** **

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSIONWashington, DC 20549  **FORM 10-Q

** **

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

**For the quarterly period ended September 30, 2007** |

 
| o                                                            | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **For the transition period from __________  to __________** |

 

**Commission File Number:  333-122770**

 

**Boise CascadeHoldings, L.L.C.**(Exact name of registrant as specified in its charter)

 

| **Delaware**(State or other jurisdiction of  incorporation or organization) | **20-1478587**

(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 90days.     Yes o     No x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone.)

 

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

 

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

 

The registrant, a limited liability company, has no voting or nonvotingequity held by nonaffiliates and no common stock outstanding. Equity unitsissued and outstanding on October 31, 2007, were as follows:

 

| **Series**                  | ** ** | **Units  Outstanding as of October 31, 2007** | ** ** |
|-----------------------------|------------|-----------------------------------------------|------------|
|                        |       |                                          |       |
| Series A Common  Units |       | 66,000,000                                    |       |
| Series B Common  Units |       | 547,091,488                                   |       |
| Series C Common  Units |       | 39,264,142                                    |       |
|                             |            |                                               |            |  |

 

These units are neither registered norpublicly traded.

 

 

 

----

 

 
| **Table  of Contents**                 |
|----------------------------------------|
| **PART  I—FINANCIAL INFORMATION** |
|                                   |   |
| Item 1.                                | Consolidated Financial Statements | 1 |
|                                   | Notes to Unaudited Quarterly Consolidated Financial  Statements | 7 |
|                                   | 1. | Basis  of Presentation | 7 |
|                                   | 2. | Sale of Paper and Packaging & Newsprint  Assets | 7 |
|                                   | 3. | Transactions With Related Parties | 8 |
|                                   | 4. | Vendor and Customer Rebates and Allowances | 8 |
|                                   | 5. | Other  (Income) Expense, Net | 9 |
|                                   | 6. | Leases | 9 |
|                                   | 7. | Income Taxes | 10 |
|                                   | 8. | Receivables | 11 |
|                                   | 9. | Inventories | 11 |
|                                   | 10. | Property and Equipment, Net | 11 |
|                                   | 11. | Goodwill and Intangible Assets | 12 |
|                                   | 12. | Asset Retirement Obligations | 13 |
|                                   | 13. | Debt | 14 |
|                                   | 14. | Financial  Instruments | 16 |
|                                   | 15. | Recently Adopted Accounting Standards | 17 |
|                                   | 16. | Retirement and Benefit Plans | 19 |
|                                   | 17. | Restructuring Activities | 19 |
|                                   | 18. | Segment  Information | 20 |
|                                   | 19. | Commitments and Guarantees | 22 |
|                                   | 20. | Consolidating Guarantor and Nonguarantor Financial  Information | 23 |
|                                   | 21. | Legal Proceedings and Contingencies | 34 |
|                                   |   |   |   |
| Item 2.                           | Management’s Discussion and Analysis of Financial  Condition and Results of Operations | 34 |
|                                   | Understanding Our Financial Information | 34 |
|                                   | Our Segments | 34 |
|                                   | Sale of Paper and Packaging & Newsprint  Assets | 35 |
|                                   | Overview of Financial Condition | 36 |
|                                   | Factors That Affect Our Operating Results | 37 |
|                                   | Acquisitions | 41 |
|                                   | Our Operating Results | 42 |
|                                   | Liquidity and Capital Resources | 47 |
|                                   | Contractual  Obligations | 51 |
|                                   | Off-Balance-Sheet  Activities | 52 |
|                                   | Guarantees | 52 |
|                                   | Environmental | 52 |
|                                   | Critical Accounting Estimates | 52 |
|                                   | Recently Adopted Accounting Standards | 52 |
|                                   |   |   |   |
| Item 3.                           | Quantitative and Qualitative Disclosures About Market  Risks | 53 |
|                                   |   |   |   |
| Item 4.                           | Controls and Procedures | 55 |
|                                   |   |   |   |
| **PART  II—OTHER INFORMATION**    |
| Item 1.                           | Legal  Proceedings | 56 |
|                                   |   |   |   |
| Item 1A.                          | Risk Factors | 56 |
|                                   |   |   |   |
| Item 1B.                          | Unresolved Staff Comments | 56 |
|                                   |   |   |   |
| Item 2.                                | Unregistered Sales of Equity Securities and Use of  Proceeds | 56 |
|                                   |   |   |   |
| Item 3.                                | Defaults Upon Senior Securities | 56 |
|                                   |   |   |   |
| Item 4.                                | Submission of Matters to a Vote of Securityholders | 56 |
|                                   |   |   |   |
| Item  5.                               | Other  Information | 56 |
|                                   |   |   |   |
| Item 6.                           | Exhibits |   |
|                                   |   |   |   |

 

All reports we file with the Securities and ExchangeCommission (SEC) are available free of charge via Electronic Data GatheringAnalysis and Retrieval (EDGAR) through the SEC website at www.sec.gov. We alsoprovide copies of our SEC filings at no charge upon request and make electroniccopies of our reports available through our website at www.bc.com as soon asreasonably practicable after filing such material with the SEC.

 

ii

----

**PART1—FINANCIAL INFORMATION**

 

 

***ITEM 1.          CONSOLIDATEDFINANCIAL STATEMENTS***

 

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

**(unaudited)**

** **

| ** **                                      | ** ** | **Three Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                      | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                           | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **(thousands)**                      | ** ** |
| ** **                                      | ** ** | ** **                           | ** ** | ** ** | ** ** |
| **Sales**                                       |       |                                 |       |   |   |
| Trade                                           |       | $                                    | 1,247,563  |   | $ | 1,332,187 |   |
| Related parties                                 |       | 154,570                              |       | 148,159 |   |
|                                            |       | 1,402,133                            |       | 1,480,346 |   |
|                                            |       |                                 |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 1,202,547                            |       | 1,285,335 |   |
| Depreciation,  amortization, and depletion      |       | 32,273                               |       | 39,274 |   |
| Selling and  distribution expenses              |       | 72,356                               |       | 71,555 |   |
| General and  administrative expenses            |       | 22,597                               |       | 19,725 |   |
| Other (income)  expense, net                    |       | 390                                  |       | (105 | ) |
|                                            |       | 1,330,163                            |       | 1,415,784 |   |
|                                            |       |                                 |       |   |   |
| **Income  from operations**                     |       | 71,970                               |       | 64,562 |   |
|                                            |       |                                 |       |   |   |
| Foreign exchange  gain (loss)                   |       | 2,333                                |       | (89 | ) |
| Interest expense                                |       | (23,356                              | )          | (28,400 | ) |
| Interest income                                 |       | 1,274                                |       | 909 |   |
|                                            |       | (19,749                              | )          | (27,580 | ) |
|                                            |       |                                 |       |   |   |
| **Income  before income taxes**                 |       | 52,221                               |       | 36,982 |   |
| Income tax  provision                           |       | (3,056                               | )          | (616 | ) |
| **Net  income**                                 | ** ** | **$**                                | **49,165** | ** ** | **$** | **36,366** | ** ** |

** **

See accompanying notes to unaudited quarterlyconsolidated financial statements.

** **

 

 

1

----

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

**(unaudited)**

** **
| ** **                                      | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                               | ** ** | ** ** | ** ** |
|                                            |       | **(thousands  )**                        |       |
|                                            |       | ** **                               |       |
| **Sales**                                       |       |                                     |       |   |   |
| Trade                                           |       | $                                        | 3,699,657  |   | $ | 4,085,469 |   |
| Related parties                                 |       | 471,842                                  |       | 424,929 |   |
|                                            |       | 4,171,499                                |       | 4,510,398 |   |
|                                            |       |                                     |       |   |   |
| **Costs  and expenses**                         | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 3,629,740                                |       | 3,958,664 |   |
| Depreciation,  amortization, and depletion      |       | 113,355                                  |       | 114,390 |   |
| Selling and  distribution expenses              |       | 214,384                                  |       | 214,239 |   |
| General and  administrative expenses            |       | 62,302                                   |       | 67,345 |   |
| Other (income)  expense, net                    |       | (2,155                                   | )          | 1,003 |   |
|                                            |       | 4,017,626                                |       | 4,355,641 |   |
|                                            |       |                                     |       |   |   |
| **Income  from operations**                     |       | 153,873                                  |       | 154,757 |   |
|                                            |       |                                     |       |   |   |
| Foreign exchange  gain                          |       | 4,595                                    |       | 1,650 |   |
| Change in fair  value of interest rate swaps    |       | 5,395                                    |       | — |   |
| Interest expense                                |       | (70,051                                  | )          | (87,186 | ) |
| Interest income                                 |       | 2,517                                    |       | 2,447 |   |
|                                            |       | (57,544                                  | )          | (83,089 | ) |
|                                            |       |                                     |       |   |   |
| **Income  before income taxes**                 |       | 96,329                                   |       | 71,668 |   |
| Income tax  provision                           |       | (7,729                                   | )          | (2,139 | ) |
| **Net  income**                                 | ** ** | **$**                                    | **88,600** | ** ** | **$** | **69,529** | ** ** |
|                                                 |            |                                          |            |  |  |  |  |  |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

 

 

2

----

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

**ConsolidatedBalance Sheets**

(unaudited)

 
| ** **                                        | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                        | ** ** | **2007**               | ** **    | **2006**              | ** ** |
| ** **                                        | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                        | ** ** | **(thousands)**        | ** **    |
| **ASSETS**                                        | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                        | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Current**                                       | ** ** | ** **             | ** **    | ** **            | ** ** |
| Cash and cash  equivalents                        |       | $                      | 65,608        |                  | $          | 45,169 |   |
| Receivables                                       |       |                   |          |                  |       |
| Trade, less  allowances of $1,065 and $1,734 |       | 200,130                |          | 327,138               |       |
| Related parties                                   |       | 8                      |          | 37,986                |       |
| Other                                             |       | 6,927                  |          | 19,027                |       |
| Inventories                                       |       | 339,130                |          | 640,826               |       |
| Assets held for  sale                             |       | 1,856,061              |          | —                |       |
| Restricted cash  held for bond redemption         |       | 200,000                |          | —                |       |
| Other                                             |       | 6,868                  |          | 13,027                |       |
|                                              |       | 2,674,732              |          | 1,083,173             |       |
|                                              |       |                   |          |                  |       |
| **Property**                                      | ** ** | ** **             | ** **    | ** **            | ** ** |
| Property and  equipment, net                      |       | 305,897                |          | 1,462,315             |       |
| Fiber farms and  deposits                         |       | 23,981                 |          | 40,492                |       |
|                                              |       | 329,878                |          | 1,502,807             |       |
|                                              |       |                   |          |                  |       |
| **Deferred  financing costs**                     |       | 28,485                 |          | 31,474                |       |
| **Goodwill**                                      |       | 12,170                 |          | 21,846                |       |
| **Intangible  assets, net**                       |       | 9,773                  |          | 37,507                |       |
| **Other  assets**                                 |       | 10,307                 |          | 28,390                |       |
| **Total  assets**                                 | ** ** | **$**                  | **3,065,345** | ** **            | **$**      | **2,705,197** | ** ** |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

 

 

3

----

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

**ConsolidatedBalance Sheets (continued)**

(unaudited)

 
| ** **                                                                                                                                               | ** ** | **September 30,** | ** **    | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                               | ** ** | **2007**               | ** **    | **2006**              | ** ** |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                                                                                                                               | ** ** | **(thousands)**        | ** **    |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| **LIABILITIES  AND CAPITAL**                                                                                                                             | ** ** | ** **             | ** **    | ** **            | ** ** |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Current**                                                                                                                                              | ** ** | ** **             | ** **    | ** **            | ** ** |
| Short-term  borrowings                                                                                                                                   |       | $                      | —        |                  | $          | 3,200 |   |
| Current portion  of long-term debt                                                                                                                       |       | 257,250                |          | —                |       |
| Accounts payable                                                                                                                                         |       | 185,121                |          | 341,201               |       |
| Accrued  liabilities                                                                                                                                     |       |                   |          |                  |       |
| Compensation and  benefits                                                                                                                               |       | 39,884                 |          | 93,287                |       |
| Interest payable                                                                                                                                         |       | 18,998                 |          | 11,847                |       |
| Other                                                                                                                                                    |       | 58,840                 |          | 54,600                |       |
| Liabilities  related to assets held for sale                                                                                                             |       | 349,903                |          | —                |       |
|                                                                                                                                                     |       | 909,996                |          | 504,135               |       |
|                                                                                                                                                     |       |                   |          |                  |       |
| **Debt**                                                                                                                                                 | ** ** | ** **             | ** **    | ** **            | ** ** |
| Long-term debt,  less current portion                                                                                                                    |       | 1,165,125              |          | 1,213,900             |       |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Other**                                                                                                                                                | ** ** | ** **             | ** **    | ** **            | ** ** |
| Compensation and  benefits                                                                                                                               |       | 52,764                 |          | 111,676               |       |
| Other long-term  liabilities                                                                                                                             |       | 12,507                 |          | 36,642                |       |
|                                                                                                                                                     |       | 65,271                 |          | 148,318               |       |
|                                                                                                                                                     |       |                   |          |                  |       |
| **Redeemable  equity units**                                                                                                                             | ** ** | ** **             | ** **    | ** **            | ** ** |
| Series B  equity units — 16,995,889 and 17,107,889 units outstanding                                                                      |       | 17,365                 |          | 17,477                |       |
| Series C  equity units — 39,527,950 and 39,576,540 units outstanding                                                                      |       | 8,771                  |          | 6,434                 |       |
|                                                                                                                                                     |       | 26,136                 |          | 23,911                |       |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Commitments  and contingent liabilities**                                                                                                              |       |                   |          |                  |       |
|                                                                                                                                                     |       |                   |          |                  |       |
| **Capital**                                                                                                                                              | ** ** | ** **             | ** **    | ** **            | ** ** |
| Series A  equity units — no par value; 66,000,000 and 66,000,000 units authorized and  outstanding                                             |       | 76,942                 |          | 78,290                |       |
| Series B  equity units — no par value; 550,000,000 and  550,000,000 units authorized; 530,356,601 and 530,356,601 units  outstanding |       | 814,222                |          | 724,988               |       |
| Series C  equity units — no par value; 44,000,000 and 44,000,000 units authorized                                                         |       | 7,653                  |          | 11,655                |       |
| **Total  capital**                                                                                                                                       |       | 898,817                |          | 814,933               |       |
| ** **                                                                                                                                               | ** ** | ** **             | ** **    | ** **            | ** ** |
| **Total  liabilities and capital**                                                                                                                       | ** ** | **$**                  | **3,065,345** | ** **            | **$**      | **2,705,197** | ** ** |

 

See accompanying notes to unaudited quarterlyconsolidated financial statements.

 

 

4

----

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

**ConsolidatedStatements of Cash Flows**

(unaudited)

 
| ** **                                                                       | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                            | ** ** | **2006** | ** ** |
| ** **                                                                       | ** ** | ** **                          | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **(thousands)**                     | ** ** |
| ** **                                                                       | ** ** | ** **                          | ** ** |
| **Cash  provided by (used for) operations**                                      | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net income                                                                       |       | $                                   | 88,600     |   | $ | 69,529 |   |
| Items in net income  not using (providing) cash                                  |       |                                |       |   |   |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | 114,034                             |       | 116,629 |   |
| Related-party  interest expense                                                  |       | —                              |       | 12,559 |   |
| Deferred income  taxes                                                           |       | 3,650                               |       | 150 |   |
| Pension and  other postretirement benefit expense                                |       | 18,945                              |       | 20,671 |   |
| Gain on changes  in retiree healthcare programs                                  |       | (4,367                              | )          | (3,741 | ) |
| Change in fair  value of interest rate swaps                                     |       | (5,395                              | )          | — |   |
| Management  equity units expense                                                 |       | 2,337                               |       | 2,750 |   |
| Other                                                                            |       | (4,944                              | )          | (525 | ) |
| Decrease (increase)  in working capital, net of acquisitions                     |       |                                |       |   |   |
| Receivables                                                                      |       | (76,577                             | )          | (54,524 | ) |
| Inventories                                                                      |       | (30,193                             | )          | (24,056 | ) |
| Prepaid expenses                                                                 |       | 786                                 |       | 1,968 |   |
| Accounts payable  and accrued liabilities                                        |       | 18,260                              |       | 34,940 |   |
| Pension and  other postretirement benefit payments                               |       | (888                                | )          | (842 | ) |
| Current and  deferred income taxes                                               |       | 2,578                               |       | (1,647 | ) |
| Other                                                                            |       | 4,507                               |       | 3,241 |   |
| Cash provided by  operations                                                     |       | 131,333                             |       | 177,102 |   |
|                                                                             |       |                                |       |   |   |
| **Cash  provided by (used for) investment**                                      | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Expenditures for  property and equipment                                         |       | (137,247                            | )          | (105,095 | ) |
| Increase in  restricted cash held for bond redemption                            |       | (200,000                            | )          | — |   |
| Acquisitions of  businesses and facilities                                       |       | —                              |       | (42,549 | ) |
| Sales of assets                                                                  |       | 18,270                              |       | 42,953 |   |
| Other                                                                            |       | 6,378                               |       | 2,263 |   |
| Cash used for  investment                                                        |       | (312,599                            | )          | (102,428 | ) |
|                                                                             |       |                                |       |   |   |
| **Cash  provided by (used for) financing**                                       | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Issuances of  long-term debt                                                     |       | 960,000                             |       | 293,300 |   |
| Payments of  long-term debt                                                      |       | (751,525                            | )          | (400,200 | ) |
| Short-term  borrowings                                                           |       | (3,200                              | )          | — |   |
| Note payable to  related party, net                                              |       | —                              |       | (2,536 | ) |
| Proceeds from  changes to interest rate swaps                                    |       | 2,848                               |       | 25,620 |   |
| Tax  distributions to members                                                    |       | (2,753                              | )          | (19,206 | ) |
| Other                                                                            |       | (3,665                              | )          | 53 |   |
| Cash provided by  (used for) financing                                           |       | 201,705                             |       | (102,969 | ) |
|                                                                             |       |                                |       |   |   |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 20,439                              |       | (28,295 | ) |
|                                                                             |       |                                |       |   |   |
| **Balance  at beginning of the period**                                          |       | 45,169                              |       | 88,171 |   |
| ** **                                                                       |       |                                |       |   |   |
| **Balance  at end of the period**                                                | ** ** | **$**                               | **65,608** | ** ** | **$** | **59,876** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

 

 

5

----

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

**ConsolidatedStatements of Capital**

(unaudited)

 

 
| ** **                                                       | ** **   | **Series A  Equity Units** | ** **   | **Series B  Equity Units** | ** **   | **Series C  Equity Units** | ** **   | **Total**    | ** **   |
|------------------------------------------------------------------|--------------|---------------------------------|--------------|---------------------------------|--------------|---------------------------------|--------------|--------------|--------------|
| ** **                                                       | ** **   | **Units**                       | ** **   | **Amount**                      | ** **   | **Units**                       | ** **   | **Amount**   | ** **   | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| *** ***                                                     | *** *** | *** ***                    | *** *** | *** ***                    | *** *** | *** ***                    | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| *** ***                                                     |         | **(thousands)**                 |         |
| ** **                                                       | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at  December 31, 2005                               |         | 66,000                          |         | $                               | 39,885       |                            | 530,357      |         | $            | 417,601 |   | — |   | $ | 7,535 |   | $ | 465,021 |   |
|                                                             |         |                            |         |                            |         |                            |         |         |         |   |   |   |   |   |   |
| Net income (a)                                                   |         | —                          |         | —                          |         | —                          |         | 71,571       |         | — |   | — |   | 71,571 |   |
| Other  comprehensive income, net of tax (a) (b)        | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flow hedges                                                 |         | —                          |         | —                          |         | —                          |         | (10,327      | )            | — |   | — |   | (10,327 | ) |
| Minimum pension  liability adjustment                            |         | —                          |         | —                          |         | —                          |         | 58           |         | — |   | — |   | 58 |   |
| Unfunded  accumulated benefit obligation                         |         | —                          |         | —                          |         | —                          |         | 37,263       |         | — |   | — |   | 37,263 |   |
| Capital  contributions from members                              |         | —                          |         | 34,773                          |         | —                          |         | 237,709      |         | — |   | — |   | 272,482 |   |
| Paid-in-kind  dividend                                           |         | —                          |         | 3,632                           |         | —                          |         | (3,632       | )            | — |   | — |   | — |   |
| Tax  distributions to members                                    |         | —                          |         | —                          |         | —                          |         | (22,022      | )            | — |   | — |   | (22,022 | ) |
| Allocation of  profit interest to Series C equity units     |         | —                          |         | —                          |         | —                          |         | (4,120       | )            | — |   | 4,120 |   | — |   |
| Other                                                            |         | —                          |         | —                          |         | —                          |         | 887          |         | — |   | — |   | 887 |   |
| Balance at  December 31, 2006 (c)                           |         | 66,000                          |         | 78,290                          |         | 530,357                         |         | 724,988      |         | — |   | 11,655 |   | 814,933 |   |
| ** **                                                       | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (a)                                                   |         | —                          |         | —                          |         | —                          |         | 88,600       |         | — |   | — |   | 88,600 |   |
| Other  comprehensive income, net of   tax (a) (b)           | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **                      | ** **   | ** **   | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flow hedges                                                 |         | —                          |         | —                          |         | —                          |         | 850          |         | — |   | — |   | 850 |   |
| Unfunded  accumulated benefit obligation                         |         | —                          |         | —                          |         | —                          |         | (5,438       | )            | — |   | — |   | (5,438 | ) |
| Paid-in-kind  dividend                                           |         | —                          |         | 4,249                           |         | —                          |         | (4,249       | )            | — |   | — |   | — |   |
| Tax distributions  to members                                    |         | —                          |         | (5,597                          | )            | —                          |         | 5,597        |         | — |   | — |   | — |   |
| Reallocation of  profit interest from Series C equity units |         | —                          |         | —                          |         | —                          |         | 4,002        |         | — |   | (4,002 | ) | — |   |
| Other                                                            |         | —                          |         | —                          |         | —                          |         | (128         | )            | — |   | — |   | (128 | ) |
| **Balance  at September 30, 2007 (c)**                      | ** **   | **66,000**                      | ** **   | **$**                           | **76,942**   | ** **                      | **530,357**  | ** **   | **$**        | **814,222** | ** ** | **—** | ** ** | **$** | **7,653** | ** ** | **$** | **898,817** | ** ** |
|                                                                  |              |                                 |              |                                 |              |                                 |              |              |              |  |  |  |  |  |  |  |  |  |  |  |

----

| (a)                                                                               |   | Total  comprehensive income for the three and nine months ended September 30,  2007, was $43.6 million and $84.0 million, compared with  $19.2 million and $51.6 million for the three and nine months ended  September 30, 2006.             |
|-----------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                              |
| (b)                                                                               |   | Total  other comprehensive income for the three and nine months ended  September 30, 2007, was $(5.5) million and $(4.6) million,  compared with $(17.2) million and $(18.0) million for the three and  nine months ended September 30, 2006. |
|                                                                              |
| (c)                                                                               |   | Accumulated  other comprehensive income at September 30, 2007, and December 31,  2006, was $35.9 million and $40.5 million, respectively.                                                                                                               |
|                                                                              |   |                                                                                                                                                                                                                                                                        |
| See  accompanying notes to unaudited quarterly consolidated financial statements. |

 

6

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***Notesto Unaudited Quarterly Consolidated Financial Statements***

 

***1.             Basis of Presentation***

 

As used in theseconsolidated financial statements, the terms “Boise” and “we” refer to BoiseCascade Holdings, L.L.C., and its consolidated subsidiaries. We are a diversifiedNorth American paper and forest products company headquartered in Boise, Idaho.We operate our business in the following five reportable segments: BuildingMaterials Distribution, Wood Products, Paper, Packaging & Newsprint,and Corporate and Other. See Note 18, Segment Information, for additionalinformation about our reportable segments.

 

Our operations began on October 29, 2004(inception), when we acquired the forest products and paper assets of OfficeMax(the Forest Products Acquisition). The quarterly consolidated financialstatements have not been audited by an independent registered public accountingfirm but, in the opinion of management, include all adjustments, consistingonly of normal, recurring adjustments, necessary to present fairly the resultsfor the periods presented. Net income for the three and nine months endedSeptember 30, 2007 and 2006, involved estimates and accruals. Actualresults may vary from those estimates. Quarterly results are not necessarilyindicative of results that may be expected for the full year.

 

                Certain amounts in prior periods’consolidated financial statements have been recast to conform with the currentperiod’s presentation. For more information, see the discussion of Financial Accounting Standards Board (FASB) StaffPosition (FSP) No. AUG AIR-1, *Accounting forPlanned Major Maintenance Activities,*adopted in January 2007, in Note 15, Recently Adopted AccountingStandards.

 

 

***2.***             ***Sale of Paper andPackaging & Newsprint Assets***

 

                In September 2007, Boise Cascade, L.L.C. (Boise LLC),our wholly owned direct subsidiary, entered into a purchase and sale agreement(PSA) with Aldabra 2 Acquisition Corp. (Aldabra) for the sale of our Paper andPackaging & Newsprint segments and most of our Corporate and Othersegment for cash and shares of Aldabra common stock equal to approximately$1.625 billion, plus working capital adjustments. As part of thetransaction, Aldabra intends to change its name to Boise Paper Company (BPC).Following the transaction, Boise LLC will maintain 100% ownership of our WoodProducts and Building Materials Distribution segments, and we expect to ownapproximately 40% of BPC’s shares. The actual amount of our ownership in BPC is dependent on a number offactors, including the number of Aldabra shareholders, if any, that exercisetheir conversion rights.  In any event,our ownership in BPC cannot exceed 49% of BPC’s outstanding stock at the timeof closing. Bothcompanies will be headquartered in Boise, Idaho.

 

In September 2007, in connection with the Aldabra transaction, wereclassified the assets and liabilities of our Paper and Packaging &Newsprint segments, as well as some of the assets and liabilities included inour Corporate and Other segment, to “Assets held for sale” and “Liabilities relatedto assets held for sale” on our Consolidated Balance Sheet and stoppeddepreciating and amortizing those assets. The three and nine months endedSeptember 30, 2007, included approximately $10.4 million of lowerdepreciation and amortization expense as a result of discontinuing depreciationand amortization on the assets recorded as held for sale. Of the $10.4 million of lowerdepreciation and amortization expense, $5.4 million related to our Papersegment, $4.8 million related to our Packaging & Newsprintsegment, and $0.2 million related to our Corporate and Other segment. Based on the terms of the PSA and the carrying valueof the assets held for sale, no impairment exists. The equity interest that weexpect to own in BPC after the transaction represents a significant continuinginvolvement. As a result, until the transaction is completed the operatingresults of the Paper and Packaging & Newsprint segments will continueto be included in continuing operations in the Consolidated Statements ofIncome (Loss).

 

 

7

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In accordance with Statement of Financial Accounting Standards (SFAS) No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, we did not recast the prior-periodbalance sheet for assets and liabilities held for sale to conform with thecurrent-period presentation. At September 30, 2007, the carrying amounts of themajor classes of assets and liabilities classified as “Assets held for sale”and “Liabilities related to assets held for sale” on our September 30,2007, Consolidated Balance Sheet were as follows:

 
| ** **                                   | ** ** | **September 30,** | ** **    |
|----------------------------------------------|------------|------------------------|---------------|
| ** **                                   | ** ** | **2007**               | ** **    |
| ** **                                   | ** ** | ** **             | ** **    |
| ** **                                   | ** ** | **(thousands)**        | ** **    |
| ** **                                   | ** ** | ** **             | ** **    |
| Assets                                       |       |                   |          |
| Accounts  receivable, net                    |       | $                      | 253,387       |   |
| Inventories                                  |       | 328,727                |          |
| Property and  equipment, net                 |       | 1,169,280              |          |
| Fiber farms and  deposits                    |       | 18,393                 |          |
| Goodwill                                     |       | 42,336                 |          |
| Intangible  assets, net                      |       | 23,967                 |          |
| Other                                        |       | 19,971                 |          |
| Assets held for  sale                        | ** ** | **$**                  | **1,856,061** | ** ** |
|                                         |       |                   |          |
| Liabilities                                  |       |                   |          |
| Accounts payable                             |       | $                      | 170,004       |   |
| Accrued  compensation and benefits           |       | 72,476                 |          |
| Other accrued  liabilities                   |       | 107,423                |          |
| Liabilities  related to assets held for sale | ** ** | **$**                  | **349,903**   | ** ** |
|                                              |            |                        |               |  |  |

 

 

***3.             Transactions With Related Parties***

 

*Sales*

 

                Duringeach of the periods presented, we sold paper and paper products to OfficeMax atsales prices that were designed to approximate market prices. For the threemonths ended September 30, 2007 and 2006, sales to OfficeMax were$154.6 million and $148.1 million, respectively. Sales to OfficeMaxwere $471.8 million and $424.9 million for the nine months endedSeptember 30, 2007 and 2006, respectively. These sales are included in “Sales,Related parties” in the Consolidated Statements of Income.

 

*Debt andInterest*

 

                In November 2006, we repaid a related-party notepayable to Boise Land & Timber Corp. in full. For the three and ninemonths ended September 30, 2006, interest expense in our ConsolidatedStatements of Income included $3.6 million and $12.6 million,respectively, of related-party interest expense.

 

*Equity Distributions*

 

                The majority of our businessesand assets are held and operated by limited liability companies, which are notsubject to entity-level federal or state income taxation. We make cashdistributions to permit the members of Boise and affiliates to pay incometaxes. During the nine months ended September 30, 2007, we made no cashdistributions to Forest Products Holdings (FPH), our majority owner; MadisonDearborn Partners (MDP), our equity sponsor; or management investors; however,we made $2.8 million of cash distributions to OfficeMax to fund its taxobligations related to its investment in us.

 

                Duringthe nine months ended September 30, 2006, we made $16.0 million ofcash distributions to FPH, which in turn paid $14.2 million to MDP and$1.8 million to management investors. During this period, we also made$3.2 million of cash distributions to OfficeMax to fund its taxobligations related to its investment in us.

 

 

***4.             Vendorand Customer Rebates and Allowances***

 

                Wereceive rebates and allowances from our vendors under a number of differentprograms, including vendor marketing programs. At September 30, 2007, andDecember 31, 2006, we had $2.0 million and $4.3 million,respectively, of vendor rebates and allowances recorded in “Receivables, Other”on the Consolidated Balance Sheets. These rebates and allowances are accountedfor in

 

 

8

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accordance with Emerging Issues Task Force(EITF) 02-16, *Accounting by a Customer(Including a Reseller) for Certain Consideration Received From a Vendor*.Rebates and allowances received from our vendors are recognized as a reductionof “Materials, labor, and other operating expenses” when the product is sold,unless the rebates and allowances are linked to a specific incremental cost tosell a vendor’s product. Amounts received from vendors that are linked tospecific selling and distribution expenses are recognized as a reduction of “Sellingand distribution expenses” in the period the expense is incurred.

 

                We also provide rebates to ourcustomers based on the volume of their purchases. We provide the rebates toincrease the sell-through of our products. The rebates provided to ourcustomers are accounted for in accordance with EITF 01-09, *Accounting for Consideration Given by a Vendor to a Customer*.The rebates are recorded as a decrease in sales. At September 30, 2007,and December 31, 2006, we had $12.9 million and $23.9 million,respectively, of rebates payable to our customers recorded in “Accruedliabilities, Other” on our Consolidated Balance Sheets.

 

 

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

 

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

 
| ** **                              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                              | ** ** | ** **                                          | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **(thousands)**                                     | ** ** |
|                                    |       |                                                |       |                                               |       |   |   |   |   |
| Changes in  retiree healthcare programs |       | $                                                   | —     |                                               | $          | — |   | $ | (4,367 | ) | $ | (3,741 | ) |
| Sales of assets,  net                   |       | (95                                                 | )          | (164                                               | )          | (796 | ) | 2,244 |   |
| Project costs                           |       | 163                                                 |       | —                                             |       | 412 |   | 2,135 |   |
| Other, net (a)                          |       | 322                                                 |       | 59                                                 |       | 2,596 |   | 365 |   |
| ** **                              | ** ** | **$**                                               | **390**    | ** **                                         | **$**      | **(105** | **)** | **$** | **(2,155** | **)** | **$** | **1,003** | ** ** |

 

----

(a)                                  The three andnine months ended September 30, 2007, included $0.2 million and$2.2 million of expense related to the closure of our paper convertingfacility in Salem, Oregon, which closed in third quarter 2007.

 

 

***6.             Leases***

 

                Welease a portion of our distribution centers as well as other property andequipment under operating leases. For purposes of determining straight-linerent expense, the lease term is calculated from the date we first takepossession of the facility, including any periods of free rent and any optionperiods we are reasonably assured of exercising. Straight-line rent expense isalso adjusted to reflect any allowances or reimbursements provided by thelessor. Rental expense for operating leases was $6.5 million and$6.9 million for the three months ended September 30, 2007 and 2006,and $19.1 million and $18.1 million for the nine months endedSeptember 30, 2007 and 2006, respectively. Sublease rental income was notmaterial in any of the periods presented.

 

                Fornoncancelable operating leases with remaining terms of more than one year, theminimum lease payment requirements are $5.5 million for the remainder of2007, $21.3 million in 2008, $19.9 million in 2009, $18.4 millionin 2010, $15.0 million in 2011, and $13.0 million in 2012, with totalpayments thereafter of $59.5 million. These future minimum lease paymentrequirements have not been reduced by sublease rentals due in the future undernoncancelable subleases. Minimum sublease income received in the future is notexpected to be material.

 

                In second quarter 2007, we sold our newly constructed building materialsdistribution center in Milton, Florida, for $10.1 million, net of relatedfees and expenses. The proceeds were used to make debt repayments. Inconnection with the sale, we leased back the facility over a 15-year leaseterm. The lease is accounted for as an operating lease. The minimum leasepayment requirements related to the transaction are included in the minimumlease payments disclosed above.

 

 

 

9

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In third quarter 2006, we sold and leased back our Lakeville, Minnesota,and Rochelle, Illinois, building materials distribution facilities. Wecollected $11.0 million of sale proceeds, net of related fees and expenses,which we used to pay down our Tranche D term loan. In connection with thesale, we recorded a $1.5 million deferred gain in “Other long-termliabilities” in our Consolidated Balance Sheet, which we are recognizing as areduction of lease expense over the life of the lease. The leases are accountedfor as operating leases. The minimum lease payment requirements related to thetransactions are included in the minimum lease payments disclosed above.

 

                Infirst quarter 2006, we sold our headquarters building in Boise, Idaho, for$27.2 million, net of related fees and expenses, and recognized a$1.7 million loss recorded in “Other (income) expense, net” in ourConsolidated Statement of Income. The proceeds were used to pay down ourTranche D term loan. In connection with the sale, we leased backapproximately 65% of the building over a staggered lease term of ten to12 years. The lease is accounted for as an operating lease. The minimumlease payment requirements related to the transaction are included in theminimum lease payments disclosed above.

 

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

 

 

***7.             Income Taxes***

 

                The majority ofour businesses and assets are held and operated by limited liability companies,which are not subject to entity-level federal or state income taxation. Theincome taxes with respect to these operations are payable by our equity holdersin accordance with their respective ownership percentages. We make cashdistributions to permit the members of Boise and affiliates to pay these taxes.For the three months ended September 30, 2007 and 2006, we made zero and$8.5 million of cash distributions, respectively, to permit our equity holdersto pay these taxes and $2.8 million and $19.2 million for the ninemonths ended September 30, 2007 and 2006, respectively. Both our seniorcredit facilities and the indenture governing our notes permit thesedistributions.

 

                Boise CascadeHoldings, L.L.C., or one of our subsidiaries files federal income tax returnsin the U.S. and Canada and various state and foreign income tax returns in themajor state jurisdictions of Alabama, Idaho, Louisiana, Oregon, Minnesota,Texas, and Washington. We are subject to tax examinations from October 29,2004 (our inception) to present. In third quarter 2007, the Canadian RevenueAgency began an audit of Boise AllJoist for tax years 2005 and 2006.

 

                During the threemonths ended September 30, 2007 and 2006, our effective tax rates for ourseparate subsidiaries that are taxed as corporations were 35.4% and 36.1%. Oureffective tax rates were 35.0% and 40.0% for the nine months endedSeptember 30, 2007 and 2006. The primary reason for the difference in taxrates is the effect of state income taxes and the mix of domestic and foreignsources of income.

 

                For the three and nine monthsended September 30, 2007, income tax expense was $3.1 million and $7.7 million,compared with $0.6 million and $2.1 million for the same periods ayear ago. During the three months ended September 30, 2007, the increaseprimarily related to income tax expense related to our cash flow hedges. Duringthe nine months ended September 30, 2007, the increase primarily relatedto income tax expense related to our cash flow hedges and the true-up ofmiscellaneous state income tax items.

 

                Forthe three and nine months ended September 30, 2006, we received$0.1 million and $6.1 million of federal and state income tax refundsas a result of rescinding our C corporation status in fourth quarter 2005and paid $0.7 million and $4.0 million of taxes, net of other refundsreceived. During the three and nine months ended September 30, 2007, wepaid $0.5 million and $1.8 million of taxes, net of refunds received.At September 30, 2007, and December 31, 2006, we had$0.5 million and $0.4 million of deferred tax liabilities related toour taxable subsidiaries recorded on our Consolidated Balance Sheets.

 

10

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InJanuary 2007, we adopted the provisions of FASB Interpretation (FIN)No. 48, *Accounting for Uncertainty in Income Taxes —an Interpretation of FASB Statement No. 109,*and it did nothave a significant impact on our financial position or results of operations.On January 1, 2007, we had an insignificant amount of unrecognized taxbenefits, none of which would affect our effective tax rate if recognized. Wedo not anticipate that the amount of unrecognized tax benefits willsignificantly increase or decrease within the next 12 months. We recognizeinterest and penalties on unrecognized tax benefits in**“Incometax provision” in the Consolidated Statements of Income. For the three and ninemonths ended September 30, 2007 and 2006, and the year endedDecember 31, 2006, we recognized an insignificant amount of interest andpenalties in our Consolidated Statements of Income and on our ConsolidatedBalance Sheets.

 

 

***8.******                                     ******Receivables***

 

                                                Wehave a large, diversified customer base. A large portion of our office paperssales volume is sold to OfficeMax. We market our newsprint throughAbitibi-Consolidated (Abitibi) pursuant to an arrangement whereby Abitibipurchases all of the newsprint we produce at a price equal to the price atwhich Abitibi sells newsprint produced at its mills located in the southernUnited States, less associated expenses and a sales and marketing discount.Sales to OfficeMax and Abitibi-Consolidated represent concentrations in thevolumes of business transacted and concentrations of credit risk. AtSeptember 30, 2007, we had $52.7 million and $25.0 million ofaccounts receivable due from OfficeMax and Abitibi, respectively, and atDecember 31, 2006, we had $37.2 million and $30.1 million. Theseamounts are related to our Paper and Packaging & Newsprint segmentsand recorded in “Assets held for sale” on our Consolidated Balance Sheet. SeeNote 2, Sale of Paper and Packaging & Newsprint Assets.

 

                A largeportion of our receivables are used to secure our borrowings under the accountsreceivable securitization program described in Note 13, Debt.

 

 

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

 

Inventoriesinclude the following:

 
| ** **                          | ** ** | **September 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|-------------------------------------|------------|------------------------------|-------------|------------------------|------------|
| ** **                          | ** ** | ** **                   | ** **  | ** **             | ** ** |
| ** **                          | ** ** | **(thousands)**              | ** **  |
|                                |       |                         |        |                   |       |
| Finished goods  and work in process |       | $                            | 275,778     |                   | $          | 420,620 |   |
| Logs                                |       | 43,577                       |        | 54,326                 |       |
| Other raw  materials and supplies   |       | 19,775                       |        | 165,880                |       |
| ** **                          | ** ** | **$**                        | **339,130** | ** **             | **$**      | **640,826** | ** ** |

 

 

 

***10.******                              ******Property and Equipment,Net***

 

Property and equipmentconsisted of the following asset classes:

 
| ** **                     | ** ** | **September 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|--------------------------------|------------|------------------------------|-------------|------------------------|------------|
| ** **                     | ** ** | ** **                   | ** **  | ** **             | ** ** |
| ** **                     | ** ** | **(thousands)**              | ** **  |
|                           |       |                         |        |                   |       |
| Land and land  improvements    |       | $                            | 37,262      |                   | $          | 72,539 |   |
| Buildings and  improvements    |       | 100,447                      |        | 231,423                |       |
| Machinery and  equipment       |       | 250,945                      |        | 1,338,894              |       |
| Construction in  progress      |       | 12,686                       |        | 100,370                |       |
|                           |       | 401,340                      |        | 1,743,226              |       |
| Less accumulated  depreciation |       | (95,443                      | )           | (280,911               | )          |
| ** **                     | ** ** | **$**                        | **305,897** | ** **             | **$**      | **1,462,315** | ** ** |
|                                |            |                              |             |                        |            |  |  |  |

 

 

 

11

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***11.          Goodwill and Intangible Assets***

 

                Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and intangible assets of businesses acquired. Weaccount for goodwill in accordance with the provisions of SFAS No. 142, *Goodwill and Other Intangible Assets*, which requires us toassess our acquired goodwill and intangible assets with indefinite lives forimpairment at least annually in the absence of an indicator of possibleimpairment and immediately upon an indicator of possible impairment. We assessgoodwill and intangible assets with indefinite lives in the fourth quarter ofeach year using a fair-value-based approach. We also evaluate the remaininguseful lives of our finite-lived purchased intangible assets to determinewhether any adjustments to the useful lives are necessary. We completed ourannual assessment in accordance with SFAS No. 142 in fourth quarter 2006and determined that there was no impairment.

 

                        We account for acquisitions using the purchase method of accounting. As aresult, we allocate the purchase price to the tangible and intangible assetsacquired and liabilities assumed based on their respective fair values as ofthe date of acquisition. In accordance with SFAS No. 141, *Business Combinations*, we have one year from the purchasedate to finalize or receive information to determine changes in estimates ofthe fair value of assets acquired and liabilities assumed.

 

                Changes in the carrying amountof our goodwill by segment are as follows:

 
| ** **                                                               | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging**** ****&  Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|-----------|------------|---------------------------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                               | ** ** | ** **                            | ** ** |
| ** **                                                               | ** ** | **(thousands)**                       | ** ** |
|                                                                     |       |                                  |       |               |       |      |       |                                        |       |                      |       |       |       |
| Balance at  December 31, 2005                                       |       | $                                     | 5,593      |               | $          | 6,577     |       | $                                           | 1,341      |                      | $          | 1,590      |       | $ | — |   | $ | 15,101 |   |
|                                                                     |       |                                  |       |               |       |      |       |                                        |       |                      |       |       |       |
| Goodwill  acquired during 2006 (a)                                       |       | —                                |       | —             |       | —    |       | 7,046                                       |       | —                    |       | 7,046      |       |
| Purchase price  adjustments during 2006                                  |       | —                                |       | —             |       | —    |       | (301                                        | )          | —                    |       | (301       | )          |
| Balance at  December 31, 2006                                       |       | 5,593                                 |       | 6,577              |       | 1,341     |       | 8,335                                       |       | —                    |       | 21,846     |       |
|                                                                     |       |                                  |       |               |       |      |       |                                        |       |                      |       |       |       |
| Purchase price adjustments  during 2007 (b)                              |       | —                                |       | —             |       | 32,660    |       | —                                      |       | —                    |       | 32,660     |       |
| Goodwill  reclassified to “Assets held for sale” (Note 2) |       | —                                |       | —             |       | (34,001   | )          | (8,335                                      | )          | —                    |       | (42,336    | )          |
| Balance at  September 30, 2007                                      | ** ** | **$**                                 | **5,593**  | ** **         | **$**      | **6,577** | ** ** | **$**                                       | **—** | ** **                | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **12,170** | ** ** |

 

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(a)                                  On February 1, 2006, we purchased the assets of Central TexasCorrugated (CTC) in Waco, Texas, for an aggregate purchase price of$43.8 million, including fees and expenses. In connection with theacquisition, we recorded a net $6.7 million of goodwill.

 

(b)                                 As part of the Forest ProductsAcquisition, we entered into an Additional Consideration Agreement withOfficeMax, pursuant to which we agreed to adjust the purchase price based onchanges in paper prices over the six-year period following the Forest ProductsAcquisition. For the first and second anniversary periods, which endedOctober 29, 2005 and 2006, neither Boise nor OfficeMax owed additionalconsideration for the purchase price. For the third anniversary period endedOctober 29, 2007, we estimate that we will owe OfficeMax approximately$32.7 million, which we recorded in “Accrued liabilities, Other.”

 

                AtSeptember 30, 2007, intangible assets represent the values assigned totrade names and trademarks and customer relationships. The trade names and trademarkassets have an indefinite life and are not amortized. Customer relationshipsare amortized over five years. In September 2007, we stopped amortizing theintangible assets related to the Paper and Packaging & Newsprintsegments when the long-lived assets were classified as held for sale. For moreinformation, see Note 2, Sale of Paper and Packaging & NewsprintAssets.

 

 

 

12

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                Intangibleassets consisted of the following:

 

| ** **                 | ** ** | **Nine Months Ended September 30, 2007** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount**               | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|                       |       |                                          |       |   |   |   |   |
| ** **                 | ** ** | **(thousands)**                               | ** ** |
|                       |       |                                          |       |   |   |   |   |
| Trade names and trademarks |       | $                                             | 8,900      |   | $ | — |   | $ | 8,900 |   |
| Customer relationships     |       | 2,100                                         |       | (1,227 | ) | 873 |   |
|                       | ** ** | **$**                                         | **11,000** | ** ** | **$** | **(1,227** | **)** | **$** | **9,773** |   |

 

| ** **                 | ** ** | **Year Ended December 31, 2006** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount**       | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
|                       |       |                                  |       |   |   |   |   |
| ** **                 | ** ** | **(thousands)**                       | ** ** |
|                       |       |                                  |       |   |   |   |   |
| Trade names and trademarks |       | $                                     | 24,700     |   | $ | (346 | ) | $ | 24,354 |   |
| Customer relationships     |       | 13,400                                |       | (3,887 | ) | 9,513 |   |
| Noncompete agreements      |       | 1,200                                 |       | (281 | ) | 919 |   |
| Technology                 |       | 5,043                                 |       | (2,322 | ) | 2,721 |   |
|                       | ** ** | **$**                                 | **44,343** | ** ** | **$** | **(6,836** | **)** | **$** | **37,507** | ** ** |

 

                Intangible assetamortization expense was $1.4 million and $3.8 million for the threeand nine months ended September 30, 2007, and $1.0 million and$3.0 million for the same periods in 2006. The estimated amortizationexpense is $0.1 million for the remainder of 2007 and $0.4 million in2008 and 2009. We estimate no amortization expense after 2009.

 

 

***12.          Asset Retirement Obligations***

 

                We account for assetretirement obligations in accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations*, and FINNo. 47, *Accounting for Conditional Asset RetirementObligations — an Interpretation of FASB Statement No. 143*.We accrue for asset retirement obligations in the period in which they areincurred if sufficient information is available to reasonably estimate the fairvalue of the obligation. When we record the liability, we capitalize the costby increasing the carrying amount of the related long-lived asset. Over time,the liability is accreted to its settlement value, and the capitalized cost isdepreciated over the useful life of the related asset. Upon settlement of theliability, we will recognize a gain or loss for any difference between thesettlement amount and the liability recorded.

 

                At September 30, 2007, andDecember 31, 2006, we had $0.8 million and $11.5 million ofasset retirement obligations recorded in “Other, Other long-term liabilities”on our Consolidated Balance Sheets. These liabilities related primarily tolandfill closure costs. The liabilities are based on the best estimate ofcurrent costs and are updated periodically to reflect current technology, lawsand regulations, inflation, and other economic factors. We do not have anyassets legally restricted for purposes of settling asset retirementobligations. The table below describes changes to our asset retirementobligations for the nine months ended September 30, 2007, and the yearended December 31, 2006:

 

| ** **                                                                                           | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                                                                 |       |                    |       |                        |       |
| ** **                                                                                           |       | **(thousands)**         |       |
| ** **                                                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Asset retirement obligation at beginning of period                                                   |       | $                       | 11,544     |                        | $          | 11,484 |   |
| Liabilities incurred                                                                                 |       | —                  |       | 1,633                       |       |
| Accretion expense                                                                                    |       | 701                     |       | 1,020                       |       |
| Payments                                                                                             |       | —                  |       | (53                         | )          |
| Revisions in estimated cash flows                                                                    |       | —                  |       | (2,540                      | )          |
| Asset retirement obligation reclassified to  “Liabilities related to assets held for sale” |       | (11,466                 | )          | —                      |       |
| Asset retirement obligation at end of period                                                         | ** ** | **$**                   | **779**    | ** **                  | **$**      | **11,544** | ** ** |

 

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                We have additional assetretirement obligations with indeterminate settlement dates. The fair value ofthese asset retirement obligations cannot be estimated due to the lack ofsufficient information to estimate the settlement dates of the obligations.These asset retirement obligations include, for example, (i) removal anddisposal of potentially hazardous materials related to equipment and/or anoperating facility if the equipment and/or facility were to undergo majormaintenance, renovation, or demolition; (ii) wastewater treatment pondsthat may be required to be drained and/or cleaned if the related operatingfacility is closed; and (iii) storage sites or owned facilities for whichremoval and/or disposal of chemicals and other related materials are requiredif the operating facility is closed. We will recognize a liability in theperiod in which sufficient information becomes available to reasonably estimatethe fair value of these obligations.

 

 

***13.          Debt***

 

                AtSeptember 30, 2007, and December 31, 2006, our short- and long-termdebt and the interest rates on that debt were as follows:

 
| ** **                                     | ** ** | **September 30, 2007** | ** **    | **December 31, 2006**         | ** ** |
|------------------------------------------------|------------|-----------------------------|---------------|------------------------------------|------------|
| ** **                                     | ** ** | **Amount**                  | ** **    | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** | **Amount** | ** ** | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** |
|                                           |       |                        |          |                               |       |   |   |   |   |   |   |   |   |
| ** **                                     | ** ** | **(thousands**              | **)**         | ** **                         | ** ** | ** ** | ** ** | **(thousands** | **) ** | ** ** | ** ** | ** ** | ** ** |
|                                           |       |                        |          |                               |       |   |   |   |   |   |   |   |   |
| Revolving credit facility, due 2010            |       | $                           | —        |                               | N/A        |   | N/A |   | $ | — |   | N/A |   | N/A |   |
| Tranche D term loan, due 2011             |       | —                      |          | N/A                                |       | N/A |   | 538,900 |   | 7.1 | % | 6.8 | % |
| Tranche E term loan, due 2014             |       | 522,375                     |          | 6.7                                | %          | 6.5 | % | — |   | N/A |   | N/A |   |
| Senior unsecured floating-rate notes, due 2012 |       | 250,000                     |          | 8.2                                | %          | 7.6 | % | 250,000 |   | 8.2 | % | 7.6 | % |
| 7.125% senior subordinated notes, due 2014     |       | 400,000                     |          | 7.1                                | %          | N/A |   | 400,000 |   | 7.1 | % | N/A |   |
| Delayed-draw term loan, due 2014               |       | 200,000                     |          | 6.7                                | %          | N/A |   | — |   | N/A |   | N/A |   |
| Borrowings secured by receivables              |       | 50,000                      |          | 5.8                                | %          | N/A |   | 25,000 |   | 5.6 | % | N/A |   |
| Current portion of long-term debt              |       | (257,250                    | )             | 8.2                                | %          | 7.6 | % | — |   | N/A |   | N/A |   |
| Long-term debt, less current portion           |       | 1,165,125                   |          | 6.8                                | %          | 6.7 | % | 1,213,900 |   | 7.3 | % | 7.1 | % |
| Short-term borrowings                          |       | —                      |          | N/A                                |       | N/A |   | 3,200 |   | 6.0 | % | N/A |   |
| Current portion of long-term debt              |       | 257,250                     |          | 8.2                                | %          | 7.6 | % | — |   | N/A |   | N/A |   |
| Total debt                                     | ** ** | **$**                       | **1,422,375** | ** **                         | ** ** | ** ** | ** ** | ** ** | **$** | **1,217,100** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

*Amended and Restated Facilities*

                On May 3, 2007, we amended and restated oursenior secured credit facilities (the Facilities), which consisted of a$475.0 million revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). Our amended andrestated Facilities consist of a $450.0 million revolving credit facility(due in 2010) and a $525.0 million Tranche E term loan (due in 2014).In connection with our amendment and restatement, we repaid all amountsoutstanding under our Tranche D term loan. We also obtained a $200 milliondelayed-draw term loan (due in 2014) that we used to redeem the majority of ourexisting senior unsecured floating-rate notes (due in 2012) when they becamecallable at par in October 2007.

                Our amendedrevolving credit facility agreement permits us to borrow up to$450.0 million for general corporate purposes. At September 30, 2007,we had no borrowings outstanding under our revolving credit facility; however,$34.5 million of letters of credit were considered a draw on the revolver,reducing our borrowing capacity to $415.5 million. Borrowings under ourrevolving credit facility are based on the prime rate, the federal fundseffective rate, or the London Interbank Offered Rate (LIBOR). Pricing issubject to quarterly adjustment based on the ratio of our total indebtedness toour last four quarters of consolidated earnings before interest, taxes,depreciation, and amortization (EBITDA). The range of borrowing costs under thepricing grid is:  (i) the higher ofprime plus 0.50% to 1.25% or the federal funds effective rate plus 1.00% to1.75% or (ii) LIBOR plus 1.50% to 2.25%. For the nine months endedSeptember 30, 2007, and the year ended December 31, 2006, the averageinterest rate for our borrowings under the revolver was 6.0%. Letters of creditare subject to a 0.25% fronting fee payable to the issuing bank and a feepayable to the lenders equal to the product of the interest rate spreadapplicable to LIBOR borrowings under our revolving credit facility and thedaily average amount available for drawing under the outstanding letters ofcredit**.** The minimum and maximum borrowingsunder the revolver were zero and $10.5 million during the nine monthsended September 30, 2007, and zero and

 

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$30.0 million during the year ended December 31, 2006. Theweighted average amounts of borrowings outstanding under the revolver duringthe nine months ended September 30, 2007 and 2006, were $0.1 millionand $1.0 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 at negotiated rates up to an aggregate of$40.0 million from individual banks that are parties to the agreement.Swingline borrowings are considered borrowings under the revolving creditfacility agreement.

 

                AtSeptember 30, 2007, $522.4 million was outstanding under theTranche E term loan amended and restated credit facility (including$5.3 million of current portion), and our borrowing rate was 6.7%.Borrowings under the Tranche E term loan are based on (i) the higher ofthe prime rate plus 0.50% or the federal funds effective rate plus 1.00% or(ii) LIBOR plus 1.50%. We are required to make scheduled principalpayments on the Tranche E term loan in the amount of $1.3 millionduring the remainder of 2007, $5.3 million in each of 2008 through 2012,$248.7 million in 2013, and $245.9 million in 2014.

 

*               *Borrowings under the Facilities are subject tofinancial covenants, including a requirement to maintain a minimum interest coverage ratio and a maximumlimit on our leverage ratio, as well as customary nonfinancial covenants. The financial maintenance covenants areapplicable only to the $450 million revolving credit portion of theagreement and function as debt incurrence covenants with respect to theremainder of the facility.

 

*Senior Notes*

 

                In October 2004, Boise Cascade,L.L.C. (Boise LLC) issued $250.0 million of senior unsecured floating-ratenotes due in 2012 and $400.0 million of 7.125% senior subordinated notesdue in 2014. Net proceeds from the notes were used to fund a portion of thepurchase price for the Forest Products Acquisition. In July 2005, wecompleted an exchange offer whereby all of our senior unsecured floating-ratenotes and senior subordinated notes were exchanged for registered securitieswith identical terms (other than terms relating to registration rights) to thenotes issued in October 2004. We may redeem all or part of the notes at anytime at redemption prices set forth in the indenture. If we sell specificassets or experience specific kinds of changes in control, we must offer topurchase the notes. The senior unsecured floating-rate notes bear interest at afloating rate equal to LIBOR plus 2.9%. At both September 30, 2007, andDecember 31, 2006, our borrowing rate for the $250.0 million seniorunsecured floating-rate notes was 8.2%. In connection with the amendment andrestatement of our Facilities, we obtained $200 million of commitments fora delayed-draw term loan, which weborrowed against in September 2007. At September 30, 2007, the $200 millionreceived from the delayed-draw term loan was recorded in “Restricted cash heldfor bond redemption” on our Consolidated Balance Sheet. The $200 millionwas invested in preparation for the repayment of the $250 million seniorunsecured floating-rate notes in October 2007. We redeemed the notes onOctober 15, 2007. Thedelayed-draw term loan had a commitment fee of 1.5% per annum until drawn. Nowthat we have drawn against the term loan, the interest rate on the loan is thesame as for the Tranche E term loan. We are required to make scheduledprincipal payments on the delayed-draw term loan in the amount of$0.5 million in 2007, $2.0 million in each of 2008 through 2012,$95.3 million in 2013, and $94.2 million in 2014.

 

*BorrowingsSecured by Receivables*

 

                In October2005, our wholly owned subsidiary, Boise LLC, and several of its subsidiaries,including Birch Creek Investments, L.L.C. (Birch Creek), entered into anaccounts receivable securitization program with Bank of America NationalAssociation and Calyon New York Branch (the Investors). Under this three-yearprogram, Boise LLC sells its interest in a defined pool of accounts receivablegenerated by its domestic operations on a revolving basis to Birch Creek, aconsolidated, wholly owned, special-purpose subsidiary. In turn, Birch Creeksells the receivables to the affiliates of the Investors. Because Boise LLC hasthe right to repurchase the sold receivables, sales of receivables under theprogram are accounted for as a secured borrowing. At September 30, 2007,and December 31, 2006, we had $50.0 million and $25.0 million outstandingunder our accounts receivable securitization program. The receivablesoutstanding and the corresponding debt are included as “Receivables” and “Long-termdebt,” respectively, on our Consolidated Balance Sheets. We record thefinancing costs associated with the program in “Interest expense” in ourConsolidated Statements of Income. The cost of funds under this program variesbased on changes in interest rates. At September 30, 2007, andDecember 31, 2006, the interest rates for borrowings secured byreceivables were 5.8% and 5.6%.

 

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                Underthe accounts receivable securitization program, the maximum borrowing amount issubject to change based on the level of eligible receivables and restrictionson concentrations of receivables and, at September 30, 2007, could notexceed $250.0 million. Theaccounts receivable securitization program contains financial covenantsrequiring us to maintain a minimum interest coverage ratio and a specifiedmaximum leverage ratio.

 

*Other*

 

                Wealso have other outstanding letters of credit, which are used for tradepurchases. At September 30, 2007, and December 31, 2006, we had$1.2 million and $0.1 million, respectively, of outstanding lettersof credit. These letters of credit do not reduce our borrowing capacity underour amended revolving credit facility.

 

                We have entered into interest rate swaps to hedge themajority of the cash flow risk from the variable interest payments on ourvariable-rate debt. These swaps gave us effective interest rates on all of ourlong-term variable-rate debt (less current portion) of 6.5% and 7.0% atSeptember 30, 2007, and December 31, 2006, respectively. Foradditional information on our interest rate swaps, see Note 14, FinancialInstruments.

                At September 30, 2007, and December 31, 2006, we had$28.5 million and $31.5 million of costs recorded in “Deferredfinancing costs” on our Consolidated Balance Sheets. In connection with the May2007 amendment and restatement of our Facilities, we capitalized$2.6 million of financing costs and wrote off approximately$1.8 million of deferred financing costs. We recorded the$1.8 million charge in “Interest expense” in our Consolidated Statement ofIncome for the nine months ended September 30, 2007. In fourth quarter2007, in connection with the repayment of the $250 million seniorunsecured floating-rate notes, we wrote off $4.5 million of relateddeferred financing costs as a charge to interest expense.

 

                AtSeptember 30, 2007, and December 31, 2006, our average effectiveinterest rates, including the effect of our interest rate swaps, on all of ourlong-term debt (less current portion) were 6.7% and 7.1%.

 

                For the nine months endedSeptember 30, 2007 and 2006, cash payments for interest, net of interestcapitalized, were $62.2 million and $63.9 million.

 

 

***14.******                              ******Financial Instruments***

 

                We areexposed to risks such as changes in interest rates, energy prices, and foreigncurrency exchange rates. We employ a variety of practices to manage theserisks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is aneconomic hedge or we designate the derivative as a cash flow or fair valuehedge. We formally document all relationships between hedging instruments andthe hedged items, as well as our risk management objectives and strategies forundertaking various hedged transactions. For those derivatives designated ascash flow or fair value hedges, we formally assess, both at the derivatives’inception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in the hedgeditems. The ineffective portion of hedging transactions is recognized in income(loss).

 

                In accordance with SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, as amended, we record allderivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. The fair value of these instruments is determined bythird parties. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income,” as appropriate. The gain orloss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). The gain or loss on derivativesdesignated as

 

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fairvalue hedges and the offsetting gain or loss on the hedged item attributable tothe hedged risk are included in income (loss) in the period in which changes infair value occur. The gain or loss on derivatives that have not been designatedas hedging instruments is included in income (loss) in the period in whichchanges in fair value occur.

 

*Interest Rate Risk*

 

                Ourdebt is predominantly variable-rate. We manage interest rate risk on ourvariable-rate debt by entering into interest rate swaps. At September 30,2007, the estimated current market value of our fixed-rate debt, based onthen-current interest rates for similar obligations with like maturities, wasapproximately $16.8 million lessthan the amount reported on our Consolidated Balance Sheet.

 

                Ifthe announced sale of our Paper and Packaging & Newsprint assets goesthrough, we plan to use the proceeds from the transaction to pay down debt. InOctober 2007, we concluded that the interest payments on our variable rate debtwere no longer probable of occurring after March 2008. As a result, in fourthquarter 2007, we recorded $3.0 million of income in “Change in fair valueof interest rate swaps” in our Consolidated Statement of Income.

 

                During second quarter2007, in connection with the amendment and restatement of our Facilities, weconcluded that the interest payments on our senior unsecured floating-ratenotes were no longer probable of occurring after October 2007, when the notesbecame callable at par. As a result, during second quarter 2007, we recordedthe fair value of the interest rate swaps, or $5.4 million of income, in “Changein fair value of interest rate swaps” in our Consolidated Statements of Income.

 

                InJune 2007, in exchange for the termination of two of our interest rate swapagreements that were scheduled to begin in 2009, we received $2.8 millionthat we recorded in “Accumulated other comprehensive income.” We willreclassify the $2.8 million in “Accumulated other comprehensive income” asa reduction of interest expense in 2009 and 2010.

 

                AtSeptember 30, 2007, we had fourinterest rate swaps to hedge our exposure to interest rate fluctuationsassociated with a portion of our variable-rate debt. The swaps effectivelyhedge $500 million of our variable-rate debt exposure through 2009.Assuming no changes in interest rates, we expect to reclassify$1.4 million of amounts recorded in “Accumulated other comprehensiveincome” as a decrease ininterest expense during the remainder of 2007. At September 30, 2007, werecorded no ineffectivenessrelated to these hedges.

 

*Energy Risk*

 

                We enter into natural gas swaps,options, or a combination of these instruments to hedge the variable cash flowrisk of natural gas purchases at index prices. As of September 30, 2007,we had entered into derivative instruments related to approximately 25% of ourforecasted natural gas purchases through March 2008. We have elected to accountfor these instruments as economic hedges and record the changes in fair valuein our Consolidated Statements of Income.

 

*ForeignCurrency Risk*

 

                At September 30, 2007, wehad no foreign currency hedges.

 

 

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

 

                InJanuary 2007, we adopted FSP No. AUG AIR-1, *Accountingfor Planned Major Maintenance Activities,* and began expensing thecosts of periodic major overhauls and maintenance of plant and equipment asincurred. Prior to the adoption of this FSP, we charged planned shutdownmaintenance costs in our Paper and Packaging & Newsprint segments toincome (loss) ratably over the year. We recast our 2006 interim financialinformation included in this Form 10-Q using the direct expense method.As a result of adopting this FSP, we decreased “Materials, labor, and otheroperating expenses” $1.4 million and increased “Net income” by the sameamount for the three months ended September 30, 2006. Of the$1.4 million adjustment, we increased income $0.5 million in ourPaper segment and $0.9 million in our Packaging & Newsprintsegment. During the nine months ended September 30, 2006,

 

17

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we decreased “Materials, labor, and otheroperating expenses” $1.1 million and increased “Net income” by the sameamount. Of the $1.1 million adjustment, we increased income$2.1 million in our Paper segment and reduced income $1.0 million inour Packaging & Newsprint segment. The FSP increases the volatility ofearnings in the period a planned shutdown occurs, but it has no impact on ourannual results of operations.

 

                In January 2007, we adoptedFIN No. 48, *Accounting for Uncertaintyin Income Taxes — an Interpretation of FASB Statement No. 109*. FINNo. 48 clarifies the criteria for recognizing tax benefits under FASBStatement No. 109, *Accounting forIncome Taxes*. It also requires additional financial statementdisclosures about uncertain tax positions. Because the majority of ourbusinesses and assets are held and operated by limited liability companies andthe income taxes of these operations are payable by our equity holders, it didnot have a material impact on our financial position or results of operations.For more information, see Note 7, Income Taxes. Events could arise in thefuture that would cause the adoption of this interpretation to have a materialimpact on our financial statements. For example, if our tax status were tochange in the future, we would have to reevaluate the impact of FIN No. 48on our financial position and results of operations at that time.

 

                InDecember 2006, we adopted SFAS No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans — anAmendment of FASB Statements No. 87, 88, 106, and 132(R)*, whichrequired us to recognize the funded status of our pension and otherpostretirement benefit plans on our 2006 Consolidated Balance Sheet. It alsorequired us to recognize the actuarial and experience gains and losses and theprior service costs and credits as a component of other comprehensive income,net of tax, in our Consolidated Statement of Capital. In connection withadopting SFAS No. 158, we reduced our liabilities $38.1 million andincreased capital by about the same amount. Retrospective application was notpermitted. For more information, see Note 15, Retirement and BenefitPlans, of the Notes to Consolidated Financial Statements in “Item 8.  ConsolidatedFinancial Statements” of our 2006 Annual Report on Form 10-K.

 

                InDecember 2006, we adopted Staff Accounting Bulletin (SAB) Topic 1N, *Financial Statements — Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements* (SAB 108). SAB 108 addresses how the effects ofprior-year uncorrected misstatements should be considered when quantifyingmisstatements in current-year financial statements. SAB 108 requiresregistrants to quantify misstatements using both the balance sheet and incomestatement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors. SAB 108 did not have a material impact on ourfinancial position or results of operations.

 

                InFebruary 2006, we adopted FSP No. FAS 123(R)-4, *Classification of Options and Similar Instruments Issued as EmployeeCompensation That Allow for Cash Settlement Upon the Occurrence of a ContingentEvent*. FAS 123(R)-4 requires companies to assess the probabilitythat a contingent cash settlement event will occur when it determines theclassification of options or other similar instruments issued as part ofemployee compensation arrangements. Because redemption by Forest ProductsHoldings, our equity sponsor, and the expected parallel redemptions of theSeries B and Series C equity units granted to our employees under theManagement Equity Agreement are a contingent event outside employees’ control,we account for the units using equity plan accounting in accordance withFAS 123(R)-4.

 

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***16.          Retirement and Benefit Plans***

 

                Thefollowing table presents the components of net periodic pension andpostretirement benefit costs in accordance with revised SFAS No. 132, *Employers’ Disclosures About Pensions and Other Postretirement Benefits*:

 
|                                           |       | **Pension  Benefits**                 | ** ** | **Other  Benefits**                   |       |
|------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
|                                           |       | **Three  Months Ended  September 30** | ** ** | **Three  Months Ended  September 30** |       |
|                                           |       | **2007**                              | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** |   |
|                                           |       |                                  |       |                                  |       |   |   |   |   |
|                                           |       | **(thousands)**                       |       |
|                                           |       |                                  |       |                                  |       |   |   |   |   |
| Service cost  (gain)                           |       | $                                     | 5,909      |                                  | $          | 6,246 |   | $ | (9 | ) | $ | 54 |   |
| Interest cost                                  |       | 9,743                                 |       | 8,835                                 |       | 10 |   | 97 |   |
| Expected return  on plan assets                |       | (9,786                                | )          | (8,902                                | )          | — |   | — |   |
| Recognized  actuarial loss (gain)              |       | 130                                   |       | 69                                    |       | (34 | ) | — |   |
| Amortization of  prior service costs and other |       | 322                                   |       | 186                                   |       | — |   | — |   |
| Company-sponsored  plans                       |       | 6,318                                 |       | 6,434                                 |       | (33 | ) | 151 |   |
| Multiemployer  pension plans                   |       | 122                                   |       | 108                                   |       | — |   | — |   |
| Net periodic  benefit cost (gain)              | ** ** | **$**                                 | **6,440**  | ** **                            | **$**      | **6,542** | ** ** | **$** | **(33** | **)** | **$** | **151** | ** ** |

 
|                                           |       | **Pension  Benefits**                |       | **Other  Benefits**                  |       |
|------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
|                                           |       | **Nine  Months Ended  September 30** | ** ** | **Nine  Months Ended  September 30** |       |
|                                           |       | **2007**                             | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** |   |
|                                           |       |                                 |       |                                 |       |   |   |   |   |
|                                           |       | **(thousands)**                      |       |
|                                           |       |                                 |       |                                 |       |   |   |   |   |
| Service cost                                   |       | $                                    | 17,271     |                                 | $          | 18,684 |   | $ | 75 |   | $ | 161 |   |
| Interest cost                                  |       | 28,550                               |       | 25,726                               |       | 237 |   | 283 |   |
| Expected return  on plan assets                |       | (28,600                              | )          | (26,013                              | )          | — |   | — |   |
| Recognized  actuarial loss (gain)              |       | 390                                  |       | 208                                  |       | (34 | ) | — |   |
| Amortization of prior  service costs and other |       | 867                                  |       | 410                                  |       | — |   | — |   |
| Curtailment  (gain) loss                       |       | (181                                 | )          | 822                                  |       | — |   | — |   |
| Company-sponsored  plans                       |       | 18,297                               |       | 19,837                               |       | 278 |   | 444 |   |
| Multiemployer  pension plans                   |       | 370                                  |       | 390                                  |       | — |   | — | ** ** |
| Net periodic  benefit cost                     | ** ** | **$**                                | **18,667** | ** **                           | **$**      | **20,227** | ** ** | **$** | **278** | ** ** | **$** | **444** | ** ** |

 

In 2007, we are not required to make a minimumcontribution to our pension plans; however, we may elect to make voluntarycontributions.

 

 

***17.          Restructuring Activities***

 

                Inconnection with the Forest Products Acquisition, we evaluated the acquiredfacilities and organizational structure. In accordance with the provisions ofEITF 95-3, *Recognition of Liabilitiesin Connection With a Purchase Business Combination*, exit activitiesrelated to the Forest Products Acquisition increased goodwill. We had one yearfrom the acquisition date to finalize our restructuring plans and adjustgoodwill.

 

19

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At September 30, 2007, we had approximately$4,000 of restructuring reserves related to severance costs recorded in “Accruedliabilities, Compensation and benefits” on our Consolidated Balance Sheet. The2004 restructuring reserve related to approximately 350 terminatedemployees and is recorded in Corporate and Other. Restructuring reserveliability account activity related to these charges is as follows:

 
| ** **                                                                                 | ** ** | **Severance**   | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|
|                                                                                       |       |            |       |       |       |       |       |
| ** **                                                                                 | ** ** | **(thousands)** | ** ** |
|                                                                                       |       |            |       |       |       |       |       |
| 2004  restructuring reserve                                                                |       | $               | 13,768     |       | $          | 501        |       | $ | 14,269 |   |
| Charges against  reserve                                                                   |       | (1,012          | )          | (1         | )          | (1,013     | )          |
| Restructuring  reserve at December 31, 2004                                           |       | 12,756          |       | 500        |       | 13,256     |       |
|                                                                                       |       |            |       |       |       |       |       |
| Additions to  restructuring reserve                                                        |       | 6,913           |       | 221        |       | 7,134      |       |
| Charges against  reserve                                                                   |       | (16,162         | )          | (593       | )          | (16,755    | )          |
| Restructuring  reserve at December 31, 2005                                           |       | 3,507           |       | 128        |       | 3,635      |       |
|                                                                                       |       |            |       |       |       |       |       |
| Charges against  reserve                                                                   |       | (2,894          | )          | (128       | )          | (3,022     | )          |
| Restructuring  reserve at December 31, 2006                                           |       | 613             |       | —     |       | 613        |       |
|                                                                                       |       |            |       |       |       |       |       |
| Charges against  reserve                                                                   |       | (510            | )          | —     |       | (510       | )          |
| Severance  reserve reclassified to “Liabilities related to assets held for sale” |       | (99             | )          | —     |       | (99        | )          |
| Restructuring  reserve at September 30, 2007                                          | ** ** | **$**           | **4**      | ** ** | **$**      | **—** | ** ** | **$** | **4** | ** ** |

 

 

***18.        Segment Information***

 

                Thereare no differences in our basis of segmentation or in our basis of measurementof segment profit or loss from those disclosed in Note 18, SegmentInformation, of the Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements” in our2006 Annual Report on Form 10-K.

 

                Ananalysis of our operations by segment is as follows:

 
| ** **                                      | ** ** | ** **     | ** **  | **Income**  | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|-------------|-------------|------------|-------------------|------------|------------|------------|
| ** **                                      | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                      | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(d)** | ** ** |
| ** **                                      | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **(millions)** | ** **  |
| ** **                                      | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Three  Months Ended September 30, 2007** |       |           |        |        |       |              |       |       |       |   |   |   |   |   |   |
| Building  Materials Distribution                |       | $              | 686.6       |        | $          | —            |       | $          | —     |   | $ | 686.6 |   | $ | 16.1 |   | $ | 1.8 |   | $ | 18.0 |   |
| Wood Products                                   |       | 151.6          |        | —      |       | 110.0             |       | 261.6      |       | 9.2 |   | 7.1 |   | 16.3 |   |
| Paper                                           |       | 231.5          |        | 154.6       |       | 16.0              |       | 402.1      |       | 49.5 |   | 12.0 |   | 61.5 |   |
| Packaging &  Newsprint                 |       | 173.7          |        | —      |       | 19.3              |       | 193.0      |       | 4.2 |   | 10.3 |   | 14.5 |   |
| Corporate and  Other                            |       | 4.1            |        | —      |       | 11.2              |       | 15.3       |       | (4.7 | ) | 1.1 |   | (3.7 | ) |
|                                            |       | 1,247.5        |        | 154.6       |       | 156.5             |       | 1,558.6    |       | 74.3 |   | 32.3 |   | 106.6 |   |
| Intersegment  eliminations                      |       | —         |        | —      |       | (156.5            | )          | (156.5     | )          | — |   | — |   | — |   |
| Interest expense                                |       | —         |        | —      |       | —            |       | —     |       | (23.4 | ) | — |   | — |   |
| Interest income                                 |       | —         |        | —      |       | —            |       | —     |       | 1.3 |   | — |   | — |   |
| ** **                                      | ** ** | **$**          | **1,247.5** | ** **  | **$**      | **154.6**         | ** ** | **$**      | **—** | ** ** | **$** | **1,402.1** | ** ** | **$** | **52.2** | ** ** | **$** | **32.3** | ** ** | **$** | **106.6** | ** ** |
|                                                 |            |                |             |             |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

20

----

 
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|----------------|-------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                            | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| ** **                                            | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(d)**    | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(millions)** | ** **  |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Three  Months Ended**                               | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **September 30,  2006**                          | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Building  Materials Distribution                      |       | $              | 756.6       |        | $          | —            |       | $          | —     |       | $          | 756.6             |       | $          | 19.4       |   | $ | 2.4 |   | $ | 21.7 |   |
| Wood Products                                         |       | 176.6          |        | —      |       | 122.5             |       | 299.1      |       | 5.6        |       | 7.1               |       | 12.7       |       |
| Paper                                                 |       | 209.5          |        | 148.1       |       | 15.9              |       | 373.5      |       | 31.3       |       | 15.7              |       | 47.0       |       |
| Packaging &  Newsprint                       |       | 185.3          |        | —      |       | 21.5              |       | 206.8      |       | 16.5       |       | 12.8              |       | 29.2       |       |
| Corporate and  Other                                  |       | 4.2            |        | —      |       | 10.6              |       | 14.8       |       | (8.3       | )          | 1.3               |       | (6.9       | )          |
|                                                  |       | 1,332.2        |        | 148.1       |       | 170.5             |       | 1,650.8    |       | 64.5       |       | 39.3              |       | 103.7      |       |
| Intersegment  eliminations                            |       | —         |        | —      |       | (170.5            | )          | (170.5     | )          | —     |       | —            |       | —     |       |
| Interest expense                                      |       | —         |        | —      |       | —            |       | —     |       | (28.4      | )          | —            |       | —     |       |
| Interest income                                       |       | —         |        | —      |       | —            |       | —     |       | 0.9        |       | —            |       | —     |       |
| ** **                                            | ** ** | **$**          | **1,332.2** | ** **  | **$**      | **148.1**         | ** ** | **$**      | **—** | ** ** | **$**      | **1,480.3**       | ** ** | **$**      | **37.0**   | ** ** | **$** | **39.3** | ** ** | **$** | **103.7** | ** ** |
|                                                  |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
|                                                  |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| ** **                                            | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(d)**    | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(millions)** | ** **  |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Nine  Months Ended**                                | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **September 30,  2007**                          | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Building  Materials Distribution                      |       | $              | 2,018.8     |        | $          | —            |       | $          | 0.2        |       | $          | 2,019.0           |       | $          | 47.0       |   | $ | 5.6 |   | $ | 52.5 |   |
| Wood Products                                         |       | 465.0          |        | —      |       | 329.2             |       | 794.2      |       | 28.6       |       | 22.0              |       | 50.6       |       |
| Paper                                                 |       | 680.6          |        | 471.8       |       | 45.9              |       | 1,198.3    |       | 80.7       |       | 44.7              |       | 125.4      |       |
| Packaging &  Newsprint                       |       | 524.4          |        | —      |       | 55.5              |       | 579.9      |       | 14.6       |       | 37.6              |       | 52.2       |       |
| Corporate and  Other                                  |       | 10.9           |        | —      |       | 32.6              |       | 43.5       |       | (12.4      | ) (a) | 3.5               |       | (8.9       | ) (a) |
|                                                  |       | 3,699.7        |        | 471.8       |       | 463.4             |       | 4,634.9    |       | 158.5      |       | 113.4             |       | 271.8      |       |
| Intersegment  eliminations                            |       | —         |        | —      |       | (463.4            | )          | (463.4     | )          | —     |       | —            |       | —     |       |
| Change in fair  value of interest rate swaps (b) |       | —         |        | —      |       | —            |       | —     |       | 5.4        |       | —            |       | —     |       |
| Interest expense  (c)                                 |       | —         |        | —      |       | —            |       | —     |       | (70.1      | )          | —            |       | —     |       |
| Interest income                                       |       | —         |        | —      |       | —            |       | —     |       | 2.5        |       | —            |       | —     |       |
| ** **                                            | ** ** | **$**          | **3,699.7** | ** **  | **$**      | **471.8**         | ** ** | **$**      | **—** | ** ** | **$**      | **4,171.5**       | ** ** | **$**      | **96.3**   | ** ** | **$** | **113.4** | ** ** | **$** | **271.8** | ** ** |
|                                                  |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
|                                                  |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Sales**      | ** **  | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| ** **                                            | ** ** | **Trade**      | ** **  | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(d)**    | ** ** |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(millions)** | ** **  |
| ** **                                            | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **Nine  Months Ended**                                | ** ** | ** **     | ** **  | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| **September 30,  2006**                          |       |           |        |        |       |              |       |       |       |       |       |              |       |       |       |
| Building  Materials Distribution                      |       | $              | 2,351.1     |        | $          | —            |       | $          | 0.1        |       | $          | 2,351.2           |       | $          | 63.3       |   | $ | 7.1 |   | $ | 70.4 |   |
| Wood Products                                         |       | 545.4          |        | —      |       | 381.0             |       | 926.4      |       | 41.6       |       | 20.1              |       | 61.7       |       |
| Paper                                                 |       | 658.7          |        | 424.9       |       | 41.9              |       | 1,125.5    |       | 46.8       |       | 45.8              |       | 92.6       |       |
| Packaging &  Newsprint                       |       | 516.5          |        | —      |       | 59.9              |       | 576.4      |       | 30.7       |       | 37.5              |       | 68.3       |       |
| Corporate and  Other                                  |       | 13.8           |        | —      |       | 33.5              |       | 47.3       |       | (26.0      | ) (a) | 3.9               |       | (22.2      | ) (a) |
|                                                  |       | 4,085.5        |        | 424.9       |       | 516.4             |       | 5,026.8    |       | 156.4      |       | 114.4             |       | 270.8      |       |
| Intersegment  eliminations                            |       | —         |        | —      |       | (516.4            | )          | (516.4     | )          | —     |       | —            |       | —     |       |
| Interest expense                                      |       | —         |        | —      |       | —            |       | —     |       | (87.2      | )          | —            |       | —     |       |
| Interest income                                       |       | —         |        | —      |       | —            |       | —     |       | 2.4        |       | —            |       | —     |       |
| ** **                                            | ** ** | **$**          | **4,085.5** | ** **  | **$**      | **424.9**         | ** ** | **$**      | **—** | ** ** | **$**      | **4,510.4**       | ** ** | **$**      | **71.6**   | ** ** | **$** | **114.4** | ** ** | **$** | **270.8** | ** ** |

 

----

(a)                                  The nine monthsended September 30, 2007 and 2006, include a $4.4 million and$3.7 million gain, respectively, for changes in our retiree healthcareprograms.

 

21

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(b)                                 Includes the change in the fair value ofinterest rate swaps related to the anticipated repayment of our seniorunsecured floating-rate notes in October 2007.

 

(c)                                  Includes the write-off of$1.8 million of deferred financing costs resulting from the repayment ofour Tranche D term loan and reduction in borrowing capacity under ourrevolving credit facility.

 

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

 

                                                The following isa reconciliation of net income to EBITDA:

 
| ** **                                   | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                  | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                                      |       |                                |       |   |   |   |   |
| ** **                                   | ** ** | **(millions)**                            | ** ** |
|                                         |       |                                      |       |                                |       |   |   |   |   |
| Net income                                   |       | $                                         | 49.2       |                                | $          | 36.4 |   | $ | 88.6 |   | $ | 69.5 |   |
| Change in fair  value of interest rate swaps |       | —                                    |       | —                              |       | (5.4 | ) | — |   |
| Interest expense                             |       | 23.4                                      |       | 28.4                                |       | 70.1 |   | 87.2 |   |
| Interest income                              |       | (1.3                                      | )          | (0.9                                | )          | (2.5 | ) | (2.4 | ) |
| Income tax  provision                        |       | 3.1                                       |       | 0.6                                 |       | 7.7 |   | 2.1 |   |
| Depreciation,  amortization, and depletion   |       | 32.3                                      |       | 39.3                                |       | 113.4 |   | 114.4 |   |
| EBITDA                                       | ** ** | **$**                                     | **106.6**  | ** **                          | **$**      | **103.7** | ** ** | **$** | **271.8** | ** ** | **$** | **270.8** | ** ** |

 

 

***19.          Commitments and Guarantees***

 

*Commitments*

 

We have commitments for fiber, leases, and long-termdebt that are discussed further in Note 1, Summary of SignificantAccounting Policies; Note 7, Leases; and Note 13, Debt, of the Notesto Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements” in our2006 Annual Report on Form 10-K. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business. At September 30, 2007,there have been no material changes to our commitments, except as they relateto amounts we estimate we owe OfficeMax under the Additional ConsiderationAgreement (discussed below), our commitments under our amended and restatedsenior secured credit facilities, discussed in Note 13, Debt, and changesto our lease commitments for the incremental lease expense in our BuildingMaterials Distribution segment as we continue to grow and expand the business.The updated lease payment stream for all of our leases is disclosed inNote 6, Leases.

 

22

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# *AdditionalConsideration Agreement*

 

                Aspart of the Forest Products Acquisition, we entered into an AdditionalConsideration Agreement with OfficeMax, pursuant to which we agreed to adjustthe purchase price based on changes in paper prices over the six-year period followingthe Forest Products Acquisition. Under the Additional Consideration Agreement,we could pay to OfficeMax, or OfficeMax could pay to us, a maximum aggregateamount of $125.0 million, in each case net of payments received. Aftereach anniversary of the Forest Products Acquisition, we review paper priceswith the provisions of the Additional Consideration Agreement to determinewhether any amounts are owed or receivable under the agreement. For the firstand second anniversary periods, which ended October 29, 2005 and 2006,neither Boise nor OfficeMax owed additional consideration for the purchaseprice. For the third anniversary period ended October 29, 2007, weestimate that we will owe OfficeMax approximately$32.7 million under the Additional Consideration Agreement, which werecorded in “Accrued liabilities, Other” on our Consolidated Balance Sheet.Pursuant to the Additional Consideration Agreement, the payment will betreated as an adjustment to the purchase price and, therefore, will not be reportedin our Consolidated Statement of Income but will be included in EBITDA forpurposes of certain covenants under our debt agreements. For more informationabout the Additional Consideration Agreement, see “Item 13.  Certain Relationships and Related Transactions,and Director Independence” of our 2006 Annual Report on Form 10-K.

# * *

# *Guarantees*

 

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FINNo. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.Note 19, Commitments and Guarantees,of the Notes to Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements” in our2006 Annual Report on Form 10-K, describes the nature of our guarantees,including the approximate terms of the guarantees, how the guarantees arose,the events or circumstances that would require us to perform under theguarantees, and the maximum potential undiscounted amounts of future paymentswe could be required to make. As of September 30, 2007, there have been nomaterial changes to the guarantees disclosed in our 2006 Annual Report onForm 10-K, except that Boise Cascade Holdings, L.L.C., and its direct andindirect domestic subsidiaries, excluding foreign subsidiaries and Birch Creek,now guarantee the obligations of our amended and restated obligations discussedin Note13, Debt. See Note 13 for more information related to the amendedand restated Facilities.

 

 

***20.          ConsolidatingGuarantor and Nonguarantor Financial Information***

 

The following consolidating financial informationpresents the Statements of Income (Loss), Balance Sheets, and Cash Flowsrelated to our business. The senior unsecured floating-rate notes areguaranteed on a senior basis, and the senior subordinated notes are guaranteedon a senior subordinated basis, in each case jointly and severally by Boise andeach of its existing and future subsidiaries (other than the co-issuers,Boise LLC and Boise Cascade Finance Corporation). The nonguarantorsinclude our foreign subsidiaries and Birch Creek. Other than the consolidatedfinancial statements and footnotes for Boise Cascade Holdings, L.L.C.,financial statements and other disclosures concerning the guarantors have notbeen presented because management believes that such information is notmaterial to investors.

 

23

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**Boise Cascade Holdings, L.L.C.,and Subsidiaries****Consolidating Statements of Income (Loss)****F****or the Three MonthsEnded September 30, 2007**

** **
| ** **                                                                                | ** ** | **Boise Cascade  Holdings,  L.L.C. (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                | ** ** | **(thousands)**                               | ** ** |
| ** **                                                                                | ** ** | ** **                                    | ** ** |
| **Sales**                                                                                 | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                     |       | $                                             | —     |                              | $          | —                      |       | $                                 | 1,240,525  |             | $          | 7,038            |       | $ | — |   | $ | 1,247,563 |   |
| Intercompany                                                                              |       | —                                        |       | 869                               |       | 1                           |       | 23,103                            |       | (23,973          | )          | —           |       |
| Related parties                                                                           |       | —                                        |       | —                            |       | 154,570                     |       | —                            |       | —           |       | 154,570          |       |
|                                                                                      |       | —                                        |       | 869                               |       | 1,395,096                   |       | 30,141                            |       | (23,973          | )          | 1,402,133        |       |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Costs  and expenses**                                                                   | ** ** | ** **                                    | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                        |       | 572                               |       | 1,195,260                   |       | 20,406                            |       | (13,691          | )          | 1,202,547        |       |
| Depreciation,  amortization, and depletion                                                |       | —                                        |       | 838                               |       | 30,399                      |       | 1,036                             |       | —           |       | 32,273           |       |
| Selling and  distribution expenses                                                        |       | —                                        |       | —                            |       | 71,656                      |       | 700                               |       | —           |       | 72,356           |       |
| General and  administrative expenses                                                      |       | —                                        |       | 7,520                             |       | 24,644                      |       | 715                               |       | (10,282          | )          | 22,597           |       |
| Other (income)  expense, net                                                              |       | —                                        |       | 440                               |       | (537                        | )          | 487                               |       | —           |       | 390              |       |
|                                                                                      |       | —                                        |       | 9,370                             |       | 1,321,422                   |       | 23,344                            |       | (23,973          | )          | 1,330,163        |       |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) from operations**                                                        |       | —                                        |       | (8,501                            | )          | 73,674                      |       | 6,797                             |       | —           |       | 71,970           |       |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                             |       | —                                        |       | 13,817                            |       | 1,172                       |       | (12,656                           | )          | —           |       | 2,333            |       |
| Interest expense                                                                          |       | —                                        |       | (21,547                           | )          | —                      |       | (1,809                            | )          | —           |       | (23,356          | )          |
| Interest  expense—intercompany                                                       |       | —                                        |       | (187                              | )          | —                      |       | (6,172                            | )          | 6,359            |       | —           |       |
| Interest income                                                                           |       | —                                        |       | 1,242                             |       | 32                          |       | —                            |       | —           |       | 1,274            |       |
| Interest  income—intercompany                                                        |       | —                                        |       | 29                                |       | 6,330                       |       | —                            |       | (6,359           | )          | —           |       |
|                                                                                      |       | —                                        |       | (6,646                            | )          | 7,534                       |       | (20,637                           | )          | —           |       | (19,749          | )          |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                        |       | (15,147                           | )          | 81,208                      |       | (13,840                           | )          | —           |       | 52,221           |       |
| Income tax  provision                                                                     |       | —                                        |       | (2,254                            | )          | (802                        | )          | —                            |       | —           |       | (3,056           | )          |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                       |       | —                                        |       | (17,401                           | )          | 80,406                      |       | (13,840                           | )          | —           |       | 49,165           |       |
|                                                                                      |       |                                          |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                            |       | 49,165                                        |       | 66,566                            |       | —                      |       | —                            |       | (115,731         | )          | —           |       |
| **Net  income (loss)**                                                                    | ** ** | **$**                                         | **49,165** | ** **                        | **$**      | **49,165**                  | ** ** | **$**                             | **80,406** | ** **       | **$**      | **(13,840**      | **)**      | **$** | **(115,731** | **)** | **$** | **49,165** | ** ** |
|                                                                                           |            |                                               |            |                                   |            |                             |            |                                   |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

24

----

 

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

**ConsolidatingStatements of Income (Loss)**

**F****or the Three MonthsEnded September 30, 2006**
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                           | ** ** | **(thousands)**                                 | ** ** |
| ** **                                                                           | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Sales**                                                                            | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                |       | $                                               | —     |                        | $          | —                      |       | $                                | 1,317,055  |             | $          | 15,132           |       | $ | — |   | $ | 1,332,187 |   |
| Intercompany                                                                         |       | —                                          |       | 855                         |       | 2                           |       | 20,670                           |       | (21,527          | )          | —           |       |
| Related parties                                                                      |       | —                                          |       | —                      |       | 148,159                     |       | —                           |       | —           |       | 148,159          |       |
|                                                                                 |       | —                                          |       | 855                         |       | 1,465,216                   |       | 35,802                           |       | (21,527          | )          | 1,480,346        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| **Costs  and expenses**                                                              | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                       | ** ** | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                 |       | —                                          |       | 2,931                       |       | 1,267,468                   |       | 27,703                           |       | (12,767          | )          | 1,285,335        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |       | 977                         |       | 37,219                      |       | 1,078                            |       | —           |       | 39,274           |       |
| Selling and  distribution expenses                                                   |       | —                                          |       | —                      |       | 71,029                      |       | 526                              |       | —           |       | 71,555           |       |
| General and  administrative expenses                                            |       | —                                          |       | 5,590                       |       | 22,173                      |       | 722                              |       | (8,760           | )          | 19,725           |       |
| Other (income)  expense, net                                                         |       | —                                          |       | 72                          |       | (931                        | )          | 754                              |       | —           |       | (105             | )          |
|                                                                                 |       | —                                          |       | 9,570                       |       | 1,396,958                   |       | 30,783                           |       | (21,527          | )          | 1,415,784        |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                          |       | (8,715                      | )          | 68,258                      |       | 5,019                            |       | —           |       | 64,562           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| Foreign exchange  gain (loss)                                                        |       | —                                          |       | (182                        | )          | (125                        | )          | 218                              |       | —           |       | (89              | )          |
| Interest expense                                                                     |       | —                                          |       | (25,649                     | )          | —                      |       | (2,751                           | )          | —           |       | (28,400          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |       | (133                        | )          | —                      |       | (5,555                           | )          | 5,688            |       | —           |       |
| Interest income                                                                      |       | —                                          |       | 844                         |       | 37                          |       | 28                               |       | —           |       | 909              |       |
| Interest  income—intercompany                                                   |       | —                                          |       | 47                          |       | 5,641                       |       | —                           |       | (5,688           | )          | —           |       |
|                                                                                 |       | —                                          |       | (25,073                     | )          | 5,553                       |       | (8,060                           | )          | —           |       | (27,580          | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                          |       | (33,788                     | )          | 73,811                      |       | (3,041                           | )          | —           |       | 36,982           |       |
| Income tax  provision                                                                |       | —                                          |       | (5                          | )          | (611                        | )          | —                           |       | —           |       | (616             | )          |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | —                                          |       | (33,793                     | )          | 73,200                      |       | (3,041                           | )          | —           |       | 36,366           |       |
|                                                                                 |       |                                            |       |                        |       |                        |       |                             |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 36,366                                          |       | 70,159                      |       | —                      |       | —                           |       | (106,525         | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **36,366** | ** **                  | **$**      | **36,366**                  | ** ** | **$**                            | **73,200** | ** **       | **$**      | **(3,041**       | **)**      | **$** | **(106,525** | **)** | **$** | **36,366** | ** ** |
|                                                                                      |            |                                                 |            |                             |            |                             |            |                                  |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

25

----

 

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

**ConsolidatingStatements of Income (Loss)**

**F****or the Nine Months EndedSeptember 30, 2007**
| ** **                                                                                | ** ** | **Boise  Cascade  Holdings,  L.L.C. (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                | ** ** | **(thousands)**                                | ** ** |
| ** **                                                                                |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Sales**                                                                                 | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                     |       | $                                              | —     |                              | $          | —                      |       | $                                 | 3,677,842   |             | $          | 21,815           |       | $ | — |   | $ | 3,699,657 |   |
| Intercompany                                                                              |       | —                                         |       | 2,607                             |       | 2                           |       | 68,332                            |        | (70,941          | )          | —           |       |
| Related parties                                                                           |       | —                                         |       | —                            |       | 471,842                     |       | —                            |        | —           |       | 471,842          |       |
|                                                                                      |       | —                                         |       | 2,607                             |       | 4,149,686                   |       | 90,147                            |        | (70,941          | )          | 4,171,499        |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Costs  and expenses**                                                                   | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                      |       | —                                         |       | 1,387                             |       | 3,611,149                   |       | 62,617                            |        | (45,413          | )          | 3,629,740        |       |
| Depreciation,  amortization, and depletion                                                |       | —                                         |       | 2,736                             |       | 107,490                     |       | 3,129                             |        | —           |       | 113,355          |       |
| Selling and  distribution expenses                                                        |       | —                                         |       | —                            |       | 212,327                     |       | 2,057                             |        | —           |       | 214,384          |       |
| General and  administrative expenses                                                 |       | —                                         |       | 21,568                            |       | 64,188                      |       | 2,074                             |        | (25,528          | )          | 62,302           |       |
| Other (income)  expense, net                                                              |       | —                                         |       | (3,182                            | )          | (1,108                      | )          | 2,135                             |        | —           |       | (2,155           | )          |
|                                                                                      |       | —                                         |       | 22,509                            |       | 3,994,046                   |       | 72,012                            |        | (70,941          | )          | 4,017,626        |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) from operations**                                                        |       | —                                         |       | (19,902                           | )          | 155,640                     |       | 18,135                            |        | —           |       | 153,873          |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| Foreign exchange  gain (loss)                                                             |       | —                                         |       | 29,176                            |       | 2,166                       |       | (26,747                           | )           | —           |       | 4,595            |       |
| Change in fair  value of interest rate swaps                                              |       | —                                         |       | 5,395                             |       | —                      |       | —                            |        | —           |       | 5,395            |       |
| Interest expense                                                                          |       | —                                         |       | (64,318                           | )          | —                      |       | (5,733                            | )           | —           |       | (70,051          | )          |
| Interest  expense—intercompany                                                       |       | —                                         |       | (469                              | )          | —                      |       | (15,554                           | )           | 16,023           |       | —           |       |
| Interest income                                                                           |       | —                                         |       | 2,374                             |       | 110                         |       | 33                                |        | —           |       | 2,517            |       |
| Interest  income—intercompany                                                        |       | —                                         |       | 61                                |       | 15,962                      |       | —                            |        | (16,023          | )          | —           |       |
|                                                                                      |       | —                                         |       | (27,781                           | )          | 18,238                      |       | (48,001                           | )           | —           |       | (57,544          | )          |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                         |       | (47,683                           | )          | 173,878                     |       | (29,866                           | )           | —           |       | 96,329           |       |
| Income tax  provision                                                                     |       | —                                         |       | (5,565                            | )          | (2,164                      | )          | —                            |        | —           |       | (7,729           | )          |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                       |       | —                                         |       | (53,248                           | )          | 171,714                     |       | (29,866                           | )           | —           |       | 88,600           |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                            |       | 88,600                                         |       | 141,848                           |       | —                      |       | —                            |        | (230,448         | )          | —           |       |
| **Net  income (loss)**                                                                    | ** ** | **$**                                          | **88,600** | ** **                        | **$**      | **88,600**                  | ** ** | **$**                             | **171,714** | ** **       | **$**      | **(29,866**      | **)**      | **$** | **(230,448** | **)** | **$** | **88,600** | ** ** |
|                                                                                           |            |                                                |            |                                   |            |                             |            |                                   |             |                  |            |                  |            |  |  |  |  |  |  |  |  |  |

 

26

----

 

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

**ConsolidatingStatements of Income (Loss)**

**F****or the Nine Months EndedSeptember 30, 2006**
| ** **                                                                                | ** ** | **Boise  Cascade  Holdings,  L.L.C. (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                                | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                                | ** ** | **(thousands)**                                | ** ** |
| ** **                                                                                | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Sales**                                                                                 | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Trade                                                                                     |       | $                                              | —     |                              | $          | —                      |       | $                                 | 4,037,032   |             | $          | 48,437           |       | $ | — |   | $ | 4,085,469 |   |
| Intercompany                                                                              |       | —                                         |       | 3,422                             |       | 1,238                       |       | 59,494                            |        | (64,154          | )          | —           |       |
| Related parties                                                                           |       | —                                         |       | —                            |       | 424,929                     |       | —                            |        | —           |       | 424,929          |       |
|                                                                                      |       | —                                         |       | 3,422                             |       | 4,463,199                   |       | 107,931                           |        | (64,154          | )          | 4,510,398        |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Costs  and expenses**                                                                   | ** ** | ** **                                     | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Materials,  labor, and other operating expenses                                           |       | —                                         |       | 4,325                             |       | 3,907,228                   |       | 89,745                            |        | (42,634          | )          | 3,958,664        |       |
| Depreciation, amortization,  and depletion                                                |       | —                                         |       | 2,844                             |       | 108,404                     |       | 3,142                             |        | —           |       | 114,390          |       |
| Selling and  distribution expenses                                                        |       | —                                         |       | —                            |       | 212,527                     |       | 1,712                             |        | —           |       | 214,239          |       |
| General and  administrative expenses                                                 |       | —                                         |       | 26,091                            |       | 60,801                      |       | 1,973                             |        | (21,520          | )          | 67,345           |       |
| Other (income)  expense, net                                                              |       | —                                         |       | 419                               |       | (1,819                      | )          | 2,403                             |        | —           |       | 1,003            |       |
|                                                                                      |       | —                                         |       | 33,679                            |       | 4,287,141                   |       | 98,975                            |        | (64,154          | )          | 4,355,641        |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) from operations**                                                        |       | —                                         |       | (30,257                           | )          | 176,058                     |       | 8,956                             |        | —           |       | 154,757          |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| Foreign exchange  gain (loss)                                                             |       | —                                         |       | 4,511                             |       | 278                         |       | (3,139                            | )           | —           |       | 1,650            |       |
| Interest expense                                                                          |       | —                                         |       | (79,436                           | )          | —                      |       | (7,750                            | )           | —           |       | (87,186          | )          |
| Interest  expense—intercompany                                                       |       | —                                         |       | (379                              | )          | —                      |       | (14,067                           | )           | 14,446           |       | —           |       |
| Interest income                                                                           |       | —                                         |       | 2,230                             |       | 156                         |       | 61                                |        | —           |       | 2,447            |       |
| Interest  income—intercompany                                                        |       | —                                         |       | 160                               |       | 14,286                      |       | —                            |        | (14,446          | )          | —           |       |
|                                                                                      |       | —                                         |       | (72,914                           | )          | 14,720                      |       | (24,895                           | )           | —           |       | (83,089          | )          |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                         |       | (103,171                          | )          | 190,778                     |       | (15,939                           | )           | —           |       | 71,668           |       |
| Income tax  provision                                                                     |       | —                                         |       | (10                               | )          | (2,129                      | )          | —                            |        | —           |       | (2,139           | )          |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                       |       | —                                         |       | (103,181                          | )          | 188,649                     |       | (15,939                           | )           | —           |       | 69,529           |       |
|                                                                                      |       |                                           |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                            |       | 69,529                                         |       | 172,710                           |       | —                      |       | —                            |        | (242,239         | )          | —           |       |
| **Net  income (loss)**                                                                    | ** ** | **$**                                          | **69,529** | ** **                        | **$**      | **69,529**                  | ** ** | **$**                             | **188,649** | ** **       | **$**      | **(15,939**      | **)**      | **$** | **(242,239** | **)** | **$** | **69,529** | ** ** |

 

27

----

 

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

**ConsolidatingBalance Sheets at September 30, 2007**

** **
| ** **                                | ** ** | **Boise Cascade Holdings, L.L.C. (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|-------------|-----------------------------|------------|----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | ** **                                  | ** **  | ** **                  | ** ** | ** **                 | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                | ** ** | **(thousands)**                             | ** **  |
|                                      |       |                                        |        |                        |       |                       |       |                              |          |             |       |             |       |
| **ASSETS**                                | ** ** | ** **                                  | ** **  | ** **                  | ** ** | ** **                 | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                      |       |                                        |        |                        |       |                       |       |                              |          |             |       |             |       |
| **Current**                               | ** ** | ** **                                  | ** **  | ** **                  | ** ** | ** **                 | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents                |       | $                                           | 1           |                        | $          | 65,361                     |       | $                                 | 21            |             | $          | 225              |       | $ | — |   | $ | 65,608 |   |
| Receivables                               |       |                                        |        |                        |       |                       |       |                              |          |             |       |             |       |
| Trade, less  allowances                   |       | —                                      |        | —                      |       | (3,382                     | )          | 203,512                           |          | —           |       | 200,130          |       |
| Intercompany                              |       | —                                      |        | —                      |       | 56                         |       | 1,487                             |          | (1,543           | )          | —           |       |
| Related parties                           |       | —                                      |        | 8                           |       | —                     |       | —                            |          | —           |       | 8                |       |
| Other                                     |       | —                                      |        | 616                         |       | 4,731                      |       | 1,580                             |          | —           |       | 6,927            |       |
| Inventories                               |       | —                                      |        | 7                           |       | 322,857                    |       | 16,266                            |          | —           |       | 339,130          |       |
| Assets held for  sale                     |       | —                                      |        | 13,148                      |       | 1,617,539                  |       | 225,374                           |          | —           |       | 1,856,061        |       |
| Restricted cash  held for bond redemption |       | —                                      |        | 200,000                     |       | —                     |       | —                            |          | —           |       | 200,000          |       |
| Other                                     |       | —                                      |        | 3,034                       |       | 3,058                      |       | 776                               |          | —           |       | 6,868            |       |
|                                      |       | 1                                           |        | 282,174                     |       | 1,944,880                  |       | 449,220                           |          | (1,543           | )          | 2,674,732        |       |
|                                      |       |                                        |        |                        |       |                       |       |                              |          |             |       |             |       |
| **Property**                              | ** ** | ** **                                  | ** **  | ** **                  | ** ** | ** **                 | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment, net              |       | —                                      |        | 2,872                       |       | 273,139                    |       | 29,886                            |          | —           |       | 305,897          |       |
| Fiber farms and  deposits                 |       | —                                      |        | —                      |       | 8,755                      |       | 15,226                            |          | —           |       | 23,981           |       |
|                                      |       | —                                      |        | 2,872                       |       | 281,894                    |       | 45,112                            |          | —           |       | 329,878          |       |
| ** **                                | ** ** | ** **                                  | ** **  | ** **                  | ** ** | ** **                 | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Deferred  financing costs**             |       | —                                      |        | 28,297                      |       | —                     |       | 188                               |          | —           |       | 28,485           |       |
| **Goodwill**                              |       | —                                      |        | —                      |       | 12,170                     |       | —                            |          | —           |       | 12,170           |       |
| **Intangible  assets, net**               |       | —                                      |        | —                      |       | 9,773                      |       | —                            |          | —           |       | 9,773            |       |
| **Investments  in affiliates**            |       | 924,952                                     |        | 827,315                     |       | —                     |       | —                            |          | (1,752,267       | )          | —           |       |
| **Other  assets**                         |       | —                                      |        | 3,391                       |       | 3,924                      |       | 2,992                             |          | —           |       | 10,307           |       |
| **Total  assets**                         | ** ** | **$**                                       | **924,953** | ** **                  | **$**      | **1,144,049**              | ** ** | **$**                             | **2,252,641** | ** **       | **$**      | **497,512**      | ** ** | **$** | **(1,753,810** | **)** | **$** | **3,065,345** | ** ** |
|                                           |            |                                             |             |                             |            |                            |            |                                   |               |                  |            |                  |            |  |  |  |  |  |  |  |  |

 

28

----

** **

**Boise Cascade Holdings, L.L.C., andSubsidiariesConsolidating Balance Sheets at September 30, 2007 (continued)**

 
| ** **                                  | **Boise   Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor********Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|--------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                  | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | **(thousands)**                                  | ** **  |
| ** **                                  | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| **LIABILITIES AND CAPITAL**                 | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Current**                                 |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| Current portion of long-term debt           | $                                                | —      |                        | $          | 257,250                     |       | $                                       | —        |             | $          | —           |       | $ | — |   | $ | 257,250 |   |
| Accounts payable                            |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| Trade                                       | —                                           |        | 17,761                      |       | 161,191                     |       | 6,169                                   |          | —           |       | 185,121          |       |
| Intercompany                                | —                                           |        | —                      |       | 1,487                       |       | 56                                      |          | (1,543           | )          | —           |       |
| Accrued liabilities                         |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| Compensation and benefits                   | —                                           |        | 12,391                      |       | 26,399                      |       | 1,094                                   |          | —           |       | 39,884           |       |
| Interest payable                            | —                                           |        | 18,459                      |       | —                      |       | 539                                     |          | —           |       | 18,998           |       |
| Other                                       | —                                           |        | 36,403                      |       | 18,174                      |       | 4,263                                   |          | —           |       | 58,840           |       |
| Liabilities related to assets held for sale | —                                           |        | 118,624                     |       | 231,279                     |       | —                                  |          | —           |       | 349,903          |       |
|                                        | —                                           |        | 460,888                     |       | 438,530                     |       | 12,121                                  |          | (1,543           | )          | 909,996          |       |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Debt**                                    |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| Long-term debt, less current portion        | —                                           |        | 1,115,125                   |       | —                      |       | 50,000                                  |          | —           |       | 1,165,125        |       |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Other**                                   | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and benefits                   | —                                           |        | 52,764                      |       | —                      |       | —                                  |          | —           |       | 52,764           |       |
| Other long-term liabilities                 | —                                           |        | 7,801                       |       | 4,706                       |       | —                                  |          | —           |       | 12,507           |       |
|                                        | —                                           |        | 60,565                      |       | 4,706                       |       | —                                  |          | —           |       | 65,271           |       |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Due to (from) affiliates**                | —                                           |        | (1,417,481                  | )          | 1,035,424                   |       | 382,057                                 |          | —           |       | —           |       |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Redeemable equity units**                 |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| Series B equity units                  | 17,365                                           |        | —                      |       | —                      |       | —                                  |          | —           |       | 17,365           |       |
| Series C equity units                  | 8,771                                            |        | —                      |       | —                      |       | —                                  |          | —           |       | 8,771            |       |
| Redeemable equity units                     | —                                           |        | 26,136                      |       | —                      |       | —                                  |          | (26,136          | )          | —           |       |
|                                        | 26,136                                           |        | 26,136                      |       | —                      |       | —                                  |          | (26,136          | )          | 26,136           |       |
|                                        |                                             |        |                        |       |                        |       |                                    |          |             |       |             |       |
| **Commitments and contingent liabilities**  | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                 | ** **                                       | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                              | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity units                       | 76,942                                           |        | —                      |       | —                      |       | —                                  |          | —           |       | 76,942           |       |
| Series B equity units                       | 814,222                                          |        | —                      |       | —                      |       | —                                  |          | —           |       | 814,222          |       |
| Series C equity units                       | 7,653                                            |        | —                      |       | —                      |       | —                                  |          | —           |       | 7,653            |       |
| Subsidiary equity                           | —                                           |        | 898,816                     |       | 773,981                     |       | 53,334                                  |          | (1,726,131       | )          | —           |       |
| **Total capital**                           | 898,817                                          |        | 898,816                     |       | 773,981                     |       | 53,334                                  |          | (1,726,131       | )          | 898,817          |       |
| **Total liabilities and capital**           | **$**                                            | **924,953** | ** **                  | **$**      | **1,144,049**               | ** ** | **$**                                   | **2,252,641** | ** **       | **$**      | **497,512**      | ** ** | **$** | **(1,753,810** | **)** | **$** | **3,065,345** | ** ** |

** **

** **

29

 

----

** **

**Boise Cascade Holdings, L.L.C., andSubsidiariesConsolidating Balance Sheets at December 31, 2006**

 
| ** **                     | ** ** | **Boise   Cascade   Holdings,   L.L.C.   (Parent)** | ** **  | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|-----------------------------------------------------|-------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **(thousands)**                                     | ** **  |
| ** **                     | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **ASSETS**                     | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                           |       |                                                |        |                              |       |                        |       |                              |          |             |       |             |       |
| **Current**                    | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Cash and cash  equivalents     |       | $                                                   | —      |                              | $          | 42,962                      |       | $                                 | 32            |             | $          | 2,175            |       | $ | — |   | $ | 45,169 |   |
| Receivables                    |       |                                                |        |                              |       |                        |       |                              |          |             |       |             |       |
| Trade, less  allowances        |       | —                                              |        | —                            |       | 135                         |       | 327,003                           |          | —           |       | 327,138          |       |
| Intercompany                   |       | —                                              |        | —                            |       | 3,956                       |       | 1,988                             |          | (5,944           | )          | —           |       |
| Related parties                |       | —                                              |        | 695                               |       | 3,430                       |       | 33,861                            |          | —           |       | 37,986           |       |
| Other                          |       | —                                              |        | 1,447                             |       | 16,707                      |       | 873                               |          | —           |       | 19,027           |       |
| Inventories                    |       | —                                              |        | 17                                |       | 625,575                     |       | 15,234                            |          | —           |       | 640,826          |       |
| Other                          |       | —                                              |        | 6,123                             |       | 6,258                       |       | 646                               |          | —           |       | 13,027           |       |
|                           |       | —                                              |        | 51,244                            |       | 656,093                     |       | 381,780                           |          | (5,944           | )          | 1,083,173        |       |
|                           |       |                                                |        |                              |       |                        |       |                              |          |             |       |             |       |
| **Property**                   | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Property and  equipment, net   |       | —                                              |        | 8,911                             |       | 1,421,512                   |       | 31,892                            |          | —           |       | 1,462,315        |       |
| Fiber farms and  deposits      |       | —                                              |        | —                            |       | 27,008                      |       | 13,484                            |          | —           |       | 40,492           |       |
|                           |       | —                                              |        | 8,911                             |       | 1,448,520                   |       | 45,376                            |          | —           |       | 1,502,807        |       |
| ** **                     | ** ** | ** **                                          | ** **  | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Deferred  financing costs**  |       | —                                              |        | 31,156                            |       | —                      |       | 318                               |          | —           |       | 31,474           |       |
| **Goodwill**                   |       | —                                              |        | —                            |       | 21,846                      |       | —                            |          | —           |       | 21,846           |       |
| **Intangible  assets, net**    |       | —                                              |        | —                            |       | 37,507                      |       | —                            |          | —           |       | 37,507           |       |
| **Investments  in affiliates** |       | 838,844                                             |        | 685,467                           |       | —                      |       | —                            |          | (1,524,311       | )          | —           |       |
| **Other  assets**              |       | —                                              |        | 10,539                            |       | 15,043                      |       | 2,808                             |          | —           |       | 28,390           |       |
| **Total  assets**              | ** ** | **$**                                               | **838,844** | ** **                        | **$**      | **787,317**                 | ** ** | **$**                             | **2,179,009** | ** **       | **$**      | **430,282**      | ** ** | **$** | **(1,530,255** | **)** | **$** | **2,705,197** | ** ** |

 

 

30

 

----

 

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2006 (continued)**

 
| ** **                                  | ** ** | **Boise   Cascade   Holdings,   L.L.C.   (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | **(thousands)**                                     | ** **  |
| ** **                                  | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **LIABILITIES  AND CAPITAL**                | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                                 | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Short-term  borrowings                      |       | $                                                   | —      |                        | $          | 3,200                       |       | $                                 | —        |             | $          | —           |       | $ | — |   | $ | 3,200 |   |
| Accounts payable                            |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                                       |       | —                                              |        | 32,860                      |       | 303,732                     |       | 4,609                             |          | —           |       | 341,201          |       |
| Intercompany                                |       | —                                              |        | 2,752                       |       | 1,988                       |       | 1,204                             |          | (5,944           | )          | —           |       |
| Accrued  liabilities                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and  benefits                  |       | —                                              |        | 22,793                      |       | 69,847                      |       | 647                               |          | —           |       | 93,287           |       |
| Interest payable                            |       | —                                              |        | 11,213                      |       | —                      |       | 634                               |          | —           |       | 11,847           |       |
| Other                                       |       | —                                              |        | 16,317                      |       | 32,155                      |       | 6,128                             |          | —           |       | 54,600           |       |
|                                        |       | —                                              |        | 89,135                      |       | 407,722                     |       | 13,222                            |          | (5,944           | )          | 504,135          |       |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                    | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Long-term debt                              |       | —                                              |        | 1,188,900                   |       | —                      |       | 25,000                            |          | —           |       | 1,213,900        |       |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                                   | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                  |       | —                                              |        | 111,676                     |       | —                      |       | —                            |          | —           |       | 111,676          |       |
| Other long-term  liabilities                |       | —                                              |        | 23,180                      |       | 13,462                      |       | —                            |          | —           |       | 36,642           |       |
|                                        |       | —                                              |        | 134,856                     |       | 13,462                      |       | —                            |          | —           |       | 148,318          |       |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**               |       | —                                              |        | (1,464,418                  | )          | 1,155,558                   |       | 308,860                           |          | —           |       | —           |       |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**                | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series B  equity units                 |       | 17,477                                              |        | —                      |       | —                      |       | —                            |          | —           |       | 17,477           |       |
| Series C  equity units                 |       | 6,434                                               |        | —                      |       | —                      |       | —                            |          | —           |       | 6,434            |       |
| Redeemable  equity units                    |       | —                                              |        | 23,911                      |       | —                      |       | —                            |          | (23,911          | )          | —           |       |
|                                        |       | 23,911                                              |        | 23,911                      |       | —                      |       | —                            |          | (23,911          | )          | 23,911           |       |
|                                        |       |                                                |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Commitments  and contingent liabilities** | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                 | ** ** | ** **                                          | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A equity  units                      |       | 78,290                                              |        | —                      |       | —                      |       | —                            |          | —           |       | 78,290           |       |
| Series B equity  units                      |       | 724,988                                             |        | —                      |       | —                      |       | —                            |          | —           |       | 724,988          |       |
| Series C equity  units                      |       | 11,655                                              |        | —                      |       | —                      |       | —                            |          | —           |       | 11,655           |       |
| Subsidiary  equity                          |       | —                                              |        | 814,933                     |       | 602,267                     |       | 83,200                            |          | (1,500,400       | )          | —           |       |
| **Total  capital**                          |       | 814,933                                             |        | 814,933                     |       | 602,267                     |       | 83,200                            |          | (1,500,400       | )          | 814,933          |       |
| **Total  liabilities and capital**          | ** ** | **$**                                               | **838,844** | ** **                  | **$**      | **787,317**                 | ** ** | **$**                             | **2,179,009** | ** **       | **$**      | **430,282**      | ** ** | **$** | **(1,530,255** | **)** | **$** | **2,705,197** | ** ** |

 

 

31

 

----

 

**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Nine Months Ended September 30, 2007**

** **
| ** **                                                                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                       | ** ** | **(thousands)**                                 | ** ** |
| ** **                                                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| **Cash  provided by (used for) operations**                                      | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                |       | $                                               | 88,600     |                              | $          | 88,600                      |       | $                                 | 171,714    |             | $          | (29,866          | )          | $ | (230,448 | ) | $ | 88,600 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Equity in net  income of affiliates                                              |       | (88,600                                         | )          | (141,848                          | )          | —                      |       | —                            |       | 230,448          |       | —           |       |
| Depreciation, depletion,  and amortization of deferred financing costs and other |       | —                                          |       | 3,285                             |       | 107,490                     |       | 3,259                             |       | —           |       | 114,034          |       |
| Related-party  interest expense                                                  |       | —                                          |       | 469                               |       | —                      |       | 15,554                            |       | (16,023          | )          | —           |       |
| Related-party  interest income                                                   |       | —                                          |       | (61                               | )          | (15,962                     | )          | —                            |       | 16,023           |       | —           |       |
| Deferred income  taxes                                                           |       | —                                          |       | 3,555                             |       | 95                          |       | —                            |       | —           |       | 3,650            |       |
| Pension and other  postretirement benefit expense                                |       | —                                          |       | 18,945                            |       | —                      |       | —                            |       | —           |       | 18,945           |       |
| Gain on changes  in retiree healthcare programs                                  |       | —                                          |       | (4,367                            | )          | —                      |       | —                            |       | —           |       | (4,367           | )          |
| Change in fair  value of interest rate swaps                                     |       | —                                          |       | (5,395                            | )          | —                      |       | —                            |       | —           |       | (5,395           | )          |
| Management equity  units expense                                                 |       | —                                          |       | 2,337                             |       | —                      |       | —                            |       | —           |       | 2,337            |       |
| Other                                                                            |       | —                                          |       | (28,978                           | )          | (2,772                      | )          | 26,806                            |       | —           |       | (4,944           | )          |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                      |       | —                                          |       | 1,209                             |       | (5,157                      | )          | (68,228                           | )          | (4,401           | )          | (76,577          | )          |
| Inventories                                                                      |       | —                                          |       | 3                                 |       | (29,164                     | )          | (1,032                            | )          | —           |       | (30,193          | )          |
| Prepaid expenses                                                                 |       | —                                          |       | 3,037                             |       | (2,121                      | )          | (130                              | )          | —           |       | 786              |       |
| Accounts payable  and accrued liabilities                                        |       | —                                          |       | (5,606                            | )          | 20,566                      |       | (1,101                            | )          | 4,401            |       | 18,260           |       |
| Pension and other  postretirement benefit payments                               |       | —                                          |       | (888                              | )          | —                      |       | —                            |       | —           |       | (888             | )     |
| Current and  deferred income taxes                                               |       | —                                          |       | 2,180                             |       | 612                         |       | (214                              | )          | —           |       | 2,578            |       |
| Other                                                                            |       | —                                          |       | 4,299                             |       | 216                         |       | (8                                | )          | —           |       | 4,507            |       |
| Cash provided by  (used for) operations                                          |       | —                                          |       | (59,224                           | )          | 245,517                     |       | (54,960                           | )          | —           |       | 131,333          |       |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                 | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Expenditures for  property and equipment                                    |       | —                                          |       | (3,460                            | )          | (131,175                    | )          | (2,612                            | )          | —           |       | (137,247         | )          |
| Increase in  restricted cash held for bond redemption                            |       | —                                          |       | (200,000                          | )          | —                      |       | —                            |       | —           |       | (200,000         | )          |
| Sales of assets                                                                  |       | —                                          |       | 11                                |       | 18,259                      |       | —                            |       | —           |       | 18,270           |       |
| Investments in  affiliates                                                       |       | 3,002                                           |       | 141,848                           |       | —                      |       | —                            |       | (144,850         | )          | —           |       |
| Other                                                                            |       | —                                          |       | 29,179                            |       | 4,220                       |       | (27,021                           | )          | —           |       | 6,378            |       |
| Cash provided by  (used for) investment                                     |       | 3,002                                           |       | (32,422                           | )          | (108,696                    | )          | (29,633                           | )          | (144,850         | )          | (312,599         | )          |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                     |       | —                                          |       | 725,000                           |       | —                      |       | 235,000                           |       | —           |       | 960,000          |       |
| Payments of  long-term debt                                                      |       | —                                          |       | (541,525                          | )          | —                      |       | (210,000                          | )          | —           |       | (751,525         | )          |
| Short-term  borrowings                                                           |       | —                                          |       | (3,200                            | )          | —                      |       | —                            |       | —           |       | (3,200           | )          |
| Proceeds from  changes to interest rate swaps                                    |       | —                                          |       | 2,848                             |       | —                      |       | —                            |       | —           |       | 2,848            |       |
| Tax distributions  to members                                                    |       | (2,753                                          | )          | —                            |       | —                      |       | —                            |       | —           |       | (2,753           | )          |
| Tax distribution  to Boise Cascade Holdings, L.L.C.                              |       | —                                          |       | (2,753                            | )          | —                      |       | —                            |       | 2,753            |       | —           |       |
| Other                                                                            |       | (248                                            | )          | (3,666                            | )          | —                      |       | —                            |       | 249              |       | (3,665           | )          |
| Cash provided by  (used for) financing                                           |       | (3,001                                          | )          | 176,704                           |       | —                      |       | 25,000                            |       | 3,002            |       | 201,705          |       |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| Due to (from)  affiliates                                                        |       | —                                          |       | (62,659                           | )          | (136,832                    | )          | 57,643                            |       | 141,848          |       | —           |       |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |       |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 1                                               |       | 22,399                            |       | (11                         | )          | (1,950                            | )          | —           |       | 20,439           |       |
| **Balance  at beginning of the year**                                            |       | —                                          |       | 42,962                            |       | 32                          |       | 2,175                             |       | —           |       | 45,169           |       |
| **Balance  at end of the year**                                                  | ** ** | **$**                                           | **1**      | ** **                        | **$**      | **65,361**                  | ** ** | **$**                             | **21**     | ** **       | **$**      | **225**          | ** ** | **$** | **—** | ** ** | **$** | **65,608** | ** ** |

 

 

32

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash Flows****For theNine Months Ended September 30, 2006**

** **
| ** **                                                                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,   L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                                                       | ** ** | **(thousands)**                                 | ** ** |
| ** **                                                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Cash  provided by (used for) operations**                                 | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Net income (loss)                                                                |       | $                                               | 69,529     |                              | $          | 69,529                      |       | $                                 | 188,649     |             | $          | (15,939          | )          | $ | (242,239 | ) | $ | 69,529 |   |
| Items in net  income (loss) not using (providing) cash                      |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| Equity in net  (income) loss of affiliates                                       |       | (69,529                                         | )          | (172,710                          | )          | —                      |       | —                            |        | 242,239          |       | —           |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | —                                          |       | 4,952                             |       | 108,405                     |       | 3,272                             |        | —           |       | 116,629          |       |
| Related-party  interest expense                                                  |       | —                                          |       | 12,938                            |       | —                      |       | 14,067                            |        | (14,446          | )          | 12,559           |       |
| Related-party  interest income                                                   |       | —                                          |       | (160                              | )          | (14,286                     | )          | —                            |        | 14,446           |       | —           |       |
| Deferred income  taxes                                                           |       | —                                          |       | 3                                 |       | 147                         |       | —                            |        | —           |       | 150              |       |
| Pension and other  postretirement benefit expense                                |       | —                                          |       | 20,671                            |       | —                      |       | —                            |        | —           |       | 20,671           |       |
| Gain on changes  in retiree healthcare programs                                  |       | —                                          |       | (3,741                            | )          | —                      |       | —                            |        | —           |       | (3,741           | )          |
| Management equity  units expense                                            |       | —                                          |       | 2,750                             |       | —                      |       | —                            |        | —           |       | 2,750            |       |
| Other                                                                            |       | —                                          |       | (4,084                            | )          | 420                         |       | 3,139                             |        | —           |       | (525             | )          |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| Receivables                                                                      |       | —                                          |       | 7,368                             |       | 7,478                       |       | (72,156                           | )           | 2,786            |       | (54,524          | )          |
| Inventories                                                                      |       | —                                          |       | 106                               |       | (27,450                     | )          | 3,288                             |        | —           |       | (24,056          | )          |
| Prepaid expenses                                                                 |       | —                                          |       | 4,746                             |       | (2,575                      | )          | (203                              | )           | —           |       | 1,968            |       |
| Accounts payable  and accrued liabilities                                        |       | —                                          |       | (1,183                            | )          | 34,054                      |       | 4,855                             |        | (2,786           | )          | 34,940           |       |
| Pension and other  postretirement benefit payments                               |       | —                                          |       | (842                              | )          | —                      |       | —                            |        | —           |       | (842             | )          |
| Current and  deferred income taxes                                               |       | —                                          |       | 366                               |       | (2,013                      | )          | —                            |        | —           |       | (1,647           | )          |
| Other                                                                            |       | —                                          |       | (1,022                            | )          | 4,278                       |       | (15                               | )           | —           |       | 3,241            |       |
| Cash provided by  (used for) operations                                          |       | —                                          |       | (60,313                           | )          | 297,107                     |       | (59,692                           | )           | —           |       | 177,102          |       |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Cash  provided by (used for) investment**                                      | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Expenditures for property  and equipment                                         |       | —                                          |       | (2,125                            | )          | (100,418                    | )          | (2,552                            | )           | —           |       | (105,095         | )          |
| Acquisitions of  businesses and facilities                                       |       | —                                          |       | —                            |       | (42,549                     | )          | —                            |        | —           |       | (42,549          | )          |
| Sales of assets                                                                  |       | —                                          |       | 27,744                            |       | 15,209                      |       | —                            |        | —           |       | 42,953           |       |
| Investments in  related parties                                                  |       | 19,130                                          |       | 172,710                           |       | —                      |       | —                            |        | (191,840         | )          | —           |       |
| Other                                                                            |       | —                                          |       | 4,429                             |       | 790                         |       | (2,956                            | )           | —           |       | 2,263            |       |
| Cash provided by  (used for) investment                                          |       | 19,130                                          |       | 202,758                           |       | (126,968                    | )          | (5,508                            | )           | (191,840         | )          | (102,428         | )          |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Cash  provided by (used for) financing**                                       | ** ** | ** **                                      | ** ** | ** **                        | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                     |       | —                                          |       | 68,300                            |       | —                      |       | 225,000                           |        | —           |       | 293,300          |       |
| Payments of  long-term debt                                                      |       | —                                          |       | (165,200                          | )          | —                      |       | (235,000                          | )           | —           |       | (400,200         | )          |
| Note payable to  related party, net                                              |       | —                                          |       | (2,536                            | )          | —                      |       | —                            |        | —           |       | (2,536           | )          |
| Proceeds from  changes in interest rate swaps                                    |       | —                                          |       | 25,620                            |       | —                      |       | —                            |        | —           |       | 25,620           |       |
| Tax distributions  to members                                                    |       | (19,206                                         | )          | —                            |       | —                      |       | —                            |        | —           |       | (19,206          | )          |
| Tax distributions  to Boise Cascade Holdings, L.L.C.                             |       | —                                          |       | (19,206                           | )          | —                      |       | —                            |        | 19,206           |       | —           |       |
| Other                                                                            |       | 76                                              |       | 61                                |       | —                      |       | (8                                | )           | (76              | )          | 53               |       |
| Cash provided by  (used for) financing                                           |       | (19,130                                         | )          | (92,961                           | )          | —                      |       | (10,008                           | )           | 19,130           |       | (102,969         | )          |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| Due to (from)  affiliates                                                        |       | —                                          |       | (79,917                           | )          | (184,392                    | )          | 91,599                            |        | 172,710          |       | —           |       |
|                                                                             |       |                                            |       |                              |       |                        |       |                              |        |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                            |       | —                                          |       | (30,433                           | )          | (14,253                     | )          | 16,391                            |        | —           |       | (28,295          | )          |
| **Balance  at beginning of the period**                                          |       | —                                          |       | 88,171                            |       | —                      |       | —                            |        | —           |       | 88,171           |       |
| **Balance  at end of the period**                                                | ** ** | **$**                                           | **—** | ** **                        | **$**      | **57,738**                  | ** ** | **$**                             | **(14,253** | **)**            | **$**      | **16,391**       | ** ** | **$** | **—** | ** ** | **$** | **59,876** | ** ** |

 

 

33

 

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***21.          Legal Proceedings and Contingencies***

 

                We are a party to routine legalproceedings that arise in the ordinary course of our business.We are notcurrently a party to any legal proceedings or environmental claims that webelieve would have a material adverse effect on our financial position, resultsof operations, or cash flows.

 

** **

| ***ITEM  2.*** | *** *** | ***MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*** |
|----------------|--------------|---------------------------------------------------------------------------------------------------|

 

***Understanding Our FinancialInformation***

 

The following discussion and analysis provides information managementbelieves to be relevant to understanding our financial condition and results ofoperations. For a full understanding of our financial condition and results ofoperations, you should read this discussion along with Management’s Discussionand Analysis of Financial Condition and Results of Operations in our 2006Annual Report on Form 10-K.

 

This discussion and analysis includes statements regarding our expectationswith respect to our performance, liquidity, and capital resources. Suchstatements, along with any other nonhistorical statements in the discussion,are forward-looking. These forward-looking statements are subject to numerousrisks and uncertainties, including, but not limited to, the risks anduncertainties described in “Item 1A. Risk Factors” of our 2006 Annual Report on Form 10-K, as well asthose factors listed in other documents we file with the Securities andExchange Commission (SEC).

 

This discussion and analysis also includes forward-looking statements aboutthe proposed transaction with Aldabra 2 Acquisition Corp. (Aldabra) and ourplanned use of proceeds from that transaction. The Aldabra transaction issubject to a number of uncertainties, risks, and assumptions. The transactionrequires approval of Aldabra's shareholders, the receipt of regulatoryapprovals, Aldabra's ability to obtain financing, and the satisfaction of otherclosing conditions. The inability to satisfy any of these requirements may havea material and negative impact on the transaction and/or its timing and mayconsequently affect our intended use of proceeds. 

 

                We do not assume an obligationto update any forward-looking statement. Our actual results may differmaterially from those contained in or implied by any of the forward-looking statementscontained in this Form 10-Q. 

***Our Segments***

 

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

 

*                Building Materials Distribution. *Our Building Materials Distribution segment is aleading national inventory-carrying wholesale distributor of buildingmaterials. We distribute a broad line of building materials, includingengineered wood products (EWP), oriented strand board (OSB), plywood, lumber,and general line items such as framing accessories, composite decking, roofing,siding, and insulation. We purchase most of these building materials fromthird-party suppliers and market them primarily to customers that resellbuilding materials to professional builders in the residential, lightcommercial construction, and repair-and-remodeling markets.

 

                *Wood Products. *Our Wood Products segmentmanufactures and sells EWP, consisting of laminated veneer lumber (LVL), ahigh-strength engineered lumber often used in beams; I-joists, astructural support typically used in floors and roofs; and laminated beams. Wealso produce plywood, particleboard, dimension lumber, and high-qualityponderosa pine lumber, a premium lumber grade sold primarily to manufacturersof specialty wood windows, moldings, and doors. Our wood products are usedprimarily in new residential and light commercial construction and inresidential repair and remodeling. Most of these products are sold towholesalers, major retailers, and industrial converters or through our ownwholesale building materials distribution outlets. During 2006, approximately43% of the wood products we manufactured, including approximately 60% of ourEWP, were sold to our Building Materials Distribution segment.

 

*                Paper. *Our Paper segment manufactures and sells uncoated freesheet (including cut-size office papers, commercial printing paper, envelopepapers, and a wide range of premium and specialty papers), market pulp, andcontainerboard (corrugating medium). Many of our paper products are commodityproducts, while other products have specialized features that make them premiumand specialty papers. Our premium and specialty grades include high-brightrecycled and colored cut-size office papers and

 

34

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custom-developedspecialty papers for such uses as label and release. We sell to customers bothdirectly from our mills and through distribution centers. In 2006,approximately 45% of our uncoated free sheet sales volume, including about 80%of our office papers sales volume, was sold to OfficeMax.

 

*                Packaging & Newsprint*.  OurPackaging & Newsprint segment manufactures and sells containerboard(linerboard) and newsprint products at our mill in DeRidder, Louisiana. We alsooperate five corrugated container plants in the Northwest and a sheet feederplant in Waco, Texas. Our corrugated containers are used in the packaging offresh fruit and vegetables, processed food, beverages, and other industrial andconsumer products. Our Waco plant, known as Central Texas Corrugated, or CTC,produces corrugated sheets that are sold to sheet plants in the region, wherethey are converted into corrugated containers for a variety of customers. Ourcontainerboard and corrugated products are sold by our sales personnel or, insome cases, by brokers. We market our newsprint through Abitibi-Consolidated(Abitibi) pursuant to an arrangement whereby Abitibi purchases all of thenewsprint we produce at a price equal to the price at which Abitibi sellsnewsprint produced at its mills located in the southern United States, lessassociated expenses and a sales and marketing discount. The newsprint price isverified through a third-party review.

 

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

 

***Sale of Paper and Packaging & Newsprint Assets***

 

                In September 2007, BoiseCascade, L.L.C. (Boise LLC), our wholly owned direct subsidiary, entered into apurchase and sale agreement (PSA) with Aldabra 2 Acquisition Corp. (Aldabra)for the sale of our Paper and Packaging & Newsprint segments and mostof our Corporate and Other segment for cash and shares of Aldabra common stockequal to approximately $1.625 billion, plus working capital adjustments.As part of the transaction, Aldabra intends to change its name to Boise PaperCompany (BPC). Following the transaction, Boise LLC will maintain 100%ownership of our Wood Products and Building Materials Distribution segments,and we expect to own approximately 40% of BPC’s shares. The actual amount of our ownership in BPC is dependenton a number of factors, including the number of Aldabra shareholders, if any,that exercise their conversion rights. In any event, our ownership in BPCcannot exceed 49% of BPC’s outstanding stock at the time of closing. Both companies will be headquartered inBoise, Idaho.

 

In September 2007,in connection with the Aldabra transaction, we reclassified the assets andliabilities of our Paper and Packaging & Newsprint segments, as wellas some of the assets and liabilities included in our Corporate and Othersegment, to “Assets held for sale” and “Liabilities related to assets held forsale” on our Consolidated Balance Sheet and stopped depreciating and amortizingthose assets. The three and nine months ended September 30, 2007, includedapproximately $10.4 million of lower depreciation and amortization expenseas a result of discontinuing depreciation and amortization on the assetsrecorded as held for sale. Of the $10.4 million of lower depreciation andamortization expense, $5.4 million related to our Paper segment,$4.8 million related to our Packaging & Newsprint segment, and$0.2 million related to our Corporate and Other segment. Based on theterms of the PSA and the carrying value of the assets held for sale, noimpairment exists. The equity interest that we expect to own in BPC after thetransaction represents a significant continuing involvement. As a result, untilthe transaction is completed the operating results of the Paper andPackaging & Newsprint segments will continue to be included incontinuing operations in the Consolidated Statements of Income (Loss).

 

35

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In accordance with Statement of Financial Accounting Standards (SFAS) No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, we did not recast the prior-periodbalance sheet for assets and liabilities held for sale to conform with thecurrent-period presentation. At September 30, 2007, the carrying amounts of themajor classes of assets and liabilities classified as “Assets held for sale”and “Liabilities related to assets held for sale” on our September 30,2007, Consolidated Balance Sheet were as follows:

** **
| ** **                                   | ** ** | **September 30,** | ** **  |
|----------------------------------------------|------------|------------------------|-------------|
| ** **                                   | ** ** | **2007**               | ** **  |
|                                         |       |                   |        |
| ** **                                   | ** ** | **(millions)**         | ** **  |
|                                         |       |                   |        |
| Assets                                       |       |                   |        |
| Accounts  receivable, net                    |       | $                      | 253.4       |   |
| Inventories                                  |       | 328.7                  |        |
| Property and  equipment, net                 |       | 1,169.3                |        |
| Fiber farms and  deposits                    |       | 18.4                   |        |
| Goodwill                                     |       | 42.3                   |        |
| Intangible  assets, net                      |       | 24.0                   |        |
| Other                                        |       | 20.0                   |        |
| Assets held for  sale                        | ** ** | **$**                  | **1,856.1** | ** ** |
|                                         |       |                   |        |
| Liabilities                                  |       |                   |        |
| Accounts payable                             |       | $                      | 170.0       |   |
| Accrued  compensation and benefits           |       | 72.5                   |        |
| Other accrued  liabilities                   |       | 107.4                  |        |
| Liabilities  related to assets held for sale | ** ** | **$**                  | **349.9**   | ** ** |
|                                              |            |                        |             |  |  |

 

***Overview of Financial Condition***

 

*Recent Trends and Operational Outlook*

 

*               *Recent trends in our businesses have beenmixed. Residential construction markets continued to be weak, while demand forpackaging and office papers has been firm. The newsprint market continues to beimpacted by shrinking demand.

 

                The weakness in new residentialconstruction markets is having a negative impact on demand both for productsproduced by our Wood Products segment and for products distributed by ourBuilding Materials Distribution segment. The U.S. Census Bureau reported theSeptember 2007 Seasonally Adjusted Annual Rate of New Privately Owned HousingUnits Started at 1.191 million units, compared with 1.721 millionunits in September 2006, and 1.629 million units in December 2006. Recentdisruptions in mortgage finance markets have created greater uncertainty as tothe length of the downturn. The September 2007 Seasonally Adjusted Annual Rateof New Homes For Sale as reported by the U.S. Census Bureau were 523 thousandunits, and there were 8.3 months’ supply homes available for sale. Thiscompares to 560 million units and 6.8 months’ supply of new homes inSeptember 2006.

 

                As demand for building productshas fallen, prices have been negatively impacted, and given the challengingenvironment looking forward, it is likely that pressures for lower pricing willpersist and potentially intensify. We see the impact of lower demand on oursales volumes of engineered wood products and lumber most acutely. Offsettingthese impacts on the revenue side are improved cost elements in the form oflower log and OSB costs. We have responded to the reduction in demand byreducing production volumes through shift curtailments, and we continue toassess our operations for additional curtailments. In our Building MaterialsDistribution segment, we have responded to the lower level of sales by reducinginventory levels during the quarter.

 

                The demand for our office papershas continued to be relatively firm, and prices are currently stable. Printingand converting paper demand was negatively affected in the second quarter bythe change in the postal rate structures, which caused envelope converters toreduce purchases of our paper while they adjusted their business strategies andequipment to respond to the change in rate structure. It appears that ourcustomers have largely completed these adjustments and order patterns haveresumed. Effective September 10, 2007, we increased prices on most of ourprinting and converting grades by $60 per ton. This increase is beingphased in as contracts permit.

 

                The reconfiguration of our W-3paper machine in Wallula, Washington, to enable it to produce label and releasepapers in addition to the historical mix of commodity papers came online insecond quarter 2007 and continues in start-up. We have qualified most of thelabel and release products on that machine with customers and continue toqualify the remaining grades as we produce them. While product quality has metexpectations and customer acceptance has been positive, production efficiencyhas

 

36

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not yet metour expectations, as technical issues around start-up have negatively affectedproduct yields. The machine is running normally on commodity products but hasnot yet performed at expected productivity levels on the label and releaseproducts. While we expect to have the machine fully qualified and running wellon all target grades by year-end, during the third quarter, the performance of theproject negatively affected the financial performance of our Paper segmentbecause of the lower than expected productivity on the label and releaseproducts.

 

**               **Packaging markets have been stable allowing us to increase corrugated andlinerboard prices. The weak US dollar is making our linerboard more competitiveoverseas while making it less attractive for overseas competitors to ship tothe United States. Newsprint markets have continued to be negatively impactedby oversupply relative to demand in North America. We do not anticipate anychanges in the demand trend for newsprint in North America.

 

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

 

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

 

•                  General economic conditions, includingbut not limited to housing starts, repair-and-remodel activity, nonresidentialconstruction, white-collar employment, electronic substitution, durable goodsproduction, and relative currency values;

 

•                  Volatility in raw material and energyprices;

 

•                  Pricing volatility in our distributionbusiness;

 

•                  The commodity nature of our products andour ability to maintain margins;

 

•                  Industry cycles and capacity utilizationrates;

 

•                  Our ability to implement our strategies;

 

•                  Actions of suppliers, customers, and competitors;

 

•                  The ability to secure appropriate technical personneland staffing; and

 

•                  The other factors described in “Item 1A. RiskFactors” in our 2006 Annual Report on Form 10-K.

 

*Commodity and Premium andSpecialty Products*

 

                Many of the products we manufacture and distributeare widely available and can be readily produced by our competitors. Becausecommodity products have few distinguishing qualities from producer to producer,competition for these products is primarily based on price, which is determinedby supply relative to demand. Generally, market conditions beyond our controldetermine the prices for our commodity products, and the price for any one ormore of these products may fall below our cash production costs. Therefore, ourprofitability with respect to these products is highly dependent on managingour cost structure, particularly raw material and energy costs, which alsoexhibit commodity characteristics.

 

                Not all of our products are commodities. Our EWP andpremium and specialty papers are differentiated from competing products basedon quality and product design as well as related customer service. In the caseof these products, we are generally able to influence price based on the strengthof differentiation and levels of customer service and over time are able tosell these products at higher margins than our commodity products. In order toreduce our sensitivity to the cyclicality of our industry, a fundamentalcomponent of our strategy is to increase production of EWP as a share of ourtotal Wood Products segment sales and increase premium and specialty papers asa percent of our total Paper segment sales. We believe these products are lesssusceptible to commodity dynamics.

 

                Theslowdown in new residential construction has inhibited our ability to grow ourEWP sales in the short term. Comparing the third quarter of 2007 with the thirdquarter of 2006, our LVL and I-joist sales volumes decreased 13% and 16%,respectively. The project to convert our Wallula, Washington, W-3 papermachine to enable it to produce pressure sensitive grades is a key step inproviding us with

 

37

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the capacity to increase production of premium andspecialty paper grades. As discussed above, this project came online duringsecond quarter 2007.

 

*Demand*

 

The overall levelof demand for the products we make and distribute is affected by, among otherthings, construction activity, manufacturing activity, employment, and consumerspending. Accordingly, we believe that our financial results depend in largepart on general macroeconomic conditions in North America, as well as onregional economic conditions in the geographic markets in which we operate.While no single product line drives our overall financial performance,individual product lines are influenced by conditions in their respectiveindustries. For example:

 

•                  Demand for building materials, including woodproducts, depends on new residential and light commercial construction andresidential repair-and-remodeling activity, which are affected by demographictrends, interest rate levels, weather, and general economic conditions. Inrecent years, demand for wood products has been high due to strong new housingstarts, the increasing size of new homes, a robust repair-and-remodelingmarket, and a recovering light commercial construction market. However,beginning in the second half of 2006, there was a significant increase in thenumber of homes for sale relative to the monthly sales activity. This has ledto a drop in new home construction activity, resulting in price declines formany products. For example, third-quarter sales prices for LVL, I-joists, andlumber in our Wood Products segment declined 9%, 8%, and 5%, respectively, fromthe same period in 2006. The trend in reduced construction activity continuedduring third quarter 2007 and continued to reduce demand for our products. Forexample, the sales volumes of LVL and I-joists by our Wood Products segment duringthird quarter 2007 were down 13% and 16%, respectively, from the same period in2006. Offsetting the broader trend, sales prices for plywood in third quarter2007 increased 16%, compared with the same period in 2006.

 

•                  Historically, demand for uncoated free sheetcorrelated positively with general economic activity. However, demand forcommunications paper grades such as cut-size paper, which we produce, hasdecreased as the use of electronic transmission and document storagealternatives has become more widespread and more efficient.

 

•                  A large share of the demand for corrugated containers,and therefore containerboard, is driven by manufacturing, specifically themanufacture of nondurable goods. In addition, inventory stocking or liquidationof these goods has an impact, as do currency exchange rates that affect thecost-competitiveness of foreign manufacturers. Demand has strengthenedrecently, as the weakening U.S. dollar has made U.S. producers more attractiverelative to overseas competitors.

 

•                  Demand for newsprint depends uponprevailing levels of newspaper advertising and circulation. Demand fornewsprint in North America declined approximately 14% between 2002 and 2006,according to Resource Information Systems, Inc. (RISI), due in part to the growthof online media.

 

*Supply*

 

Industry supply ofcommodity wood products and paper is affected by the number of operational oridled facilities, the building of new capacity, and the shutting down ofexisting capacity. Capacity also tends to increase gradually over time withoutsignificant capital expenditures, as manufacturers improve productionefficiencies. Generally, more capacity is added or employed when supply istight and margins are relatively high, and capacity is idled or eliminated whencapacity significantly exceeds demand and margins are poor. Because ofrelatively lower capital investments, lower shutdown and start-up costs, andthe ability in most facilities to reduce production economically by curtailingshifts, wood products manufacturing producers tend to react more quickly tooversupply situations by removing shifts or curtailing facilities than pulp andpaper manufacturers.

 

While new capacity additions are constrained by thehigh capital investment and long lead times required to plan, obtain regulatoryapprovals for, and build a new mill, a favorable pricing environment may promptmanufacturers to initiate expansion projects.

 

38

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Some major OSB producers have announced indefiniteshutdowns of existing facilities in the face of declining prices, and othershave announced delays in previously announced capacity additions. A number ofOSB producers have announced the intention to produce a strand lumber productthat is intended to be a substitute for EWP in some applications. Their abilityto produce such a product and its impact on the EWP market are uncertain.

 

From 2002 to 2006, North American uncoated free sheet,containerboard, and newsprint capacities declined 6%, 3%, and 19%, respectively,according to RISI. In addition, some suppliers have recently announced eithermodifications to paper machines to move capacity to other grades or shutdownsof paper machines and paper mills.

 

Industry supply of commodity wood products and paperis also influenced by the level of imports and overseas production capacity,which has grown in recent years. The weakness of the U.S. dollar has mitigatedthe level of imports in recent years.

 

*Operating Costs*

 

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

 

*Labor.*  Our labor costs tend to increase steadilydue to inflation in healthcare and wage costs. Labor costs are not as volatileas our energy and wood fiber costs.

 

As of September 30, 2007, we had approximately10,100 employees. Approximately 4,800, or 48%, of these employees workpursuant to collective bargaining agreements. Our contract at our St. Jacques, New Brunswick, Canada, I-joist plantthat covers approximately 120 workers expired December 31, 2006. Thecontract remains in place pending further negotiations. In May 2007, the unionsat our paper mill in Jackson, Alabama, ratified a new, four-year agreement. Inaddition, in July 2007, we reached a new, four-year agreement at our Nampa,Idaho, container facility covering 110 employees. The agreement at ourWallula, Washington, container plant expires in fourth quarter 2007. We do notexpect material work interruptions or increases in our costs during the courseof the negotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

 

*Wood fiber.*  Our primary raw material is wood fiber,accounting for the following percentages of materials, labor, and otheroperating expenses for our Wood Products, Paper, and Packaging &Newsprint segments:

 
| ** **                 | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                       |       |                                |       |   |   |
| Wood Products              |       | 42                                  | %          | 41 | % |
| Paper                      |       | 28                                  | %          | 27 | % |
| Packaging &  Newsprint |       | 17                                  | %          | 14 | % |
|                       |       |                                |       |   |   |

 

Our primary sources of logs and wood fiber are timberand byproducts of timber, such as wood chips, wood shavings, and sawdust. Ourwood fiber costs also include purchases of semifinished materials such as OSBand lumber for use in EWP production as well as purchased market pulp, which isused in paper production. We acquire substantially all of our fiber fromoutside sources, including pursuant to long-term supply agreements with ForestCapital Partners. In our Wood Products segment, we convert logs into lumber andveneer, and in turn, we convert veneer into EWP and plywood. Logs are a lowerpercentage of the total cost of materials, labor, and other operating expensesin producing engineered wood than commodity products such as lumber andplywood. While log costs are still a significant component of costs, as wecontinue to produce more engineered wood relative to commodity products,direct-log costs decline as a percentage of the total cost of materials, labor,and other operating

 

39

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expenses. We also convert residual wood fiber from our operations, aswell as from third parties, into particleboard. In our Paper andPackaging & Newsprint segments, we convert logs and wood chips intopulp, which we sell or use at our paper mills to produce paper. On an aggregatebasis, we are generally able to produce all of our pulp needs, generallypurchasing and selling similar amounts on the open market.

 

Logs and wood fiber are commodities, and prices forlogs and wood fiber have historically been cyclical due to changing levels ofdemand. Log and fiber supply may be limited by public policy or governmentregulation as well as fire, insect infestation, disease, ice storms, windstorms,hurricanes, flooding, other weather conditions, and other natural and man-madecauses. Residual fiber supply may be limited due to reduction in primarymanufacturing at sawmills and plywood plants. Declines in log and fiber supply,driven primarily by changes in public policy and government regulation, havebeen severe enough to cause the closure of numerous facilities in some of theregions in which we operate. Any sustained undersupply and resulting increasein wood fiber prices could decrease our production volumes and/or increase ouroperating costs. Prices for our products might not reflect increases ordecreases in log and wood fiber prices, and as a result, our operating marginscould fluctuate. Market prices for a variety of fiber sources, including logsand residual fiber for our Northwest operations and logs for our Minnesotaoperations, were high relative to historical standards in the first half of2006. While wood costs came down in Minnesota during the second half of 2006and into the first nine months of 2007, they are still high by historicalstandards. In the Pacific Northwest, residual fiber costs began to come downlate in first quarter 2007 but continue to be high by historical standards.Because residual fiber for our paper mills in the Pacific Northwest comespredominantly from sawmills and plywood plants, curtailments in these mills asa result of decreased demand for these products related to the housing slowdownwill continue to impact the availability of residual fiber for our Northwestpulp and paper operations. Relative to historical standards, fiber costs werehigh in Louisiana in the third quarter of 2007 due to unusually high andpersistent rainfall, which limited access to many harvest areas and limitedsupply availability.

 

*Other raw materials and energy purchasing andpricing. *We purchase other raw materials and energy used tomanufacture our products in both the open market and through long-termcontracts. These contracts are generally with regional suppliers who agree tosupply all of our needs for a certain raw material or energy at one of ourfacilities. These contracts normally contain minimum purchase requirements andare for terms of various lengths. They also contain price adjustment mechanismsthat take into account changes in market prices. Therefore, although ourlong-term contracts provide us with supplies of raw materials and energy thatare more stable than open-market purchases, in many cases, they may notalleviate fluctuations in market prices.

 

Our costs for rawmaterials are influenced by increases in energy costs. Specifically, some ofour key chemicals, including pulping and bleaching chemicals consumed in ourPaper and Packaging & Newsprint mills and glues and resins consumed inour Wood Products operations, are heavily influenced by energy costs. A numberof our major suppliers have obtained price increases tied to their increasedenergy costs. For our commodity products, the relationship between industrysupply and demand, rather than changes in the cost of raw materials, determinesour ability to increase prices. Consequently, we may be unable to passincreases in our operating costs to our customers in the short term.

 

*Energy. *Energy prices, particularly forelectricity, natural gas, and fuel oil, have been volatile in recent years andcurrently exceed historical averages. In addition, we have limited flexibilityto switch between fuel sources in the short term; accordingly, we havesignificant exposure to natural gas price changes. Energy costs represented thefollowing percentages of materials, labor, and other operating expenses for ourWood Products, Paper, and Packaging & Newsprint segments:

 
| ** **                 | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                       |       |                                |       |   |   |
| Wood Products              |       | 4                                   | %          | 3 | % |
| Paper                      |       | 14                                  | %          | 15 | % |
| Packaging &  Newsprint |       | 15                                  | %          | 15 | % |
|                       |       |                                |       |   |   |

 

We enter into natural gas swaps, options, or acombination of these instruments to hedge the variable cash flow risk ofnatural gas purchases at index prices. As of September 30, 2007, we had

 

40

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entered into derivative instruments related to approximately 25% of ourforecasted natural gas purchases through March 2008.

 

*Chemicals. *Important chemicals we use in the production of ourproducts include precipitated calcium carbonate, sodium chlorate, sodiumhydroxide, dyes, resins, and adhesives. Purchases of chemicals represented thefollowing percentages of materials, labor, and other operating expenses for ourWood Products, Paper, and Packaging & Newsprint segments:

 
| ** **                 | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2007**                            | ** ** | **2006** | ** ** |
|                       |       |                                |       |   |   |
| Wood Products              |       | 7                                   | %          | 6 | % |
| Paper                      |       | 14                                  | %          | 14 | % |
| Packaging &  Newsprint |       | 6                                   | %          | 5 | % |
|                       |       |                                |       |   |   |

 

In 2007, chemicalcosts increased, compared with the same period in 2006, due in part toincreases in energy and transportation costs sustained by our chemicalsuppliers that they have partially passed through to us.

 

*Inflationary and seasonal influences. *Other than the effects of higher energy costs, whichwe describe in our 2006 Annual Report on Form 10-K, we believe inflationhas not had a material effect on our financial condition or results ofoperations. However, there can be no assurance that we will not be affected byinflation in the future. Seasonal changes in levels of building activity affectour building products businesses. We typically have higher sales and workingcapital in the second and third quarters because the weather in those quartersis more conducive to construction than the first and fourth quarters. To alesser degree, our paper businesses also experience some seasonality in theirbusinesses, based primarily on buying patterns associated with particularproducts. For example, the demand for our corrugated containers is influencedby agricultural demand in the Northwest. In addition, seasonally cold weatherincreases costs, especially energy consumption, at all of our manufacturingfacilities.

 

***Acquisitions***

 

***Central Texas CorrugatedAcquisition***

 

On February 1, 2006, we purchased theassets of Central Texas Corrugated (CTC) in Waco, Texas, for an aggregatepurchase price of $43.8 million, including fees and expenses but beforeworking capital adjustments. In 2006, we paid approximately $42.5 millionof cash for the acquisition, which is net of a $2.0 million holdback thatis payable in five years. At September 30, 2007, we had a$1.5 million discounted holdback (including accrued accretion expense)recorded in “Liabilities related to assets held for sale” on our ConsolidatedBalance Sheet. CTC manufactures corrugated sheets that it sells primarily toregional container plants in Texas, Louisiana, Arkansas, and Mexico. CTC islocated close to our mill in DeRidder, Louisiana, which produces linerboardused in CTC’s manufacturing processes. During the nine months endedSeptember 30, 2007, we produced approximately 426,000 short tons oflinerboard in our Packaging & Newsprint segment, and our Paper segmentproduced approximately 99,000 tons of corrugating medium. Our corrugatedcontainer and sheet plants consumed approximately 379,000 tons ofcontainerboard, or the equivalent of 72% of our containerboard production.

 

                We accounted forthe acquisition using the purchase method of accounting. As a result, thepurchase price was allocated to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date of theacquisition. For more information, see Note 4, Purchase of Central TexasCorrugated’s Assets, of the Notes to Consolidated Financial Statements in “Item8. Consolidated Financial Statements” of our 2006 Annual Report on Form 10-K.

 

41

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*** ***

***OurOperating Results***

 

                Thefollowing tables set forth the results of operations in dollars and as apercentage of sales for the three and nine months ended September 30, 2007and 2006:

 

 
| ** **                                      | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                             | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                      |       | **(millions)**                       |       |
| ** **                                      |       |                                 |       |                                     |       |   |   |   |   |
| **Sales**                                       | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                           |       | $                                    | 1,247.5    |                                     | $          | 1,332.2 |   | $ | 3,699.7 |   | $ | 4,085.5 |   |
| Related parties                                 |       | 154.6                                |       | 148.1                                    |       | 471.8 |   | 424.9 |   |
|                                            |       | 1,402.1                              |       | 1,480.3                                  |       | 4,171.5 |   | 4,510.4 |   |
|                                            |       |                                 |       |                                     |       |   |   |   |   |
| **Costs  and expenses**                         | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 1,202.5                              |       | 1,285.3                                  |       | 3,629.7 |   | 3,958.7 |   |
| Depreciation,  amortization, and depletion      |       | 32.3                                 |       | 39.3                                     |       | 113.4 |   | 114.4 |   |
| Selling and  distribution expenses              |       | 72.3                                 |       | 71.5                                     |       | 214.4 |   | 214.2 |   |
| General and  administrative expenses            |       | 22.6                                 |       | 19.7                                     |       | 62.3 |   | 67.3 |   |
| Other (income)  expense, net                    |       | 0.4                                  |       | (0.1                                     | )          | (2.2 | ) | 1.0 |   |
|                                            |       | 1,330.1                              |       | 1,415.7                                  |       | 4,017.6 |   | 4,355.6 |   |
|                                            |       |                                 |       |                                     |       |   |   |   |   |
| **Income  from operations**                     | ** ** | **$**                                | **72.0**   | ** **                               | **$**      | **64.6** | ** ** | **$** | **153.9** | ** ** | **$** | **154.8** | ** ** |
|                                            |       |                                 |       |                                     |       |   |   |   |   |
| ** **                                      |       | **(percentage  of sales )**          |       |
| ** **                                      |       | ** **                           |       |
| **Sales**                                       | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                           |       | 89.0                                 | %          | 90.0                                     | %          | 88.7 | % | 90.6 | % |
| Related parties                                 |       | 11.0                                 |       | 10.0                                     |       | 11.3 |   | 9.4 |   |
|                                            |       | 100.0                                | %          | 100.0                                    | %          | 100.0 | % | 100.0 | % |
|                                            |       |                                 |       |                                     |       |   |   |   |   |
| **Costs  and expenses**                         | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses |       | 85.8                                 | %          | 86.8                                     | %          | 87.0 | % | 87.8 | % |
| Depreciation,  amortization, and depletion      |       | 2.3                                  |       | 2.7                                      |       | 2.7 |   | 2.5 |   |
| Selling and  distribution expenses              |       | 5.2                                  |       | 4.8                                      |       | 5.1 |   | 4.8 |   |
| General and  administrative expenses            |       | 1.6                                  |       | 1.3                                      |       | 1.5 |   | 1.5 |   |
| Other (income)  expense, net                    |       | —                               |       | —                                   |       | — |   | — |   |
|                                            |       | 94.9                                 | %          | 95.6                                     | %          | 96.3 | % | 96.6 | % |
|                                            |       |                                 |       |                                     |       |   |   |   |   |
| **Income  from operations**                     | ** ** | **5.1**                              | **%**      | **4.4**                                  | **%**      | **3.7** | **%** | **3.4** | **%** |
|                                                 |            |                                      |            |                                          |            |  |  |  |  |  |  |  |  |  |

 

 

42

 

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***Sales Volumes and Prices***

 

                Set forth below are our segment sales volumes andaverage net selling prices for our principal products for the three and ninemonths ended September 30, 2007 and 2006:

 
| ** **                                           | ** ** | **Three Months Ended  September 30**                               | ** ** | **Nine Months Ended  September 30** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                                                | ** ** | **2006**                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           |       | **(millions)**                                                          |       |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Building  Materials Distribution**                 | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sales dollars                                        |       | $                                                                       | 686.6      |                                     | $          | 756.6 |   | $ | 2,019.0 |   | $ | 2,351.2 |   |
|                                                 |       |                                                                    |       |                                     |       |   |   |   |   |
|                                                 |       | **(percentage  of Building Materials Distribution sales )**             |       |
|                                                 |       | ** **                                                              |       |
| **Product  Line Sales**                              | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commodity                                            |       | 44.3                                                                    | %          | 43.4                                     | %          | 43.6 | % | 45.8 | % |
| Engineered wood  products                            |       | 14.8                                                                    |       | 16.2                                     |       | 15.0 |   | 15.6 |   |
| General line  items                                  |       | 40.9                                                                    |       | 40.4                                     |       | 41.4 |   | 38.6 |   |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales  Volumes**                                   | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                                   | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (cubic feet)          |       | 2.8                                                                     |       | 3.2                                      |       | 8.7 |   | 9.9 |   |
| I-joists  (equivalent lineal feet)                   |       | 48                                                                      |       | 57                                       |       | 155 |   | 180 |   |
| Plywood (sq.  ft.) (3/8” basis)                 |       | 306                                                                     |       | 316                                      |       | 915 |   | 964 |   |
| Lumber (board  feet)                                 |       | 60                                                                      |       | 69                                       |       | 179 |   | 219 |   |
| Particleboard  (sq. ft.) (3/4” basis)           |       | 40                                                                      |       | 45                                       |       | 113 |   | 126 |   |
|                                                 |       |                                                                    |       |                                     |       |   |   |   |   |
|                                                 |       | **(thousands  of short tons, except corrugated containers and sheets)** |       |
|                                                 |       | ** **                                                              |       |
| **Paper**                                            | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Uncoated free  sheet                                 |       | 363                                                                     |       | 363                                      |       | 1,118 |   | 1,142 |   |
| Containerboard  (medium)                             |       | 34                                                                      |       | 35                                       |       | 99 |   | 102 |   |
| Market pulp                                          |       | 44                                                                      |       | 20                                       |       | 101 |   | 87 |   |
| ** **                                           | ** ** | **441**                                                                 | ** ** | **418**                                  | ** ** | **1,318** | ** ** | **1,331** | ** ** |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**                  | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Containerboard  (linerboard)                         |       | 59                                                                      |       | 65                                       |       | 183 |   | 203 |   |
| Newsprint                                            |       | 97                                                                      |       | 109                                      |       | 306 |   | 307 |   |
| Corrugated  containers and sheets (mmsf)             |       | 1,689                                                                   |       | 1,705                                    |       | 4,976 |   | 4,964 |   |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           |       | **(dollars  per unit )**                                                |       |
| ** **                                           |       |                                                                    |       |
| **Average  Net Selling Prices**                      | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                                   | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet) |       | $                                                                       | 1,685      |                                     | $          | 1,860 |   | $ | 1,719 |   | $ | 1,893 |   |
| I-joists  (1,000 equivalent lineal feet)             |       | 1,020                                                                   |       | 1,109                                    |       | 1,033 |   | 1,104 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)           |       | 287                                                                     |       | 248                                      |       | 264 |   | 263 |   |
| Lumber (1,000  board feet)                           |       | 438                                                                     |       | 462                                      |       | 441 |   | 489 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis)     |       | 304                                                                     |       | 399                                      |       | 319 |   | 334 |   |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           |       | **(dollars  per short ton, except corrugated containers and sheets )**  |       |
| ** **                                           |       | ** **                                                              |       |
| **Paper**                                            | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Uncoated free  sheet                                 |       | $                                                                       | 876        |                                     | $          | 834 |   | $ | 859 |   | $ | 789 |   |
| Containerboard  (medium)                             |       | 432                                                                     |       | 418                                      |       | 426 |   | 384 |   |
| Market pulp                                          |       | 544                                                                     |       | 477                                      |       | 534 |   | 419 |   |
| ** **                                           | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Packaging &  Newsprint**                  | ** ** | ** **                                                              | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Containerboard  (linerboard)                         |       | $                                                                       | 385        |                                     | $          | 383 |   | $ | 380 |   | $ | 350 |   |
| Newsprint                                            |       | 468                                                                     |       | 533                                      |       | 496 |   | 536 |   |
| Corrugated  containers and sheets ($/msf)            |       | 53                                                                      |       | 52                                       |       | 52 |   | 50 |   |
|                                                      |            |                                                                         |            |                                          |            |  |  |  |  |  |  |  |  |  |  |

 

 

43

 

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***OperatingResults***

 

# ***Sales***

 

For the three months ended September 30, 2007,total sales decreased $78.2 million, or 5%, to $1,402.1 million,compared with $1,480.3 million a year ago. For the nine months endedSeptember 30, 2007, total sales decreased $338.9 million, or 8%, to$4,171.5 million, compared with $4,510.4 million in the prior year.Relative to the three months ended September 30, 2006, segment sales decreasedin our Building Materials Distribution, Wood Products, and Packaging &Newsprint segments and increased in our Paper segment. For the nine monthsended September 30, 2007, sales decreased in our Building MaterialsDistribution and Wood Products segments and increased in our Paper andPackaging & Newsprint segments, compared with the same period in 2006.The decrease in sales in our Building Materials Distribution and Wood Productssegments in both periods reflects the impact of the softer residentialconstruction market, while the decrease in sales in our Packaging &Newsprint segment during the three months ended September 30, 2007,reflects continued weakness in newsprint markets as demand continues todecline. Paper segment sales increases reflect higher prices as a result ofimproved supply-demand balances in that business and higher sales volumes ofmarket pulp.

 

*Building Materials Distribution. *Sales decreased $70.0 million, or 9%, to$686.6 million for the three months ended September 30, 2007,compared with $756.6 million in the prior year. During the nine monthsended September 30, 2007, sales decreased $332.2 million, or 14%, to$2,019.0 million, compared with $2,351.2 million in the prior year.The third-quarter decrease in sales reflects an 8% decrease in sales volumes aswell as lower sales prices. The year-to-date decrease reflects a 10% reductionin sales volume and a 5% reduction in sales prices. The decrease in volumes andprices are both the result of weak residential construction markets.

 

*Wood Products*.  Salesdecreased $37.5 million, or 13%, to $261.6 million for the threemonths ended September 30, 2007, compared with $299.1 million for thethree months ended September 30, 2006. During the nine months endedSeptember 30, 2007, sales decreased $132.2 million, or 14%, to$794.2 million from $926.4 million in the same period a year ago.Compared with the third quarter 2006, the decrease in sales is the result oflower prices for engineered wood products, lumber, and particleboard and lowersales volumes for all products. These decreases were offset, in part, by higherplywood prices. The decrease in year-to-date sales reflects lower sales volumesfor all products and lower sales prices for engineered wood products,particleboard, and lumber. In both periods, the decreases in volumes and pricesreflect softer residential construction markets, while the increase in plywoodsales prices in third quarter 2007 reflects a more favorable supply-demandbalance for that product as well as the more diverse end-use markets forplywood relative to other structural panel products such as oriented strandboard.

 

*Paper. *Sales increased $28.6 million, or8%, to $402.1 million for the three months ended September 30, 2007,from $373.5 million for the three months ended September 30, 2006.During the nine months ended September 30, 2007, sales increased$72.8 million, or 6%, to $1,198.3 million from $1,125.5 millionin the same period a year ago. The increases in both periods are the result ofhigher prices for our uncoated free sheet papers, market pulp, and corrugatingmedium coupled with higher sales volumes of market pulp. In the comparableperiod of 2006, we curtailed pulp production at our St. Helens mill due tohigh fiber prices, which resulted in lower market pulp sales in that period. Theimproved pricing is the result of an improved supply-demand balance for thosegrades.

 

*Packaging & Newsprint*.  For the threemonths ended September 30, 2007, sales decreased $13.8 million, or7%, to $193.0 million, compared with $206.8 million a year ago. Duringthe nine months ended September 30, 2007, sales increased$3.5 million, or 1%, to $579.9 million from $576.4 million inthe prior year. The decrease in segment sales for the three-month periodresulted primarily from lower newsprint sales prices and volumes, partiallyoffset by higher prices for linerboard and corrugated containers and sheets.The increase in segment sales for the nine-month period reflects higher pricesfor linerboard and corrugated containers and sheets, partially offset by lowernewsprint prices and, to a lesser extent, lower newsprint volumes.

 

The lower newsprint prices and volumes in both periods reflect continuingreductions in newsprint consumption in North America. The higher prices forlinerboard and corrugated containers and sheets in both periods reflects arelatively strong demand coupled with limited capacity additions. Linerboardsales 

 

 

44

 

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volumes were lower in both periods, asmore of our production was consumed in our own packaging plants either directlyor through containerboard partner trades.

 

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

 

Materials, labor, and other operating expensesdecreased $82.8 million, or 6%, to $1.2 billion, compared with$1.3 billion for the three months ended September 30, 2006. Comparedwith the nine months ended September 30, 2006, these costs decreased$329.0 million, or 8%, to $3.6 billion from $4.0 billion in theprior year. The overall decrease was driven by lower costs for productspurchased for resale in our Building Materials Distribution segment and lower rawmaterials cost in our Wood Products segment. The decrease in materials cost inboth the Building Materials Distribution and Wood Products segments is theresult of lower demand for these products as a result of the weak residentialconstruction market. These cost decreases were offset, in part, by higher fibercosts in our Paper and Packaging & Newsprint segments, as lessresidual fiber was available in the Pacific Northwest and heavy rains inLouisiana during the first half of 2007 drove fiber costs up.

 

Depreciation, amortization, and depletion expenses decreased$7.0 million, or 18%, to $32.3 million for the three months endedSeptember 30, 2007, compared with $39.3 million for the three monthsended September 30, 2006. For the nine months ended September 30,2007, depreciation, amortization, and depletion expenses decreased$1.0 million, or 1%, to $113.4 million, compared with$114.4 million a year ago. The reduction in both periods is primarily theresult of lower depreciation and amortization expense as a result of enteringinto an agreement to sell our Paper and Packaging & Newsprint segments anddiscontinuing depreciation and amortization on the assets recorded as held forsale. The three and nine months ended September 30, 2007 included$10.4 million of lower depreciation and amortization expense. Thisreduction in depreciation was partially offset by an increase in depreciationexpense as the result of our reviewing the estimated useful lives of some ofour depreciable assets earlier in the year and determining that some of ourassets would be used for a shorter period of time than the depreciable livespreviously assigned to them. As a result, we revised our depreciation estimatesto reflect the remaining expected use of the assets.

 

Sellingand distribution expenses increased slightly, or 1%, to $72.3 million for the three months ended September 30, 2007,compared with $71.5 millionfor the same period in the prior year. For the nine months endedSeptember 30, 2007, these costs increased to $214.4 million, comparedwith $214.2 million in the same period a year ago. The results in bothperiods include incremental costs related to the expansion of our distributioncenters in California, Florida, and Ohio in our Building Materials Distributionsegment.

 

Generaland administrative expenses increased $2.9 million, or 15%, to$22.6 million for the three months ended September 30, 2007, comparedwith $19.7 million for the three months ended September 30, 2006.General and administrative expenses as a percentage of sales increased to 1.6%for the three months ended September 30, 2007, from 1.3% for the threemonths ended September 30, 2006. For the nine months endedSeptember 30, 2007, general and administrative expenses decreased$5.0 million, or 7%, to $62.3 million, compared with$67.3 million a year ago. As a percentage of sales, these costs remainedflat, compared with the prior year. Relativeto the three months ended September 30, 2006, general and administrativeexpenses increased primarily due to higher professional fees and leasecosts. These costs decreased during the nine months ended September 30,2007, primarily due to lower payroll and benefit costs and trainingexpenditures, partially offset by higher lease costs.

 

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

 

For the three months ended September 30, 2007,income from operations increased $7.4 million, or 11%, to$72.0 million, compared with $64.6 million in the same period a yearago. The increase was primarily the result of higher income in the WoodProducts and Paper segments, offset in part by lower income in the BuildingMaterials Distribution and Packaging & Newsprint segments. Income fromoperations decreased $0.9 million, or 1%, from $154.8 million for the ninemonths ended September 30, 2006, to $153.9 million for the ninemonths ended September 30, 2007. The decrease was primarily the result oflower income in the Wood Products, Building Materials Distribution, andPackaging & Newsprint segments, offset in part by improved performancein the Paper segment.

 

 

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*Building Materials Distribution. *Segment income decreased $3.3 million, or 17%, to$16.1 million for the three months ended September 30, 2007, from$19.4 million for the three months ended September 30, 2006. Duringthe nine months ended September 30, 2007, segment income decreased$16.3 million, or 26%, to $47.0 million, compared with$63.3 million during the same period in the prior year. The decrease inboth periods was driven primarily by lower sales volumes and sales prices,offset in part by lower costs for goods we purchased for resale.

 

*Wood Products. *Segmentincome increased $3.6 million, or 63%, to $9.2 million for the threemonths ended September 30, 2007, compared with $5.6 million for thethree months ended September 30, 2006. Higher plywood prices and lower rawmaterials costs more than offset lower prices and volumes for engineered woodproducts and particleboard. Relative to the nine months endedSeptember 30, 2006, segment income decreased $13.0 million, or 31%, from$41.6 million to $28.6 million during the same period in 2007. Thedecrease was the result of lower prices for engineered wood products,particleboard, and lumber and lower volumes for engineered wood products,plywood, and particleboard, offset in part by lower raw materials costs.

 

*Paper.*Segment income increased $18.2 million, or 58%,to $49.5 million for the three months ended September 30, 2007,compared with $31.3 million for the three months ended September 30,2006. During the nine months ended September 30, 2007, segment incomeincreased $33.9 million, or 72%, to $80.7 million, compared with$46.8 million in the same period a year ago. During both the three andnine months ended September 30, 2007, higher product prices and pulp salesvolumes and lower energy costs more than offset higher fiber and chemicalcosts. As the result of the proposed sale of this business, we suspendeddepreciation and amortization of its long-lived assets in September 2007, whichreduced depreciation and amortization during the three and nine months endedSeptember 30, 2007, by approximately $5.4 million.

 

*                Packaging &Newsprint.*Segmentincome decreased $12.3 million, or 74%, to $4.2 million for the threemonths ended September 30, 2007, compared with $16.5 million for thethree months ended September 30, 2006. During the nine months endedSeptember 30, 2007, segment income decreased $16.1 million, or 52%,to $14.6 million, compared with $30.7 million in the same period ayear ago. During both the three and nine monthsended September 30, 2007, lower newsprint sales prices and higher fibercosts contributed to reduced earnings. In addition, during the three monthsended September 30, 2007, the annual maintenance outage at our DeRidder,Louisiana, mill decreased segment income. During the nine months endedSeptember 30, 2007, the lower newsprint sales prices and higher fibercosts more than offset the increase in linerboard prices and corrugatedcontainer and sheet prices. Partially offsetting the unfavorable impacts onsegment income in both the three and nine months ended September 30, 2007,was $4.8 million of lower depreciation and amortization expense as aresult of the proposed sale of the paper and packaging and newsprintbusinesses.

 

                Other (income) expense, netincludes miscellaneous income and expense items. The components of “Other(income) expense, net” in the Consolidated Statements of Income are as follows:

 
| ** **                              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2007**                             | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                 |       |                                |       |   |   |   |   |
|                                    |       | **(millions)**                       |       |
|                                    |       |                                 |       |                                |       |   |   |   |   |
| Changes in  retiree healthcare programs |       | $                                    | —     |                                | $          | — |   | $ | (4.4 | ) | $ | (3.7 | ) |
| Sales of assets,  net                   |       | (0.1                                 | )          | (0.2                                | )          | (0.8 | ) | 2.2 |   |
| Project costs                           |       | 0.2                                  |       | —                              |       | 0.4 |   | 2.1 |   |
| Other, net (a)                          |       | 0.3                                  |       | 0.1                                 |       | 2.6 |   | 0.4 |   |
| ** **                              | ** ** | **$**                                | **0.4**    | ** **                          | **$**      | **(0.1** | **)** | **$** | **(2.2** | **)** | **$** | **1.0** | ** ** |

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(a)                                  The three andnine months ended September 30, 2007, included $0.2 million and$2.2 million of expense related to the closure of our paper convertingfacility in Salem, Oregon, which we closed during third quarter 2007.

 

 

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*Other*

 

*                Changein fair value of interest rate swaps.*  During second quarter 2007, inconnection with the amendment and restatement of our senior secured creditfacilities (the Facilities), we concluded that the interest payments on oursenior unsecured floating-rate notes were no longer probable of occurring afterOctober 2007, when they became callable at par. As a result, during the nine months ended September 30,2007, we recorded the fair value of the interest rate swaps, or$5.4 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statement of Income.

 

*Interest expense.*  For the threeand nine months ended September 30, 2007, interest expense was$23.4 million and $70.1 million, compared with $28.4 million and$87.2 millionin the same periods a year ago. During both periods,the decrease in interest expense is primarily attributable to a$373.7 million decrease in long-term debt, less current portion. AtSeptember 30, 2007, our long-term debt, less current portion, was $1.2 billion,compared with $1.5 billion in the prior year. The decrease in long-term debt is primarilyattributable to repaying the note payable to a related entity, BoiseLand & Timber Corp.

 

*               **Income tax provision.* For the threeand nine months ended September 30, 2007, income tax expense was $3.1 million and $7.7 million, compared with$0.6 million and $2.1 million for the same periods a year ago. Duringthe three months ended September 30, 2007, the increase primarily relatedto income tax expense related to our cash flow hedges. During the nine monthsended September 30, 2007, the increase primarily related to income taxexpense related to our cash flow hedges and the true-up of miscellaneous stateincome tax items. During the three and nine months ended September 30,2007, our effective tax rates for our separate subsidiaries that are taxed as acorporation were 35.4% and 35.0%, compared with 36.1% and 40.0%for the same periods in the prior year. The primary reason for the differencein tax rates is the effect of state income taxes and the mix of domestic andforeign sources of income.

 

***Liquidity and CapitalResources***

 

                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 thatour current financial position and financing plans will provide flexibility infinancing activities and permit us to respond to changing conditions in creditmarkets. We cannot assure, however, that our business will generate sufficientcash flow from operations or that future borrowings will be available for useunder our revolving credit facility in an amount sufficient to enable us to payour indebtedness or to fund our other liquidity needs. If the announced sale ofour Paper and Packaging & Newsprint assets goes through, we plan touse the proceeds from the transaction to pay down debt, which will strengthenour balance sheet further.

 

***OperatingActivities***

 

                Weoperate in a cyclical industry, and our operating cash flows vary accordingly.Our principal operating cash expenditures are for purchased inventories,compensation, fiber, energy, and interest. For the nine months endedSeptember 30, 2007 and 2006, our operating activities provided$131.3 million and $177.1 million of cash. In 2007, items included innet income provided $212.8 million of cash. Unfavorable changes in workingcapital and other items used $81.5 million of cash from operations.Working capital is subject to cyclical operating needs, the timing of thecollection of receivables, the payment of payables and expenses, and to alesser extent, seasonal fluctuations in our operations. During the nine monthsended September 30, 2007, the increase in working capital was primarilyattributable to higher receivables in Building Materials Distribution andPaper, and to a lesser extent, higher inventories, primarily in BuildingMaterials Distribution. Higher receivables in Building Materials Distributionand Paper reflected increased sales, comparing September 2007 sales withDecember 2006 sales. The increase in inventories in Building MaterialsDistribution reflected seasonal inventory builds. This increase in receivablesand inventories was partially offset by higher overall accounts payable andaccrued liabilities.

 

 

47

 

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As part of the Forest Products Acquisition, we entered into an AdditionalConsideration Agreement with OfficeMax, pursuant to which we agreed to adjustthe purchase price based on changes in paper prices over the six-year periodfollowing the Forest Products Acquisition. Under the Additional ConsiderationAgreement, we could pay to OfficeMax, or OfficeMax could pay to us, a maximumaggregate amount of $125.0 million, in each case net of payments received.After each anniversary of the Forest Products Acquisition, we review paperprices with the provisions of the Additional Consideration Agreement todetermine whether any amounts are owed or receivable under the agreement. Forthe third anniversary period ended October 29, 2007, we estimate that wewill owe OfficeMax approximately$32.7 million under the Additional Consideration Agreement, which werecorded in “Accrued liabilities, Other” on our Consolidated Balance Sheet.This agreement will be terminated as a result of the Aldabra transaction; andconsequently, if the Aldabra transaction is completed before the fourthanniversary period ended October 29, 2008, we will neither receivepayments from, nor make subsequent payments to, OfficeMax under this agreement.Pursuant to the Additional Consideration Agreement, the payment will betreated as an adjustment to the purchase price and, therefore, will not bereported in our Consolidated Statement of Income but will be included inconsolidated earnings before interest, taxes, depreciation, and amortization(EBITDA) for purposes of certain covenants under our debt agreements. For moreinformation about the Additional Consideration Agreement, see “Item 13.  Certain Relationships and RelatedTransactions, and Director Independence” of our 2006 Annual Report onForm 10-K.

 

In 2006, items included in net income provided $218.0 million of cash.Unfavorable changes in workingcapital and other items used $40.9 million of cash from operations. The2006 increase in working capital items was primarily attributable to higherreceivables in Buildings Materials Distribution and Packaging & Newsprintand, to a lesser extent, increased company inventory levels. The higherreceivables reflect differences in the timing of collections and higher salesin Buildings Materials Distribution and Packaging & Newsprint,comparing September 2006 sales with December 2005 sales. The increase inreceivable and inventory levels was partially offset by higher overall combinedaccounts payable and accrued liabilities.

 

***Investment Activities***

 

Cash investing activities used $312.6 million forthe nine months ended September 30, 2007, and $102.4 million duringthe same period in 2006. In 2007, investing activities included a$200.0 million increase in restricted cash held for bond redemption. The$200.0 million was invested in preparation for the repayment of the$250 million senior unsecured floating-rate notes in October 2007.Investing activities also included $137.2 million of cash for the purchaseof property, plant, and equipment. Approximately $42 million of our expenditures for property, plant, andequipment related to the reconfiguration of the paper machine at our pulp andpaper mill in Wallula, Washington, to produce both pressure sensitive paper andcommodity uncoated free sheet. As of September 30, 2007, spending on this project totaled approximately $80 million. Investing activities also included$18.3 million of proceeds from the sale of assets, which included$10.1 million of net proceeds from the sale of our newly constructedbuilding materials distribution center in Milton, Florida, which we completedduring the second quarter. In connection with the sale of our Milton facility,we leased it back over a 15-year lease term.

 

In 2006, investing activities included $105.1 million of capital expendituresfor the purchase of property and equipment. Capital expenditures for propertyand equipment consisted primarily of expansion, business improvement andquality/efficiency projects, replacement projects, and ongoing environmentalcompliance. Investing activities also included $42.5 million of cash paid for the purchase of CTC’s assets in Waco,Texas. These expenditures were partially offset by $43.0 million ofproceeds from the sale of assets. This included $27.2 million of proceedsfrom the sale of our headquarters building in Boise, Idaho; $11.0 millionof proceeds from the sale of our Lakeville, Minnesota, and Rochelle, Illinois,building materials distribution facilities; and $4.8 million of proceedsfrom other miscellaneous asset sales. In connection with the sale of ourheadquarters building, we leased back approximately 65% of the building over a staggered lease term of ten to 12 years, and weleased back our building materials distribution facilities over a 35-year leaseterm including renewal options.

 

We expect capital investments in 2007 to totalapproximately $195 million, excluding acquisitions. This level of capitalexpenditures could increase or decrease as a result of a number of factors,including our financial results and future economic conditions. Our capitalspending in 2007 will be for expansion, business improvement andquality/efficiency projects, replacement projects, and ongoing environmental 

 

 

48

 

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compliance. During 2006, we spent $9 million on environmentalcompliance. We expect to spendapproximately $10 million in 2007 for this purpose.

 

***Financing Activities***

 

Cash provided by financing activities was $201.7 million for the ninemonths ended September 30, 2007, compared with $103.0 million usedfor financing activities during the same period in 2006. During the nine monthsended September 30, 2007, financing activities included$538.9 million of debt prepayments related to our Tranche D termloan, which was paid down primarily with the proceeds from our new$525.0 million Tranche E term loan. Cash provided by financing alsoincluded $200 million for a delayed-draw term loan, which we borrowedagainst in September 2007. Cash provided by financing activities also includeda $25.0 million net increase in borrowings under our accounts receivablesecuritization program, $2.8 million of proceeds from unwinding two of ourinterest rate swap agreements that were scheduled to begin in 2009, $3.2 millionof cash for the repayment of short-term borrowings, and $2.8 million ofcash used to pay one of our equity investors to fund its tax obligationsrelated to its investment in us.

 

In 2006, the $103.0 million of cash used forfinancing activities included $96.9 million of prepayments on ourTranche D term loan, which was paid with $38.2 million of proceedsfrom asset sales, $25.6 million of proceeds from unwinding and resettingthe fixed interest rate we pay on our interest rate swap agreements, and othercash flows. Additionally, we had a $10.0 million decrease in ourborrowings under our accounts receivable securitization program, and we used$19.2 million of cash to pay our equity investors amounts to fund theirtax obligations related to their investment in us.

 

At September 30, 2007, and December 31,2006, our short- and long-term debt and the interest rates on that debt were asfollows:

 
| ** **                                      | ** ** | **September 30, 2007** | ** **  | **December 31, 2006**         | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|------------------------------------|------------|
| ** **                                      | ** ** | **Amount**                  | ** **  | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** | **Amount** | ** ** | **Interest  Rate  Without  Swaps** | ** ** | **Interest  Rate  With  Swaps** | ** ** |
| ** **                                      | ** ** | ** **                  | ** **  | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                            |       | **(millions)**              |        |                               |       |   |   | **(millions)** |   |   |   |   |   |
|                                            |       |                        |        |                               |       |   |   |   |   |   |   |   |   |
| Revolving credit  facility, due 2010            |       | $                           | —      |                               | N/A        |   | N/A |   | $ | — |   | N/A |   | N/A |   |
| Tranche D  term loan, due 2011             |       | —                      |        | N/A                                |       | N/A |   | 538.9 |   | 7.1 | % | 6.8 | % |
| Tranche E  term loan, due 2014             |       | 522.4                       |        | 6.7                                | %          | 6.5 | % | — |   | N/A |   | N/A |   |
| Senior unsecured  floating-rate notes, due 2012 |       | 250.0                       |        | 8.2                                | %          | 7.6 | % | 250.0 |   | 8.2 | % | 7.6 | % |
| 7.125% senior  subordinated notes, due 2014     |       | 400.0                       |        | 7.1                                | %          | N/A |   | 400.0 |   | 7.1 | % | N/A |   |
| Delayed-draw  term loan, due 2014               |       | 200.0                       |        | 6.7                                | %          | N/A |   | — |   | N/A |   | N/A |   |
| Borrowings  secured by receivables              |       | 50.0                        |        | 5.8                                | %          | N/A |   | 25.0 |   | 5.6 | % | N/A |   |
| Current portion  of long-term debt              |       | (257.3                      | )           | 8.2                                | %          | 7.6 | % | — |   | N/A |   | N/A |   |
| Long-term debt,  less current portion           |       | 1,165.1                     |        | 6.8                                | %          | 6.7 | % | 1,213.9 |   | 7.3 | % | 7.1 | % |
| Short-term  borrowings                          |       | —                      |        | N/A                                |       | N/A |   | 3.2 |   | 6.0 | % | N/A |   |
| Current portion  of long-term debt              |       | 257.3                       |        | 8.2                                | %          | 7.6 | % | — |   | N/A |   | N/A |   |
| Total debt                                      | ** ** | **$**                       | **1,422.4** | ** **                         | ** ** | ** ** | ** ** | ** ** | **$** | **1,217.1** | ** ** | ** ** | ** ** | ** ** | ** ** |

 

 

*Amendedand Restated Facilities*

 

On May 3, 2007, we amended and restated oursenior secured credit facilities (the Facilities), which consisted of a$475.0 million revolving credit facility (due in 2010) and an$840.0 million Tranche D term loan (due in 2011). Our amended andrestated Facilities consist of a $450.0 million revolving credit facility(due in 2010) and a $525.0 million Tranche E term loan (due in 2014).In connection with our amendment and restatement, we repaid all amountsoutstanding under our Tranche D term loan. We also obtained a $200 milliondelayed-draw term loan (due in 2014) that we used to redeem the majority of ourexisting senior unsecured floating-rate notes (due in 2012) when they becamecallable at par in October 2007.

 

Our amended revolving credit facility agreementpermits us to borrow up to $450.0 million for general corporate purposes.At September 30, 2007, we had no borrowings outstanding under ourrevolving credit facility; however, $34.5 million of letters of creditwere considered a draw on the revolver, 

 

 

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reducing our borrowing capacity to $415.5 million. Borrowingsunder our revolving credit facility are based on the prime rate, the federalfunds effective rate, or the London Interbank Offered Rate (LIBOR).Pricing is subject to quarterly adjustment based on the ratio of our totalindebtedness to our last four quarters of consolidated earnings beforeinterest, taxes, depreciation, and amortization (EBITDA). The range ofborrowing costs under the pricing grid is: (i) the higher of prime plus 0.50% to 1.25% or the federal fundseffective rate plus 1.00% to 1.75% or (ii) LIBOR plus 1.50% to 2.25%.For the nine months ended September 30, 2007, and the year endedDecember 31, 2006, the average interest rate for our borrowings under therevolver was 6.0%. Letters of credit are subject to a 0.25% fronting feepayable to the issuing bank and a fee payable to the lenders equal to theproduct of the interest rate spread applicable to LIBOR borrowings underour revolving credit facility and the daily average amount available fordrawing under the outstanding letters of credit**.**The minimum and maximum borrowings under the revolver were zero and$10.5 million during the nine months ended September 30, 2007, andzero and $30.0 million during the year ended December 31, 2006. Theweighted average amounts of borrowings outstanding under the revolver duringthe nine months ended September 30, 2007 and 2006, were $0.1 millionand $1.0 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 at negotiated rates up to an aggregateof $40.0 million from individual banks that are parties to the agreement.Swingline borrowings are considered borrowings under the revolving creditfacility agreement.

 

At September 30, 2007, $522.4 million wasoutstanding under the Tranche E term loan amended and restated creditfacility (including $5.3 million of current portion), and our borrowingrate was 6.7%. Borrowings under the Tranche E term loan are based on (i)the higher of the prime rate plus 0.50% or the federal funds effective rateplus 1.00% or (ii) LIBOR plus 1.50%. We are required to make scheduledprincipal payments on the Tranche E term loan in the amount of$1.3 million during the remainder of 2007, $5.3 million in each of2008 through 2012, $248.7 million in 2013, and $245.9 million in2014.

 

Borrowings under the Facilities are subject tofinancial covenants, including a requirement to maintain a minimum interest coverage ratio and a maximumlimit on our leverage ratio, as well as customary nonfinancial covenants. The financial maintenance covenants areapplicable only to the $450 million revolving credit portion of theagreement and function as debt incurrence covenants with respect to theremainder of the facility.

 

*Senior Notes*

 

In October 2004, Boise Cascade, L.L.C. (Boise LLC)issued $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 Forest Products Acquisition. In July 2005, we completed an exchangeoffer whereby all of our senior unsecured floating-rate notes and seniorsubordinated notes were exchanged for registered securities with identicalterms (other than terms relating to registration rights) to the notes issued inOctober 2004. We may redeem all or part of the notes at any time at redemptionprices set forth in the indenture. If we sell specific assets or experiencespecific kinds of changes in control, we must offer to purchase the notes. Thesenior unsecured floating-rate notes bear interest at a floating rate equal toLIBOR plus 2.9%. At both September 30, 2007, and December 31, 2006,our borrowing rate for the $250.0 million senior unsecured floating-ratenotes was 8.2%. In connection with the amendment and restatement of ourFacilities, we obtained $200 million of commitments for a delayed-drawterm loan, which we borrowed against in September2007. At September 30, 2007, the $200 million received from the delayed-drawterm loan was recorded in “Restricted cash held for bond redemption” on ourConsolidated Balance Sheet. The $200 million was invested in preparationfor the repayment of the $250 million senior unsecured floating-rate notes inOctober 2007. We redeemed the notes on October 15, 2007.The delayed-draw term loan had acommitment fee of 1.5% per annum until drawn. Now that we have drawn againstthe term loan, the interest rate on the loan is the same as for theTranche E term loan. We are required to make scheduled principal paymentson the delayed-draw term loan in the amount of $0.5 million in 2007, $2.0 millionin each of 2008 through 2012, $95.3 million in 2013, and$94.2 million in 2014.

 

We currently plan to utilize a portion of the Aldabra transaction proceedsto make an offer to repurchase, at par, a portion of our 7.125% seniorsubordinated notes due in 2014. The aggregate portion of the transactionproceeds to be used for such repurchase has not been finally determined andwill depend on, among other things, the aggregate amount of cash proceeds wereceive from the Aldabra 

 

 

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transaction, the amount of senior debtrepaid from the proceeds of the Aldabra transaction, the transaction expensesrelated to the Aldabra transaction, the aggregate tax liability related to theAldabra transaction, and the requirements of our indenture governing the notes.

 

*Borrowings Secured by Receivables*

 

In October2005, our wholly owned subsidiary, Boise LLC, and several of its subsidiaries,including Birch Creek Investments, L.L.C. (Birch Creek), entered into anaccounts receivable securitization program with Bank of America NationalAssociation and Calyon New York Branch (the Investors). Under this three-yearprogram, Boise LLC sells its interest in a defined pool of accounts receivablegenerated by its domestic operations on a revolving basis to Birch Creek, a consolidated,wholly owned, special-purpose subsidiary. In turn, Birch Creek sells thereceivables to the affiliates of the Investors. Because Boise LLC has the rightto repurchase the sold receivables, sales of receivables under the program areaccounted for as a secured borrowing. At September 30, 2007, andDecember 31, 2006, we had $50.0 million and $25.0 millionoutstanding under our accounts receivable securitization program. Thereceivables outstanding and the corresponding debt are included as “Receivables”and “Long-term debt,” respectively, on our Consolidated Balance Sheets. Werecord the financing costs associated with the program in “Interest expense” inour Consolidated Statements of Income. The cost of funds under this programvaries based on changes in interest rates. At September 30, 2007, andDecember 31, 2006, the interest rates for borrowings secured byreceivables were 5.8% and 5.6%.

 

Under the accounts receivable securitization program, the maximum borrowingamount is subject to change based on the level of eligible receivables andrestrictions on concentrations of receivables and, at September 30, 2007,could not exceed $250.0 million. Theaccounts receivable securitization program contains financial covenantsrequiring us to maintain a minimum interest coverage ratio and a specifiedmaximum leverage ratio.

 

*Other*

 

We also have other outstanding letters of credit,which are used for trade purchases. At September 30, 2007, andDecember 31, 2006, we had $1.2 million and $0.1 million,respectively, of outstanding letters of credit. These letters of credit do notreduce our borrowing capacity under our amended revolving credit facility.

 

We have entered into interest rate swaps to hedge themajority of the cash flow risk from the variable interest payments on ourvariable-rate debt. These swaps gave us effective interest rates on all of ourlong-term variable-rate debt (less current portion) of 6.5% and 7.0% atSeptember 30, 2007, and December 31, 2006, respectively. Foradditional information on our interest rate swaps, see Note 14, FinancialInstruments, in “Item 1. Consolidated Financial Statements” of this Form 10-Q.

 

At September 30, 2007, and December 31, 2006, we had$28.5 million and $31.5 million of costs recorded in “Deferredfinancing costs” on our Consolidated Balance Sheets. In connection with the May2007 amendment and restatement of our Facilities, we capitalized$2.6 million of financing costs and wrote off approximately$1.8 million of deferred financing costs. We recorded the $1.8 millioncharge in “Interest expense” in our Consolidated Statement of Income for thenine months ended September 30, 2007. In fourth quarter 2007, inconnection with the repayment of the $250 million senior unsecuredfloating-rate notes, we wrote off $4.5 million of related deferredfinancing costs as a charge to interest expense.

 

At September 30, 2007, and December 31,2006, our average effective interest rates, including the effect of ourinterest rate swaps, on all of our long-term debt (less current portion) were6.7% and 7.1%.

 

Forthe nine months ended September 30, 2007 and 2006, cash payments forinterest, net of interest capitalized, were $62.2 million and $63.9 million.

 

***Contractual Obligations***

 

For information on contractual obligations, see ContractualObligations in “Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour 2006 Annual Report on 

 

 

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Form 10-K. Asof September 30, 2007,there have been no material changes to our contractual obligations outside thenormal course of business, except as they relate to amounts we estimate we oweOfficeMax under the Additional Consideration Agreement, which we disclose in “InvestingActivities” under Liquidity and Capital Resources in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations, andthose amounts disclosed in “Financing Activities” under Liquidity and CapitalResources in this Management’s Discussion and Analysis of Financial Conditionand Results of Operations related to commitments under our amended and restatedsenior secured credit facilities. In addition, our lease obligations haveincreased in our Building Materials Distribution segment as we continue to growand expand the business. See Note 6, Leases, for our updated lease paymentrequirements for all of our leases.

 

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

 

AtSeptember 30, 2007, and December 31, 2006, we had nooff-balance-sheet arrangements with unconsolidated entities.

 

***Guarantees***

 

Note 19, Commitments and Guarantees, of the Notes to ConsolidatedFinancial Statements in “Item 8. Consolidated Financial Statements” in our 2006 Annual Report on Form10-K describes the nature of our guarantees, including the approximate terms ofthe guarantees, how the guarantees arose, the events or circumstances thatwould require us to perform under the guarantees, and the maximum potentialundiscounted amounts of future payments we could be required to make. As ofSeptember 30, 2007, there have been no material changes to the guaranteesdisclosed in our 2006 Annual Report on Form 10-K, except that BoiseCascade Holdings, L.L.C., and its direct and indirect domestic subsidiaries,excluding foreign subsidiaries and Birch Creek, now guarantee the obligationsof our amended and restated obligations discussed in “Financing Activities”under Liquidity and Capital Resources in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations.

 

***Environmental***

 

For information on environmental issues, see Environmentalin “Item 7.  Management’s Discussionand Analysis of Financial Condition and Results of Operations” in our 2006Annual Report on Form 10-K.

 

***Critical Accounting Estimates***

 

Criticalaccounting estimates are those that are most important to the portrayal of ourfinancial condition and results. These estimates require management’s mostdifficult, subjective, or complex judgments, often as a result of the need toestimate matters that are inherently uncertain. We review the development,selection, and disclosure of our critical accounting estimates with the AuditCommittee of our board of directors. For information about critical accountingestimates, see Critical Accounting Estimates in “Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2006 Annual Report onForm 10-K.

 

***Recently Adopted Accounting Standards***

 

In January 2007, we adopted Financial Accounting Standards Board (FASB)Staff Position (FSP) No. AUG AIR-1, *Accountingfor Planned Major Maintenance Activities,* and began expensing thecosts of periodic major overhauls and maintenance of plant and equipment asincurred. Prior to the adoption of this FSP, we charged planned shutdownmaintenance costs in our Paper and Packaging & Newsprint segments toincome (loss) ratably over the year. We recast our 2006 interim financialinformation included in this Form 10-Q using the direct expensemethod. As a result of adopting this FSP, we decreased “Materials, labor, andother operating expenses” $1.4 million and increased “Net income” by thesame amount for the three months ended September 30, 2006. Of the$1.4 million adjustment, we increased income $0.5 million in ourPaper segment and $0.9 million in our Packaging & Newsprintsegment. During the nine months ended September 30, 2006, we decreased “Materials,labor, and other operating expenses” $1.1 million and increased “Netincome” by the same amount. Of the $1.1 million adjustment, we increasedincome $2.1 million in our Paper segment and reduced income $1.0 millionin our 

 

 

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Packaging & Newsprint segment.The FSP increases the volatility of earnings in the period a planned shutdownoccurs, but it has no impact on our annual results of operations.

 

In January 2007, we adopted FASB Interpretation (FIN) No. 48, *Accounting for Uncertainty in Income Taxes — anInterpretation of FASB Statement No. 109*. FIN No. 48 clarifiesthe criteria for recognizing tax benefits under FASB Statement No. 109, *Accounting for Income Taxes*. It alsorequires additional financial statement disclosures about uncertain taxpositions. Because the majority of our businesses and assets are held andoperated by limited liability companies and the income taxes of theseoperations are payable by our equity holders, it did not have a material impacton our financial position or results of operations. For more information, seeNote 7, Income Taxes. Events could arise in the future that would causethe adoption of this interpretation to have a material impact on our financialstatements. For example, if our tax status were to change in the future, wewould have to reevaluate the impact of FIN No. 48 on our financialposition and results of operations at that time.

 

In December 2006, we adopted Statement of Financial Accounting Standards(SFAS) No. 158, *Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — an Amendment of FASBStatements No. 87, 88, 106, and 132(R)*, which required us torecognize the funded status of our pension and other postretirement benefit planson our 2006 Consolidated Balance Sheet. It also required us to recognize theactuarial and experience gains and losses and the prior service costs andcredits as a component of other comprehensive income, net of tax, in ourConsolidated Statement of Capital. In connection with adopting SFASNo. 158, we reduced our liabilities $38.1 million and increasedcapital by about the same amount. Retrospective application was not permitted.For more information, see Note 15, Retirement and Benefit Plans, of the Notesto Consolidated Financial Statements in “Item 8.  Consolidated Financial Statements” of our2006 Annual Report on Form 10-K.

 

In December 2006, we adopted Staff Accounting Bulletin (SAB) Topic 1N, *Financial Statements — Considering the Effectsof Prior Year Misstatements When Quantifying Misstatements in Current YearFinancial Statements* (SAB 108). SAB 108 addresses how the effects ofprior-year uncorrected misstatements should be considered when quantifyingmisstatements in current-year financial statements. SAB 108 requiresregistrants to quantify misstatements using both the balance sheet and incomestatement approaches and to evaluate whether either approach results inquantifying an error that is material in light of relevant quantitative andqualitative factors. SAB 108 did not have a material impact on ourfinancial position or results of operations.

 

In February 2006, we adopted FSP No. FAS 123(R)-4, *Classification of Options and Similar Instruments Issued as EmployeeCompensation That Allow for Cash Settlement Upon the Occurrence of a ContingentEvent*. FAS 123(R)-4 requires companies to assess the probabilitythat a contingent cash settlement event will occur when it determines theclassification of options or other similar instruments issued as part ofemployee compensation arrangements. Because redemption by Forest ProductsHoldings, our equity sponsor, and the expected parallel redemptions of theSeries B and Series C equity units granted to our employees under theManagement Equity Agreement are a contingent event outside employees’ control,we account for the units using equity plan accounting in accordance withFAS 123(R)-4.

 

 
| ***ITEM  3.*** | ***QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS*** |
|----------------|-------------------------------------------------------------------|

 

We are exposed to risks such aschanges in interest rates, energy prices, and foreign currency exchange rates.We employ a variety of practices to manage these risks, including operating andfinancing activities and, where deemed appropriate, the use of derivativeinstruments. Derivative instruments are used only for risk management purposesand not for speculation or trading. Derivatives are such that a specific debtinstrument, contract, or anticipated purchase determines the amount, maturity,and other specifics of the hedge. If a derivative contract is entered into, weeither determine that it is an economic hedge or we designate the derivative asa cash flow or fair value hedge. We formally document all relationships betweenhedging instruments and the hedged items, as well as our risk management objectivesand strategies for undertaking various hedged transactions. For thosederivatives designated as cash flow or fair value hedges, we formally assess,both at the derivatives’ inception and on an ongoing basis, whether thederivatives that are used in hedging transactions are highly effective inoffsetting changes in the hedged items. The ineffective portion of hedgingtransactions is recognized in income (loss).

 

 

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Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, werecord all derivative instruments as assets or liabilities on our ConsolidatedBalance Sheets at fair value. The fair value of these instruments is determinedby third parties. Changes in the fair value of derivatives are recorded ineither “Net income (loss)” or “Other comprehensive income,” as appropriate. Thegain or loss on derivatives designated as cash flow hedges is included in “Othercomprehensive income” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). The gain or loss on derivativesdesignated as fair value hedges and the offsetting gain or loss on the hedgeditem attributable to the hedged risk are included in income (loss) in theperiod in which changes in fair value occur. The gain or loss on derivativesthat have not been designated as hedging instruments is included in income(loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

Our debt is predominantly variable-rate.We manage interest rate risk on our variable-rate debt by entering intointerest rate swaps. At September 30, 2007, the estimated current marketvalue of our fixed-rate debt, based on then-current interest rates for similarobligations with like maturities, was approximately $16.8 million less than the amount reported on ourConsolidated Balance Sheet.

 

If the announced sale of our Paper andPackaging & Newsprint assets goes through, we plan to use the proceedsfrom the transaction to pay down debt. In October 2007, we concluded that theinterest payments on our variable rate debt were no longer probable ofoccurring after March 2008. As a result, in fourth quarter 2007, we recorded $3.0 millionof income in “Change in fair value of interest rate swaps” in our ConsolidatedStatement of Income.

 

During second quarter 2007, in connection with the amendment andrestatement of our senior secured credit facilities, we concluded that theinterest payments on our senior unsecured floating-rate notes were no longerprobable of occurring after October 2007, when the notes became callable atpar. As a result, during second quarter 2007, we recorded the fair value of theinterest rate swaps, or $5.4 million of income, in “Change in fair valueof interest rate swaps” in our Consolidated Statements of Income.

 

In June 2007, in exchange for thetermination of two of our interest rate swap agreements that were scheduled tobegin in 2009, we received $2.8 million that we recorded in “Accumulatedother comprehensive income.” We will reclassify the $2.8 million in “Accumulatedother comprehensive income” as a reduction of interest expense in 2009 and2010.

 

At September 30, 2007, we had fourinterest rate swaps to hedge our exposure to interest rate fluctuationsassociated with a portion of our variable-rate debt. The swaps effectivelyhedge $500 million of our variable-rate debt exposure through 2009. Assumingno changes in interest rates, we expect to reclassify $1.4 million ofamounts recorded in “Accumulated other comprehensive income” as a decrease in interest expense duringthe remainder of 2007. At September 30, 2007, we recorded no ineffectiveness related to thesehedges.

 

*Energy Risk*

 

We enter intonatural gas swaps, options, or a combination of these instruments to hedge thevariable cash flow risk of natural gas purchases at index prices. As ofSeptember 30, 2007, we had entered into derivative instruments related toapproximately 25% of our forecasted natural gas purchases through March 2008.We have elected to account for these instruments as economic hedges and recordthe changes in fair value in our Consolidated Statements of Income.

 

*ForeignCurrency Risk*

 

At September 30, 2007, we had no foreign currencyhedges.

 

 

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***ITEM4.      CONTROLS AND PROCEDURES***

 

                Attached asexhibits to this Form 10-Q are certifications of our chief executive officerand chief financial officer. Rule 13a-14 of the Securities Exchange Act of1934, as amended, requires that we include these certifications with thisreport. This Controls and Procedures section includes information concerningthe disclosure controls and procedures referred to in the certifications. Youshould read this section in conjunction with the certifications.

 

*Evaluationof Disclosure Controls and Procedures*

 

                We maintain “disclosurecontrols and procedures,” as Rule 13a-15(e) under the Securities Exchange Actof 1934, as amended, defines such term. We have designed these controls andprocedures to reasonably assure that information required to be disclosed inour reports filed under the Exchange Act, such as this Form 10-Q, isrecorded, processed, summarized, and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. We have alsodesigned our disclosure controls to provide reasonable assurance that suchinformation is accumulated and communicated to our senior management, includingthe chief executive officer (CEO) and chief financial officer (CFO), asappropriate, to allow them to make timely decisions regarding our requireddisclosures.

 

                Weevaluate the effectiveness of our disclosure controls and procedures on atleast a quarterly basis. A number of key components in our internal controlsystem assist us in these evaluations. Since the company’s inception, we havehad a disclosure committee. The committee meets regularly and includes inputfrom our senior management, general counsel, internal audit staff, andindependent accountants. This committee is charged with considering andevaluating the materiality of information and reviewing the company’sdisclosure obligations on a timely basis. Our internal audit department alsoevaluates components of our internal controls on an ongoing basis. To assist inits evaluations, the audit staff uses a web-based application that helps toidentify, document, and test our internal controls. Our intent is to maintaindisclosure controls and procedures as dynamic processes that change as ourbusiness and working environments change.

 

                Ourmanagement, with the participation of our CEO and CFO, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the quarter covered by the quarterly report on thisForm 10-Q. Based on that evaluation, the CEO and CFO have concludedthat, as of such date, our disclosure controls and procedures were effective inmeeting the objectives for which they were designed and were operating at areasonable assurance level. Furthermore, the company’s management noted that asa result of their evaluation of changes in internal control over financialreporting, they identified no changes during the third quarter of 2007 thatmaterially affected, or would be reasonably likely to materially affect, thecompany’s internal control over financial reporting.

 

*Limitationson the Effectiveness of Controls and Procedures*

 

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

 

 

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** **
| **PART II—OTHER INFORMATION** |
|------------------------------------|

 

 

***ITEM1.      LEGAL PROCEEDINGS***

 

                                                We are a party to routine legalproceedings that arise in the ordinary course of our business. We are notcurrently a party to any legal proceedings or environmental claims that webelieve would have a material adverse effect on our financial position, resultsof operations, or cash flows.

 

 

***ITEM1A.      RISK FACTORS***

 

                                                This Quarterly Report on Form 10-Qcontains forward-looking statements. Statements that are not historical orcurrent facts, including statements about our expectations, anticipatedfinancial results, projected capital expenditures, and future businessprospects, are forward-looking statements. You can identify these statements byour use of words such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,”and other similar expressions. You can find examples of these statementsthroughout this report, including the Overview of Financial Condition sectionof Management’s Discussion and Analysis of Financial Condition and Results ofOperations. We cannot guarantee that our actual results will be consistent withthe forward-looking statements we make in this report. You should reviewcarefully the risk factors listed in “Item 1A.  Risk Factors” of our 2006 Annual Report onForm 10-K, as well as those factors listed in other documents we file withthe Securities and Exchange Commission (SEC). There have been no materialchanges to our risk factors for the nine months ended September 30, 2007,from those listed in our 2006 Annual Report on Form 10-K.

 

 

***ITEM1B.      UNRESOLVED STAFF COMMENTS***

 

Wehave no unresolved comments from the Commission staff.

 

 

***ITEM2.      UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS***

 

None.

 

 

***ITEM3.      DEFAULTS UPON SENIOR SECURITIES***

 

None.

 

 

***ITEM4.      SUBMISSION OF MATTERS TO A VOTE OFSECURITYHOLDERS***

 

Not applicable.

 

 

***ITEM5.      OTHER INFORMATION***

 

None.

 

 

***ITEM6.      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 HOLDINGS,  L.L.C.                                  |
|--------|--------|------------------------------------------------------------------|
|   |   |                                                             |
|   |   |                                                             |
|   |   | /s/ Samuel K. Cotterell                                          |
|   |   | Samuel K. Cotterell  Vice President and Controller               |
|   |   | (As Duly Authorized Officer and Chief   Accounting Officer) |

 

Date:  November 7, 2007

 

 

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

**INDEX TO EXHIBITS**

Filed With the QuarterlyReport on Form 10-Q for the Quarter Ended September 30, 2007

 
| **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 |       |

 

 

 

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