economic activity. In our newsprint business, weare particularly susceptible to electricity pricing. Our electrical supplier in Louisiana,CLECO Power LLC, has recently advised us that it is forecasting increases ofover 20% in our electricity rates due to cost increases in its primary fuelsource, natural gas. Although we are exploring ways to mitigate theseincreases, the profitability of our Packaging & Newsprint segment willbe negatively impacted beginning in the third quarter.

                Demand for products in the Wood Products and BuildingMaterials Distribution businesses is driven largely by new residentialconstruction, which continues to show strength, based on underlying demographicfactors coupled with relatively low financing costs. Offsetting the positivetrend in demand are increases in costs such as wood, resin, and energy. Inaddition, a number of competitors have announced they will make significantincreases in oriented strand board (OSB) capacity over the next couple of years.OSB competes directly with plywood in many applications; if the announcedincreases in capacity are realized, it will likely put pressure on prices forour plywood. We purchase OSB for use as web stock in our engineered woodproducts business, so falling OSB prices will allow us to produce theseproducts at a lower cost.

***Liquidity and Capital Resources***

***Operating Activities***

                Forthe six months ended June 30, 2005, our operating activities provided $133.3 million in cash, comparedwith $65.7 million in thesame period in 2004. For the six months ended June 30, 2005, itemsincluded in net income provided$185.7 million of cash, and increases in working capital items used $52.4 millionof cash from operations. The increase in working capital for the period endedJune 30, 2005, was primarily attributable to higher receivables inBuilding Materials Distribution and higher overall inventories. Higherreceivables in Building Materials Distribution reflected increased sales ofapproximately 45%, when comparing June sales with December sales. Relative toDecember 31, 2004, finished goods inventories were seasonally higher in our WoodProducts and Building Materials Distribution segments. In addition, finishedgoods inventories increased in our Paper segment primarily due to increaseduncoated free sheet production in anticipation of higher sales volumes later inthe year. The increases in finished goods inventory were partially offset byseasonally lower log inventories. For the six months ended June 30, 2004, items included in netincome provided $157.4 millionof cash, and increases in working capital items used $91.7 million of cash from operations.

***Investing Activities***

                Ourcash investing activities provided $95.6 millionfor the six months ended June 30, 2005, compared with $13.6 millionduring the same period in 2004. In 2005, investing activities included $157.5 millionfor collection of a related-party note received from a subsidiary of TimberHoldings and $11.7 million of proceeds received from the sale of assets. Approximately$10.4 million of the proceeds related to the sale of a portion of ourfiber farms. These proceeds were partially offset by $73.3 million usedfor the purchase of property and equipment. In the predecessor period, cashinvesting activities included $103.2 million of proceeds from the sale ofour predecessor’s plywood and lumber facilities in Yakima, Washington, inFebruary 2004 and the sale of Voyageur Panel in May 2004, partially offset by $82.3 millionused for purchases of property and equipment.

                Weexpect capital investments in 2005 to total approximately $185 million,excluding acquisitions. Included in the $185 million of expected capitalinvestments are expenditures related to our recently announced expansion at ourengineered wood products operations in Alexandria, Louisiana. We expect toadd approximately 4 million cubic feet of laminated veneer lumber capacityby early 2006. When the current expansion is complete, the facility will have LVLcapacity of approximately 21 million cubic feet. Beyond this capacityexpansion, we plan to build another 4 million cubic feet of capacity atthe plant as required by the market. By fourth quarter 2005, we plan to open anew building materials distribution center in Lathrop, California, toserve the northern California and northern Nevada trade areas. In addition, ourcapital spending in 2005 will be for quality and efficiency projects,replacement 

 

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projects, and ongoing environmental compliance. During2004, we spent $8 million on environmental compliance. We expect to spendapproximately $20 million in 2005 for this purpose.

We recently announced that we plan to expand ourproduction of pressure-sensitive papers by reconfiguring an existing papermachine in Wallula, Washington. Most of the $60.0 million capital investment wehave estimated for this project would be spent in 2006 and beyond.

 

***Financing Activities***

Cash used for financingactivities was $263.1 million and $79.4 million for the six monthsended June 30, 2005 and 2004. Cash used for financing activities in thefirst six months of 2005 included $1,330.0 million of debt prepaymentsrelated to our Tranche B term loan, which was paid down primarily with theproceeds from our new $840.0 million Tranche D term loan, $157.5 millionrelated to the collection of a loan to a subsidiary of Timber Holdings, $251.3 millionreceived in connection with a related-party note payable to a subsidiary ofTimber Holdings, as well as cash flow from operations. Additionally, $19.6 millionof cash was used to pay our equity investors amounts to fund their taxobligation related to their investment in us prior to us converting to acorporation. Cash used for financing activities in the six months ended June 30,2004, included $45.2 million of cash paid through net equity transactionswith OfficeMax, and $34.2 million in debt payments to OfficeMax.

                Our primary source of liquidityfor our business is cash flow generatedfrom operations and borrowing capacity available under our revolving creditfacility. We expect that our primary liquidity requirements will be debtservice, working capital, and capital expenditures.

# *DebtTransactions*

                At June 30, 2005, andDecember 31, 2004, our long-term debt consisted of the following (in millions):
| ** **                                  | ** ** | **June 30, 2005** | ** **  | **December 31, 2004** | ** ** |
|---------------------------------------------|------------|-------------------|-------------|----------------------------|------------|
| Revolving credit  facility, due 2010        |       | $                 | —      |                       | $          | — |   |
| Tranche B  term loan, due 2011         |       | —            |        | 1,330.0                    |       |
| Tranche D  term loan, due 2011         |       | 837.9             |        | —                     |       |
| Senior  floating-rate notes, due 2012       |       | 250.0             |        | 250.0                      |       |
| 7.125% senior  subordinated notes, due 2014 |       | 400.0             |        | 400.0                      |       |
| Note payable to  related party, due 2015    |       | 261.3             |        | —                     |       |
|                                        |       | 1,749.2           |        | 1,980.0                    |       |
| Less current  portion                       |       | (8.4              | )           | (13.3                      | )          |
|                                        | ** ** | **$**             | **1,740.8** | ** **                 | **$**      | **1,966.7** | ** ** |

** **

*Amended and Restated CreditFacilities*

                On April 18, 2005, weamended and restated our senior secured credit facilities (the Facilities),which consisted of a six-year $400.0 million senior secured revolvingcredit facility and a seven-year senior secured Tranche B term loan (usedto fund the Acquisition and for general corporate purposes). Our amended andrestated Facilities consisted of a $475.0 million revolving creditfacility (due in 2010) and an $840.0 million Tranche D term loan (duein 2011). In connection with our amendment and restatement, we repaid allamounts outstanding under our Tranche B term loan.

                Our amended revolving credit facility agreementpermits us to borrow up to $475.0 million for general corporate purposes. AtJune 30, 2005, we had no borrowings outstanding under our revolving creditfacility. Borrowings under our revolving credit facility are based on eitherthe prime rate, the federal funds effective rate, or the London InterbankOffered Rate (LIBOR). Pricing is subject to quarterly adjustment based on theratio of our total indebtedness to our last four quarters consolidated EBITDA. Therange of borrowing spreads under the pricing grid is prime plus 0.50% to 1.25%,federal funds plus 1.00% to 1.75%, and LIBOR plus 1.50% to 2.25%. Asof June 30, 2005, our leverage ratio allowed us to borrow at the lowestrates. During the three and six months ended June 30, 2005, the averageinterest rates for our borrowings under the revolver was 5.1%. Letters ofcredit 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. At June 30, 2005, $62.2 million of letters of credit wereconsidered a draw on the revolver, thus reducing our borrowing capacity to$412.8 million. The revolving credit facility provides for a commitmentfee of 0.50% per annum, payable to the lenders on 

 

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the average daily unusedportion of the revolving credit facility. We also have a swingline option underthe revolver which allows us to borrow up to an aggregate of $40 millionfrom individual banks that are parties to the agreement at negotiated rates. Swinglineborrowings do not increase our borrowing availability under the revolvingcredit agreement. Borrowings under the revolving credit facility are subject tocertain financial covenants and restrictions including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures.

At June 30, 2005,$837.9 million was outstanding under the Tranche D term loan amendedand restated credit facility, and our borrowing rate was 5.2%. Borrowings underthe Tranche D term loan are based on the prime rate plus 0.75%, thefederal funds effective rate plus 1.25%, or the LIBOR plus 1.75%. We arerequired to make scheduled principal payments on the Tranche D term loanin the amounts of $4.2 million for the remainder of 2005, $8.4 millionin each of 2006 through 2009, and $6.3 million in 2010.

*Senior Notes*

In October 2004, weissued $250.0 million of senior unsecured floating-rate notes due in 2012and $400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Acquisition. In July 2005, we completed an exchange offer whereby allof our senior unsecured floating-rate notes and senior subordinated notes wereexchanged for publicly traded, registered securities with identical terms(other than terms relating to registrations rights) to the notes issued inOctober 2004. We may redeem all or part of the notes at any time at redemptionprices defined in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. AtJune 30, 2005, our borrowing rate for the $250.0 million senior floating-ratenotes was 6.0%. Including the effect of the swaps, the interest rate on thesenior floating-rate notes was 6.6% at June 30, 2005.

*NotePayable to Related Party*

At June 30, 2005, we had a $261.3 million notepayable to a subsidiary of Timber Holdings, recorded as “Note payable torelated party” on our Consolidated Balance Sheet. The note is subject toadjustment based on transactions between the subsidiary and us. Our borrowingrate under the note is 8%, and it matures February 4**,**2015. For the three and six months ended June 30, 2005, we recorded $5.2 millionand $8.3 million of interest expense related to the note. Timber Holdingsis a guarantor of our debt.

*Other*

We have entered into interest rate swaps to hedge the majorityof the cash flow risk from the variable interest payments on our variable-ratedebt, which gave us an effective interest rate on all of our variable-ratedebt, of 5.5% at June 30, 2005. For additional information on our interestrate swaps, see “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”

                Wepaid approximately $85.9 million of fees and expenses associated with oursenior secured credit facilities, our senior unsecured floating-rate notes, andour senior subordinated notes, which we entered into in October 2004. The feesare being amortized over the shorter of the call period or the terms of theloans, which range from three to eight years. At June 30, 2005, andDecember 31, 2004, we had $38.2 million and $84.1 million ofcosts recorded in “Deferred financing costs” on our Consolidated Balance Sheets.In connection with the repayment of the Tranche B term loan, we recorded a$43.0 million charge for the write-off of the deferred financing costs. Werecorded the $43.0 million charge in “Interest Expense” in ourConsolidated Statements of Income (Loss) for the three and six months endedJune 30, 2005.

                At June 30, 2005, our average effective interestrate, including the effect of our interest rate swaps, on all of our debt, exceptfor our note payable to related party, was 5.9%.

# *Predecessor Periods*

                In the predecessor periods presented, our predecessorparticipated in OfficeMax’s centralized cash management system. Cash advancesnecessary to fund Boise Forest Products Operations’ major improvements to, andreplacements of, property, as well as acquisitions and expansion, to the extentnot 

 

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provided throughinternally generated funds, were provided by OfficeMax’s cash or funded withdebt. In the predecessor periods presented, interest costs were allocated toour predecessor based on its average asset balances. The interest expenseattributable to the debt allocated from OfficeMax is included in ourConsolidated Statements of Income. We believe the allocation of interest is areasonable reflection of Boise Forest Products Operations’ interest costs.

                Cash payments for interest, net of interestcapitalized, were $48.9 million and $43.4 million for the six monthsended June 30, 2005 and 2004.

# *Other*

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

                We believe that our current 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 amended and restatedrevolving credit facility in an amount sufficient to enable us to pay ourindebtedness or to fund our other liquidity needs.

***Contractual Obligations***

For Information about contractual obligations, see ContractualObligations, of Management’s Discussion and Analysis of Financial Condition andResults of Operations, in our Registration Statement. At June 30, 2005, therewere no material changes to our obligations outside the ordinary course ofbusiness from the information disclosed in this section of our RegistrationStatement.

##### ***Off-Balance-SheetActivities***

                AtJune 30, 2005, we did not have any off-balance-sheet arrangements withunconsolidated entities.

##### ***Guarantees***

                See Note 16, Commitmentsand Guarantees, of the Notes to the Consolidated Financial Statements in “Item 1.Consolidated Financial Statements” of this Form 10-Q for a description ofour guarantees and the nature of our guarantees, including the approximateterms of the guarantees, how the guarantees arose, the events or circumstancesthat would require us to perform under the guarantees and the maximum potentialundiscounted amounts of future payments we could be required to make.

###### ***Inflationary and SeasonalInfluences***

                We believe inflation has not had a material effect onour financial condition or results of operations. However, there can be noassurance that we will not be affected by inflation in the future. Seasonalchanges in levels of building activity affect our building products businesses,and we typically have higher sales and working capital in the second and thirdquarters. In addition, cold weather may affect our operating costs (includingenergy) at our manufacturing facilities.

***Environmental***

Our businesses are subject toa wide range of general and industry-specific environmental laws andregulations. In particular, we are affected by laws and regulations coveringair emissions, wastewater discharges, solid and hazardous waste management andsite remediation. Compliance with these laws and regulations is a significantfactor in the operation of our businesses. We believe that we have created acorporate culture of strong compliance by taking a conservative approach toenvironmental issues in order to assure that we are operating well within thebounds of regulatory requirements. However, we cannot assure you that we willat all times be in full compliance with environmental requirements, and we cannotassure you that we will not incur fines and penalties in the future.

 

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In 2002, OfficeMax entered into a consent decree withthe Environmental Protection Agency (EPA) to settle alleged air permit violationsat eight of the plywood and particleboard manufacturing facilities that we nowown. The EPA alleged these plants failed to obtain New Source Review airpermits. The final installation of control equipment required under the ConsentDecree was completed in April 2005.

We incur substantial capitaland operating expenditures to comply with federal, state and localenvironmental laws and regulations. Failure to comply with these laws andregulations could result in civil or criminal fines or penalties or inenforcement actions. Our failure to comply could also result in governmental orjudicial orders that stop or interrupt our operations or require us to takecorrective measures, install additional pollution control equipment or takeother remedial actions. During 2004, we made approximately $8.0 million incapital expenditures to comply with environmental requirements. We anticipatecapital expenditures of approximately $20.0 million in 2005 to comply withenvironmental requirements, and we expect to spend similar or greater amountson environmental capital expenditures in the years ahead.

In 2004, the EPA promulgatedrules to control air toxics emissions from wood panel plants and industrialboilers. Compliance with these rules is required in 2007. The rules willrequire capital spending at our wood panel plants and paper mills. We arecurrently evaluating the rules and the amount of capital spending that will berequired to comply with them. We expect capital spending to range from $13.0 millionto $37.0 million for the period from 2005 to 2007. This range will berefined as mills develop their detailed compliance strategies.

As an owner and operator ofreal estate, we may be liable under environmental laws for the cleanup of pastand present spills and releases of hazardous or toxic substances on or from ourproperties and operations. We can be found liable under these laws if we knewof, or were responsible for, the presence of such substances. In some cases,this liability may exceed the value of the property itself.

                Some of our properties have been the subject ofinvestigation or cleanup in connection with environmental contamination. In2001, the EPA and the Oregon Department of Environmental Quality began aninvestigation at our paper mill in St. Helens, Oregon. Theinvestigation has focused on polychlorinated biphenyls, pentachlorophenol,volatile and semi-volatile organic compounds, dioxins and heavy metals. In2003, we entered the Oregon Voluntary Clean-up Program to continue theinvestigation and perform any remediation, if required. Although we cannot assure you regarding theoutcome of this investigation, based on current information, we do not expectit to result in material liabilities. Given that the investigation concernshazardous substance releases that occurred prior to closing of the Acquisition,OfficeMax retained responsibility for this matter pursuant to the AssetPurchase Agreement, as described below.

                OfficeMaxretains responsibility for environmental liabilities incurred with respect tobusinesses, facilities and other assets not purchased by us in connection withthe Acquisition, and indemnifies us for hazardous substance releases and otherenvironmental regulatory violations related to our business that occurred priorto the closing of the Acquisition or arise out of pre-closing operations. However,OfficeMax may not have sufficient funds to satisfy in full its indemnificationobligations when required, and, in some cases, we may not be entitled toindemnification under the Asset Purchase Agreement.

###### ***Critical Accounting Estimates***

                For information about criticalaccounting estimates, see Critical Accounting Estimates, in Management’sDiscussion and Analysis of Financial Condition and Results of Operations, in ourRegistration Statement.

###### ***Cautionary and Forward-Looking Statements***

                This Management’s Discussion andAnalysis of Financial Condition and Results of Operations containsforward-looking statements. Statements that are not historical or currentfacts, including statements about our expectations, anticipated financialresults and future business prospects, are forward-looking statements. You canidentify these statements by our use of words such as “may,” “will,” “expect,” “believe,”“should,” “plan,” “anticipate” and other similar expressions. You can findexamples of these statements throughout this report, including the Summary andOutlook section. We cannot 

 

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guaranteethat our actual results will be consistent with the forward-looking statementswe make in this report. We have listed below inherent risks and uncertaintiesthat could cause our actual results to differ materially from those we project.We do not assume an obligation to update any forward-looking statement.

***The paper and forest productsindustry is highly cyclical. Fluctuations in the prices of and the demand forour products could result in smaller profit margins and lower sales volumes****.*   The paper and forest products industry is highly cyclical. Historically,economic and market shifts, fluctuations in capacity and changes in foreigncurrency exchange rates have created cyclical changes in prices, sales volumesand margins for our products. The length and magnitude of industry cycles havevaried over time and by product, but generally reflect changes in macroeconomicconditions and levels of industry capacity. Most of our paper products,including our cut-size office paper, containerboard and newsprint, and many ofour wood products, including our plywood, lumber and particleboard, arecommodities that are widely available from other producers. Even ournon-commodity products, such as value-added papers and engineered wood products(EWP), are susceptible to commodity dynamics. Because commodity products havefew distinguishing qualities from producer to producer, competition for theseproducts is based primarily on price, which is determined by supply relative todemand.

The overall levels of demandfor the commodity products we make and distribute, and consequently our salesand profitability, reflect fluctuations in levels of end-user demand, whichdepend in large part on general macroeconomic conditions in North America andregional economic conditions in our markets, as well as foreign currencyexchange rates. For example, demand for cut-size office paper fluctuates withlevels of white-collar employment, and demand for containerboard depends on thestate of the durable and nondurable goods industries. Demand for newsprintdepends upon prevailing levels of newspaper advertising and circulation. Demandfor wood products depends on new residential and light commercial constructionand residential repair-and-remodeling activity, which are impacted bydemographic trends, interest rate levels, weather and general economic conditions.Demand for many of our products was materially and negatively impacted by theglobal economic downturn in the early part of this decade, and we expect to besensitive to such downturns in the future.

Industry supply of commodity paper and wood products is also subject tofluctuation, as changing industry conditions can influence producers to idle orpermanently close individual machines or entire mills. In addition, to avoidsubstantial cash costs in connection with idling or closing a mill, some producerswill choose to continue to operate at a loss, sometimes even a cash loss, whichcould prolong weak pricing environments due to oversupply. Oversupply in thesemarkets can also result from producers introducing new capacity in response tofavorable short-term pricing trends.

Industry supply of commodity papers and wood productsis also influenced by overseas production capacity, which has grown in recentyears and is expected to continue to grow. While the weakness of the U.S.dollar has mitigated the levels of imports in recent years, a strengthening ofthe U.S. dollar is likely to increase imports of commodity papers and woodproducts from overseas, putting downward pressure on prices.

                As a result, prices for all ofour products are driven by many factors outside of our control, and we havelittle influence over the timing and extent of price changes, which are oftenvolatile. Because market conditions beyond our control determine the prices forour commodity products, the price for any one or more of these products mayfall below our cash production costs, requiring us to either incur short-termlosses on product sales or cease production at one or more of our manufacturingfacilities. Therefore, our profitability with respect to these products dependson managing our cost structure, particularly raw materials and energy prices,which represent the largest components of our operating costs and can fluctuatebased upon factors beyond our control, as described below. If the prices of ourproducts decline, or if our raw materials or energy costs increase, or both,demand for our products may decline, and our sales and profitability could bematerially and adversely affected.

**               *****Ourmanufacturing businesses may have difficulty obtaining timber at favorableprices or at all****.*   Wood fiber is our principal raw material,comprising approximately 17%, 12% and 33% of the aggregate amount of materials,labor and other operating expenses and fiber costs from related parties for ourPaper, Packaging & Newsprint and Wood Products segments, respectively,during the six months ended June 30, 2005. Wood fiber is a commodity, andprices historically have been cyclical. Environmental litigation and regulatorydevelopments have caused, and may cause in the future, significant reductionsin the amount of timber available for commercial harvest in the United States. 

 

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These reductions have causedthe closure of plywood and lumber operations in some of the geographic areas inwhich we operate, including the closure of two facilities previously operatedby OfficeMax. In addition, future domestic or foreign legislation andlitigation concerning the use of timberlands, the protection of endangeredspecies, the promotion of forest health and the response to and prevention ofcatastrophic wildfires could also affect timber supplies. Availability ofharvested timber may further be limited by fire, insect infestation, disease,ice storms, windstorms, flooding and other natural and manmade causes, therebyreducing supply and increasing prices. Wood fiber pricing is subject toregional market influences, and our cost of wood fiber may increase inparticular regions due to market shifts in those regions. In addition, ourability to obtain wood fiber from Brazil may be impacted by legal and politicalconditions in that country as well as transportation difficulties. Anysustained increase in wood fiber prices would increase our operating costs, andwe may be unable to increase prices for our products in response to increasedwood fiber costs due to additional factors affecting the demand or supply ofthese products.

Over the past three years, prior to the timberlandssale, the timberlands operations provided, on average, approximately 47% of ourwood fiber requirements. In connection with the Timberlands Sale, we enteredinto long-term supply agreements pursuant to which we expect to obtain asignificant portion of our future wood fiber requirements. We purchasesubstantially all of our wood fiber from third parties, either pursuant tothese supply agreements or in the open market. If any of our major suppliers ofwood fiber stops selling or is unable to sell wood fiber to us, our financialcondition and operating results would suffer. As a result of the TimberlandsSale, we have increased our open-market purchases of wood fiber. Since we havenot historically made open-market purchases of wood fiber in such largeamounts, our wood fiber costs may exceed our historical costs. For example, dueto increased costs associated with the procurement of wood fiber, such ashigher transportation costs and costs related to identifying potential vendors,we estimate that our wood fiber costs would have been $8 million to $12 millionhigher in 2004 had the Timberlands Sale been completed on January 1, 2004. Furthermore,as the amount of wood fiber we purchase pursuant to existing supply agreementsdeclines, our wood fiber costs may increase further as we increase our relianceon open-market purchases. In addition, our limited access to an internal supplyof timber could expose us to the effects of short-term price volatility andlimit our flexibility in responding to shortages in wood fiber supply, andcould cause our operating costs to increase to a greater extent than those ofour competitors that own timberlands. If we experience constraints on ourtimber supply for any of these or other reasons, we would be required to limitproduction in and/or close manufacturing facilities.

***An increase in the cost of our purchasedenergy or chemicals would lead to higher manufacturing costs, thereby reducingour margins.***   Energyis one of our most significant raw materials, comprising approximately 15%, 12%and 3% of the aggregate amount of materials, labor and other operating expensesand fiber costs from related parties for our Paper, Packaging & Newsprintand Wood Products segments, respectively, during the six months ended June 30,2005. Energy prices, particularly for electricity, natural gas and fuel oil,have been volatile in recent years and currently exceed historical averages. Thesefluctuations impact our manufacturing costs and contribute to earningsvolatility. While we purchasesubstantial portions of our energy under supply contracts, many of thesecontracts rely on market pricing. We estimate that a hypothetical 10% increasein electricity, natural gas and fuel oil costs would have reduced our operatingincome by approximately $15.2 million for the six months ended June 30,2005. Our electrical supplier in Louisiana, CLECO Power LLC, hasrecently advised us that it is forecasting increases of over 20% in ourelectricity rates due to cost increases in its primary fuel source, natural gas.Although we are exploring ways to mitigate these increases, the profitabilityof our Packaging & Newsprint segment will be negatively impacted beginningin the third quarter.

Other raw materials we use include various chemical compounds, such asprecipitated calcium carbonate, sodium chlorate, sodium hydroxide, dyes, resinsand adhesives. Purchases of chemicals accounted for approximately 13%, 3% and 6%of the aggregate amount of materials, labor and other operating costs and fibercosts from related parties for our Paper, Packaging & Newsprint and WoodProducts segments, respectively, during the six months ended June 30, 2005.The costs of these chemicals have been volatile historically and are influencedby capacity utilization, energy prices and other factors beyond our control.

For our commodity products,the relationship between industry supply and demand, rather than changes in thecost of raw materials, determines our ability to increase prices. Consequently,we may be unable to pass increases in our operating costs to our customers inthe short term. Any sustained 

 

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increase in chemical orenergy prices would reduce our operating margins and potentially require us tolimit or cease operations of one or more of our machines.

**                *Weface strong competition in our markets.***   The paper and forest productsindustry is highly fragmented and we face competition from numerouscompetitors, domestic as well as foreign.Some of our competitors in each of our businesses are large, verticallyintegrated companies that have greater financial and other resources, greatermanufacturing economies of scale, greater energy self-sufficiency and/or loweroperating costs than we do. In addition, some of our competitors have lessindebtedness than we do, and therefore, more of their cash is available forbusiness purposes other than debt service. We may be unable to compete,particularly with respect to our commodity products, during the various stagesof the business cycle.

**                *Failure******toimplement any of our business strategies could result in decreased future salesand net income.***   We may be unable to implement fully ourstrategies or achieve the anticipated results. Our strategies are subject tosignificant business, economic and competitive uncertainties and contingencies,many of which are beyond our control. For example, we intend to expand ourleadership in the production of higher-growth, higher-margin products such asvalue-added papers and EWP. This strategy will require us to develop new andinnovative product and service characteristics and respond to shifts incustomer demand. In addition, we plan to continue to expand our buildingmaterials distribution business into new geographical regions, which willrequire us to identify growing markets and deliver superior customer service. Ifour manufacturing businesses fail to deliver quality products at competitivecosts, if our distribution business fails to acquire market share in newmarkets or if we are unable to implement our other key business strategies, ourfuture sales and net income could decrease.

***A material disruption at one of our manufacturing facilities couldprevent us from meeting customer demand, reduce our sales and/or negativelyimpact our net income.***   Any of our paper orEWP manufacturing facilities, or any of our machines within an otherwiseoperational facility, could cease operations unexpectedly due to a number ofevents, including:

•                  maintenance outages;

•                  prolonged power failures;

•                  an equipment failure;

•                  a chemical spill or release;

•                  explosion of a boiler;

•                  the effect of a drought or reduced rainfall onour water supply;

•                  disruptions in the transportationinfrastructure, including roads, bridges, railroad tracks and tunnels;

•                  fires, floods, earthquakes, hurricanes orother catastrophes;

•                  terrorism or threats of terrorism;

•                  labor difficulties; or

•                  other operational problems.

Events such asthose listed above have resulted in operating losses in the past. For example, werecently experienced market pulp production losses due to the mechanicalfailure of one of our digesters at our Wallula, Washington, facility. Thisinterruption resulted in a reduction in second quarter 2005 operating income ofapproximately $2.2 million. Also, in September 2004, damage caused by Hurricane Ivan to our Jackson,Alabama, paper mill and the surrounding area led to a temporary shutdown ofthat facility, resulting in 1.7 days of downtime and a reduction inoperating income of approximately $2.8 million. In addition, a fire at ourMedford, Oregon, plywood plant in 1998 resulted in significant downtime andcaused our plywood sales to drop 20%, compared with sales volumes for the prioryear. Future events may cause similar shutdowns, which may result in additionaldowntime and/or cause 

 

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

                ***Someof our paper and wood products are vulnerable to long-term declines in demanddue to competing technologies or materials.***   Our uncoated free sheet andnewsprint compete with electronic transmission and document storagealternatives, as well as with paper grades we do not produce. As the use ofthese alternatives grows, demand for paper products may decline or shift fromone grade of paper to another. For example, demand for newsprint has declinedand may continue to decline as newspapers are replaced with electronic media,and demand for our uncoated free sheet for use in pre-printed forms hasdeclined and may continue to decline as the use of desktop publishing andon-demand printing continues to displace traditional forms. Demand for ourcontainerboard may decline as corrugated paper packaging is replaced withreusable plastic alternatives, particularly with respect to uses for perishablefood products. Demand for plywood may also decline as customers continue toshift to oriented strand board, a product we do not manufacture. Anysubstantial shift in demand from our products to competing technologies ormaterials could result in a material decrease in sales of our products.

***Our operations require substantial capital, and we may nothave adequate capital resources to provide for all of our capital requirements.***   Our businesses arecapital-intensive, and we regularly incur capital expenditures to expand ouroperations, maintain our equipment, increase our operating efficiency andcomply with environmental laws. Our total capital expenditures, excludingacquisitions, were approximately $169 million during 2004, includingapproximately $114 million for maintenance capital and approximately $8 millionfor environmental expenditures, and we expect to spend approximately $185 millionon capital expenditures during 2005, including approximately $98 millionfor maintenance capital and approximately $20 million for environmentalexpenditures. We anticipate our available cash resources and cash generatedfrom operations will be sufficient to fund our operating needs and capitalexpenditures for at least the next year. However, if we require additionalfunds, we may not be able to obtain them on favorable terms, or at all. Inaddition, our debt service obligations reduce our available cash flows. If wecannot maintain or upgrade our equipment as we require or ensure environmentalcompliance, we could be required to cease or curtail some of our manufacturingoperations or we may become unable to manufacture products that can competeeffectively in one or more of our markets.

***Our operations areaffected by our relationship with OfficeMax.***   Until October 2004, we operatedas business units of OfficeMax and not as a stand-alone company. During 2004,which period includes the ramp-up of sales to OfficeMax’s retail network, salesto OfficeMax represented approximately 47% of our uncoated free sheet sales. Duringthe six months ended June 30, 2005, sales to OfficeMax accounted forapproximately 49% of our uncoated free sheet volume, including approximately 84%of our office paper volume, was purchased by OfficeMax. We anticipate thatOfficeMax will continue to be our largest customer and that we will continue todepend on its distribution network for a substantial portion of our uncoatedfree sheet sales in the future. In connection with the Acquisition, OfficeMaxretained and indemnified us against certain liabilities related to our business.Furthermore, we and OfficeMax entered into an Additional ConsiderationAgreement pursuant to which OfficeMax may be required to make payments to us. Anysignificant deterioration in OfficeMax’s financial condition or ourrelationship with OfficeMax, or a significant change in OfficeMax’s businessstrategy, could result in OfficeMax ceasing to be our customer or failing tosatisfy its contractual obligations to us, which in turn could reduce our salesand subject us to additional material liabilities.

                In addition, we may be required to make substantialpayments to OfficeMax in connection with agreements we entered into related tothe Acquisition. We currently indemnify OfficeMax for breaches ofrepresentations, warranties and covenants made in the Asset Purchase Agreement,as well as for all liabilities we assumed, in connection with the Acquisition. Ourindemnification obligations with respect to breaches of representations andwarranties are, with certain exceptions, subject to a deductible of $20.7 million,and our indemnification obligations are capped at $248.9 million in theaggregate. The Additional Consideration Agreement also requires us to pay OfficeMax,to the extent that the average market price for a benchmark grade of cut-sizeoffice paper manufactured within our Paper segment exceeds a specified amount,up to an aggregate amount of $125 million. If we are required to makesubstantial payments to OfficeMax in respect of our indemnificationobligations, the resulting outflows of cash would adversely affect ouroperating results and financial condition. In addition, if we are required to 

 

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make substantial paymentsto OfficeMax under the additional consideration agreement, our financialcondition would be adversely affected.

**                *Weare subject to significant environmental regulation and environmentalcompliance expenditures, as well as other potential environmental liabilities.***   We are subject to a wide rangeof general and industry-specific environmental laws and regulations,particularly with respect to air emissions, wastewater discharges, solid andhazardous waste management, and site remediation. Our capital expenditures forenvironmental compliance were approximately $12 million and $8 millionin 2003 and 2004, respectively, and we expect to incur approximately $20 millionin 2005. We expect to continue to incur significant capital and operatingexpenditures in order to maintain compliance with applicable environmental lawsand regulations. OnJuly 30, 2004, the U.S. Environmental Protection Agency (EPA) promulgatedrules regulating toxic air emissions from wood panel plants. A second ruleregulating toxic air emissions from industrial boilers at wood products plantsand paper mills was promulgated on September 13, 2004. We are currentlyevaluating these rules and the amount of capital expenditures that will berequired for compliance. We expect to incur capital expenditures ranging from$13 million to $37 million for the period from 2005 to 2007 to complywith these regulations. We may also be required to incur substantialadditional capital expenditures to comply with future environmental regulations.If we fail to comply with applicable environmental laws and regulations, we mayface civil or criminal fines or penalties or enforcement actions, includingorders limiting our operations or requiring corrective measures, installationof pollution control equipment or other remedial actions.

As owners and operators ofreal estate, we may be liable under environmental laws for cleanup and otherdamages, including tort liability, resulting from releases of hazardoussubstances on or from our properties, including asbestos. We may have liabilityunder these laws whether or not we knew of, or were responsible for, thepresence of these substances on our property, and, in some cases, our liabilitymay not be limited to the value of the property. OfficeMax retainsresponsibility for environmental liabilities that occurred with respect tobusinesses, facilities and other assets not purchased by us in the Acquisition.In addition, OfficeMax generally indemnifies us for hazardous substancereleases and other environmental violations that occurred prior to the closingof the Acquisition or arise out of pre-closing operations at the businesses,facilities and other assets purchased by us. However, OfficeMax may not havesufficient funds to fully satisfy its indemnification obligations whenrequired, and in some cases, we may not be contractually entitled toindemnification by OfficeMax. Furthermore, we are not entitled toindemnification for liabilities incurred due to releases and violations ofenvironmental laws occurring after the closing of the Acquisition. With respectto the timberlands operations, we may have responsibility for certainenvironmental liabilities that occurred in the period following the Acquisitionbut prior to the Timberlands Sale. Any material liability we incur wouldadversely impact our financial condition and could preclude us from makingcapital expenditures that would otherwise benefit our business.

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

**                *Labor disruptions or increased labor costs couldadversely affect our business.***   We could experience a materiallabor disruption or significantly increased labor costs at one or more of ourfacilities, either in the course of negotiations of a labor agreement orotherwise, any of which could prevent us from meeting customer demand, reducingour sales and profitability. As of June 30, 2005, we had 10,337 employees.Approximately 5,260, or 51%, of these employees work pursuant to collectivebargaining agreements. Several of these agreements have recently expired orwill expire in 2005, although the parties are continuing the agreements while bargaining.In December 2004, an agreement covering approximately 100 workers in ourcorrugated container facility in Salem, Oregon, expired and in March 2005, anagreement covering approximately 860 workers in our paper facilities in St. Helens,Oregon; Vancouver, Washington; Salem, Oregon; and Wallula, Washington, expired.We are currently in negotiations with respect to agreement covering thesematters. Agreements covering approximately 700 workers in our Oakdale, Louisiana,and Florien, Louisiana, wood products facilities expired in July 2005. Inaddition, an agreement covering approximately 100 workers in our Salt LakeCity, Utah, corrugated container plant will expire in October 2005. We expectthe key issues in the negotiations for new collective bargaining agreements tobe pensions, healthcare and work rules and other contract requirements that webelieve inhibit our ability to reduce operational costs. We may be unable torenew these agreements without work stoppages or significant increases incosts, which would reduce our operating margins and which could require us tolimit or cease manufacturing operations at one or more facilities.

 

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***We depend upon the continued servicesof our senior management team.***   Our success depends,in part, on the efforts of our senior management and other key employees. Oursenior management team, led by Tom Stephens, our chief executive officer, hassignificant industry experience and would be difficult to replace. Theseindividuals possess sales, marketing, engineering, manufacturing, financial andadministrative skills that are critical to the operation of our business. Whilewe are party to an employment agreement with Mr. Stephens until 2007, ifhe were to resign prior to the expiration of the initial agreement term or failto renew the agreement upon expiration, the implementation of our businessstrategy may be slowed. If we lose or suffer an extended interruption in theservices of Mr. Stephens or one of our other senior officers, we may becomeunable to implement our business strategy, resulting in lower profitability. Moreover,the market for qualified individuals is highly competitive, and we may not beable to attract and retain qualified personnel to replace or succeed members ofour senior management or other key employees should the need arise. We do notmaintain any key-man or similar insurance policies covering any of our seniormanagement or other key employees.

***Our substantial indebtedness couldadversely affect our financial condition and impair our ability to operate ourbusiness.***   We are a highly leveraged company. As of June 30,2005, we had $1.7 billion of outstanding indebtedness, including $837.9 millionof indebtedness under our senior secured credit facilities (excluding unusedavailability under our revolving credit facility and outstanding and undrawnletters of credit), $261.3 million related-party note (the related party isa guarantor of our debt), $250 million of senior notes and $400 millionof senior subordinated notes. This level of indebtedness could have importantconsequences on our business, financial condition and operating results,including the following:

•                  it may limit our ability to borrow money orsell stock to fund our working capital, capital expenditures, acquisitions anddebt service requirements and other financing needs;

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

•                  it may limit our flexibility in planning for,or reacting to, changes in our business and future business opportunities;

•                  we are more highly leveraged than some of ourcompetitors, which may place us at a competitive disadvantage;

•                  it may make us more vulnerable to a downturnin our business, industry or the economy in general;

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

•                  there would be a material adverse effect onour business and financial condition if we were unable to service ourindebtedness or obtain additional financing as needed.

***We may not be able to generate sufficient cash flows to meet our debtservice obligations.***   Our ability to makepayments on and to refinance our indebtedness and to fund planned capitalexpenditures depends on our ability to generate cash from our future operations.This, to a certain extent, is subject to general economic, financial,competitive, legislative, regulatory and other factors that are beyond ourcontrol.

Our business may not generatesufficient cash flow from operations, or future borrowings under our seniorsecured credit facilities or from other sources may not be available to us inan amount sufficient, to enable us to repay our indebtedness or to fund ourother liquidity needs, including capital expenditure requirements. Asubstantial portion of our indebtedness bears interest at floating rates, andaccordingly, if interest rates rise, our debt service requirements willincrease. We may not be able to refinance any of our indebtedness oncommercially reasonable terms, or at all. If we cannot service ourindebtedness, we may have to take actions such as selling assets, seekingadditional equity or reducing 

 

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or delaying capitalexpenditures, strategic acquisitions, investments and alliances, any of whichcould impede the implementation of our business strategy or prevent us fromentering into transactions that would otherwise benefit our business. Additionally,we may not be able to effect such actions, if necessary, on commerciallyreasonable terms, or at all.

***The terms of our senior secured credit agreement and the indenturegoverning our notes restrict our ability to operate our business and to pursueour business strategies.***   Our senior securedcredit agreement and the indenture governing our notes contain, and any futureindebtedness of ours would likely contain, a number of restrictive covenantsthat impose significant operating and financial restrictions on us. Our seniorsecured credit agreement and the indenture governing our notes limit ourability, among other things, to:

•                  pay dividends or make distributions in respectof our common stock or make certain other restricted payments or investments;

•                  incur additional indebtedness, enter intosale/leaseback transactions or issue preferred stock;

•                  sell assets, including capital stock ofsubsidiaries;

•                  agree to limitations on the ability of oursubsidiaries to make distributions;

•                  enter into transactions with our affiliates;

•                  incur liens;

•                  enter into new lines of business; and

•                  engage in consolidations, mergers or sales ofsubstantially all of our assets.

Our senior secured creditagreement also requires us to achieve specified financial and operating resultsand maintain compliance with specified financial ratios. Our ability to complywith these ratios may be affected by events beyond our control.

The restrictions contained inour senior secured credit agreement and the indenture could:

•                  limit our ability to plan for or react tomarket conditions or meet capital needs or otherwise restrict our activities orbusiness plans; and

•                  adversely affect our ability to finance ouroperations, strategic acquisitions, investments or alliances or other capitalneeds or to engage in other business activities that would be in our interest.

 

***ITEM 3.                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

At June 30, 2005, the estimated current marketvalue of our debt, based on then-current interest rates for similar obligationswith like maturities, was approximately $9.4 million less than the amountreported in our Consolidated Balance Sheet. The estimated fair values of ourother financial instruments, cash and cash equivalents, and receivables werethe same as their carrying values.

For the three and six months ended June 30, 2005,$142.1 million and $292.5 million, or 10% of our total sales in bothperiods, were to OfficeMax, which represents a concentration in the volume ofbusiness transacted and the revenue generated from these transactions. Apartfrom these sales, concentration of credit risks with respect to tradereceivables is limited due to the wide variety of customers and channels to andthrough which our products are sold, as well as their dispersion across manygeographic areas.

                Changes in interest and currency rates expose us tofinancial market risk. We use derivative financial instruments, such asinterest rate swaps, rate hedge agreements, forward purchase contracts, and forwardexchange contracts, to hedge underlying debt obligations or anticipatedtransactions. We do 

 

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not use them for tradingpurposes. For qualifying interest hedges, the interest rate differential isreflected as an adjustment to interest expense over the life of the swap orunderlying debt.

                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 millionto hedge the exposure to interest rate fluctuations associated with ourTranche B term loan. The swaps on $300 million of our Tranche Bterm loan were fixed at an average pay rate of 3.3% and expire in December2007, while the swaps on $250 million of our Tranche B term loan werefixed at an average pay rate of 3.5% and expire in December 2008. With theanticipated repayment of the Tranche B term loan, these interest rateswaps were no longer considered hedges of the variable interest payments onthat loan. As a result, during first quarter 2005, we recorded the fair valueof the interest rate swaps, or $15.2 million, in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Income. On April 28,2005, we redesignated the $550 million of interest rate swaps as hedges ofthe cash flow from the LIBOR-based variable interest payments on amountsborrowed under our Facilities. We recognized $5.3 million of non-cashexpense in “Change in fair value of interest rate swaps” in our ConsolidatedStatement of Loss during the three months ended June 30, 2005. Thenet $9.9 million of value that was recorded in “Other assets” in ourConsolidated Balance Sheet will result in higher interest expense over theremaining life of the interest rate swaps. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rate onthat debt, of 5.1% at June 30, 2005.

                We are exposed to modest credit-related risks in theevent of nonperformance by counterparties to these interest rate swaps. However,we do not expect the counterparties, which are all major financialinstitutions, to fail to meet their obligations.

                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 floating-rate notes, which gave us an effective interest rate on thatdebt of 6.6% at June 30, 2005. These swaps expire in October 2009.

                All of the swaps were designated as cash flow hedges.Accordingly, changes in the fair value of the interest rate swaps, net oftaxes, were recorded in “Series B equity units” prior to our conversion toa corporation and in “Accumulated other comprehensive income” subsequent to ourconversion and were reclassified to “Interest expense” as interest expense wasrecognized on the LIBOR-based debt.

                As described in “Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations” in thisForm 10-Q, in the predecessor periods presented, OfficeMax allocated debtand interest costs to Boise Forest Products Operations based on its averageasset balances. OfficeMax occasionally used derivative financial instruments,such as interest rate swaps, rate hedge agreements, and forward exchangecontracts, to hedge underlying debt obligations or anticipated transactions. Theeffects of these financial instruments are not included in the predecessorfinancial statements other than through OfficeMax’s allocations to ourpredecessor.

***ITEM 4.                CONTROLSAND PROCEDURES ***
| (a)    | As of the end of  the period covered by this report, the chief executive officer and chief  financial officer directed and supervised an evaluation of the design and  operation of our disclosure controls and procedures pursuant to Rule 13a-15(e)  of the Securities Exchange Act of 1934, as amended. The evaluation was  conducted to determine whether the company’s disclosure controls and  procedures were effective in bringing material information about the company  to the attention of senior management. Based on that evaluation, our chief  executive officer and chief financial officer concluded that the company’s  disclosure controls and procedures are effective in alerting them in a timely  manner to material information that the company is required to disclose in  its filings with the SEC. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (b)    | Since  our evaluation, we have made no significant changes in the design or  operation of our internal controls. Likewise, we have not taken  corrective actions or made changes to other factors that could significantly  affect the design or operation of these controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |

 

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**PARTII—OTHER INFORMATION**

 

***ITEM 1.             LEGALPROCEEDINGS***

 

*Legal Proceedings*

                Weare a party to various legal proceedings arising in the normal course of ourbusiness. We have also assumed responsibility for a small number of legalproceedings that arose before we acquired our assets from OfficeMax. Managementdoes not believe these proceedings, either individually or in the aggregate,will have a material adverse effect on our financial position or results ofoperations. OfficeMax agreed to retain responsibility for all legal proceedingsnot explicitly assumed by us.

*Environmental Matters*

                Weare not currently involved in any material environmental proceedings. OfficeMaxretained responsibility for environmental claims and liabilities related tobusinesses, facilities, and other assets not purchased by us in the Acquisition.In addition, OfficeMax indemnifies us for hazardous substance releases andother environmental regulatory violations that relate to the businesses we didpurchase and that occurred before the Acquisition or arose from pre-Acquisitionoperations. OfficeMax, however, may not have sufficient funds to satisfy infull its indemnification obligations and, in some cases, we may not be entitledto indemnification. Management does not believe that the potential exposure tothe company for environmental matters would have a material adverse effect onour financial position or results of operations, even if OfficeMax failed tofulfill its indemnification responsibilities.

 

***ITEM 6.                EXHIBITS***

Required exhibits arelisted in the Index to Exhibits and 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 COMPANY                                      |
|--------|--------|------------------------------------------------------------|
|   |   |                                                       |
|   |   | /s/ Samuel K. Cotterell                                    |
|   |   | Samuel K. Cotterell  Vice President and Controller         |
|   |   | (As Duly Authorized Officer and Chief Accounting  Officer) |

 

Date:  August 11, 2005

 

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**BOISECASCADE COMPANY**

**INDEX TOEXHIBITS**

Filed With theQuarterly Report on Form 10-Q for the Quarter Ended June 30, 2005

 
| **Number** | ** ** | **Description**                                                                                              | ** ** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------|
| 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                                 |       |       |
| 32         |       | Section 906  Certifications of Chief Executive Officer and Chief Financial Officer of  Boise Cascade Company |       |       |
| 99         |       | Financial  Statements of Boise Land & Timber Holdings Corp.                                              |       |       |

 

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