**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                        | ** ** | ** **                                                                                               |
| **For the quarterly period ended September 30,  2005** |
|                                                        | ** ** | ** **                                                                                               |
| **o**                                                       | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**CommissionFile Number:****   333-122770**

 

**BOISE CASCADE COMPANY**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                     | ** ** | **20-2807265**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or  organization) |       | (I.R.S.  Employer Identification No.) |

 

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

(Address of principal executiveoffices, including zip code)

 

**(208)384-6161**

(Registrant’s telephone number,including area code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý     No o

 

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

 

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

 

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

 
| **Class**                                       | ** ** | **Shares Outstanding as of September 30,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|
| Class A common stock, $0.01 par value |       | 0                                                     |       |
| Class B common stock, $0.01 par value      |       | 41,303,763                                            |       |
| Class C common stock, $0.01 par value      |       | 2,671,302                                             |       |

 

 

----

 

**Tableof 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.                                                                                          | Purchase of OfficeMax’s Paper and Forest Products Assets    | 8          |
|         | 3.                                                                                          | Transactions With Related Parties                                | 8          |
|         | 4.                                                                                          | Vendor and Customer Rebates and Allowances                       | 10         |
|         | 5.                                                                                          | Other  (Income) Expense, Net                                     | 10         |
|         | 6.                                                                                          | Income  Taxes                                                    | 11         |
|         | 7.                                                                                          | Leases                                                           | 11         |
|         | 8.                                                                                          | Investments in Equity Affiliate                                  | 11         |
|         | 9.                                                                                          | Inventories                                                      | 12         |
|         | 10.                                                                                         | Goodwill and Intangible Assets                                   | 12         |
|         | 11.                                                                                         | Debt                                                             | 13         |
|         | 12.                                                                                         | Financial  Instruments                                           | 15         |
|         | 13.                                                                                         | New and Recently Adopted Accounting Standards                    | 16         |
|         | 14.                                                                                         | Retirement and Benefit Plans                                     | 18         |
|         | 15.                                                                                         | Segment Information                                              | 18         |
|         | 16.                                                                                         | Commitments and Guarantees                                       | 21         |
|         | 17.                                                                                         | Consolidating Guarantor and Non-Guarantor  Financial Information | 23         |
|         | 18.                                                                                         | Legal Proceedings and Contingencies                              | 29         |
|         | 19.                                                                                         | Pro Forma Adjustments                                            | 29         |
|         |                                                                                        |                                                             |       |
| Item 2.      | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 29                                                               |
|         | Our Segments                                                                                | 30                                                               |
|         | Summary of Results of Operations                                                            | 30                                                               |
|         | Purchase of OfficeMax’s Paper and Forest  Products Assets                              | 31                                                               |
|         | Results of Operations                                                                       | 32                                                               |
|         | Liquidity and Capital Resources                                                             | 37                                                               |
|         | Inflationary and Seasonal Influences                                                        | 41                                                               |
|         | Environmental                                                                               | 41                                                               |
|         | Critical Accounting Estimates                                                               | 42                                                               |
|         | Cautionary and Forward-Looking Statements                                                   | 42                                                               |
|         |                                                                                        |                                                             |       |
| Item 3. | Quantitative and Qualitative Disclosures  About Market Risk                                 | 49                                                               |
|         |                                                                                        |                                                             |       |
| Item 4. | Controls and Procedures                                                                     | 50                                                               |
|         |                                                                                        |                                                             |       |
|         |                                                                                        | **PART II—OTHER INFORMATION**                          | ** ** |
|         |                                                                                        |                                                             |       |
| Item 1. | Legal Proceedings                                                                           | 51                                                               |
|         |                                                                                        |                                                             |       |
| Item 6. | Exhibits                                                                                    | 51                                                               |

 

All reports we file with the Securities and Exchange Commission (SEC)are available free of charge via Electronic Data Gathering Analysis andRetrieval (EDGAR) through the SEC website at www.sec.gov. We also providecopies of our SEC filings at no charge upon request and make electronic copiesof our reports available through our website at www.bc.com, as soon asreasonably practicable after filing such material with the SEC.

 

----

 

**PART 1—FINANCIAL INFORMATION**

 

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

 

**BoiseCascade Company**

**ConsolidatedStatements of Income**

(unaudited, in thousands)

 
| ** **                                      | ** ** | **Boise**                                 | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **Three Months Ended  September 30** | ** ** |
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004**        | ** ** |
| **Sales**                                       |       |                                      |       |            |       |
| Trade                                           |       | $                                         | 1,423,005  |            | $          | 1,417,753 |   |
| Related  parties                                |       | 133,292                                   |       | 141,546         |       |
|                                            |       | 1,556,297                                 |       | 1,559,299       |       |
|                                            |       |                                      |       |            |       |
| **Costs  and expenses**                         |       |                                      |       |            |       |
| Materials,  labor, and other operating expenses |       | 1,358,764                                 |       | 1,295,191       |       |
| Fiber costs  from related parties               |       | —                                    |       | 30,342          |       |
| Depreciation,  amortization, and depletion      |       | 33,044                                    |       | 59,407          |       |
| Selling and  distribution expenses              |       | 69,185                                    |       | 67,239          |       |
| General and  administrative expenses            |       | 15,861                                    |       | 25,774          |       |
| Other  (income) expense, net                    |       | 60                                        |       | 1,452           |       |
|                                            |       | 1,476,914                                 |       | 1,479,405       |       |
|                                            |       |                                      |       |            |       |
| **Income  from operations**                     |       | 79,383                                    |       | 79,894          |       |
|                                            |       |                                      |       |            |       |
| Foreign  exchange gain                          |       | 1,039                                     |       | 1,064           |       |
| Interest  expense                               |       | (31,055                                   | )          | (21,281         | )          |
| Interest  income                                |       | 367                                       |       | 199             |       |
|                                            |       | (29,649                                   | )          | (20,018         | )          |
|                                            |       |                                      |       |            |       |
| **Income  before income taxes**                 |       | 49,734                                    |       | 59,876          |       |
| Income tax  provision                           |       | (21,260                                   | )          | (24,701         | )          |
| **Net  income**                                 |       | **$**                                     | **28,474** | ** **      | **$**      | **35,175** |   |

 

See accompanying notes to unaudited quarterly consolidated financial statements.

 

1

----

 

**BoiseCascade Company**

**ConsolidatedStatements of Income**

(unaudited, in thousands)

 
| ** **                                      | ** ** | **Boise**                                | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------|------------|------------------------------------------|------------|-----------------|------------|
| ** **                                      | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                      | ** ** | **2005**                                 | ** ** | **2004**        | ** ** |
| **Sales**                                       |       |                                     |       |            |       |
| Trade                                           |       | $                                        | 4,057,406  |            | $          | 4,001,281 |   |
| Related  parties                                |       | 425,773                                  |       | 397,639         |       |
|                                            |       | 4,483,179                                |       | 4,398,920       |       |
|                                            |       |                                     |       |            |       |
| **Costs  and expenses**                         |       |                                     |       |            |       |
| Materials,  labor, and other operating expenses |       | 3,878,831                                |       | 3,713,777       |       |
| Fiber costs  from related parties               |       | 17,609                                   |       | 86,401          |       |
| Depreciation,  amortization, and depletion      |       | 95,393                                   |       | 176,055         |       |
| Selling and  distribution expenses              |       | 195,947                                  |       | 190,843         |       |
| General and  administrative expenses            |       | 53,101                                   |       | 67,831          |       |
| Other  (income) expense, net                    |       | 3,848                                    |       | 14,085          |       |
|                                            |       | 4,244,729                                |       | 4,248,992       |       |
|                                            |       |                                     |       |            |       |
| **Income  from operations**                     |       | 238,450                                  |       | 149,928         |       |
|                                            |       |                                     |       |            |       |
| Equity in  net income of affiliate              |       | —                                   |       | 6,308           |       |
| Gain on sale  of equity affiliate               |       | —                                   |       | 46,498          |       |
| Foreign  exchange gain (loss)                   |       | (2                                       | )          | 649             |       |
| Change in  fair value of interest rate swaps    |       | 9,886                                    |       | —          |       |
| Interest  expense                               |       | (137,499                                 | )          | (64,730         | )          |
| Interest  income                                |       | 2,151                                    |       | 524             |       |
|                                            |       | (125,464                                 | )          | (10,751         | )          |
|                                            |       |                                     |       |            |       |
| **Income  before income taxes**                 |       | 112,986                                  |       | 139,177         |       |
| Income tax  provision                           |       | (34,242                                  | )          | (55,402         | )          |
| **Net  income**                                 |       | **$**                                    | **78,744** | ** **      | **$**      | **83,775** |   |
|                                            |       |                                     |       |            |       |
| **Pro  forma income data—Note 19**         |       |                                     |       |            |       |
| Net income  as reported                         |       | $                                        | 78,744     |            |       |   |
| Pro forma  income taxes                         |       | (15,192                                  | )          |            |       |
| Pro forma  net income                           |       | **$**                                    | **63,552** |            |       |   |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

2

----

 

**BoiseCascade Company**

#### **Consolidated BalanceSheets**

(unaudited, in thousands)

 
| ** **                                        | ** ** | **September 30,  2005** | ** **    | **December 31,  2004** | ** ** |
|---------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| **ASSETS**                                        |       |                         |          |                        |       |
|                                              |       |                         |          |                        |       |
| **Current**                                       |       |                         |          |                        |       |
| Cash and  cash equivalents                        |       | $                            | 175,112       |                        | $          | 163,345 |   |
| Receivables                                       |       |                         |          |                        |       |
| Trade, less  allowances of $2,560 and $2,323 |       | 403,994                      |          | 276,668                     |       |
| Related  parties                                  |       | 38,054                       |          | 42,055                      |       |
| Other                                             |       | 17,841                       |          | 19,174                      |       |
| Inventories                                       |       | 621,308                      |          | 594,869                     |       |
| Deferred  income taxes                            |       | 36,097                       |          | —                      |       |
| Other                                             |       | 14,879                       |          | 15,621                      |       |
|                                              |       | 1,307,285                    |          | 1,111,732                   |       |
|                                              |       |                         |          |                        |       |
| **Property**                                      |       |                         |          |                        |       |
| Property and  equipment                           |       |                         |          |                        |       |
| Land and  land improvements                       |       | 80,843                       |          | 83,123                      |       |
| Buildings  and improvements                       |       | 222,838                      |          | 204,704                     |       |
| Machinery  and equipment                          |       | 1,289,909                    |          | 1,196,978                   |       |
|                                              |       | 1,593,590                    |          | 1,484,805                   |       |
|                                              |       |                         |          |                        |       |
| Accumulated  depreciation                         |       | (108,805                     | )             | (18,956                     | )          |
|                                              |       | 1,484,785                    |          | 1,465,849                   |       |
| Fiber farms  and timber deposits                  |       | 52,553                       |          | 44,646                      |       |
|                                              |       | 1,537,338                    |          | 1,510,495                   |       |
|                                              |       |                         |          |                        |       |
| **Note  receivable from related party**           |       | —                       |          | 157,509                     |       |
| **Deferred  financing costs**                     |       | 36,624                       |          | 84,054                      |       |
| **Goodwill**                                      |       | 14,871                       |          | 18,390                      |       |
| **Intangible  assets**                            |       | 32,412                       |          | 34,357                      |       |
| **Other  assets**                                 |       | 34,312                       |          | 15,532                      |       |
| **Total  assets**                                 |       | **$**                        | **2,962,842** | ** **                  | **$**      | **2,932,069** |   |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

3

----

 

**BoiseCascade Company**

**ConsolidatedBalance Sheets (continued)**

(unaudited, in thousands exceptfor equity units and shares)

 
| ** **                                                                                                                                   | ** ** | **September 30,  2005** | ** **    | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| **LIABILITIES  AND CAPITAL**                                                                                                                 |       |                         |          |                        |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Current**                                                                                                                                  |       |                         |          |                        |       |
| Current  portion of long-term debt                                                                                                           |       | $                            | 8,400         |                        | $          | 13,300 |   |
| Income taxes  payable                                                                                                                        |       | 6,152                        |          | 272                         |       |
| Accounts  payable                                                                                                                            |       |                         |          |                        |       |
| Trade                                                                                                                                        |       | 367,697                      |          | 310,148                     |       |
| Related  parties                                                                                                                             |       | 507                          |          | 150                         |       |
| Accrued  liabilities                                                                                                                         |       |                         |          |                        |       |
| Compensation  and benefits                                                                                                                   |       | 95,099                       |          | 62,495                      |       |
| Interest  payable                                                                                                                            |       | 16,213                       |          | 8,584                       |       |
| Other                                                                                                                                        |       | 47,667                       |          | 43,359                      |       |
|                                                                                                                                         |       | 541,735                      |          | 438,308                     |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Debt**                                                                                                                                     |       |                         |          |                        |       |
| Long-term  debt, less current portion                                                                                                        |       | 1,477,400                    |          | 1,966,700                   |       |
| Note payable  to related party, net                                                                                                          |       | 266,405                      |          | —                      |       |
|                                                                                                                                         |       | 1,743,805                    |          | 1,966,700                   |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Other**                                                                                                                                    |       |                         |          |                        |       |
| Deferred  income taxes                                                                                                                       |       | 60,269                       |          | —                      |       |
| Compensation  and benefits                                                                                                                   |       | 152,871                      |          | 133,648                     |       |
| Other  long-term liabilities                                                                                                                 |       | 32,590                       |          | 23,573                      |       |
|                                                                                                                                         |       | 245,730                      |          | 157,221                     |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Commitments  and contingent liabilities**                                                                                                  |       |                         |          |                        |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Capital**                                                                                                                                  |       |                         |          |                        |       |
| Series A  equity units—no par value; 66,000,000 units authorized; 0 and  66,000,000 units outstanding               |       | —                       |          | 36,868                      |       |
| Series B  equity units—no par value; 549,000,000 units authorized; 0 and  549,000,000 units outstanding                  |       | —                       |          | 332,972                     |       |
| Series C  equity units—no par value; 38,165,775 units authorized; 0 and  35,600,120 units outstanding                    |       | —                       |          | —                      |       |
| Series A  preferred stock—$0.01 par value; 66,000,000 shares  authorized; 66,000,000 and 0 shares issued and outstanding |       | 39,112                       |          | —                      |       |
| Class A  common stock—$0.01 par value; 150,000,000 shares authorized; 0 and  0 shares issued and outstanding             |       | —                       |          | —                      |       |
| Class B  common stock—$0.01 par value; 100,000,000 shares authorized;  41,303,763 and 0 shares issued and outstanding    |       | 413                          |          | —                      |       |
| Class C  common stock—$0.01 par value; 10,000,000 shares authorized; 2,671,302 and  0 shares issued and outstanding           |       | 27                           |          | —                      |       |
| Additional  paid-in capital                                                                                                                  |       | 336,202                      |          | —                      |       |
| Retained  earnings from May 9, 2005                                                                                                     |       | 44,695                       |          | —                      |       |
| Accumulated  other comprehensive income                                                                                                      |       | 11,123                       |          | —                      |       |
| **Total  capital**                                                                                                                           |       | 431,572                      |          | 369,840                     |       |
|                                                                                                                                         |       |                         |          |                        |       |
| **Total  liabilities and capital**                                                                                                           |       | **$**                        | **2,962,842** | ** **                  | **$**      | **2,932,069** |   |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

4

----

 

**BoiseCascade Company**

**ConsolidatedStatements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                             | ** ** | **Boise**                                | ** **  | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------|-------------|-----------------|------------|
| ** **                                                                             | ** ** | **Nine Months Ended  September 30** | ** **  |
| ** **                                                                             | ** ** | **2005**                                 | ** **  | **2004**        | ** ** |
| **Cash  provided by (used for) operations**                                            |       |                                     |        |            |       |
| Net income                                                                             |       | $                                        | 78,744      |            | $          | 83,775 |   |
| Items in net  income not using (providing) cash                                        |       |                                     |        |            |       |
| Equity in  net income of affiliate                                                     |       | —                                   |        | (6,308          | )          |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | 145,867                                  |        | 176,055         |       |
| Related-party  interest expense                                                        |       | 13,690                                   |        | —          |       |
| Deferred  income tax provision                                                         |       | 21,032                                   |        | 7,750           |       |
| Pension and  other postretirement benefit expense                                      |       | 21,388                                   |        | 60,821          |       |
| Change in  fair value of interest rate swaps                                           |       | (9,886                                   | )           | —          |       |
| Management  equity units expense                                                       |       | 2,188                                    |        | —          |       |
| Gain on  sales of assets                                                               |       | —                                   |        | (46,745         | )          |
| Other                                                                                  |       | (1,341                                   | )           | (649            | )          |
| Decrease  (increase) in working capital                                                |       |                                     |        |            |       |
| Receivables                                                                            |       | (121,816                                 | )           | (294,296        | )          |
| Inventories                                                                            |       | (26,467                                  | )           | (47,459         | )          |
| Accounts  payable and accrued liabilities                                              |       | 93,705                                   |        | 89,986          |       |
| Pension and  other postretirement benefit payments                                     |       | (508                                     | )           | (60,821         | )          |
| Current and  deferred income taxes                                                     |       | 5,917                                    |        | (5,907          | )          |
| Other                                                                                  |       | 4,827                                    |        | (7,129          | )          |
| Cash  provided by (used for) operations                                                |       | 227,340                                  |        | (50,927         | )          |
|                                                                                   |       |                                     |        |            |       |
| **Cash  provided by (used for) investment**                                            |       |                                     |        |            |       |
| Expenditures  for property and equipment                                               |       | (116,791                                 | )           | (121,856        | )          |
| Repayment of  note receivable from related party                                       |       | 157,509                                  |        | —          |       |
| Sales of  assets                                                                       |       | 12,575                                   |        | 103,229         |       |
| Other                                                                                  |       | 654                                      |        | (1,151          | )          |
| Cash  provided by (used for) investment                                                |       | 53,947                                   |        | (19,778         | )          |
|                                                                                   |       |                                     |        |            |       |
| **Cash  provided by (used for) financing**                                             |       |                                     |        |            |       |
| Tax  distributions to members                                                          |       | (23,295                                  | )           | —          |       |
| Note payable  to related party, net                                                    |       | 251,042                                  |        | —          |       |
| Payments of  long-term debt                                                            |       | (1,334,200                               | )           | —          |       |
| Issuances of  long-term debt                                                           |       | 840,000                                  |        | —          |       |
| Net equity  transactions with OfficeMax                                                |       | —                                   |        | 16,264          |       |
| Net debt  issuances                                                                    |       | —                                   |        | 54,441          |       |
| Other                                                                                  |       | (3,067                                   | )           | —          |       |
| Cash  provided by (used for) financing                                                 |       | (269,520                                 | )           | 70,705          |       |
|                                                                                   |       |                                     |        |            |       |
| **Increase  in cash and cash equivalents**                                             |       | 11,767                                   |        | —          |       |
|                                                                                   |       |                                     |        |            |       |
| **Balance  at beginning of the period**                                                |       | 163,345                                  |        | —          |       |
|                                                                                   |       |                                     |        |            |       |
| **Balance  at end of the period**                                                      |       | **$**                                    | **175,112** | ** **      | **$**      | **—** |   |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

5

----

 

**BoiseCascade Company**

**ConsolidatedStatements of Capital**

(unaudited, in thousands)

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

 
| ** **                                  | ** ** | **Series A  Preferred Stock** | ** ** | **Class B  Common Stock** | ** ** | **Class C  Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total**   | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|-------------------------|------------|--------------|------------|---------------------------------------|------------|-------------|------------|
| ** **                                  | ** ** | **Shares**                              | ** ** | **Amount**                          | ** ** | **Shares**                          | ** ** | **Amount**              | ** ** | **Shares**   | ** ** | **Amount**                            | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Income** | ** ** | **Capital** | ** ** |
| Balance at May 9, 2005 (b)   |       | 66,000                                  |       | $                                   | 37,903     |                                | 41,307     |                    | $          | 413          |       | 2,675                                 |       | $           | 27         |   | $ | 335,085 |   | $ | — |   | $ | 5,951 |   | $ | 379,379 |   |
|                                        |       |                                    |       |                                |       |                                |       |                    |       |         |       |                                  |       |        |       |   |   |   |   |   |   |
| Net income                                  |       | —                                  |       | —                              |       | —                              |       | —                  |       | —       |       | —                                |       | —      |       | 46,492 |   | — |   | 46,492 |   |
| Management equity units expense             |       | —                                  |       | —                              |       | —                              |       | —                  |       | —       |       | —                                |       | 1,147       |       | — |   | — |   | 1,147 |   |
| Other comprehensive income (a)              |       |                                    |       |                                |       |                                |       |                    |       |         |       |                                  |       |        |       |   |   |   |   |   |   |
| Cash flow hedges                            |       | —                                  |       | —                              |       | —                              |       | —                  |       | —       |       | —                                |       | —      |       | — |   | 5,172 |   | 5,172 |   |
| Paid-in-kind dividend                       |       | —                                  |       | 1,209                               |       | —                              |       | —                  |       | —       |       | —                                |       | —      |       | (1,209 | ) | — |   | — |   |
| Tax distribution to members                 |       | —                                  |       | —                              |       | —                              |       | —                  |       | —       |       | —                                |       | —      |       | (588 | ) | — |   | (588 | ) |
| Repurchase of common stock                  |       | —                                  |       | —                              |       | (3                                  | )          | —                  |       | (4           | )          | —                                |       | (30         | )          | — |   | — |   | (30 | ) |
| **Balance at September 30, 2005** | ** ** | **66,000**                              | ** ** | **$**                               | **39,112** | ** **                          | **41,304** | ** **              | **$**      | **413**      | ** ** | **2,671**                             | ** ** | **$**       | **27**     | ** ** | **$** | **336,202** | ** ** | **$** | **44,695** | ** ** | **$** | **11,123** | ** ** | **$** | **431,572** |   |

 

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(a)                                  Comprehensive income, net of taxes, for thethree and nine months ended September 30, 2005, was $36.2 million and$83.6 million.

 

(b)                                 On May 9, 2005, we converted to acorporation from a limited liability company. In connection with converting toa corporation, the Series A equity units were exchanged for shares of Series Apreferred stock, the Series B equity units were exchanged for shares of Class Bcommon stock, and the Series C equity units were exchanged for shares of Class Ccommon stock. The Series A equity units were exchanged at a 1:1 ratiofor shares of Series A preferred stock, and the Series B and C equityunits were exchanged at a .075:1 ratio for shares of Class Band C common stock. The balance at May 9, 2005, reflects thisconversion.

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

6

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***Notes to Unaudited QuarterlyConsolidated Financial Statements***

 

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

 

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

 

On May 18, 2005, the Securities andExchange Commission (SEC) declared our registration statement, filed on Form S-1(Registration No. 333-122770) as amended, under the Securities Act of1933, effective. Although we have not issued shares under this registrationstatement, we became a registrant with the SEC and, accordingly, began filingperiodic reports with them. We also have publicly-traded, registered debt securities,which also require the filing of such reports. These unaudited quarterlyconsolidated financial statements and notes should be read together with theconsolidated financial statements and notes filed with the SEC in ourregistration statement on Form S-1, as amended, on May 18, 2005(Registration Statement).

 

The quarterly consolidated financialstatements have not been audited by an independent registered public accountingfirm but, in the opinion of management, include all adjustments, consisting onlyof normal, recurring adjustments, necessary to present fairly the results forthe periods presented. Net income for the three and nine months ended September 30,2005 and 2004, involved estimates and accruals. Actual results may vary fromthose estimates. Quarterly results are not necessarily indicative of resultsthat may be expected for the full year.

 

Certain amounts in prior years’ consolidatedfinancial statements have been reclassified to conform with the current year’spresentation. These reclassifications did not affect net income.

 

As used in these consolidated financial statements, the terms “Boise”and “we” refer to Boise Cascade Company and its consolidated subsidiaries andtheir predecessors in interest. The terms “Boise Forest Products Operations”and “predecessor” refer to the paper and forest products assets of OfficeMaxIncorporated (OfficeMax) that we acquired on October 29, 2004, fromOfficeMax. OfficeMax was formerly known as Boise Cascade Corporation. SeeNote 2, Purchase of OfficeMax’s Paper and Forest Products Assets, of theNotes to Consolidated Financial Statements in our Registration Statement.

 

We are a diversified, North American, paperand forest products company. We are headquartered in Boise, Idaho. Theunaudited quarterly consolidated financial statements present the financialresults of Boise for the three and nine months ended September 30, 2005,and the results of Boise Forest Products Operations for the three and ninemonths ended September 30, 2004. We have five reportable segments:  Paper, Packaging & Newsprint, WoodProducts, Building Materials Distribution, and Corporate and Other.Historically, OfficeMax conducted Boise Forest Products Operations in threesegments:  Boise Paper Solutions, BoiseBuilding Solutions, and Corporate and Other. We have recast the financialstatements of our predecessor included herein to conform to our current segmentpresentation. See Note 15, Segment Information in this Report on Form 10-Q,for additional information on our reportable segments.

 

The predecessor financial statements includeaccounts specifically attributed to Boise Forest Products Operations and aportion of OfficeMax’s shared corporate general and administrative expenses.These shared services included, but were not limited to, finance, accounting,legal, information technology, and human resource functions. Some of OfficeMax’scorporate costs related solely to Boise Forest Products Operations and wereallocated in full to these operations. Shared corporate general and administrativeexpenses not specifically identifiable to Boise Forest Products Operations havebeen allocated based on sales, assets, and labor costs. The predecessorfinancial statements also include an allocation of OfficeMax’s interest expensebased on average asset balances (see Note 11, Debt). The predecessor’sresults have been or will be included in OfficeMax’s consolidated tax returns.Income taxes in the predecessor periods of these consolidated financialstatements have been calculated as if Boise Forest Products Operations had beena separate taxable entity (see Note 6, Income Taxes). Information on theallocations and related-party transactions is included in Note 3,Transactions With Related Parties.

 

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

 

7

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***2.***                                      ***Purchase of OfficeMax’s Paper andForest Products Assets***

 

On October 29, 2004, we acquiredOfficeMax’s paper and forest products assets, other than its timberlandsoperations, for an aggregate purchase price of $2.2 billion, includingapproximately $140 million of related fees and expenses (the Acquisition).For more information about our purchase of OfficeMax’s paper and forestproducts assets, see Note 2, Purchase of OfficeMax’s Paper and ForestProducts Assets, of the Notes to Consolidated Financial Statements in ourRegistration Statement.

 

We accounted for the Acquisition using thepurchase method of accounting. As a result, the purchase price was allocated tothe tangible and intangible assets acquired and liabilities assumed based ontheir respective fair values as of the date of the Acquisition. The excess ofthe purchase price over the fair value of assets acquired and liabilitiesassumed was allocated to goodwill.

 

The initial purchase price allocations may be adjusted within one yearof the purchase date for changes in estimates of the fair value of assetsacquired and liabilities assumed. During the nine months ended September 30,2005, we recorded $3.5 million of purchase price adjustments thatdecreased the recorded amount of goodwill (see Note 10, Goodwill andIntangible Assets). The adjustments were related to fair value adjustments,liability accruals, and pension and other severance adjustments.

 

# *Restructuring Activities*

# * *

In connection with the Acquisition, we areevaluating the acquired facilities and organizational structure. In accordancewith the provisions of Emerging Issues Task Force (EITF) 95-3, Recognitionof Liabilities in Connection With a Purchase Business Combination, exitactivities related to the Acquisition will increase goodwill. We had one yearfrom the acquisition date to develop our restructuring plans and adjustgoodwill. At December 31, 2004, we had finalized a portion of our plans insufficient detail to meet the requirements of EITF 95-3 to record a liability.During the nine months ended September 30, 2005, we recorded an additionalrestructuring reserve of $7.4 million. These charges reflect additionalseverance costs and increase the total restructuring reserve recorded since theAcquisition to $21.6 million. Most of the severance cost adjustmentsrelate to severance costs for 330 employees. At September 30, 2005,we had terminated approximately 290 employees. Most of the remaining costswill be paid during 2005.

 

At September 30, 2005, approximately$9.0 million of the 2004 restructuring reserve was included in “Accruedliabilities, Compensation and benefits,” and $0.1 million was included in “Accruedliabilities, Other.” Of the $9.1 million restructuring reserve,$2.8 million was recorded in our Paper segment, $0.1 million inPackaging & Newsprint, $0.1 million in Wood Products, and$6.1 million in Corporate and Other. Restructuring reserve liabilityaccount activity related to these charges is as follows (in thousands):

 
| ** **                                        | ** ** | **Severance** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------|------------|------------|------------|-----------|------------|
| 2004  restructuring reserve                       |       | $             | 13,768     |       | $          | 501       |       | $ | 14,269 |   |
| Charges  against reserve                          |       | (1,012        | )          | (1         | )          | (1,013    | )          |
| Restructuring  reserve at December 31, 2004  |       | 12,756        |       | 500        |       | 13,256    |       |
|                                              |       |          |       |       |       |      |       |
| Charges  against reserve                          |       | (10,962       | )          | (597       | )          | (11,559   | )          |
| Costs  incurred and charged to goodwill           |       | 7,135         |       | 221        |       | 7,356     |       |
| Restructuring  reserve at September 30, 2005 |       | **$**         | **8,929**  | ** ** | **$**      | **124**   | ** ** | **$** | **9,053** |   |

 

***3.******                                      TransactionsWith Related Parties***

 

During the predecessor periods presented, ourpredecessor participated in OfficeMax’s cash management system. Cash receiptsattributable to our predecessor’s operations were collected by OfficeMax, andcash disbursements were funded by OfficeMax. The net effect of thesetransactions has been reflected as “Net equity transactions with OfficeMax” inthe Consolidated Statement of Cash Flow. The following table includes thecomponents of net equity transactions with OfficeMax (in thousands):

 

8

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| ** **                                       | ** ** | **Predecessor**                                | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                       | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
| Cash  collections                                |       | $                                              | (4,208,377 | ) |
| Payment of  accounts payable                     |       | 4,062,681                                      |       |
| Capital  expenditures and acquisitions           |       | 121,856                                        |       |
| Income taxes                                     |       | 47,652                                         |       |
| Net debt  issuances                              |       | (54,441                                        | )          |
| Corporate  general and administrative allocation |       | 38,342                                         |       |
| Other                                            |       | 8,551                                          |       |
| Net equity  transactions with OfficeMax          |       | **$**                                          | **16,264** |   |

 

During the predecessor periods presented, ourpredecessor used services and administrative staff of OfficeMax. These servicesincluded, but were not limited to, finance, accounting, legal, informationtechnology, and human resource functions. The costs not specificallyidentifiable to Boise Forest Products Operations were allocated based onaverage sales, assets, and labor costs. For the predecessor nine months ended September 30,2004, the allocated costs amounted to $38.3 million. These costs areincluded in “General and administrative expenses” in the Consolidated Statementof Income. Management believes these allocations are a reasonable reflection ofour predecessor’s use of such services. However, they may not necessarily beindicative of costs to be incurred by us in the future.

 

At September 30, 2005, we had a$266.4 million note payable to a subsidiary of Boise Land &Timber Holdings Corp. (Timber Holdings) recorded as “Note payable to relatedparty, net” in the Consolidated Balance Sheet. For more information, seeNote 11, Debt. For the nine months ended September 30, 2005, werecorded $13.7 million of interest expense for the note.

 

At December 31, 2004, we had a$157.5 million note receivable from a subsidiary of Timber Holdingsrecorded as “Note receivable from related party” on our Consolidated BalanceSheet. The note was repaid in February 2005. The note accrued interest at6%.  For the nine months ended September 30,2005, we recorded $0.9 million of interest income from the note.

 

During each of the periods presented, we sold paper and paper productsto OfficeMax at sales prices that were designed to approximate market prices.During the three and nine months ended September 30, 2005, sales toOfficeMax were $133.3 million and $425.8 million. For the three andnine months ended September 30, 2004, sales to OfficeMax were$141.5 million and $395.1 million. These sales are included in “Sales,Related parties” in the Consolidated Statements of Income. Sales to OfficeMaxrepresent a concentration in the volume of business transacted and the revenuegenerated from these transactions. Apart from these sales, concentration ofcredit risks with respect to trade receivables is limited due to the widevariety of customers and channels to and through which our products are sold,as well as their dispersion across many geographic areas.

 

During the periods presented, we purchasedfiber from related parties at prices that approximated market prices. Duringthe three and nine months ended September 30, 2005, fiber purchases fromBoise Land & Timber Corp., a subsidiary of Timber Holdings, werezero and $17.6 million. On February 4, 2005, Timber Holdings sold allof its timberlands. For the three and nine months ended September 30,2004, fiber purchases from OfficeMax’s timberlands operations were$30.3 million and $86.4 million. The costs associated with thesepurchases are recorded as “Fiber costs from related parties” in theConsolidated Statements of Income.

 

During the predecessor periods, most BoiseForest Products Operations employees, along with some employees of OfficeMax,participated in OfficeMax’s defined benefit pension plans. In addition, mostemployees of Boise Forest Products Operations were eligible for participationin OfficeMax’s defined contribution plans. For the three and nine months ended September 30,2004, the Consolidated Statements of Income included $22.3 million and$69.7 million of expenses attributable to our participation in OfficeMax’sdefined benefit and defined contribution plans.

 

Boise Forest Products Operations employeesand former employees also participated in OfficeMax’s other postretirementbenefit plans. All of the postretirement benefit plans are unfunded (seeNote 14, Retirement and Benefit Plans). In addition, employeesparticipated in OfficeMax’s stock compensation programs.

 

9

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For more information, see Note 13, Retirement and Benefit Plans,of the Notes to Consolidated Financial Statements in our RegistrationStatement.

 

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

 

We receive rebates and allowances from our vendors under a number ofdifferent programs, including vendor marketing programs. At September 30,2005, and December 31, 2004, we had $2.9 million and$2.0 million, respectively, of vendor rebates and allowances recorded in “Receivables,Other” on the Consolidated Balance Sheets. These rebates and allowances areaccounted for in accordance with EITF 02-16, Accounting by a Customer(Including a Reseller) for Certain Consideration Received From a Vendor.Rebates and allowances received from our vendors are recognized as a reductionof “Materials, labor, and other operating expenses” when the product is sold,unless the rebates and allowances are linked to a specific incremental cost tosell a vendor’s product. Amounts received from vendors that are linked tospecific selling and distribution expenses are recognized as a reduction of “Sellingand distribution expenses” in the period the expense is incurred.

 

Included in the vendor rebate programs referred to above are variousvolume purchase rebate programs. These programs generally include annualpurchase targets and may offer increasing tiered rebates based on our reachingdefined purchase levels. For such tiered rebate programs, the companycalculates an estimated consideration based on the probability of the rebatebeing earned during the year. We review sales projections and related purchaseson a quarterly basis and adjust the estimated consideration accordingly. Werecord consideration received for these programs as a reduction of “Materials,labor, and other operating expenses” as the related inventory is sold.

 

We also provide rebates to our customers based on the volume of theirpurchases. We provide the rebates to increase the sell-through of our products.The rebates provided to our customers are accounted for in accordance withEITF 01-09, Accounting for Consideration Given by a Vendor to a Customer.At September 30, 2005, and December 31, 2004, we had$21.9 million and $20.4 million, respectively, of rebates payable toour customers recorded in “Accrued liabilities, Other” on the ConsolidatedBalance Sheets.

 

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

 

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

 
| ** **                                 | ** ** | **Boise**                                 | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                                 | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                 | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| Sale of  plywood and lumber operations (a) |       | $                                         | —     |                                     | $          | —    |       | $               | —     |   | $ | 7,123 |   |
| Sale of  receivables (b)                   |       | —                                    |       | 933                                      |       | —    |       | 2,176           |       |
| Loss on  sales of assets                   |       | 77                                        |       | 1,188                                    |       | 363       |       | 3,082           |       |
| Write-off of  offering costs (c)           |       | —                                    |       | —                                   |       | 3,600     |       | —          |       |
| Other, net                                 |       | (17                                       | )          | (669                                     | )          | (115      | )          | 1,704           |       |
|                                       |       | **$**                                     | **60**     | ** **                               | **$**      | **1,452** | ** ** | **$**           | **3,848**  | ** ** | **$** | **14,085** |   |

 

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(a)                                  In February 2004, Boise Forest ProductsOperations sold its plywood and lumber facilities in Yakima, Washington. Inconnection with the sale, it recorded $7.1 million of costs in “Other(income) expense, net” in its Consolidated Statement of Income for the ninemonths ended September 30, 2004. However, the sale also resulted in a$7.4 million reduction in the estimated LIFO reserve, which wasrecorded in “Materials, labor, and other operating expenses.”

 

(b)                                 In the predecessor periods presented, BoiseForest Products Operations participated in OfficeMax’s receivable salesprogram. The program consisted of a revolving sale of receivables for364 days and was subject to renewal.

 

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

 

10

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

 

On May 9, 2005, we converted to acorporation. Prior to the conversion, we were a limited liability company andwere not subject to entity-level income taxation. The taxes with respect tothese operations were payable by our equity holders in accordance with theirrespective ownership percentages. During the three and nine months ended September 30,2005, we made $3.7 million and $23.3 million of cash distributions topermit our equity holders to pay the taxes. Both our senior secured creditfacilities and the indenture governing our notes permitted these distributions.

 

Tax expenses and benefits related tooperations prior to May 9 were recognized by the partners of the limitedliability company. For the period of May 9 through September 30,2005, we recorded income tax expense at an estimated annual effective taxprovision rate of 43.5%. The effect of establishing deferred taxes uponconversion to a corporation was not material to income tax expense.

 

In the predecessor periods presented, BoiseForest Products Operations results were included in the consolidated income taxreturns of OfficeMax. However, in the predecessor financial statements, incometaxes were provided based on a calculation of the income tax expense that wouldhave been incurred if our predecessor had operated as a separate taxpayer.Income taxes have been provided for all items included in the ConsolidatedStatements of Income, regardless of when such items were reported for tax purposesor when the taxes were actually paid or refunded.

 

For the nine months ended September 30,2005, cash payments for taxes, subsequent to converting to a corporation, netof refunds received, were $7.3 million. For the nine months ended September 30,2004, cash payments for taxes, net of refunds received, were$47.7 million.

 

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

 

We did not have any capital leases during anyof the periods presented. We lease a portion of our distribution centers, aswell as other property and equipment, under operating leases. For purposes ofdetermining straight-line rent expense, the lease term is calculated from thedate we first take possession of the facility, including any periods of freerent and any option periods we are reasonably assured of exercising. Straight-linerent expense is also adjusted to reflect any allowances or reimbursementsprovided by the lessor. Rental expense for operating leases and sublease rentalincome received was as follows (in thousands):

 
| ** **              | ** ** | **Boise**                                 | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|-------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------------|------------|
| ** **              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **              | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005**  | ** ** | **2004**        | ** ** |
|                    |       |                                      |       |                                     |       |      |       |            |       |
| Rental  expense         |       | $                                         | 4,904      |                                     | $          | 4,575     |       | $               | 13,202     |   | $ | 13,227 |   |
| Sublease  rental income |       | 5                                         |       | 4                                        |       | 71        |       | 22              |       |
|                         |            |                                           |            |                                          |            |           |            |                 |            |  |  |  |  |

 

For the operating leases with remaining termsof more than one year, the minimum lease payment requirements are$3.1 million for the last quarter of 2005, $11.8 million for 2006,$11.2 million for 2007, $9.9 million for 2008, and $8.7 millionfor 2009, with total payments thereafter of $36.1 million. These futureminimum lease payment requirements have not been reduced by sublease rentalsdue in the future under noncancelable subleases. Minimum sublease incomereceived in the future is not expected to be material.

 

Substantially all lease agreements have fixedpayment terms based on the passage of time. Some lease agreements provide uswith the option to purchase the leased property. Additionally, some agreementscontain renewal options, averaging 8.2 years, with fixed payment termssimilar to those in the original lease agreements.

 

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

 

In May 2004, Boise Forest ProductsOperations sold its 47% interest in Voyageur Panel, which owned an orientedstrand board plant in Barwick, Ontario, Canada, and recorded a $46.5 milliongain on

 

11

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the sale in “Gain on sale of equity affiliate” in the ConsolidatedStatement of Income for the nine months ended September 30, 2004.

 

Prior to the sale, Boise Forest ProductsOperations accounted for the joint venture under the equity method.Accordingly, the results do not include the joint venture’s sales but doinclude $6.3 million of equity in earnings for the nine months ended September 30,2004.

 

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

 

Inventories include the following (inthousands):

 
| ** **                          | ** ** | **September 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| Finished  goods and work in process |       | $                            | 399,747     |                        | $          | 384,772 |   |
| Logs                                |       | 57,943                       |        | 62,406                      |       |
| Other raw  materials and supplies   |       | 163,618                      |        | 147,691                     |       |
|                                |       | **$**                        | **621,308** | ** **                  | **$**      | **594,869** |   |

 

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

 

Goodwill represents the excess of purchaseprice and related costs over the value assigned to the net tangible andintangible assets of businesses acquired. We account for goodwill in accordancewith the provisions of Statement of Financial Accounting Standards (SFAS) No. 142,Goodwill and Other Intangible Assets, which requires us to assess our acquiredgoodwill and intangible assets with indefinite lives for impairment at leastannually in the absence of an indicator of possible impairment and immediatelyupon an indicator of possible impairment. We will assess goodwill andintangible assets with indefinite lives in the fourth quarter of each yearusing a fair-value-based approach. We will also evaluate the remaining usefullives of our finite-lived purchased intangible assets to determine whether anyadjustments to the useful lives are necessary. The finite-lived purchasedintangible assets consist of customer relationships and technology. Theseintangible assets are discussed in more detail below.

 

Changes in the carrying amount of ourgoodwill by segment are as follows (in thousands):

 
| ** **                                     | ** ** | **Paper** | ** ** | **Packaging &  Newsprint** | ** ** | **Wood  Products** | ** ** | **Building  Materials  Distribution** | ** ** | **Corporate  and  Other** | ** ** | **Total** | ** ** |
|------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|---------------------------------------|------------|---------------------------|------------|-----------|------------|
| Balance at December 31,  2004             |       | $         | 8,776      |                                | $          | 1,510              |       | $                                     | 3,198      |                      | $          | 348       |       | $ | 4,558 |   | $ | 18,390 |   |
| Purchase  price adjustments (Note 2) |       | (2,325    | )          | 847                                 |       | 212                |       | 2,305                                 |       | (4,558                    | )          | (3,519    | )          |
| Balance at September 30,  2005            |       | **$**     | **6,451**  | ** **                          | **$**      | **2,357**          | ** ** | **$**                                 | **3,410**  | ** **                | **$**      | **2,653** | ** ** | **$** | **—** | ** ** | **$** | **14,871** |   |

 

12

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Intangible assets represent the valuesassigned to trade names and trademarks, customer relationships, and technology.The trade names and trademarks assets have an indefinite life and are notamortized. All other intangible assets are amortized over their expected usefullives. Customer relationships are amortized over five years, and technology isamortized over three to five years. Intangible assets consist of the following(in thousands):

 
| ** **                  | ** ** | **Nine Months Ended September 30,  2005** | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| Trade names  and trademarks |       | $                                              | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer  relationships     |       | 6,800                                          |       | (1,248 | ) | 5,552 |   |
| Technology                  |       | 5,080                                          |       | (1,020 | ) | 4,060 |   |
|                        |       | **$**                                          | **34,680** | ** ** | **$** | **(2,268** | **)** | **$** | **32,412** |   |

 
|                        |   | **Period Ended December 31, 2004** |       |
|-----------------------------|--------|-----------------------------------------|------------|
|                        |   | **Gross Carrying  Amount**         | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** |   |
| Trade names  and trademarks |   | $                                       | 22,800     |   | $ | — |   | $ | 22,800 |   |
| Customer  relationships     |   | 6,800                                   |       | (227 | ) | 6,573 |   |
| Technology                  |   | 5,080                                   |       | (96 | ) | 4,984 |   |
|                        |   | **$**                                   | **34,680** | ** ** | **$** | **(323** | **)** | **$** | **34,357** |   |

 

Intangible asset amortization expense was$0.6 million and $1.9 million for the three and nine months ended September 30,2005, and $0.01 million and $0.04 million for the three and ninemonths ended September 30, 2004. The estimated amortization expense is$2.6 million in 2005, $2.5 million in 2006, $2.4 million in2007, $2.3 million in 2008, and $1.8 million in 2009.

 

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

 

At September 30, 2005, and December 31,2004, our long-term debt consisted of the following (in thousands):

 
| ** **                                      | ** ** | **September 30,  2005** | ** **    | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| Revolving  credit facility, due 2010            |       | $                            | —        |                        | $          | — |   |
| Tranche B  term loan, due 2011             |       | —                       |          | 1,330,000                   |       |
| Tranche D  term loan, due 2011             |       | 835,800                      |          | —                      |       |
| Senior  unsecured floating-rate notes, due 2012 |       | 250,000                      |          | 250,000                     |       |
| 7.125%  senior subordinated notes, due 2014     |       | 400,000                      |          | 400,000                     |       |
|                                            |       | 1,485,800                    |          | 1,980,000                   |       |
| Less current  portion                           |       | (8,400                       | )             | (13,300                     | )          |
|                                            |       | 1,477,400                    |          | 1,966,700                   |       |
| Note payable  to related party, net, due 2015   |       | 266,405                      |          | —                      |       |
|                                            |       |                         |          |                        |       |
|                                            |       | **$**                        | **1,743,805** | ** **                  | **$**      | **1,966,700** |   |

 

*Amended and Restated Credit Facilities*

 

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

 

Our amended revolving credit facility agreement permits us to borrow upto $475.0 million for general corporate purposes. At September 30,2005, we had no borrowings outstanding under our revolving credit facility,however, $54.7 million of letters of credit were considered a draw on therevolver, reducing our borrowing capacity to $420.3 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

 

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consolidatedearnings before interest, taxes, depreciation, and amortization (EBITDA). Therange of borrowing costs under the pricing grid is:  (i) the higher of prime plus 0.50% to1.25%, or the federal funds plus 1.00% to 1.75%; or (ii) LIBOR plus1.50% to 2.25%. During the three months ended September 30, 2005, theaverage interest rate for our borrowings under the revolver was 4.3%. For thenine months ended September 30, 2005, the average interest rate for ourborrowings under the revolver was 5.1%. Letters of credit are subject to a0.25% fronting fee payable to the issuing bank and a fee payable to the lendersequal to the product of the interest rate spread applicable to LIBORborrowings under our revolving credit facility and the daily average amountavailable for drawing under the outstanding letters of credit. During the ninemonths ended September 30, 2005, our minimum and maximum borrowings underthe revolver were zero and $126.5 million. The average amount of borrowingsoutstanding under the revolver during the nine months ended September 30,2005, was $15.7 million. The revolving credit facility provides for acommitment fee of 0.50% per annum payable to the lenders on the average dailyunused portion of the revolving credit facility. We also have a swinglineoption under the revolver, which allows us to borrow at negotiated rates up toan aggregate of $40 million from individual banks that are parties to theagreement. Swingline borrowings do not increase our borrowing availabilityunder the revolving credit facility agreement. 

 

At September 30, 2005,$835.8 million was outstanding under the Tranche D term loan amendedand restated credit facility, and our borrowing rate was 5.7%. Borrowings underthe Tranche D term loan are based on (i) the higher of the prime rateplus 0.75%, or the federal funds effective rate plus 1.25%, (ii) orthe LIBOR plus 1.75%. We are required to make scheduled principal paymentson the Tranche D term loan in the amounts of $2.1 million for theremainder of 2005, $8.4 million in each of 2006 through 2009, and$6.3 million in 2010.

 

Borrowings under the Facilities are subjectto certain financial covenants and restrictions, including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At September 30, 2005, we were in compliance with thesecovenants.

 

*Senior Notes*

 

In October 2004, we issued $250.0 million of senior unsecuredfloating-rate notes due in 2012 and $400.0 million of 7.125% seniorsubordinated notes due in 2014. Net proceeds from the notes were used to fund aportion of the purchase price for the Acquisition. In July 2005, wecompleted an exchange offer whereby all of our senior unsecured floating-ratenotes and senior subordinated notes were exchanged for publicly traded,registered securities with identical terms (other than terms relating toregistration rights) to the notes issued in October 2004. We may redeemall or part of the notes at any time at redemption prices defined in theindenture. If we sell specific assets or experience specific kinds of changesin control, we must offer to purchase the notes. The senior unsecuredfloating-rate notes bear interest at a floating rate equal to LIBOR plus 2.9%.At September 30, 2005, our borrowing rate for the $250.0 millionsenior unsecured floating-rate notes was 6.5%.

 

*Note Payable to Related Party, Net*

 

At September 30, 2005, we had a $266.4 million note payableto a subsidiary of Timber Holdings recorded as “Note payable to related party,net” on our Consolidated Balance Sheet. The note is subject to adjustment basedon transactions between the subsidiary and us. Our borrowing rate under thenote is 8%, and the note matures February 4**,** 2015. For the three and nine months ended September 30,2005, we recorded $5.4 million and $13.7 million of interest expenserelated to the note. Timber Holdings is a guarantor of our debt (seeNote 17, Consolidating Guarantor and Non-Guarantor Financial Information).

 

*Other*

 

We have entered into interest rate swaps to hedge the majority of thecash flow risk from the variable interest payments on our variable-rate debt,which gave us an effective interest rate on all of our variable-rate debt of5.6% at September 30, 2005. For additional information on our interestrate swaps, see Note 12, Financial Instruments.

 

We paid approximately $85.9 million of fees and expensesassociated with our senior secured credit facilities, our senior unsecuredfloating-rate notes, and our senior subordinated notes, which we entered intoin October 2004. The fees are being amortized over the shorter of the callperiod or the terms of the loans, which range from three to eight years. At September 30,2005, and December 31, 2004, we had $36.6 million and $84.1 millionof costs recorded in “Deferred financing costs” on our Consolidated BalanceSheets. In connection with the repayment of the Tranche B term loan, werecorded a $43.0 million charge for the write-off of the deferredfinancing costs. We recorded the $43.0 million charge in “Interest expense”in our Consolidated Statement of Income for the nine months ended September 30,2005.

 

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At September 30, 2005, our averageeffective interest rate, including the effect of our interest rate swaps, onall of our debt except for our note payable to related party, net, was 6.0%.

 

*Subsequent Event*

 

OnOctober 26, 2005, our wholly owned subsidiary, Boise Cascade, L.L.C. (BoiseLLC), and several of its subsidiaries, including Birch Creek Investments,L.L.C. (Birch Creek), entered into an accounts receivable securitizationprogram with Bank of America, National Association, and Calyon New York Branch(Investors). Under this three-year program, Boise LLC will sell its interest ina defined pool of accounts receivable generated by its domestic operations on arevolving basis to Birch Creek, a fully consolidated, wholly owned, specialpurpose subsidiary. In turn, Birch Creek will sell the receivables toaffiliates of the Investors. Because Boise LLC has the right to repurchase thesold receivables, sales of receivables under the program will be accounted foras a secured borrowing. The receivables outstanding under this program and thecorresponding debt will be included as “Receivables” and “Long-term debt,”respectively, on our Consolidated Balance Sheet. Financing costs associatedwith the program will be included in “Interest expense” in our ConsolidatedStatements of Income (Loss). The cost of funds under this program will vary basedon changes in interest rates.

 

Underthe accounts receivable securitization program, the maximum borrowing amount issubject to change based on the level of eligible receivables and restrictionson concentrations of receivables and cannot exceed $250 million. The accountsreceivable securitization program contains the same financial covenants as ourexisting amended and restated credit facilities. Boise LLC entered into thisreceivable securitization program to obtain additional funding flexibility atrates that are favorable to its existing borrowing arrangements. Furtherdetails regarding this agreement were disclosed on our Form 8-K filed with theSEC on November 1, 2005.

 

Weused the net proceeds from the initial sale of receivables under this receivablessecuritization program to reduce our term loan borrowings under our amended andrestated credit facilities.

 

# *Predecessor Periods*

# * *

In the predecessor periods presented, ourpredecessor participated in OfficeMax’s centralized cash management system. Cashadvances necessary to fund Boise Forest Products Operations’ major improvementsto, and replacements of, property, as well as acquisitions and expansion, tothe extent not provided through internally generated funds, were provided byOfficeMax’s cash or funded with debt. In the predecessor periods presented,interest costs were allocated to our predecessor based on its average assetbalances. The interest expense attributable to the debt allocated fromOfficeMax is included in our Consolidated Statements of Income. We believe theallocation of interest is a reasonable reflection of Boise Forest ProductsOperations’ interest costs.

 

Cash payments for interest, net of interestcapitalized, were $65.7 million and $62.3 million for the nine monthsended September 30, 2005 and 2004.

 

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

 

We areexposed to risks such as changes in interest rates, commodity prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or 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 hedge or a fairvalue hedge. We formally document all relationships between hedging instrumentsand the hedged item, as well as our risk management objectives and strategy forundertaking various hedged transactions. For those derivatives designated ascash flow or fair value hedges, we formally assess, both at the hedge’sinception 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 currentincome (loss).

 

Inaccordance with SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheet at fair value. Changes in the fair value of derivatives are recorded ineither income (loss) or accumulated other comprehensive income (loss), asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in accumulated other comprehensive income in the period in whichchanges in fair value occur and is reclassified to income (loss) in the sameperiod in which the hedged item affects income (loss) and any ineffectivenessis recognized currently in our Consolidated Statements of Income (Loss). Thegain or loss on derivatives designated as fair value hedges and the offsettinggain or loss on the hedged item attributable to the hedged risk are included incurrent income (loss) in the period in which changes in fair value occur. Thegain or loss on derivatives that have not

 

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been designated as hedginginstruments is included in current income (loss) in the period in which changesin fair value occur.

 

*Interest Rate Risk*

 

Our debt is predominantly variable-rate. Wemanage interest rate risk on our variable-rate debt by entering into interestrate swaps. At September 30, 2005, the estimated current market value ofour fixed rate debt, based on then-current interest rates for similarobligations with like maturities, was approximately $24.7 million lessthan the amount reported on our Consolidated Balance Sheet.

 

Our obligations under our senior securedcredit facilities and senior notes expose us to changes in short-term interestrates since interest rates on this debt are variable. In November 2004, weentered into four interest rate swaps with a total notional amount of$550 million to hedge the exposure to interest rate fluctuationsassociated with our Tranche B term loan. The swaps on $300 million ofour Tranche B term loan were fixed at an average pay rate of 3.3% andexpire in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche Bterm loan, these interest rate swaps were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or$15.2 million, in “Change in fair value of interest rate swaps” in ourConsolidated Statement of Income. In second quarter 2005, we redesignated the$550 million of interest rate swaps as hedges of the cash flow fromthe LIBOR-based variable interest payments on amounts borrowed under our Facilitiesand recognized $5.3 million of noncash expense in “Change in fair value ofinterest rate swaps” in our Consolidated Statement of Loss. The net$9.9 million of value that was recorded in “Other assets” on ourConsolidated Balance Sheet will result in higher interest expense over theremaining life of the interest rate swaps. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rateof 5.3% on that debt at September 30, 2005. Ineffectiveness related to theredesignated hedges was not significant.

 

In November 2004, we also entered intotwo 3.7% interest rate swaps with an aggregate notional amount of$250 million to hedge the exposure to floating-rate interest rate risksassociated with our senior unsecured floating-rate notes, which gave us aneffective interest rate on that debt of 6.6% at September 30, 2005. Theseswaps expire in October 2009. These swaps were designated as cash flowhedges. Accordingly, changes in the fair value of the interest rate swaps wererecorded in “Series B equity units” prior to our conversion to acorporation and in “Accumulated other comprehensive income” subsequent to ourconversion and were reclassified to “Interest expense” as interest expense wasrecognized on the LIBOR-based debt. There was no ineffectiveness relatedto these hedges.

 

*Predecessor Period*

 

As described in Note 11, Debt, in thepredecessor periods presented, OfficeMax allocated debt and interest costs toBoise Forest Products Operations based on its average asset balances. OfficeMaxoccasionally used derivative financial instruments, such as interest rateswaps, rate hedge agreements, and forward exchange contracts, to hedgeunderlying debt obligations or anticipated transactions. The effects of these financialinstruments are not included in the predecessor financial statements other thanthrough OfficeMax’s allocations to our predecessor.

 

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

 

*New Accounting Standards*

 

In September 2005, the Financial Accounting Standards Board’s(FASB) Emerging Issues Task Force (EITF) reached a consensus on EITF 04-13,Accounting for Purchases and Sales of Inventory with the Same Counterparty. Theconsensus identifies circumstances under which two or more transactions involvinginventory with the same counterparty should be viewed as a single nonmonetarytransaction within the scope of Accounting Principles Board (APB) Opinion No. 29,Accounting for Nonmonetary Transactions. EITF 04-13 is effective for newarrangements entered into in reporting periods beginning after March 15,2006. Early application is permitted. We expect to adopt this standard January 1,2006. In accordance with EITF 99-19, Reporting Revenue Gross as a PrincipalVersus Net as an Agent*,* and StaffAccounting Bulletin No. 104, Revenue Recognition, we record sales andpurchases related to our inventory buy/sell arrangements in our Packaging &Newsprint segment on a gross basis in our

 

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ConsolidatedStatements of Income. The consensus reached in EITF 04-13, however, willrequire us to report these inventory buy/sell transactions on a net basis inthe Consolidated Statements of Income. This consensus has no impact on netincome. Had this consensus been in effect, it would have reduced sales$13.8 million and $48.7 million for the three and nine months ended September 30,2005, and, would have reduced materials, labor, and other operating expenses byabout the same amounts. For the three and nine months ended September 30,2004, this consensus would have caused our predecessor to reduce sales$15.7 million and $45.9 million and reduce materials, labor, andother operating expenses by about the same amounts.

 

In March 2005, the FASB issued Interpretation No. 47, Accountingfor Conditional Asset Retirement Obligations. Interpretation No. 47clarifies that a liability must be recognized, if the fair value of theliability can be reasonably estimated, for a legal obligation to perform anasset retirement activity when the timing or method of settlement areconditional on future events that may or may not be within the control of thecompany. Interpretation No. 47 also clarifies when sufficient informationto reasonably estimate the fair value of an asset retirement obligation exists.We will adopt Interpretation No. 47 in December 2005. We do notexpect it to have a material impact on our financial position or results ofoperations.

 

In December 2004, the FASB issued SFAS No. 153,Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29,Accounting for Nonmonetary Transactions. SFAS No. 153 addresses the measurement ofexchanges of certain nonmonetary assets (except for certain exchanges ofproducts or property held for sale in the ordinary course of business). Itamends APB Opinion No. 29, Accounting for Nonmonetary Transactions, andrequires that nonmonetary exchanges be accounted for at the fair value of theassets exchanged, with gains or losses being recognized, if the fair value isdeterminable within reasonable limits and the transaction has commercialsubstance. SFAS No. 153 is effective for fiscal years beginningafter June 15, 2005. We do not expect SFAS No. 153 to have a materialimpact on our financial position or results of operations.

 

In November 2004, the FASB issued SFAS No. 151, InventoryCosts — An Amendment of Accounting Research Bulletin (ARB) No. 43,Chapter 4. SFAS No. 151 amends the guidance in ARB No. 43,Chapter 4, Inventory Pricing, to clarify the accounting for abnormalamounts of idle facility expense, freight, handling costs, and wasted material(spoilage). Among other provisions, the new rule requires that items suchas idle facility expense, excessive spoilage, double freight, and rehandlingcosts be recognized as current-period charges regardless of whether they meetthe criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFASNo. 151 requires that the allocation of fixed production overheads to thecosts of conversions be based on normal capacity of the production facilities.The provisions of SFAS No. 151 are effective for inventory costs incurredduring fiscal years beginning after September 15, 2005. We do not expectSFAS No. 151 to have a material impact on our financial position orresults of operations.

 

*Recently Adopted Accounting Standards*

 

In December 2004, the FASB issued SFAS No. 123(revised 2004), Share-Based Payment. This statement requires an entity to usethe fair-value method to recognize in the income statement the fair value ofstock options and other equity-based compensation issued to employees on thegrant date and eliminates an entity’s ability to account for share-basedcompensation transactions using the intrinsic-value method of accounting in APBOpinion No. 25, Accounting for Stock Issued to Employees, which waspermitted under SFAS No. 123 as originally issued. We adopted thisstatement effective October 29, 2004. We account for awards under ourmanagement equity agreement using the fair-value method.

 

In November 2004, the FASB’s EITFreached a consensus on EITF 03-13, Applying the Conditions in Paragraph 42 ofFASB Statement No. 144, Accounting for Impairment or Disposalof Long-Lived Assets, in Determining Whether to Report DiscontinuedOperations. We adopted EITF 03-13 on January 1, 2005, and it did not havea material impact on our financial position or results of operations.

 

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

 

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***14.******                               Retirementand Benefit Plans***

 

The following represents the components ofnet periodic pension and postretirement benefit costs in accordance withrevised SFAS No. 132, Employers’ Disclosures About Pensions and OtherPostretirement Benefits. The components of net periodic benefit costs are asfollows (in thousands):

 
| ** **                                     | ** ** | **Pension Benefits**                      | ** ** | **Other Benefits**                        | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **Boise**                                 | ** ** | **Predecessor**                           | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Three Months Ended  September 30** | ** ** | **Three Months Ended  September 30** | ** ** |
| ** **                                     | ** ** | **2005**                                  | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                   |       | $                                         | 6,363      |                                      | $          | 7,476 |   | $ | 162 |   | $ | 316 |   |
| Interest  cost                                 |       | 7,703                                     |       | 19,790                                    |       | 266 |   | 1,460 |   |
| Expected  return on plan assets                |       | (7,585                                    | )          | (18,923                                   | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 94                                        |       | 7,185                                     |       | — |   | 308 |   |
| Amortization  of prior service costs and other |       | —                                    |       | 1,270                                     |       | — |   | (267 | ) |
| Company-sponsored  plans                       |       | 6,575                                     |       | 16,798                                    |       | 428 |   | 1,817 |   |
| Multiemployer  pension plans                   |       | 119                                       |       | 119                                       |       | — |   | — |   |
| Net periodic  benefit cost                     |       | **$**                                     | **6,694**  | ** **                                | **$**      | **16,917** | ** ** | **$** | **428** | ** ** | **$** | **1,817** |   |

 
| ** **                                     | ** ** | **Pension Benefits**                     | ** ** | **Other Benefits**                       | ** ** |
|------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| ** **                                     | ** ** | **Boise**                                | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Nine Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                     | ** ** | **2005**                                 | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                   |       | $                                        | 19,088     |                                     | $          | 22,675 |   | $ | 483 |   | $ | 911 |   |
| Interest  cost                                 |       | 23,110                                   |       | 59,771                                   |       | 802 |   | 4,207 |   |
| Expected  return on plan assets                |       | (22,753                                  | )          | (57,198                                  | )          | — |   | — |   |
| Recognized  actuarial loss                     |       | 280                                      |       | 21,703                                   |       | — |   | 890 |   |
| Amortization  of prior service costs and other |       | —                                   |       | 8,224                                    |       | — |   | (770 | ) |
| Company-sponsored  plans                       |       | 19,725                                   |       | 55,175                                   |       | 1,285 |   | 5,238 |   |
| Multiemployer  pension plans                   |       | 378                                      |       | 408                                      |       | — |   | — |   |
| Net periodic  benefit cost                     |       | **$**                                    | **20,103** | ** **                               | **$**      | **55,583** | ** ** | **$** | **1,285** | ** ** | **$** | **5,238** |   |

 

Under the terms of the Acquisition, OfficeMax retained all pensioncosts related to its employees who retired or were terminated on or before July 31,2004, and all postretirement benefits costs related to its employees whoretired or were terminated before the Acquisition. In addition, OfficeMaxcontributed sufficient assets to the defined benefit pension plans to fund theaccumulated benefit obligation for the employees of the acquired businesses ata 6.25% discount rate, which improved the funded position of the pension plansat the time the plans were transferred to Boise in connection with theAcquisition. The reduced liability and increased funding reduced expense forpension and other benefits in the three and nine months ended September 30,2005, compared with the predecessor periods a year ago.

 

In 2005, we are not required to make aminimum contribution to our pension plans; however, we may decide to makevoluntary contributions. 

 

***15.******                               SegmentInformation***

 

There are no differences in our basis ofsegmentation or in our basis of measurement of segment profit or loss fromthose disclosed in Note 16, Segment Information, of the Notes toConsolidated Financial Statements in our Registration Statement.

 

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An analysis of our operations by segmentfollows (in millions):

 
| ** **                                           | ** ** | **Boise**  | ** **  |
|------------------------------------------------------|------------|------------|-------------|
| ** **                                           | ** ** | **Sales**  | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** ** | ** **  | **Related** | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                           | ** ** | **Trade**  | ** **  | **Parties** | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(a)** | ** ** |
| **Three  months ended September 30, 2005** |       |       |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                                |       | $          | 207.1       |   | $ | 133.3 |   | $ | 9.7 |   | $ | 350.1 |   | $ | 10.1 |   | $ | 13.8 |   | $ | 23.9 |   |
| Packaging &  Newsprint                      |       | 161.1      |        | — |   | 22.4 |   | 183.5 |   | 6.3 |   | 9.2 |   | 15.5 |   |
| Wood Products                                        |       | 206.2      |        | — |   | 132.4 |   | 338.6 |   | 34.7 |   | 6.2 |   | 41.0 |   |
| Building  Materials Distribution                     |       | 842.5      |        | — |   | 0.2 |   | 842.7 |   | 34.4 |   | 2.4 |   | 36.8 |   |
| Corporate  and Other                                 |       | 6.1        |        | — |   | 11.7 |   | 17.8 |   | (5.1 | ) | 1.4 |   | (3.7 | ) |
|                                                 |       | 1,423.0    |        | 133.3 |   | 176.4 |   | 1,732.7 |   | 80.4 |   | 33.0 |   | 113.5 |   |
| Intersegment  eliminations                           |       | —     |        | — |   | (176.4 | ) | (176.4 | ) | — |   | — |   | — |   |
| Interest  expense                                    |       | —     |        | — |   | — |   | — |   | (31.1 | ) | — |   | — |   |
| Interest  income                                     |       | —     |        | — |   | — |   | — |   | 0.4 |   | — |   | — |   |
|                                                 |       | **$**      | **1,423.0** | ** ** | **$** | **133.3** | ** ** | **$** | **—** | ** ** | **$** | **1,556.3** | ** ** | **$** | **49.7** | ** ** | **$** | **33.0** | ** ** | **$** | **113.5** |   |

 
| ** **                                           | ** ** | **Predecessor** | ** **  |
|------------------------------------------------------|------------|-----------------|-------------|
| ** **                                           | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Sales**       | ** **  | **(Loss)** | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **      | ** **  | **Related** | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                           | ** ** | **Trade**       | ** **  | **Parties** | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes** | ** ** | **Depletion** | ** ** | **(a)** | ** ** |
| **Three  months ended September 30, 2004** |       |            |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                                |       | $               | 202.3       |   | $ | 141.5 |   | $ | 14.5 |   | $ | 358.3 |   | $ | 7.5 |   | $ | 36.5 |   | $ | 44.0 |   |
| Packaging &  Newsprint                      |       | 164.3           |        | — |   | 19.6 |   | 183.9 |   | 8.2 |   | 10.6 |   | 18.8 |   |
| Wood  Products                                       |       | 238.5           |        | — |   | 120.7 |   | 359.2 |   | 48.0 |   | 7.1 |   | 55.1 |   |
| Building  Materials Distribution                     |       | 805.5           |        | — |   | — |   | 805.5 |   | 31.9 |   | 1.9 |   | 33.8 |   |
| Corporate  and Other                                 |       | 7.2             |        | — |   | 0.9 |   | 8.1 |   | (14.6 | ) | 3.3 |   | (11.3 | ) |
|                                                 |       | 1,417.8         |        | 141.5 |   | 155.7 |   | 1,715.0 |   | 81.0 |   | 59.4 |   | 140.4 |   |
| Intersegment  eliminations                           |       | —          |        | — |   | (155.7 | ) | (155.7 | ) | — |   | — |   | — |   |
| Interest  expense                                    |       | —          |        | — |   | — |   | — |   | (21.3 | ) | — |   | — |   |
| Interest  income                                     |       | —          |        | — |   | — |   | — |   | 0.2 |   | — |   | — |   |
|                                                 |       | **$**           | **1,417.8** | ** ** | **$** | **141.5** | ** ** | **$** | **—** | ** ** | **$** | **1,559.3** | ** ** | **$** | **59.9** | ** ** | **$** | **59.4** | ** ** | **$** | **140.4** |   |

 

19

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| ** **                                            | ** ** | **Boise**  | ** **  |
|-------------------------------------------------------|------------|------------|-------------|
| ** **                                            | ** ** | **Sales**  | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | ** ** | ** **  | **Related** | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** |
| ** **                                            | ** ** | **Trade**  | ** **  | **Parties** | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (b)** | ** ** | **Depletion** | ** ** | **(a) (b)** | ** ** |
| **Nine  months ended September 30, 2005**   |       |       |        |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                                 |       | $          | 601.8       |   | $ | 425.8 |   | $ | 33.1 |   | $ | 1,060.7 |   | $ | 66.5 |   | $ | 40.2 |   | $ | 106.6 |   |
| Packaging &  Newsprint                       |       | 483.1      |        | — |   | 62.0 |   | 545.1 |   | 20.9 |   | 27.7 |   | 48.5 |   |
| Wood  Products                                        |       | 620.3      |        | — |   | 375.7 |   | 996.0 |   | 99.2 |   | 16.9 |   | 116.0 |   |
| Building  Materials Distribution                      |       | 2,334.4    |        | — |   | 0.5 |   | 2,334.9 |   | 79.8 |   | 6.7 |   | 86.5 |   |
| Corporate  and Other                                  |       | 17.8       |        | — |   | 35.6 |   | 53.4 |   | (28.0 | ) | 3.9 |   | (23.8 | ) |
|                                                  |       | 4,057.4    |        | 425.8 |   | 506.9 |   | 4,990.1 |   | 238.4 |   | 95.4 |   | 333.8 |   |
| Intersegment  eliminations                            |       | —     |        | — |   | (506.9 | ) | (506.9 | ) | — |   | — |   | — |   |
| Change in  fair value of interest rate swaps (c) |       | —     |        | — |   | — |   | — |   | 9.9 |   | — |   | — |   |
| Interest  expense (d)                            |       | —     |        | — |   | — |   | — |   | (137.5 | ) | — |   | — |   |
| Interest  income                                      |       | —     |        | — |   | — |   | — |   | 2.2 |   | — |   | — |   |
|                                                  |       | **$**      | **4,057.4** | ** ** | **$** | **425.8** | ** ** | **$** | **—** | ** ** | **$** | **4,483.2** | ** ** | **$** | **113.0** | ** ** | **$** | **95.4** | ** ** | **$** | **333.8** |   |

 
| ** **                                      | ** ** | **Predecessor** | ** **  |
|-------------------------------------------------|------------|-----------------|-------------|
| ** **                                      | ** ** | ** **      | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** | **Equity  in Net** | ** ** |
| ** **                                      | ** ** | **Sales**       | ** **  | **(Loss)** | ** ** | **Amortization,** | ** ** | ** ** | ** ** | **Income** | ** ** |
| ** **                                      | ** ** | ** **      | ** **  | **Related** | ** ** | **Inter-** | ** ** | ** ** | ** ** | **Before** | ** ** | **and** | ** ** | **EBITDA** | ** ** | **of** | ** ** |
| ** **                                      | ** ** | **Trade**       | ** **  | **Parties** | ** ** | **segment** | ** ** | **Total** | ** ** | **Taxes (e)** | ** ** | **Depletion** | ** ** | **(a) (e)** | ** ** | **Affiliate** | ** ** |
| **Nine  months ended September 30,  2004** |       |            |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                           |       | $               | 593.4       |   | $ | 395.1 |   | $ | 41.1 |   | $ | 1,029.6 |   | $ | (27.5 | ) | $ | 107.8 |   | $ | 80.3 |   | $ | — |   |
| Packaging &  Newsprint                 |       | 451.3           |        | — |   | 52.5 |   | 503.8 |   | (2.4 | ) | 31.5 |   | 29.1 |   | — |   |
| Wood  Products                                  |       | 714.4           |        | 2.5 |   | 333.8 |   | 1,050.7 |   | 194.7 |   | 21.1 |   | 215.8 |   | 6.3 |   |
| Building  Materials Distribution                |       | 2,218.5         |        | — |   | — |   | 2,218.5 |   | 80.5 |   | 5.6 |   | 86.1 |   | — |   |
| Corporate  and Other                            |       | 23.7            |        | — |   | 46.2 |   | 69.9 |   | (41.9 | ) | 10.1 |   | (31.9 | ) | — |   |
|                                            |       | 4,001.3         |        | 397.6 |   | 473.6 |   | 4,872.5 |   | 203.4 |   | 176.1 |   | 379.4 |   | 6.3 |   |
| Intersegment  eliminations                      |       | —          |        | — |   | (473.6 | ) | (473.6 | ) | — |   | — |   | — |   | — |   |
| Interest  expense                               |       | —          |        | — |   | — |   | — |   | (64.7 | ) | — |   | — |   | — |   |
| Interest  income                                |       | —          |        | — |   | — |   | — |   | 0.5 |   | — |   | — |   | — |   |
|                                            |       | **$**           | **4,001.3** | ** ** | **$** | **397.6** | ** ** | **$** | **—** | ** ** | **$** | **4,398.9** | ** ** | **$** | **139.2** | ** ** | **$** | **176.1** | ** ** | **$** | **379.4** | ** ** | **$** | **6.3** |   |

 

----

(a)                                  EBITDA represents income (loss) beforeinterest (interest expense, interest income, and change in fair value ofinterest rate swaps), income tax provision (benefit), and depreciation,amortization, and depletion. EBITDA is the primary measure used by our chiefoperating decision makers to evaluate segment operating performance and todecide how to allocate resources to segments. We believe EBITDA is useful toinvestors because it provides a means to evaluate the operating performance ofour segments and our company on an ongoing basis using criteria that are usedby our internal decision makers and because it is frequently used by investorsand other interested parties in the evaluation of companies with substantialfinancial leverage. We believe EBITDA is a meaningful measure because itpresents a transparent view of our recurring operating performance and allowsmanagement to readily view operating trends, perform analytical comparison, andidentify strategies to improve operating performance. For example, we believethat the inclusion of items such as taxes, interest expense, and interestincome distorts management’s ability to assess and view the core operatingtrends in our segments. EBITDA, however, is not a measure of our liquidity orfinancial performance under GAAP and should not be considered as an alternativeto net income (loss), income (loss) from operations, or any other performancemeasure derived in accordance with GAAP or as an alternative to cash flow fromoperating activities as a measure of our liquidity. The use of EBITDA insteadof net income (loss) or segment income (loss) has limitations as an analyticaltool, including the inability to determine profitability; the exclusion ofinterest expense, interest income, change in the fair value of interest rateswaps, and associated significant cash requirements; and the exclusion ofdepreciation,

 

20

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amortization, and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying primarily on our GAAPresults and by using EBITDA only supplementally. Our measures of EBITDA are notnecessarily comparable to other similarly titled captions of other companiesdue to potential inconsistencies in the methods of calculation.

 

(b)                                 Includes $3.6 million for the write-offof costs incurred in connection with the canceled initial public offering.

 

(c)                                  Includes the change in the fair value ofinterest rate swaps related to our amended and restated senior credit facilities.

 

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

 

(e)                                  Income before taxes and EBITDA for the ninemonths ended September 30, 2004, include a $46.5 million pretax gainfor the sale of our predecessor’s 47% interest in Voyageur Panel in May 2004and $6.3 million of equity in earnings from the investment in VoyageurPanel.

 

The following is a reconciliation of netincome (loss) to EBITDA (in millions):

 
| ** **                                   | ** ** | **Boise**                                 | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                                   | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                   | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| Net income                                   |       | $                                         | 28.5       |                                     | $          | 35.2      |       | $               | 78.7       |   | $ | 83.8 |   |
| Change in  fair value of interest rate swaps |       | —                                    |       | —                                   |       | (9.9      | )          | —          |       |
| Interest  expense                            |       | 31.1                                      |       | 21.3                                     |       | 137.5     |       | 64.7            |       |
| Interest  income                             |       | (0.4                                      | )          | (0.2                                     | )          | (2.2      | )          | (0.5            | )          |
| Income tax  provision                        |       | 21.3                                      |       | 24.7                                     |       | 34.2      |       | 55.4            |       |
| Depreciation,  amortization, and depletion   |       | 33.0                                      |       | 59.4                                     |       | 95.4      |       | 176.1           |       |
| EBITDA                                       |       | **$**                                     | **113.5**  | ** **                               | **$**      | **140.4** | ** ** | **$**           | **333.8**  | ** ** | **$** | **379.4** |   |

 

***16.******                               Commitmentsand Guarantees***

 

*Commitments*

 

Our commitment information presented below is as of December 31,2004, unless otherwise noted. At September 30, 2005, there had been nomaterial changes to our commitments outside the ordinary course ofbusiness.  

 

We have commitments for leases and long-term debt that are discussedfurther in Note 7, Leases, and Note 11, Debt. We havecommitments for raw materials and utilities. Most of our raw materialcommitments are for contracts to purchase timber. On February 4, 2005, TimberHoldings sold all of its timberlands to Forest Capital Partners, LLC, ofBoston, Massachusetts, for $1.65 billion in cash (Timberlands Sale).Including the obligations related to the long-term supply contracts enteredinto in connection with the Timberlands Sale, we have contractual obligationsto purchase approximately $1.0 billion of timber. The prices under thecontracts related to the Timberlands Sale are set quarterly or semiannuallybased on regional market prices. The $1.0 billion estimate is based oncontract terms or first quarter 2005 pricing. Our timber obligations aresubject to change based on, among other things, the effect of governmental lawsand regulations, our manufacturing operations not operating in the normalcourse of business, timber availability, and the status of environmentalappeals. Except for deposits required pursuant to wood supply contracts, theseobligations are not recorded in our financial statements until contract paymentterms take effect.

 

We enter into utility contracts for the purchase of electricity andnatural gas. We also purchase these services under utility tariffs. Thecontractual and tariff arrangements include multiple-year commitments andminimum annual purchase requirements. At December 31, 2004, we had approximately$118.2 million of utility purchase commitments. These payment obligationswere valued at prices in effect on December 31, 2004, or contractlanguage, if available. These obligations represent the face value of thecontracts and do not consider resale value, as we use the energy to manufactureour products.

 

Pursuant to an Additional ConsiderationAgreement between us and OfficeMax, we may be required to make substantial cashpayments to, or receive substantial cash payments from, OfficeMax. Under theAdditional Consideration Agreement, the purchase price paid for the paper andforest products

 

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assets may be adjusted upward or downward based on paper prices duringthe six years following the closing date, subject to annual and aggregate caps.Neither party will be obligated to make a payment under the AdditionalConsideration Agreement in excess of $45 million in any one year. Paymentsare also subject to an aggregate cap of $125 million that declines to$115 million in the fifth year and $105 million in the sixth year. Ifthe payment were based on average paper prices for the period of October 2004through September 30, 2005, neither party would be required to makepayment to the other. 

 

# *Guarantees*

# * *

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

 

Boise Cascade Company and Timber Holdings(collectively, The Companies) and their respective direct and indirect domesticsubsidiaries, excluding foreign subsidiaries, are parties to an amended andrestated Credit Agreement dated as of April 18, 2005, with JPMorgan ChaseBank, as Administrative Agent, and certain Lenders named therein and to arelated Guarantee and Collateral Agreement of the same date (collectively theBank Credit Agreements). Boise LLC, a wholly owned direct subsidiary of BoiseCascade Company, acts as borrower under the Bank Credit Agreements for the$835.8 million Tranche D term loan and a $475.0 millionrevolving credit facility that had no outstanding balance at September 30,2005, other than reimbursement obligations in respect to $54.7 million ofstandby letters of credit issued under the revolving facility. In addition,Boise Land & Timber Corp., a wholly owned direct subsidiary ofTimber Holdings, acted as borrower under the original Bank Credit Agreementsfor the $1,225.0 million Tranche C term loan, which was paid in fullin February 2005 with the proceeds of the Timberlands Sale. Boise LLC’sloans and reimbursement obligations are guaranteed by The Companies and each oftheir domestic subsidiaries (other than Boise LLC). Prior to the repaymentby Boise Land & Timber Corp. of the Tranche C term loan, TheCompanies and each of their domestic subsidiaries (other than Boise Land &Timber Corp.) also guaranteed such loan.

 

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

 

Boise LLC guarantees the obligations and performance of its whollyowned subsidiary, Boise Cascade do Brasil Ltda., under the terms of timberand stumpage purchase agreements in Brazil. These agreements extendthrough 2014. Boise LLC’s exposure is effectively limited to the loss ofits investment in Boise Cascade do Brasil Ltda., which was approximately$37.2 million at September 30, 2005.

 

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

 

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

 

We enter into a wide range of indemnificationarrangements in the ordinary course of business. These include tort indemnifications,tax indemnifications, financing transactions, indemnifications against

 

22

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third-party claims arising out of arrangements to provide services tous, and indemnifications in merger and acquisition agreements. It is impossibleto quantify the maximum potential liability under these indemnifications. At September 30,2005, we were not aware of any material liabilities arising from theseindemnifications. 

 

In connection with the Timberlands Sale, BoiseCascade Company and Timber Holdings have agreed to indemnify the purchasers forany breach of representation or warranty or covenant contained in the purchaseagreement. Our indemnification obligations, with certain exceptions, surviveuntil February 4, 2006, and are subject to a deductible of$16.5 million and an aggregate cap of $100.0 million. In addition,the purchasers have agreed that, if the events giving rise to anindemnification claim against us and Timber Holdings also give rise to an indemnificationclaim against OfficeMax under OfficeMax’s indemnification obligations arisingfrom its sale of the timberlands operations, the purchasers will pursueremedies directly and exclusively against OfficeMax. In connection with theforegoing, Forest Products Holdings, L.L.C., our majority owner, an entitycontrolled by Madison Dearborn Partners, LLC, assigned to the purchasersall of its rights to indemnification by OfficeMax with respect to thetimberlands operations.

 

***17.******                               ConsolidatingGuarantor and Non-Guarantor Financial Information***

 

The following consolidating financial information presents thestatements of income (loss), balance sheets, and cash flow information relatedto our business. The senior notes are guaranteed on a senior basis, and the seniorsubordinated notes are guaranteed on a senior subordinated basis, in each casejointly and severally by Boise Cascade Company, by Timber Holdings, and by eachof their existing and future subsidiaries (other than the co-issuers,Boise LLC and Boise Cascade Finance Corporation). The non-guarantorsinclude our foreign subsidiaries. Other than the consolidated financialstatements and footnotes for Boise Cascade Company and Boise Land &Timber Holdings Corp., financial statements and other disclosures concerningthe guarantors have not been presented because management believes that suchinformation is not material to investors. See Exhibit 99 of this Form 10-Qfor Boise Land & Timber Holdings Corp. consolidated financialstatements and notes to unaudited quarterly consolidated financialstatements.  

 

23

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**BoiseCascade Company and Subsidiaries****Consolidating Statements of Income (Loss)****for the Three Months Ended September 30,2005**(in thousands)

 
| ** **                                                                           | ** ** | **Boise  Cascade  Company  (Parent)** | ** ** | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------------|------------|------------------|------------|------------------|------------|
| **Sales**                                                                            |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| Trade                                                                                |       | $                                     | —     |                    | $          | —                      |       | $                                | 1,405,686  |             | $          | 17,319           |       | $ | — |   | $ | 1,423,005 |   |
| Intercompany                                                                         |       | —                                |       | 855                     |       | 3,020                       |       | 14,040                           |       | (17,915          | )          | —           |       |
| Related  parties                                                                     |       | —                                |       | —                  |       | 133,292                     |       | —                           |       | —           |       | 133,292          |       |
|                                                                                 |       | —                                |       | 855                     |       | 1,541,998                   |       | 31,359                           |       | (17,915          | )          | 1,556,297        |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                |       | 271                     |       | 1,345,277                   |       | 31,131                           |       | (17,915          | )          | 1,358,764        |       |
| Depreciation,  amortization, and depletion                                           |       | —                                |       | 948                     |       | 31,155                      |       | 941                              |       | —           |       | 33,044           |       |
| Selling and  distribution expenses                                                   |       | —                                |       | —                  |       | 68,613                      |       | 572                              |       | —           |       | 69,185           |       |
| General and  administrative expenses                                                 |       | —                                |       | 6,660                   |       | 9,201                       |       | —                           |       | —           |       | 15,861           |       |
| Other  (income) expense, net                                                         |       | —                                |       | 36                      |       | (772                        | )          | 796                              |       | —           |       | 60               |       |
|                                                                                 |       | —                                |       | 7,915                   |       | 1,453,474                   |       | 33,440                           |       | (17,915          | )          | 1,476,914        |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                |       | (7,060                  | )          | 88,524                      |       | (2,081                           | )          | —           |       | 79,383           |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| Foreign  exchange gain (loss)                                                        |       | —                                |       | 3,987                   |       | 278                         |       | (3,226                           | )          | —           |       | 1,039            |       |
| Interest  expense                                                                    |       | —                                |       | (31,054                 | )          | —                      |       | (1                               | )          | —           |       | (31,055          | )          |
| Interest  expense—intercompany                                                  |       | —                                |       | (71                     | )          | —                      |       | (357                             | )          | 428              |       | —           |       |
| Interest  income                                                                     |       | —                                |       | 282                     |       | 71                          |       | 14                               |       | —           |       | 367              |       |
| Interest  income—intercompany                                                   |       | —                                |       | 357                     |       | 71                          |       | —                           |       | (428             | )          | —           |       |
|                                                                                 |       | —                                |       | (26,499                 | )          | 420                         |       | (3,570                           | )          | —           |       | (29,649          | )          |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                |       | (33,559                 | )          | 88,944                      |       | (5,651                           | )          | —           |       | 49,734           |       |
| Income tax  (provision) benefit                                                      |       | (20,705                               | )          | (12                     | )          | (572                        | )          | 29                               |       | —           |       | (21,260          | )          |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (20,705                               | )          | (33,571                 | )          | 88,372                      |       | (5,622                           | )          | —           |       | 28,474           |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 49,179                                |       | 82,750                  |       | —                      |       | —                           |       | (131,929         | )          | —           |       |
| **Net  income (loss)**                                                               |       | **$**                                 | **28,474** | ** **              | **$**      | **49,179**                  | ** ** | **$**                            | **88,372** | ** **       | **$**      | **(5,622**       | **)**      | **$** | **(131,929** | **)** | **$** | **28,474** |   |

 

24

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**BoiseCascade Company and SubsidiariesConsolidating Statements of Income (Loss)for the Nine Months Ended September 30, 2005**(in thousands)

 
| ** **                                                                           | ** ** | **Boise  Cascade  Company  (Parent)** | ** ** | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------------------------|-------------|------------------|------------|------------------|------------|
| **Sales**                                                                            |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| Trade                                                                                |       | $                                     | —     |                    | $          | —                      |       | $                                | 4,006,126   |             | $          | 51,280           |       | $ | — |   | $ | 4,057,406 |   |
| Intercompany                                                                         |       | —                                |       | 1,711                   |       | 7,497                       |       | 42,304                           |        | (51,512          | )          | —           |       |
| Related  parties                                                                     |       | —                                |       | —                  |       | 425,773                     |       | —                           |        | —           |       | 425,773          |       |
|                                                                                 |       | —                                |       | 1,711                   |       | 4,439,396                   |       | 93,584                           |        | (51,512          | )          | 4,483,179        |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                |       | 1,215                   |       | 3,835,283                   |       | 93,845                           |        | (51,512          | )          | 3,878,831        |       |
| Fiber costs  from related parties                                                    |       | —                                |       | —                  |       | 17,609                      |       | —                           |        | —           |       | 17,609           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                |       | 2,784                   |       | 90,082                      |       | 2,527                            |        | —           |       | 95,393           |       |
| Selling and  distribution expenses                                                   |       | —                                |       | —                  |       | 194,395                     |       | 1,552                            |        | —           |       | 195,947          |       |
| General and  administrative expenses                                            |       | —                                |       | 24,003                  |       | 29,070                      |       | 28                               |        | —           |       | 53,101           |       |
| Other  (income) expense, net                                                         |       | —                                |       | 3,686                   |       | (2,694                      | )          | 2,856                            |        | —           |       | 3,848            |       |
|                                                                                 |       | —                                |       | 31,688                  |       | 4,163,745                   |       | 100,808                          |        | (51,512          | )          | 4,244,729        |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | —                                |       | (29,977                 | )          | 275,651                     |       | (7,224                           | )           | —           |       | 238,450          |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| Foreign  exchange gain (loss)                                                        |       | —                                |       | 4,027                   |       | 47                          |       | (4,076                           | )           | —           |       | (2               | )          |
| Change in  fair value of interest rate swaps                                         |       | —                                |       | 9,886                   |       | —                      |       | —                           |        | —           |       | 9,886            |       |
| Interest  expense                                                                    |       | —                                |       | (137,495                | )          | —                      |       | (4                               | )           | —           |       | (137,499         | )          |
| Interest  expense—intercompany                                                  |       | —                                |       | (126                    | )          | —                      |       | (738                             | )           | 864              |       | —           |       |
| Interest  income                                                                     |       | —                                |       | 1,900                   |       | 210                         |       | 41                               |        | —           |       | 2,151            |       |
| Interest  income—intercompany                                                   |       | —                                |       | 738                     |       | 126                         |       | —                           |        | (864             | )          | —           |       |
|                                                                                 |       | —                                |       | (121,070                | )          | 383                         |       | (4,777                           | )           | —           |       | (125,464         | )          |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | —                                |       | (151,047                | )          | 276,034                     |       | (12,001                          | )           | —           |       | 112,986          |       |
| Income tax  provision                                                                |       | (32,564                               | )          | (106                    | )          | (1,552                      | )          | (20                              | )           | —           |       | (34,242          | )          |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (32,564                               | )          | (151,153                | )          | 274,482                     |       | (12,021                          | )           | —           |       | 78,744           |       |
|                                                                                 |       |                                  |       |                    |       |                        |       |                             |        |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | 111,308                               |       | 262,461                 |       | —                      |       | —                           |        | (373,769         | )          | —           |       |
| **Net  income (loss)**                                                               |       | **$**                                 | **78,744** | ** **              | **$**      | **111,308**                 | ** ** | **$**                            | **274,482** | ** **       | **$**      | **(12,021**      | **)**      | **$** | **(373,769** | **)** | **$** | **78,744** |   |

 

25

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**BoiseCascade Company and SubsidiariesConsolidating Balance Sheets at September 30, 2005**(in thousands)

 
| ** **                       | ** ** | **Boise  Cascade  Company  (Parent)** | ** **  | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-**

**Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|---------------------------------------|-------------|-------------------------|------------|-----------------------------|------------|---------------------------------------|---------------|------------------|------------|------------------|------------|
| **ASSETS**                       |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
|                             |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| **Current**                      |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Cash and  cash equivalents       |       | $                                     | —      |                    | $          | 171,996                     |       | $                                     | 59            |             | $          | 3,057            |       | $ | — |   | $ | 175,112 |   |
| Receivables                      |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Trade, less  allowances          |       | —                                |        | —                  |       | 397,281                     |       | 6,713                                 |          | —           |       | 403,994          |       |
| Intercompany                     |       | —                                |        | —                  |       | 2,702                       |       | 2,852                                 |          | (5,554           | )          | —           |       |
| Related  parties                 |       | 4,637                                 |        | —                  |       | 38,054                      |       | —                                |          | (4,637           | )          | 38,054           |       |
| Other                            |       | —                                |        | 1,179                   |       | 9,959                       |       | 6,703                                 |          | —           |       | 17,841           |       |
| Inventories                      |       | —                                |        | 23                      |       | 596,262                     |       | 25,023                                |          | —           |       | 621,308          |       |
| Deferred  income taxes           |       | 35,708                                |        | —                  |       | 389                         |       | —                                |          | —           |       | 36,097           |       |
| Other                            |       | —                                |        | 6,633                   |       | 7,677                       |       | 569                                   |          | —           |       | 14,879           |       |
|                             |       | 40,345                                |        | 179,831                 |       | 1,052,383                   |       | 44,917                                |          | (10,191          | )          | 1,307,285        |       |
|                             |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| **Property**                     |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Property and  equipment          |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Land and  land improvements      |       | —                                |        | 7,600                   |       | 72,578                      |       | 665                                   |          | —           |       | 80,843           |       |
| Buildings  and improvements      |       | —                                |        | 24,446                  |       | 190,021                     |       | 8,371                                 |          | —           |       | 222,838          |       |
| Machinery  and equipment         |       | —                                |        | 5,658                   |       | 1,250,290                   |       | 33,961                                |          | —           |       | 1,289,909        |       |
|                             |       | —                                |        | 37,704                  |       | 1,512,889                   |       | 42,997                                |          | —           |       | 1,593,590        |       |
|                             |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Accumulated  depreciation        |       | —                                |        | (1,851                  | )          | (97,332                     | )          | (9,622                                | )             | —           |       | (108,805         | )          |
|                             |       | —                                |        | 35,853                  |       | 1,415,557                   |       | 33,375                                |          | —           |       | 1,484,785        |       |
|                             |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| Fiber farms  and timber deposits |       | —                                |        | —                  |       | 40,644                      |       | 11,909                                |          | —           |       | 52,553           |       |
|                             |       | —                                |        | 35,853                  |       | 1,456,201                   |       | 45,284                                |          | —           |       | 1,537,338        |       |
|                             |       |                                  |        |                    |       |                        |       |                                  |          |             |       |             |       |
| **Deferred  financing costs**    |       | —                                |        | 36,624                  |       | —                      |       | —                                |          | —           |       | 36,624           |       |
| **Goodwill**                     |       | —                                |        | —                  |       | 14,871                      |       | —                                |          | —           |       | 14,871           |       |
| **Intangible  assets**           |       | —                                |        | —                  |       | 32,412                      |       | —                                |          | —           |       | 32,412           |       |
| **Related  party receivable**    |       | 24,719                                |        | —                  |       | —                      |       | —                                |          | (24,719          | )          | —           |       |
| **Investments  in affiliates**   |       | 431,572                               |        | 327,637                 |       | —                      |       | —                                |          | (759,209         | )          | —           |       |
| **Other  assets**                |       | —                                |        | 27,388                  |       | 6,500                       |       | 424                                   |          | —           |       | 34,312           |       |
| **Total  assets**                |       | **$**                                 | **496,636** | ** **              | **$**      | **607,333**                 | ** ** | **$**                                 | **2,562,367** | ** **       | **$**      | **90,625**       | ** ** | **$** | **(794,119** | **)** | **$** | **2,962,842** |   |

 

26

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**BoiseCascade Company and Subsidiaries Consolidating Balance Sheets at September 30, 2005**(in thousands)

 
| ** **                                 | ** ** | **Boise  Cascade  Company  (Parent)** | ** **  | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|---------------------------------------|-------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| **LIABILITIES  AND CAPITAL**               |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Current**                                |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Current  portion of long-term debt         |       | $                                     | —      |                    | $          | 8,400                       |       | $                                 | —        |             | $          | —           |       | $ | — |   | $ | 8,400 |   |
| Income taxes  payable                      |       | 4,637                                 |        | —                  |       | 1,515                       |       | —                            |          | —           |       | 6,152            |       |
| Accounts  payable                          |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Trade                                      |       | —                                |        | 28,844                  |       | 334,338                     |       | 4,515                             |          | —           |       | 367,697          |       |
| Intercompany                               |       | —                                |        | —                  |       | 2,852                       |       | 2,702                             |          | (5,554           | )          | —           |       |
| Related  parties                           |       | —                                |        | 4,637                   |       | 507                         |       | —                            |          | (4,637           | )          | 507              |       |
| Accrued  liabilities                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Compensation  and benefits                 |       | —                                |        | 32,726                  |       | 61,477                      |       | 896                               |          | —           |       | 95,099           |       |
| Interest  payable                          |       | —                                |        | 16,213                  |       | —                      |       | —                            |          | —           |       | 16,213           |       |
| Other                                      |       | —                                |        | 4,575                   |       | 40,125                      |       | 2,967                             |          | —           |       | 47,667           |       |
|                                       |       | 4,637                                 |        | 95,395                  |       | 440,814                     |       | 11,080                            |          | (10,191          | )          | 541,735          |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                   |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Long-term  debt, less current portion |       | —                                |        | 1,477,400               |       | —                      |       | —                            |          | —           |       | 1,477,400        |       |
| Note payable  to related party, net        |       | —                                |        | 266,405                 |       | —                      |       | —                            |          | —           |       | 266,405          |       |
|                                       |       | —                                |        | 1,743,805               |       | —                      |       | —                            |          | —           |       | 1,743,805        |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Other**                                  |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Deferred  income taxes                     |       | 60,427                                |        | —                  |       | (158                        | )          | —                            |          | —           |       | 60,269           |       |
| Compensation  and benefits                 |       | —                                |        | 152,871                 |       | —                      |       | —                            |          | —           |       | 152,871          |       |
| Related-party  payable                     |       | —                                |        | 24,719                  |       | —                      |       | —                            |          | (24,719          | )          | —           |       |
| Other  long-term liabilities               |       | —                                |        | 21,392                  |       | 11,198                      |       | —                            |          | —           |       | 32,590           |       |
|                                       |       | 60,427                                |        | 198,982                 |       | 11,040                      |       | —                            |          | (24,719          | )          | 245,730          |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**              |       | —                                |        | (1,862,421              | )          | 1,832,468                   |       | 29,953                            |          | —           |       | —           |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Capital**                                |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| Series A  preferred stock             |       | 39,112                                |        | —                  |       | —                      |       | —                            |          | —           |       | 39,112           |       |
| Class A  common stock                 |       | —                                |        | —                  |       | —                      |       | —                            |          | —           |       | —           |       |
| Class B  common stock                 |       | 413                                   |        | —                  |       | —                      |       | —                            |          | —           |       | 413              |       |
| Class C  common stock                 |       | 27                                    |        | —                  |       | —                      |       | —                            |          | —           |       | 27               |       |
| Additional  paid-in capital                |       | 336,202                               |        | —                  |       | —                      |       | —                            |          | —           |       | 336,202          |       |
| Retained  earnings from May 9, 2005   |       | 44,695                                |        | —                  |       | —                      |       | —                            |          | —           |       | 44,695           |       |
| Accumulated  other comprehensive income    |       | 11,123                                |        | —                  |       | —                      |       | —                            |          | —           |       | 11,123           |       |
| Subsidiary  equity                         |       | —                                |        | 431,572                 |       | 278,045                     |       | 49,592                            |          | (759,209         | )          | —           |       |
| **Total  capital**                         |       | 431,572                               |        | 431,572                 |       | 278,045                     |       | 49,592                            |          | (759,209         | )          | 431,572          |       |
|                                       |       |                                  |        |                    |       |                        |       |                              |          |             |       |             |       |
| **Total  liabilities and capital**         |       | **$**                                 | **496,636** | ** **              | **$**      | **607,333**                 | ** ** | **$**                             | **2,562,367** | ** **       | **$**      | **90,625**       | ** ** | **$** | **(794,119** | **)** | **$** | **2,962,842** |   |

 

27

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**BoiseCascade Company and SubsidiariesConsolidating Statements of Cash Flowsfor the Nine Months Ended September 30, 2005**(in thousands)

 
| ** **                                                                             | ** ** | **Boise  Cascade  Company  (Parent)** | ** ** | **Boise  Cascade  LLC** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| **Cash  provided by (used for) operations**                                       |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Net income  (loss)                                                                     |       | $                                     | 78,744     |                    | $          | 111,308                     |       | $                                 | 274,482    |             | $          | (12,021          | )          | $ | (373,769 | ) | $ | 78,744 |   |
| Items in net  income not using (providing) cash                                        |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Depreciation,  depletion, and amortization of deferred financing costs and other costs |       | —                                |       | 53,258                  |       | 90,082                      |       | 2,527                             |       | —           |       | 145,867          |       |
| Related-party  interest expense                                                        |       | —                                |       | 13,690                  |       | —                      |       | —                            |       | —           |       | 13,690           |       |
| Deferred  income tax provision                                                         |       | 21,616                                |       | (584                    | )          | —                      |       | —                            |       | —           |       | 21,032           |       |
| Pension and  other postretirement benefit expense                                      |       | —                                |       | 21,388                  |       | —                      |       | —                            |       | —           |       | 21,388           |       |
| Change in  fair value of interest rate swaps                                           |       | —                                |       | (9,886                  | )          | —                      |       | —                            |       | —           |       | (9,886           | )          |
| Management  equity units expense                                                  |       | —                                |       | 2,188                   |       | —                      |       | —                            |       | —           |       | 2,188            |       |
| Equity in  net income (loss) of affiliates                                             |       | (111,308                              | )          | (262,461                | )          | —                      |       | —                            |       | 373,769          |       | —           |       |
| Other                                                                                  |       | —                                |       | (5,370                  | )          | (47                         | )          | 4,076                             |       | —           |       | (1,341           | )          |
| Decrease  (increase) in working capital                                                |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                            |       | —                                |       | (6,291                  | )          | (107,845                    | )          | (7,680                            | )          | —           |       | (121,816         | )          |
| Inventories                                                                            |       | —                                |       | (5,147                  | )          | (13,402                     | )          | (7,918                            | )          | —           |       | (26,467          | )          |
| Accounts  payable and accrued liabilities                                         |       | —                                |       | 4,237                   |       | 86,578                      |       | 2,890                             |       | —           |       | 93,705           |       |
| Pension and  other postretirement benefit payments                                     |       | —                                |       | (508                    | )          | —                      |       | —                            |       | —           |       | (508             | )          |
| Current and  deferred income taxes                                                     |       | 4,637                                 |       | —                  |       | 1,287                       |       | (7                                | )          | —           |       | 5,917            |       |
| Other                                                                                  |       | —                                |       | 10,363                  |       | (5,331                      | )          | (205                              | )          | —           |       | 4,827            |       |
| Cash  provided by (used for) operations                                                |       | (6,311                                | )          | (73,815                 | )          | 325,804                     |       | (18,338                           | )          | —           |       | 227,340          |       |
|                                                                                   |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                       |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Expenditures  for property and equipment                                          |       | —                                |       | (3,974                  | )          | (107,095                    | )          | (5,722                            | )          | —           |       | (116,791         | )          |
| Repayment of  note receivable from related party                                       |       | —                                |       | 157,509                 |       | —                      |       | —                            |       | —           |       | 157,509          |       |
| Sales of  assets                                                                       |       | —                                |       | —                  |       | 12,575                      |       | —                            |       | —           |       | 12,575           |       |
| Investments  in related parties                                                        |       | 29,691                                |       | 262,461                 |       | —                      |       | —                            |       | (292,152         | )          | —           |       |
| Other                                                                                  |       | —                                |       | 3,854                   |       | 968                         |       | (4,168                            | )          | —           |       | 654              |       |
| Cash  provided by (used for) investment                                           |       | 29,691                                |       | 419,850                 |       | (93,552                     | )          | (9,890                            | )          | (292,152         | )          | 53,947           |       |
|                                                                                   |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                             |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Tax distributions  to members                                                          |       | (23,295                               | )          | —                  |       | —                      |       | —                            |       | —           |       | (23,295          | )          |
| Note payable  to related party, net                                                    |       | —                                |       | 251,042                 |       | —                      |       | —                            |       | —           |       | 251,042          |       |
| Payments of  long-term debt                                                            |       | —                                |       | (1,334,200              | )          | —                      |       | —                            |       | —           |       | (1,334,200       | )          |
| Issuances of  long-term debt                                                           |       | —                                |       | 840,000                 |       | —                      |       | —                            |       | —           |       | 840,000          |       |
| Other                                                                                  |       | (85                                   | )          | (32,673                 | )          | —                      |       | —                            |       | 29,691           |       | (3,067           | )          |
| Cash used  for financing                                                          |       | (23,380                               | )          | (275,831                | )          | —                      |       | —                            |       | 29,691           |       | (269,520         | )          |
|                                                                                   |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| Due to  (from) affiliates                                                              |       | —                                |       | (58,767                 | )          | (232,232                    | )          | 28,538                            |       | 262,461          |       | —           |       |
|                                                                                   |       |                                  |       |                    |       |                        |       |                              |       |             |       |             |       |
| **Increase  in cash and cash equivalents**                                        |       | —                                |       | 11,437                  |       | 20                          |       | 310                               |       | —           |       | 11,767           |       |
| **Balance  at beginning of the period**                                                |       | —                                |       | 160,559                 |       | 39                          |       | 2,747                             |       | —           |       | 163,345          |       |
| **Balance  at end of the period**                                                      |       | **$**                                 | **—** | ** **              | **$**      | **171,996**                 | ** ** | **$**                             | **59**     | ** **       | **$**      | **3,057**        | ** ** | **$** | **—** | ** ** | **$** | **175,112** |   |

 

28

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***18.******                               LegalProceedings and Contingencies***

 

*Legal Proceedings*

 

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

 

*Environmental Matters*

 

We are not currently involved in any material environmentalproceedings. OfficeMax retained responsibility for environmental claims andliabilities related to businesses, facilities, and other assets not purchasedby us in the Acquisition. In addition, OfficeMax indemnifies us for hazardoussubstance releases and other environmental regulatory violations that relate tothe businesses we did purchase and that occurred before the Acquisition orarose from pre-Acquisition operations. OfficeMax, however, may not havesufficient funds to satisfy in full its indemnification obligations, and insome cases, we may not be entitled to indemnification. Management does notbelieve that the potential exposure to the company for environmental matterswould have a material adverse effect on our financial position, results ofoperations, or cash flows even if OfficeMax failed to fulfill itsindemnification responsibilities. 

 

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

 

For the period of October 29, 2004(inception), through May 9, 2005, we operated as a limited liabilitycompany. The unaudited pro forma income data assumes we operated as acorporation. The unaudited pro forma income data presents the pro forma effectsof applying income taxes to historical net income. Such provision reflects theincome taxes that would have applied had we been taxed as a corporation for thenine months ended September 30, 2005. The pro forma estimated effectivetax rate was 43.75% for the nine months ended September 30, 2005. The proforma provision for income taxes varies from the amount that would be providedby applying the statutory federal rate. The primary reason for the differenceis the effect of state income taxes and the mix of domestic and foreign sourcesof income. The predecessor financial statements were already taxed at ratesapplicable to a corporation, and no pro forma adjustments are required.

 

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

 

On May 9, 2005, we converted to a corporation from a limitedliability company and changed our name from Boise CascadeHoldings, L.L.C., to Boise Cascade Company. In connection with convertingto a corporation, the equity units held by our owners on May 9 wereexchanged for shares of preferred and common stock, and we became a taxableentity. The Series A equity units were exchanged for shares of Series Apreferred stock, the Series B equity units were exchanged for shares of Class Bcommon stock, and the Series C equity units were exchanged for shares of Class Ccommon stock. The Series A equity units were exchanged at a 1:1 ratiofor shares of Series A preferred stock, and the Series B and C equityunits were exchanged at a .075:1 ratio for shares of common stock.

 

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

 

On May 18, 2005, the Securities andExchange Commission (SEC) declared our registration statement, filed on Form S-1(Registration No. 333-122770) as amended, under the Securities Act of1933, effective. Although we have not issued shares under this registrationstatement, we became a registrant with the SEC and, accordingly, began filingperiodic reports with them. We also have publicly-traded, registered debtsecurities, which also require the filing of such reports. These unauditedquarterly consolidated financial statements and notes should be read togetherwith the consolidated financial statements and notes filed with the SEC in ourregistration statement on Form S-1, as amended, on May 18, 2005(Registration Statement).

 

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The following discussion contains statementsabout our future financial performance. These statements are subject tonumerous risks and uncertainties, including, but not limited to, the risks anduncertainties described in “Cautionary and Forward-Looking Statements.” Ouractual results may differ materially from those contained in or implied by anyof the forward-looking statements.

 

***Our Segments***

 

We are a diversified North American paper andforest products company headquartered in Boise, Idaho. We operate our businessusing five reportable segments:  Paper,Packaging & Newsprint, Wood Products, Building Materials Distribution,and Corporate and Other. These segments represent distinct businesses that aremanaged separately because of differing products and services. Each of thesebusinesses requires distinct operating and marketing strategies. Managementreviews the performance of the company based on these segments.

 

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

 

***Summaryof Results of Operations***

 

Inthird quarter 2005, we reported net income of $28.5 million and incomefrom operations of $79.4 million, compared with net income of$35.2 million and income from operations of $79.9 million in thirdquarter 2004. During third quarter 2005, Paper reported $10.1 million ofsegment income, Packaging & Newsprint reported $6.3 million ofsegment income, Wood Products reported $34.7 million of segment income,and Building Materials Distribution reported $34.4 million of segmentincome.

 

All of our segments were affected by the hurricanes in the Gulf Coaststates. The direct impact included lost production, lost sales, and modestphysical damage in the case of our Paper mill in Jackson, Alabama, andPackaging & Newsprint mill in DeRidder, Louisiana. Our Wood Productsfacilities in Alexandria, Oakdale, and Florien, Louisiana, also experiencedlost production and lost sales due to the impact of the hurricanes. All of ourGulf Coast operations are now operating normally. We are in the process ofevaluating whether we will pursue insurance claims for the impact. We estimatea reduction in operating income of approximately $6 million as a result oflost production. Any potential insurance recovery would not be material to ourconsolidated financial position or results of operations.  

 

Indirectimpacts of the hurricanes, which continue to affect our financial results, arehigher energy and chemicals costs and higher freight costs as the result ofhigher fuel costs. Energy is a significant component of our cost structure,especially in our Paper and Packaging & Newsprint segments. While wehave some flexibility to move between fuel sources, we have significantexposure to natural gas and fuel oil price increases. In the event the currentfuel prices persist and we are unable to pass these increases on to ourcustomers in the form of higher prices, we may experience a material negativefinancial impact. Based on expected purchases of natural gas in fourth quarter2005, which will be seasonally higher than third quarter purchases, and ifdelivered gas costs are between $12 per mmBtu and $14 per mmBtu, weestimate our fourth quarter purchased natural gas costs will increaseapproximately $17 million to $24 million over third quarter 2005. Inaddition, the rates we are charged by our electrical suppliers may be impactedby the increase in natural gas prices, although the degree of impact depends oneach utility’s mix of energy resources and regulatory situation. In particular,we have been advised by the electrical utility that supplies our DeRidder,Louisiana, mill that forecast increases in their natural gas costs will likelysignificantly increase their rates to us. If their forecast is correct, weestimate that our electrical costs at that mill could increase approximately$7 million in fourth quarter 2005, compared with third quarter.  

 

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

 

On October 29, 2004, we acquiredOfficeMax’s paper and forest products assets, other than its timberlandsoperations, for an aggregate purchase price of $2.2 billion, includingapproximately $140 million of related fees and expenses (the Acquisition).For more information about our purchase of OfficeMax’s paper and forestproducts assets, see Note 2, Purchase of OfficeMax’s Paper and ForestProducts Assets, of the Notes to Consolidated Financial Statements in ourRegistration Statement.

 

We accounted for the Acquisition using thepurchase method of accounting. As a result, the purchase price was allocated tothe tangible and intangible assets acquired and liabilities assumed based ontheir respective fair values as of the date of the Acquisition. The excess ofthe purchase price over the fair value of assets acquired and liabilitiesassumed was allocated to goodwill.

 

The initial purchase price allocations may be adjusted within one yearof the purchase date for changes in estimates of the fair value of assetsacquired and liabilities assumed. During the nine months ended September 30,2005, we recorded $3.5 million of purchase price adjustments thatdecreased the recorded amount of goodwill. The adjustments were related to fairvalue adjustments, liability accruals, and pension and other severanceadjustments.

 

# *Restructuring Activities*

# * *

In connection with the Acquisition, we areevaluating the acquired facilities and organizational structure. In accordancewith the provisions of Emerging Issues Task Force (EITF) 95-3, Recognitionof Liabilities in Connection With a Purchase Business Combination, exitactivities related to the Acquisition will increase goodwill. We had one yearfrom the acquisition date to develop our restructuring plans and adjustgoodwill. At December 31, 2004, we had finalized a portion of our plans insufficient detail to meet the requirements of EITF 95-3 to record a liability.During the nine months ended September 30, 2005, we recorded an additionalrestructuring reserve of $7.4 million. These charges reflect additionalseverance costs and increase the total restructuring reserve recorded since theAcquisition to $21.6 million. Most of the severance cost adjustmentsrelate to severance costs for 330 employees. At September 30, 2005,we had terminated approximately 290 employees. Most of the remaining costswill be paid during 2005. 

 

At September 30, 2005, approximately$9.0 million of the 2004 restructuring reserve was included in “Accruedliabilities, Compensation and benefits,” and $0.1 million was included in “Accruedliabilities, Other.”  Of the$9.1 million restructuring reserve, $2.8 million was recorded in ourPaper segment, $0.1 million in Packaging & Newsprint,$0.1 million in Wood Products, and $6.1 million in Corporate andOther. Restructuring reserve liability account activity related to thesecharges is as follows (in millions):

 
| ** **                                        | ** ** | **Severance** | ** ** | **Other**  | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------|------------|------------|------------|-----------|------------|
| 2004  restructuring reserve                       |       | $             | 13.8       |       | $          | 0.5       |       | $ | 14.3 |   |
| Charges  against reserve                          |       | (1.0          | )          | —     |       | (1.0      | )          |
| Restructuring  reserve at December 31, 2004  |       | 12.8          |       | 0.5        |       | 13.3      |       |
|                                              |       |          |       |       |       |      |       |
| Charges  against reserve                          |       | (11.0         | )          | (0.6       | )          | (11.6     | )          |
| Costs  incurred and charged to goodwill           |       | 7.2           |       | 0.2        |       | 7.4       |       |
| Restructuring  reserve at September 30, 2005 |       | **$**         | **9.0**    | ** ** | **$**      | **0.1**   | ** ** | **$** | **9.1** |   |

 

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

 

The following tables set forth the results ofoperations of Boise and Boise Forest Products Operations (predecessor) indollars and as a percentage of sales for the three and nine months ended September 30,2005 and 2004 (in millions):

 
| ** **                                      | ** ** | **Boise**                                 | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                                      | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                      | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005**  | ** ** | **2004**        | ** ** |
| **Sales**                                       |       |                                      |       |                                     |       |      |       |            |       |
| Trade                                           |       | $                                         | 1,423.0    |                                     | $          | 1,417.8   |       | $               | 4,057.4    |   | $ | 4,001.3 |   |
| Related  parties                                |       | 133.3                                     |       | 141.5                                    |       | 425.8     |       | 397.6           |       |
|                                            |       | 1,556.3                                   |       | 1,559.3                                  |       | 4,483.2   |       | 4,398.9         |       |
|                                            |       |                                      |       |                                     |       |      |       |            |       |
| **Costs  and expenses**                         |       |                                      |       |                                     |       |      |       |            |       |
| Materials,  labor, and other operating expenses |       | 1,358.8                                   |       | 1,295.2                                  |       | 3,878.8   |       | 3,713.8         |       |
| Fiber costs  from related parties               |       | —                                    |       | 30.3                                     |       | 17.6      |       | 86.4            |       |
| Depreciation,  amortization, and depletion      |       | 33.0                                      |       | 59.4                                     |       | 95.4      |       | 176.1           |       |
| Selling and  distribution expenses              |       | 69.2                                      |       | 67.2                                     |       | 195.9     |       | 190.8           |       |
| General and  administrative expenses            |       | 15.9                                      |       | 25.8                                     |       | 53.1      |       | 67.8            |       |
| Other  (income) expense, net                    |       | —                                    |       | 1.5                                      |       | 3.9       |       | 14.1            |       |
|                                            |       | 1,476.9                                   |       | 1,479.4                                  |       | 4,244.7   |       | 4,249.0         |       |
|                                            |       |                                      |       |                                     |       |      |       |            |       |
| **Income  from operations**                     |       | **$**                                     | **79.4**   | ** **                               | **$**      | **79.9**  | ** ** | **$**           | **238.5**  | ** ** | **$** | **149.9** |   |

 
|                                            |   | **(percentage of sales)** |   |
|-------------------------------------------------|--------|---------------------------|--------|
| **Sales**                                       |   |                      |   |   |   |   |   |   |   |
| Trade                                           |   | 91.4                      | %      | 90.9 | % | 90.5 | % | 91.0 | % |
| Related  parties                                |   | 8.6                       |   | 9.1 |   | 9.5 |   | 9.0 |   |
|                                            |   | 100.0                     | %      | 100.0 | % | 100.0 | % | 100.0 | % |
|                                            |   |                      |   |   |   |   |   |   |   |
| **Costs  and expenses**                         |   |                      |   |   |   |   |   |   |   |
| Materials,  labor, and other operating expenses |   | 87.3                      | %      | 83.1 | % | 86.5 | % | 84.4 | % |
| Fiber costs  from related parties               |   | —                    |   | 1.9 |   | 0.4 |   | 2.0 |   |
| Depreciation,  amortization, and depletion      |   | 2.1                       |   | 3.8 |   | 2.1 |   | 4.0 |   |
| Selling and  distribution expenses              |   | 4.5                       |   | 4.3 |   | 4.4 |   | 4.3 |   |
| General and  administrative expenses            |   | 1.0                       |   | 1.7 |   | 1.2 |   | 1.6 |   |
| Other  (income) expense, net                    |   | —                    |   | 0.1 |   | 0.1 |   | 0.3 |   |
|                                            |   | 94.9                      | %      | 94.9 | % | 94.7 | % | 96.6 | % |
|                                            |   |                      |   |   |   |   |   |   |   |
| **Income  from operations**                     |   | **5.1**                   | **%**  | **5.1** | **%** | **5.3** | **%** | **3.4** | **%** |

 

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***Sales Volumes andPrices***

 

Set forth below are our segment sales volumesand average net selling prices for our principal products for the three andnine months ended September 30, 2005 and 2004:

 
| ** **                          | ** ** | **Boise**                                                    | ** ** | **Predecessor**                          | ** ** | **Boise** | ** ** | **Predecessor** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|-----------|------------|-----------------|------------|
| ** **                          | ** ** | **Three Months Ended  September 30**                    | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                          | ** ** | **2005**                                                     | ** ** | **2004**                                 | ** ** | **2005**  | ** ** | **2004**        | ** ** |
|                                |       | **(thousands of short tons, except corrugated  containers)** |       |
| **Sales  Volumes:**                 |       |                                                         |       |                                     |       |      |       |            |       |
| **Paper**                           |       |                                                         |       |                                     |       |      |       |            |       |
| Uncoated  free sheet                |       | 380                                                          |       | 374                                      |       | 1,130     |       | 1,134           |       |
| Containerboard  (medium)            |       | 32                                                           |       | 34                                       |       | 96        |       | 99              |       |
| Market pulp  and other              |       | 45                                                           |       | 44                                       |       | 102       |       | 122             |       |
|                                |       | 457                                                          |       | 452                                      |       | 1,328     |       | 1,355           |       |
|                                |       |                                                         |       |                                     |       |      |       |            |       |
| **Packaging &  Newsprint** |       |                                                         |       |                                     |       |      |       |            |       |
| Containerboard  (linerboard)        |       | 104                                                          |       | 120                                      |       | 332       |       | 343             |       |
| Newsprint                           |       | 100                                                          |       | 102                                      |       | 302       |       | 311             |       |
| Corrugated  containers (mmsf)       |       | 1,226                                                        |       | 1,244                                    |       | 3,515     |       | 3,471           |       |

 
|                                        |   | **(millions)** |   |
|---------------------------------------------|--------|----------------|--------|
| **Wood  Products**                          |   |           |   |   |   |   |   |   |   |
| Laminated  veneer lumber (LVL) (cubic feet) |   | 3.2            |   | 3.3 |   | 9.6 |   | 9.1 |   |
| I-joists  (equivalent lineal feet)          |   | 68             |   | 63 |   | 189 |   | 175 |   |
| Plywood (sq.  ft.) (3/8” basis)        |   | 349            |   | 339 |   | 1,002 |   | 1,107 |   |
| Lumber  (board feet)                        |   | 80             |   | 96 |   | 253 |   | 274 |   |
| Particleboard  (sq. ft.) (3/4” basis)  |   | 43             |   | 38 |   | 126 |   | 125 |   |
|                                        |   |           |   |   |   |   |   |   |   |
| **Building  Materials Distribution**        |   |           |   |   |   |   |   |   |   |
| Sales  dollars                              |   | $              | 842.7  |   | $ | 805.5 |   | $ | 2,334.9 |   | $ | 2,218.5 |   |
|                                             |        |                |        |  |  |  |  |  |  |  |  |  |  |

 
|                                |   | **(dollars per short ton, except corrugated  containers)** |   |
|-------------------------------------|--------|------------------------------------------------------------|--------|
| **Average  Net Selling Prices:**    |   |                                                       |   |   |   |   |   |   |   |
| **Paper**                           |   |                                                       |   |   |   |   |   |   |   |
| Uncoated  free sheet                |   | $                                                          | 732    |   | $ | 745 |   | $ | 748 |   | $ | 714 |   |
| Containerboard  (medium)            |   | 313                                                        |   | 433 |   | 339 |   | 381 |   |
| Market pulp  and other              |   | 384                                                        |   | 419 |   | 401 |   | 403 |   |
|                                |   |                                                       |   |   |   |   |   |   |   |
| **Packaging &  Newsprint** |   |                                                       |   |   |   |   |   |   |   |
| Containerboard  (linerboard)        |   | 326                                                        |   | 385 |   | 361 |   | 348 |   |
| Newsprint                           |   | 505                                                        |   | 431 |   | 481 |   | 431 |   |
| Corrugated  containers ($/msf)      |   | 51                                                         |   | 50 |   | 51 |   | 47 |   |
|                                     |        |                                                            |        |  |  |  |  |  |  |  |  |  |  |

 
|                                             |   | **(dollars per unit)** |   |
|--------------------------------------------------|--------|------------------------|--------|
| **Wood  Products**                               |   |                   |   |   |   |   |   |   |   |
| Laminated  veneer lumber (LVL) (100 cubic feet)  |   | $                      | 1,972  |   | $ | 1,706 |   | $ | 1,948 |   | $ | 1,625 |   |
| I-joists  (1,000 equivalent lineal feet)         |   | 1,114                  |   | 1,029 |   | 1,095 |   | 974 |   |
| Plywood  (1,000 sq. ft.) (3/8” basis)       |   | 294                    |   | 328 |   | 290 |   | 339 |   |
| Lumber (1,000  board feet)                       |   | 468                    |   | 575 |   | 494 |   | 553 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |   | 254                    |   | 320 |   | 264 |   | 305 |   |
|                                                  |        |                        |        |  |  |  |  |  |  |  |  |  |  |

 

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***Operating Results***

 

The consolidated financial statements presentthe financial results of Boise Cascade Company for the three and nine monthsended September 30, 2005, and the results of Boise Forest ProductsOperations for the three and nine months ended September 30, 2004.

 

# ***Sales***

# * *

For the three months ended September 30,2005, total sales were relatively flat, compared with the same period a yearago. For the nine months ended September 30, 2005, total sales increased$84.3 million, or 2%, to $4,483.2 million, compared with$4,398.9 million in the prior year. Relative to the three months ended September 30,2004, segment sales increased in Building Materials Distribution, were flat inPackaging & Newsprint, and were down in Paper and Wood Products. Forthe nine months ended September 30, 2005, sales increased in Paper,Packaging & Newsprint, and Building Materials Distribution and weredown in Wood Products, compared with the same period of 2004. Hurricanes causedproduction losses at our paper mills in Jackson, Alabama, and DeRidder,Louisiana, and at our wood products facilities in Oakdale, Florien, andAlexandria, Louisiana.

 

*Paper.*   Sales decreased $8.2 million, or 2%, to $350.1 million for thethree months ended September 30, 2005, from $358.3 million for thethree months ended September 30, 2004. During the nine months ended September 30,2005, sales increased $31.1 million, or 3%, to $1,060.7 million from$1,029.6 million in the same period a year ago. Compared with the threemonths ended September 30, 2004, our average net selling prices foruncoated free sheet papers were down 2%, due to lower market prices forvirtually all of our uncoated free sheet grades. Our uncoated free sheet salesvolume increased 2%, reflecting a 3% increase in sales of our specialty andpremium papers and a 1% increase in sales of our commodity papers. Comparedwith the nine months ended September 30, 2004, our average net sellingprices for uncoated free sheet papers were up 5%, and our volumes were flat.During the three months ended September 30, 2005, we took 10,000 tonsof market-related downtime, compared with 8,000 tons in the same period ayear ago. For the three and nine months ended September 30, 2005, we lostapproximately 3,500 tons of production due to Hurricanes Katrina and Dennis.

 

*Packaging &Newsprint.*   For the three months ended September 30,2005, sales were relatively flat with the same period a year ago. During thenine months ended September 30, 2005, sales increased $41.3 million,or 8%, to $545.1 million from $503.8 million in the prior year. Comparedwith the three months ended September 30, 2005, average net selling pricesfor newsprint and corrugated containers increased 17% and 2%, respectively.These increases were offset by a 15% decrease in average net selling prices forlinerboard. Newsprint price increases reflect improved supply-demand dynamicsfor the grade as competitors shut down production or converted production toother grades. Linerboard price decreases reflect lower end user demand. Duringthe three months ended September 30, 2005, volumes for newsprint andlinerboard were down 2% and 13%, respectively. The volume decreases reflect, inpart, lost production due to Hurricane Rita. For the nine months ended September 30,2005, average net selling prices for newsprint and corrugated containersincreased 12% and 9%, while average net selling prices for linerboard increased4%, compared with the same period in 2004. Volumes of newsprint and linerboardwere each down 3%, largely reflecting lost production due to Hurricane Rita.During the nine months ended September 30, 2005, we lost approximately9,500 tons of linerboard production and 8,200 tons of newsprintproduction due to Hurricane Rita.

 

*Wood Products.*   Salesdecreased $20.6 million, or 6%, to $338.6 million for the threemonths ended September 30, 2005, from $359.2 million for the threemonths ended September 30, 2004. During the nine months ended September 30,2005, sales decreased $54.7 million, or 5%, to $996.0 million from$1,050.7 million in the same period a year ago. Compared with the threemonths ended September 30, 2004, sales volume of I-joists increased 7%,while sales volume of LVL decreased 2%. Average net selling prices for I-joistsand LVL increased 8% and 16%. Both the price and sales volume increases inengineered wood products reflect the strong housing market. While sales ofengineered wood products (EWP) increased over the same periods a year ago,overall market demand for EWP was down as downstream customers adjustedinventory levels. As a result, we sold less EWP volume than we would haveexpected during the quarter. However, because we were able to move ourproduction into plywood, we were able to take advantage of strong plywoodmarkets, following Hurricane Katrina, while avoiding building EWP inventory.Compared with the three months ended September 30, 2004, average netselling prices for plywood, lumber, and particleboard decreased 10%, 19%, and21%, reflecting weaker supply-demand dynamics for these products. For the ninemonths ended September 30, 2005, I-joist and LVL

 

34

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sales volumes increased 8% and 6%, while I-joist and LVL sales pricesincreased 12% and 20%, compared with the same period a year ago. During thenine months ended September 30, 2005, average net selling prices forplywood, lumber, and particleboard decreased 14%, 11%, and 13%, while salesvolumes of plywood and lumber decreased 10% and 8%, as we moved more of ourveneer into engineered wood products, and reduced our lumber production in theface of softer markets.

 

*Building MaterialsDistribution.*   Sales increased$37.2 million, or 5%, to $842.7 million for the three months ended September 30,2005, from $805.5 million in the prior year. During the nine months ended September 30,2005, sales increased $116.4 million, or 5%, to $2,334.9 million from$2,218.5 million in the prior year. In both the three and nine monthsended September 30, 2005, increases in volumes and improved product mixaccounted for the increase in sales, compared with the same periods in 2004.Strong market demand reflects continued strength in housing markets.

 

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

 

For the three months ended September 30,2005, the combination of materials, labor, and other operating expenses andfiber costs from related parties as a percentage of sales increased, comparedwith the same period a year ago. Compared with the nine months ended September 30,2004, these costs and expenses as a percentage of sales were relatively flat.For the three and nine months ended September 30, 2005, Paper andPackaging & Newsprint experienced lower fixed costs, including labor,which partially offset increases in variable costs, including energy,chemicals, and fiber. Wood Products also incurred higher delivered-log costsduring these periods. Relative to the three and nine months ended September 30,2005, as a percentage of sales, materials, labor, and other operating expensesin Building Materials Distribution were relatively flat. The decrease incommodity selling prices was offset by decreases in material costs. 

 

Depreciation, amortization, and depletionexpenses decreased $26.4 million, or 44%, to $33.0 million for thethree months ended September 30, 2005, compared with $59.4 millionfor the three months ended September 30, 2004. For the nine months ended September 30,2005, depreciation, amortization, and depletion expenses decreased$80.7 million, or 46%, to $95.4 million, compared with$176.1 million a year ago. The reduction in depreciation and amortizationis primarily the result of the revaluation of assets associated with thepurchase of the assets from the predecessor.

 

For the three and nine months ended September 30,2005, selling and distribution expenses increased 3%, compared with the sameperiods a year ago. As a percentage of sales, selling and distribution expensesincreased slightly, compared with the three and nine months ended September 30,2004. This increase reflects general inflation and, in particular, increases infuel costs. 

 

General and administrative expenses decreased$9.9 million, or 38%, to $15.9 million for the three months ended September 30,2005, compared with $25.8 million for the three months ended September 30,2004. For the nine months ended September 30, 2005, general andadministrative expenses decreased $14.7 million, or 22%, to$53.1 million, compared with $67.8 million a year ago. As apercentage of sales, general and administrative expenses decreased, comparedwith the three and nine months ended September 30, 2004. These decreasesreflect lower pension and incentive compensation costs, as described in moredetail below.

 

The costs and expenses discussed abovereflect the positive impact of the reduced benefit costs we realized as aresult of the Acquisition, due to OfficeMax retaining the benefit obligationfor all of its former employees, except for the OfficeMax employees hired byus. For the three and nine months ended September 30, 2005, our pensionand other postretirement benefit expense decreased $11.6 million and$39.4 million, or 62% and 65%, to $7.1 million and$21.4 million, respectively, from $18.7 million and$60.8 million for the three and nine months ended September 30,2004.  

 

Other (income) expense, net, includesmiscellaneous income and expense items. For the three months ended September 30,2005, Other (income) expense, net, included only miscellaneous income andexpense items. For the nine months ended September 30, 2005, Other(income) expense, net, decreased $10.2 million, or 73%, to$3.9 million, compared with $14.1 million a year ago. Included in thenine months ended September 30, 2005, was $3.6 million for thewrite-off of costs incurred in connection with the canceled initial publicoffering. Included in the nine months ended September 30, 2004, was$7.1 million of costs related to our predecessor’s sale of its plywood andlumber facilities in Yakima,

 

35

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Washington, and $2.2 million of expense related to our predecessor’sparticipation in OfficeMax’s receivable sales program, as well as othermiscellaneous income and expense items.  

 

***Income (Loss) FromOperations***

 

For the three months ended September 30, 2005, income fromoperations decreased $0.5 million to $79.4 million, compared with$79.9 million in the same period a year ago. Income from operationsincreased $88.6 million, or 59%, from $149.9 million for the ninemonths ended September 30, 2004, to $238.5 million for the ninemonths ended September 30, 2005. Relative to the three months ended September 30,2004, segment income increased in our Paper and Building Materials Distributionsegments and decreased in our Wood Products and Packaging & Newsprintsegments. Relative to the nine months ended September 30, 2004, segmentincome increased in our Paper and Packaging & Newsprint segments anddecreased in our Wood Products and Building Materials Distribution segments.

 

*Paper.*   Segmentincome increased $2.6 million to $10.1 million for the three monthsended September 30, 2005, compared with $7.5 million for the threemonths ended September 30, 2004. During the nine months ended September 30,2005, segment income increased $94.0 million to $66.5 million,compared with a loss of $27.5 million in the same period a year ago. Forthe three months ended September 30, 2005, the increase in segment incomeis largely due to reduced fixed costs, including labor and depreciation andamortization, which offset reductions in prices and increases in variablecosts, including energy, chemicals, and fiber. For the nine months ended September 30,2005, the increase in segment income, relative to the same period in 2004, isdue to improved pricing and reduced fixed costs, including labor anddepreciation and amortization, partially offset by increases in variable costs,including energy, chemicals, and fiber.

 

*Packaging &Newsprint.*   Segment income decreased$1.9 million, or 23%, to $6.3 million for the three months ended September 30,2005, compared with $8.2 million for the three months ended September 30,2004. During the nine months ended September 30, 2005, segment income was$20.9 million, compared with a loss of $2.4 million in the sameperiod a year ago. For the three months ended September 30, 2005, thedecrease in segment income is due primarily to lower prices for linerboard,increased energy costs, and reduced production and sales volumes that resultedfrom Hurricane Rita. The impact of the lost production was offset, in part, byincreased newsprint and corrugated container prices and reduced fixed costs,including depreciation and amortization. For the nine months ended September 30,2005, the increase in segment income, relative to the same period in 2004, isdue to reduced fixed costs, including depreciation and amortization, coupledwith improved pricing in newsprint, corrugated containers, and linerboard,which more than offset the lost production and sales caused by Hurricane Rita.

 

*Wood Products.*   Segmentincome decreased $13.3 million, or 28%, to $34.7 million for thethree months ended September 30, 2005, compared with $48.0 millionfor the three months ended September 30, 2004. During the nine monthsended September 30, 2005, segment income decreased $95.5 million, or49%, to $99.2 million, compared with $194.7 million in the sameperiod a year ago. Relative to the three months ended September 30, 2004,segment income decreased due to decreased plywood, lumber, and particleboardprices, which reflect less favorable supply-demand dynamics for these products,coupled with increased wood costs. These decreases were offset, in part, byincreased engineered wood products volumes and prices, reflecting continuedstrength in the housing market. Relative to the nine months ended September 30,2004, segment income decreased, primarily due to a $46.5 million gain onthe sale of Voyageur Panel in May 2004. Also contributing to decreasedresults in 2005 were lower plywood, lumber, and particleboard prices, coupledwith increased wood costs, offset in part by increased engineered wood productsvolumes and prices, as noted above. 

 

*Building MaterialsDistribution.*   Segment income increased$2.5 million, or 8%, to $34.4 million for the three months ended September 30,2005, from $31.9 million for the three months ended September 30,2004. During the nine months ended September 30, 2005, segment incomeremained relatively flat with the same period a year ago. For the three monthperiod ended September 30, 2005, segment income increased due primarily toincreased volumes and improved product mix as a result of continued strength inthe underlying housing markets coupled with our strategy to grow sales ofengineered wood products and general line items.

 

*Corporate and Other.*   Segmentloss decreased $9.5 million, or 65%, to a $5.1 million loss for thethree months ended September 30, 2005, compared with a $14.6 millionloss in the prior year. During

 

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the ninemonths ended September 30, 2005, segment loss decreased$13.9 million, or 34%, to a $28.0 million loss from a$41.9 million loss in the same period a year ago. In bothperiods, the decrease was due in part to lower general and administrativeexpenses. For the three and nine months ended September 30, 2005, generaland administrative expenses decreased $4.9 million, or 46%, and$6.3 million, or 23%, respectively. The decreases were primarilyattributable to decreased compensation costs and, to a lesser extent,professional fees incurred by our predecessor in the same periods a year ago.Partially offsetting the cost decreases during the nine months ended September 30,2005, was a $3.6 million charge for the write-off of costs incurred duringsecond quarter 2005 in connection with our canceled initial publicoffering.  

 

***Other***

 

*Change in fair value of interest rate swaps.*   For the three and nine monthsended September 30, 2005, we recorded zero and $9.9 million of incomein “Change in fair value of interest swaps” in our Consolidated Statements ofIncome for the change in the fair value of interest rate swaps related to ouramended and restated credit facilities (see Liquidity and CapitalResources discussion below). In connection with the amendment and restatementand the anticipated repayment of the Tranche B term loan, the interestrate swaps associated with this debt were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or$15.2 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statement of Income. In second quarter, we redesignated the$550 million of interest rate swaps as hedges of the cash flow fromthe LIBOR-based variable interest payments on amounts borrowed under ourFacilities and recognized $5.3 million of noncash expense in “Change infair value of interest rate swaps” in our Consolidated Statement of Loss.The net $9.9 million of value that was recorded in “Other assets” in ourConsolidated Balance Sheet will result in higher interest expense over the remaininglife of the interest rate swaps.

 

*Interest expense.*   For the three and nine monthsended September 30, 2005, interest expense was $31.1 million and$137.5 million, compared with $21.3 million and $64.7 million inthe same periods a year ago. The expense recorded for the nine months ended September 30,2005, includes a $43.0 million charge for the write-off of deferredfinancing costs resulting from the repayment of the Tranche B term loan.The three- and nine-month periods also include $5.4 million and$13.7 million, respectively, of interest expense related to a note payableto a subsidiary of Boise Land & Timber Holdings Corp. (TimberHoldings). In the predecessor periods presented, OfficeMax allocated interestcosts to Boise Forest Products Operations based on its average asset balances.

 

*Income tax provision.*   For the three and nine monthsended September 30, 2005, income tax expense was $21.3 million and$34.2 million, compared with $24.7 million and $55.4 million forthe same periods a year ago. On May 9, 2005, we converted to a corporationfrom a limited liability company. Tax expenses and benefits related tooperations prior to May 9 were recognized by the partners of the limitedliability company. For the period of May 9 through September 30, 2005,we recorded income tax expense at an estimated annual effective tax provisionrate of 43.5%. The effect of establishing deferred taxes upon conversion to acorporation was not material to income tax expense. In the predecessorfinancial statements, income taxes were provided based on a calculation of theincome tax expense that would have been incurred if our predecessor hadoperated as a separate taxpayer.

 

***Liquidity and Capital Resources***

 

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

 

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

 

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***Operating Activities***

 

For the nine months ended September 30,2005 and 2004, our operating activities provided $227.3 million in cashand used $50.9 million, respectively. For the nine months ended September 30,2005, items included in net income provided $271.7 million of cash, andincreases in working capital items used $44.4 million of cash fromoperations. The increase in working capital for the period ended September 30,2005, was primarily attributable to higher receivables in Building MaterialsDistribution and, to a lesser extent, higher inventory levels in our Papersegment. Higher receivables in Building Materials Distribution reflectedincreased sales of approximately 51%, comparing September sales with December sales.The higher accounts receivable did not impact the accounts receivable turnoverratios, compared with the prior period. For the nine months ended September 30,2004, items included in net income provided $274.7 million of cash, andincreases in working capital items used $325.6 million of cash fromoperations.

 

***Investing Activities***

 

Our cash investing activities provided $53.9 million for the ninemonths ended September 30, 2005, compared with $19.8 million used forinvestment activities during the same period in 2004. In 2005, investingactivities included $157.5 million for collection of a related-party notereceived from a subsidiary of Timber Holdings and $12.6 million ofproceeds received from the sale of assets. Approximately $10.4 million ofthe proceeds related to the sale of a portion of our fiber farms. Theseproceeds were partially offset by $116.8 million used for the purchase ofproperty and equipment. In the predecessor period, cash expenditures of$121.9 million for property and equipment for the nine months ended September 30,2004, were offset by $103.2 million of proceeds from the sale of ourpredecessor’s plywood and lumber facilities in Yakima, Washington, in February 2004and the sale of Voyageur Panel in May 2004.

 

We expect capital investments in 2005 to total approximately$185 million, excluding acquisitions. Included in the $185 million ofexpected capital investments are expenditures related to the expansion at ourengineered wood products operations in Alexandria, Louisiana. When thecurrent expansion is complete in 2006, the facility will have LVL capacityof approximately 21 million cubic feet. Beyond this capacity expansion, wehave the ability to add another 4 million cubic feet of capacity asrequired by the market. By fourth quarter 2005, we plan to open a new buildingmaterials distribution center in Lathrop, California, to serve thenorthern California and northern Nevada trade areas. In addition, our capitalspending in 2005 will be for quality and efficiency projects, replacementprojects, and ongoing environmental compliance. During 2004, we spent$8 million on environmental compliance. We expect to spend approximately$18 million in 2005 for this purpose.

 

We have announced that we plan to expand our production ofpressure-sensitive papers by reconfiguring an existing paper machine inWallula, Washington. If this project is approved by our board of directors,most of the $60 million capital investment we have estimated for thisproject will be spent in 2006 and beyond.

 

***Financing Activities***

 

Cash used for financing activities was $269.5 million, and cashprovided by financing was $70.7 million for the nine months ended September 30,2005 and 2004, respectively. Cash used for financing activities in the firstnine months of 2005 included $1,330.0 million of debt prepayments relatedto our Tranche B term loan, which was paid down primarily with theproceeds from our new $840.0 million Tranche D term loan,$157.5 million related to the collection of a loan to a subsidiary ofTimber Holdings, and $251.0 million received in connection with arelated-party note payable to a subsidiary of Timber Holdings, as well as cashflow from operations. Additionally, $23.3 million of cash was used to payour equity investors amounts to fund their tax obligation related to theirinvestment in us prior to our conversion to a corporation. Cash provided byfinancing activities in the nine months ended September 30, 2004, included$16.3 million of cash received through net equity transactions withOfficeMax and $54.4 million of debt issuances to OfficeMax.

 

Our primary source of liquidity for ourbusiness is cash flow generated from operations and borrowing capacityavailable under our revolving credit facility. We expect that our primaryliquidity requirements will be debt service, working capital, and capitalexpenditures.

 

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# *Debt Transactions*

# * *

At September 30, 2005, and December 31,2004, our long-term debt consisted of the following (in millions):

 
| ** **                                      | ** ** | **September 30,  2005** | ** **  | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| Revolving  credit facility, due 2010            |       | $                            | —      |                        | $          | — |   |
| Tranche B  term loan, due 2011             |       | —                       |        | 1,330.0                     |       |
| Tranche D  term loan, due 2011             |       | 835.8                        |        | —                      |       |
| Senior  unsecured floating-rate notes, due 2012 |       | 250.0                        |        | 250.0                       |       |
| 7.125%  senior subordinated notes, due 2014     |       | 400.0                        |        | 400.0                       |       |
|                                            |       | 1,485.8                      |        | 1,980.0                     |       |
| Less current  portion                           |       | (8.4                         | )           | (13.3                       | )          |
|                                            |       | 1,477.4                      |        | 1,966.7                     |       |
| Note payable  to related party, net, due 2015   |       | 266.4                        |        | —                      |       |
|                                            |       | **$**                        | **1,743.8** | ** **                  | **$**      | **1,966.7** |   |

 

*Amended and Restated Credit Facilities*

 

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

 

Our amended revolving credit facilityagreement permits us to borrow up to $475.0 million for general corporatepurposes. At September 30, 2005, we had no borrowings outstanding underour revolving credit facility, however, $54.7 million of letters of creditwere considered a draw on the revolver, reducing our borrowing capacity to$420.3 million. Borrowings under our revolving credit facility are basedon the prime rate, the federal funds effective rate, or the LondonInterbank Offered Rate (LIBOR). Pricing is subject to quarterly adjustmentbased on the ratio of our total indebtedness to our last four quarters ofconsolidated earnings before interest, taxes, depreciation, and amortization (EBITDA).The range of borrowing costs under the pricing grid is:  (i) the higher of prime plus 0.50% to1.25%, or the federal funds plus 1.00% to 1.75%; or (ii) LIBOR plus1.50% to 2.25%. During the three months ended September 30, 2005, theaverage interest rate for our borrowings under the revolver was 4.3%. For thenine months ended September 30, 2005, the average interest rate for ourborrowings under the revolver was 5.1%. Letters of credit are subject to a0.25% fronting fee payable to the issuing bank and a fee payable to the lendersequal to the product of the interest rate spread applicable to LIBORborrowings under our revolving credit facility and the daily average amountavailable for drawing under the outstanding letters of credit. During the ninemonths ended September 30, 2005, our minimum and maximum borrowings underthe revolver were zero and $126.5 million. The average amount ofborrowings outstanding under the revolver during the nine months ended September 30,2005, was $15.7 million. The revolving credit facility provides for acommitment fee of 0.50% per annum payable to the lenders on the average dailyunused portion of the revolving credit facility. We also have a swinglineoption under the revolver, which allows us to borrow at negotiated rates up toan aggregate of $40 million from individual banks that are parties to theagreement. Swingline borrowings do not increase our borrowing availabilityunder the revolving credit facility agreement. 

 

At September 30, 2005,$835.8 million was outstanding under the Tranche D term loan amendedand restated credit facility, and our borrowing rate was 5.7%. Borrowings underthe Tranche D term loan are based on (i) the higher of the prime rateplus 0.75%, or the federal funds effective rate plus 1.25%, (ii) orthe LIBOR plus 1.75%. We are required to make scheduled principal paymentson the Tranche D term loan in the amounts of $2.1 million for theremainder of 2005, $8.4 million in each of 2006 through 2009, and$6.3 million in 2010.

 

Borrowings under the Facilities are subjectto certain financial covenants and restrictions, including a minimum interestexpense coverage ratio, maximum leverage ratio, and limitations on capitalexpenditures. At September 30, 2005, we were in compliance with these covenants.

 

*Senior Notes*

 

In October 2004, we issued $250.0 million of senior unsecuredfloating-rate notes due in 2012 and $400.0 million of 7.125% seniorsubordinated notes due in 2014. Net proceeds from the notes were used to fund aportion of the purchase price for the Acquisition. In July 2005, wecompleted an exchange

 

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offer wherebyall of our senior unsecured floating-rate notes and senior subordinated noteswere exchanged for publicly traded, registered securities with identical terms(other than terms relating to registration rights) to the notes issued in October 2004.We may redeem all or part of the notes at any time at redemption prices definedin the indenture. If we sell specific assets or experience specific kinds ofchanges in control, we must offer to purchase the notes. The senior unsecuredfloating-rate notes bear interest at a floating rate equal to LIBOR plus 2.9%.At September 30, 2005, our borrowing rate for the $250.0 millionsenior unsecured floating-rate notes was 6.5%.

 

*Note Payable to Related Party*

 

At September 30, 2005, we had a $266.4 million note payableto a subsidiary of Timber Holdings recorded as “Note payable to related party,net” on our Consolidated Balance Sheet. The note is subject to adjustment basedon transactions between the subsidiary and us. Our borrowing rate under thenote is 8%, and the note matures February 4**,** 2015. For the three and nine months ended September 30,2005, we recorded $5.4 million and $13.7 million of interest expenserelated to the note. Timber Holdings is a guarantor of our debt.

 

*Other*

 

We have entered into interest rate swaps to hedge the majority of thecash flow risk from the variable interest payments on our variable-rate debt,which gave us an effective interest rate on all of our variable-rate debt of5.6% at September 30, 2005. For additional information on our interestrate swaps, see “Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk.”

 

We paid approximately $85.9 million of fees and expensesassociated with our senior secured credit facilities, our senior unsecuredfloating-rate notes, and our senior subordinated notes, which we entered intoin October 2004. The fees are being amortized over the shorter of the callperiod or the terms of the loans, which range from three to eight years. At September 30,2005, and December 31, 2004, we had $36.6 million and$84.1 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheets. In connection with the repayment of theTranche B term loan, we recorded a $43.0 million charge for thewrite-off of the deferred financing costs. We recorded the $43.0 millioncharge in “Interest expense” in our Consolidated Statement of Income for thenine months ended September 30, 2005.

 

At September 30, 2005, our averageeffective interest rate, including the effect of our interest rate swaps, onall of our debt except for our note payable to related party, net, was 6.0%.

 

*Subsequent Event*

 

OnOctober 26, 2005, our wholly owned subsidiary, Boise Cascade, L.L.C. (BoiseLLC), and several of its subsidiaries, including Birch Creek Investments,L.L.C. (Birch Creek), entered into an accounts receivable securitizationprogram with Bank of America, National Association, and Calyon New York Branch(Investors). Under this three-year program, Boise LLC will sell its interest ina defined pool of accounts receivable generated by its domestic operations on arevolving basis to Birch Creek, a fully consolidated, wholly owned, special purposesubsidiary. In turn, Birch Creek will sell the receivables to affiliates of theInvestors. Because Boise LLC has the right to repurchase the sold receivables,sales of receivables under the program will be accounted for as a securedborrowing. The receivables outstanding under this program and the correspondingdebt will be included as “Receivables” and “Long-term debt,” respectively, onour Consolidated Balance Sheet. Financing costs associated with the programwill be included in “Interest expense” in our Consolidated Statements of Income(Loss). The cost of funds under this program will vary based on changes ininterest rates.

 

Underthe accounts receivable securitization program, the maximum borrowing amount issubject to change based on the level of eligible receivables and restrictionson concentrations of receivables and cannot exceed $250 million. The accountsreceivable securitization program contains the same financial covenants as ourexisting amended and restated credit facilities. Boise LLC entered into thisreceivable securitization program to obtain additional funding flexibility atrates that are favorable to its existing borrowing arrangements. Furtherdetails regarding this agreement were disclosed on our Form 8-K filed with theSEC on November 1, 2005.

 

Weused the net proceeds from the initial sale of receivables under thisreceivables securitization program to reduce our term loan borrowings under ouramended and restated credit facilities.

 

# *Predecessor Periods*

# * *

In the predecessor periods presented, ourpredecessor participated in OfficeMax’s centralized cash management system.Cash advances necessary to fund Boise Forest Products Operations’ majorimprovements to, and replacements of, property, as well as acquisitions andexpansion, to the extent not provided through internally generated funds, wereprovided by OfficeMax’s cash or funded with debt. In the predecessor periodspresented, interest costs were allocated to our predecessor based on itsaverage asset balances. The interest expense attributable to the debt allocatedfrom OfficeMax is

 

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included in our Consolidated Statements of Income. We believe theallocation of interest is a reasonable reflection of Boise Forest Products Operations’interest costs.

 

Cash payments for interest, net of interestcapitalized, were $65.7 million and $62.3 million for the nine monthsended September 30, 2005 and 2004.

 

***ContractualObligations***

 

At September 30, 2005, there were no material changes to ourobligations outside the ordinary course of business from the informationdisclosed in our Registration Statement in the Contractual Obligations section ofManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

 

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

 

At September 30, 2005, we did not have any off-balance-sheetarrangements with unconsolidated entities.

 

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

 

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

 

###### ***Inflationary andSeasonal Influences***

 

Other than the effects of higher energycosts, which we describe in this Form 10-Q, we believe inflation has nothad a material effect on our financial condition or results of operations.However, there can be no assurance that we will not be affected by inflation inthe future. Seasonal changes in levels of building activity affect our buildingproducts businesses, and we typically have higher sales and working capital inthe second and third quarters. In addition, cold weather may affect ouroperating costs (including energy) at our manufacturing facilities.

 

***Environmental***

 

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

 

In 2002, OfficeMax entered into a consent decree with the EnvironmentalProtection Agency (EPA) to settle alleged air permit violations at eight of theplywood and particleboard manufacturing facilities that we now own. The EPAalleged these plants failed to obtain New Source Review air permits. The finalinstallation of control equipment required under the Consent Decree wascompleted in April 2005.

 

We incur substantial capital and operating expenditures to comply withfederal, state, and local environmental laws and regulations. Failure to complywith these laws and regulations could result in civil or criminal fines orpenalties or in enforcement actions. Our failure to comply could also result ingovernmental or judicial orders that stop or interrupt our operations orrequire us to take corrective measures, install additional pollution controlequipment, or take other remedial actions. During 2004, we made approximately$8 million in capital expenditures to comply with environmentalrequirements. We anticipate capital expenditures of approximately$18 million in 2005 to comply with environmental requirements, and weexpect to spend a similar amount on environmental capital expenditures in 2006.

 

In 2004, the EPA promulgated rules to control air toxic emissionsfrom wood panel plants and industrial boilers. Compliance with these rules isrequired in 2007. The rules will require capital spending at our woodpanel plants and paper mills. We are currently developing compliance strategiesat the affected operations which will determine the amount of capital spendingthat will be required. We expect capital spending to range from$13 million to $37 million for the period from 2005 to 2007. Thisrange will be refined as mills develop their detailed compliance strategies.

 

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As an owner and operator of real estate, we may be liable underenvironmental laws for the cleanup of past and present spills and releases ofhazardous or toxic substances on or from our properties and operations. We canbe found liable under these laws if we knew of, or were responsible for, thepresence of such substances. In some cases, this liability may exceed the valueof the property itself.

 

Some of our properties have been the subject of investigation orcleanup in connection with environmental contamination. In 2001, the EPA andthe Oregon Department of Environmental Quality began an investigation at ourpaper mill in St. Helens, Oregon. The investigation has focused onpolychlorinated biphenyls, pentachlorophenol, volatile and semi-volatileorganic compounds, dioxins, and heavy metals. In 2003, we entered the OregonVoluntary Clean-up Program to continue the investigation and perform anyremediation, if required. Although we cannot assure you regarding the outcomeof this investigation, based on current information, we do not expect it toresult in material liabilities. Given that the investigation concerns hazardoussubstance releases that occurred prior to closing of the Acquisition, OfficeMaxretained responsibility for this matter pursuant to the asset purchaseagreement with OfficeMax, as described below.

 

OfficeMax retains responsibility for environmental liabilities incurredwith respect to businesses, facilities, and other assets not purchased by us inconnection with the Acquisition and indemnifies us for hazardous substancereleases and other environmental regulatory violations related to our businessthat occurred prior to the closing of the Acquisition or arose from pre-closingoperations. However, OfficeMax may not have sufficient funds to satisfy in fullits indemnification obligations when required, and in some cases, we may not beentitled to indemnification under the asset purchase agreement with Office Max,as described below.

 

###### ***CriticalAccounting Estimates***

 

Critical accounting estimates as those thatare most important to the portrayal of our financial condition and results.These estimates require management’s most difficult, subjective, or complexjudgments, often as a result of the need to estimate matters that areinherently uncertain. We reviewed the development, selection, and disclosure ofthese critical accounting estimates with our board of directors. Forinformation about critical accounting estimates, see Critical AccountingEstimates in Management’s Discussion and Analysis of Financial Condition andResults of Operations in our Registration Statement.

 

###### ***Cautionary andForward-Looking Statements***

 

The Discussion and Analysis of FinancialCondition and Results of Operations in 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 Summary section. We cannot guarantee thatour actual results will be consistent with the forward-looking statements wemake in this report. You should review carefully the cautionary factors listedbelow, as well as those factors listed in other documents we file with the SEC.We do not assume an obligation to update any forward-looking statement.

 

***The paper and forestproducts industry is highly cyclical. Fluctuations in the prices of and thedemand for our products could result in smaller profit margins and lower salesvolumes****.*  Historically, economic and market shifts, fluctuations in capacity, and changesin foreign currency exchange rates have created cyclical changes in prices,sales volumes, and margins for our products. The length and magnitude ofindustry cycles have varied over time and by product, but generally reflectchanges in macroeconomic conditions and levels of industry capacity. Most ofour paper products, including our cut-size office paper, containerboard, andnewsprint, and many of our wood products, including our plywood, lumber, andparticleboard, are commodities that are widely available from other producers.Even our non-commodity products, such as value-added papers and engineered woodproducts (EWP), are susceptible to commodity dynamics. Because commodityproducts have few distinguishing qualities from producer to producer,competition for these products is based primarily on price, which is determinedby supply relative to demand.

 

The overall levels of demand for the commodity products we make anddistribute, and consequently our sales and profitability, reflect fluctuationsin levels of end-user demand, which depend in large part on generalmacroeconomic conditions in North America and regional economic conditions inour markets, as well as foreign currency exchange rates. For example, demandfor wood products

 

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depends on newresidential and light commercial construction and residential repair-and-remodelingactivity, which are impacted by demographic trends, interest rate levels,weather, and general economic conditions. Demand for our paper productsfluctuates with levels of employment, the state of durable and nondurable goodsindustries, and prevailing levels of advertising and print circulation. Demandfor many of our products was materially and negatively impacted by the globaleconomic downturn in the early part of this decade, and we expect to besensitive to such downturns in the future.

 

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

 

Industry supply of commodity papers and wood products is alsoinfluenced by overseas production capacity, which has grown in recent years andis expected to continue to grow. While the weakness of the U.S. dollar hasmitigated the levels of imports in recent years, a strengthening of the U.S.dollar is likely to increase imports of commodity papers and wood products fromoverseas, putting downward pressure on prices.

 

As a result, prices for all of our productsare driven by many factors outside our control, and we have little influenceover the timing and extent of price changes, which are often volatile. Becausemarket conditions beyond our control determine the prices for our commodity products,the price for any one or more of these products may fall below our cashproduction costs, requiring us to either incur short-term losses on productsales or cease production at one or more of our manufacturing facilities.Therefore, our profitability with respect to these products depends on managingour cost structure, particularly raw materials and energy prices, whichrepresent the largest components of our operating costs and can fluctuate basedupon factors beyond our control, as described below. If the prices of ourproducts decline, or if our raw materials or energy costs increase, or both,demand for our products may decline, and our sales and profitability could bematerially and adversely affected.

 

***Further increases inthe cost of our purchased energy or chemicals would lead to highermanufacturing costs, thereby reducing our margins.***   Energyis one of our most significant raw materials, comprising approximately 15% and14% of the aggregate amount of materials, labor, and other operating expensesand fiber costs from related parties for our Paper and Packaging &Newsprint segments, during the nine months ended September 30, 2005.Energy prices, particularly for electricity, natural gas, and fuel oil, havebeen volatile in recent years and currently exceed historical averages. Thesefluctuations impact our manufacturing costs and contribute to earningsvolatility. While we have some flexibility to move between fuel sources, wehave significant exposure to natural gas and fuel oil price increases. In theevent the current fuel prices persist and we are unable to pass these increaseson to our customers in the form of higher prices, we may experience a materialnegative financial impact. Based on expected purchases of natural gas in fourthquarter 2005, which will be seasonally higher than third quarter purchases, andif delivered gas costs are between $12 per mmBtu and $14 per mmBtu,we estimate our fourth quarter purchased natural gas costs will increaseapproximately $17 million to $24 million over third quarter 2005. Inaddition, the rates we are charged by our electrical suppliers may be impactedby the increase in natural gas prices, although the degree of impact depends oneach utility’s mix of energy resources and regulatory situation. In particular,we have been advised by the electrical utility that supplies our DeRidder,Louisiana, mill that forecast increases in their natural gas costs will likelysignificantly increase their rates to us. If their forecast is correct, weestimate that our electrical costs at that mill could increase approximately$7 million in fourth quarter 2005, compared with third quarter.

 

Other raw materials we use include various chemical compounds, such asprecipitated calcium carbonate, sodium chlorate, sodium hydroxide, dyes,resins, and adhesives. Purchases of chemicals accounted for approximately 13%,4%, and 6% of the aggregate amount of materials, labor, and other operatingcosts and fiber costs from related parties for our Paper, Packaging &Newsprint, and Wood Products segments, respectively, during the nine monthsended September 30, 2005. The costs of these chemicals have been volatilehistorically and are influenced by capacity utilization, energy prices, andother factors beyond our control.

 

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

 

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increase inchemical or energy prices would reduce our operating margins and potentiallyrequire us to limit or cease operations of one or more of our machines.

 

***Our manufacturingbusinesses may have difficulty obtaining timber at favorable prices or at all****.*   Wood fiber is our principal rawmaterial, comprising approximately 17%, 13%, and 32% of the aggregate amount ofmaterials, labor, and other operating expenses and fiber costs from relatedparties for our Paper, Packaging & Newsprint, and Wood Productssegments, respectively, during the nine months ended September 30, 2005.Wood fiber is a commodity, and prices historically have been cyclical.Environmental litigation and regulatory developments have caused, and may causein the future, significant reductions in the amount of timber available forcommercial harvest in the United States. These reductions have caused theclosure of plywood and lumber operations in some of the geographic areas inwhich we operate, including the closure of two facilities previously operated byOfficeMax. In addition, future domestic or foreign legislation and litigationconcerning the use of timberlands, the protection of endangered species, thepromotion of forest health, and the response to and prevention of catastrophicwildfires could also affect timber supplies. Availability of harvested timbermay further be limited by fire, insect infestation, disease, ice storms,windstorms, hurricanes, flooding, and other natural and manmade causes, therebyreducing supply and increasing prices. Wood fiber pricing is subject toregional market influences, and our cost of wood fiber may increase inparticular regions due to market shifts in those regions. In addition, ourability to obtain wood fiber from Brazil may be impacted by legal and politicalconditions in that country as well as transportation difficulties. Anysustained increase in wood fiber prices would increase our operating costs, andwe may be unable to increase prices for our products in response to increasedwood fiber costs due to additional factors affecting the demand or supply ofthese products.

 

Over the past three years, prior to the Timberlands Sale, thetimberlands operations provided, on average, approximately 47% of our woodfiber requirements. In connection with the Timberlands Sale, we entered intolong-term supply agreements pursuant to which we expect to obtain a significantportion of our future wood fiber requirements. We purchase substantially all ofour wood fiber from third parties, either pursuant to these supply agreementsor in the open market. If any of our major suppliers of wood fiber stopsselling or is unable to sell wood fiber to us, our financial condition andoperating results would suffer. As a result of the Timberlands Sale, we haveincreased our open-market purchases of wood fiber. Since we have nothistorically made open-market purchases of wood fiber in such large amounts,our wood fiber costs may exceed our historical costs. For example, due toincreased costs associated with the procurement of wood fiber, such as highertransportation costs and costs related to identifying potential vendors, weestimate that our wood fiber costs would have been $8 million to$12 million higher in 2004 had the Timberlands Sale been completed on January 1,2004. Furthermore, as the amount of wood fiber we purchase pursuant to existingsupply agreements declines, our wood fiber costs may increase further as weincrease our reliance on open-market purchases. In addition, our limited accessto an internal supply of timber could expose us to the effects of short-termprice volatility and limit our flexibility in responding to shortages in woodfiber supply and could cause our operating costs to increase to a greaterextent than those of our competitors that own timberlands. If we experienceconstraints on our timber supply for any of these or other reasons, we would berequired to limit production in and/or close manufacturing facilities.

 

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

 

***Someof our paper and wood products are vulnerable to long-term declines in demanddue to competing technologies or materials.***   Ouruncoated free sheet and newsprint compete with electronic transmission anddocument storage alternatives, as well as with paper grades we do not produce.As the use of these alternatives grow, demand for paper products may shift fromone grade of paper to another, or be eliminated altogether. For example, demandfor newsprint has declined and may continue to decline as newspapers arereplaced with electronic media, and demand for our uncoated free sheet for usein pre-printed forms has declined and may continue to decline as the use ofdesktop publishing and on-demand printing continues to displace traditionalforms. Demand for our containerboard may decline as corrugated paper packagingis replaced with reusable plastic alternatives,

 

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particularly with respect to uses for perishable food products. Demandfor plywood may also decline as customers continue to shift to oriented strandboard, a product we do not manufacture. Any substantial shift in demand fromour products to competing technologies or materials could result in a materialdecrease in sales of our products.

 

***Failure to implementany of our business strategies could result in decreased future sales and netincome.***   We may be unable to fully implementour strategies or achieve the anticipated results. Our strategies are subjectto significant business, economic, and competitive uncertainties andcontingencies, many of which are beyond our control. For example, we intend toexpand our leadership in the production of higher-growth, higher-marginproducts such as value-added papers and engineered wood products. This strategywill require us to develop new and innovative product and servicecharacteristics and respond to shifts in customer demand. In addition, we planto continue to expand our building materials distribution business into newgeographical regions, which will require us to identify growing markets anddeliver superior customer service. If our manufacturing businesses fail todeliver quality products at competitive costs, if our distribution businessfails to acquire market share in new markets, or if we are unable to implementour other key business strategies, our future sales and net income coulddecrease.

 

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

 

•                  Maintenanceoutages;

 

•                  Prolongedpower failures;

 

•                  Anequipment failure;

 

•                  Achemical spill or release;

 

•                  Explosionof a boiler;

 

•                  Theeffect of a drought or reduced rainfall on our water supply;

 

•                  Disruptionsin the transportation infrastructure, including roads, bridges, railroadtracks, and tunnels;

 

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

 

•                  Terrorismor threats of terrorism;

 

•                  Labordifficulties; or

 

•                  Otheroperational problems.

 

Events such as thoselisted above have resulted in operating losses in the past. For example, werecently experienced market pulp production losses due to the mechanicalfailure of one of our digesters at our Wallula, Washington, facility. Thisinterruption resulted in a reduction in second quarter 2005 operating income ofapproximately $2.2 million. For the three and nine months ended September 30,2005, damage caused by Hurricanes Dennis, Katrina, and Rita led to lostproduction, lost sales, and temporary shutdowns in our facilities along theGulf Coast. All of these operations are now operating normally. We are in theprocess of evaluating whether we will pursue insurance claims for the impact.We estimate a reduction in operating income of approximately $6 million asa result of lost production. Any potential insurance recovery would not bematerial to our consolidated financial position or results of operations.

 

Future events may causesimilar shutdowns, which may result in additional downtime, and/or may causeadditional damage to our facilities. Any such downtime or facility damage couldprevent us from meeting customer demand for our products and/or require us tomake unplanned capital expenditures. If one of these machines or facilitieswere to incur significant downtime, our ability to meet our production capacitytargets and satisfy customer requirements would be impaired, resulting in lowersales and net income.

 

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***Ouroperations require substantial capital, and we may not have adequate capitalresources to provide for all of our capital requirements.***   Ourbusinesses are capital-intensive, and we regularly incur capital expendituresto expand our operations, maintain our equipment, increase our operatingefficiency, and comply with environmental laws. Our total capital expenditures,excluding acquisitions, were approximately $169 million during 2004,including approximately $114 million for maintenance capital andapproximately $8 million for environmental expenditures, and we expect tospend approximately $185 million on capital expenditures during 2005,including approximately $76 million for maintenance capital andapproximately $18 million for environmental expenditures. We anticipateour available cash resources and cash generated from operations will besufficient to fund our operating needs and capital expenditures for at leastthe next year. However, if we require additional funds, we may not be able toobtain them on favorable terms, or at all. In addition, our debt serviceobligations reduce our available cash flows. If we cannot maintain or upgradeour equipment as we require or ensure environmental compliance, we could berequired to cease or curtail some of our manufacturing operations or we maybecome unable to manufacture products that can compete effectively in one ormore of our markets.

 

***Our operations areaffected by our relationship with OfficeMax.***   UntilOctober 2004, we operated as business units of OfficeMax and not as astand-alone company. During the nine months ended September 30, 2005,sales to OfficeMax accounted for approximately 47% of our uncoated free sheetvolume, including approximately 83% of our office paper volume. We anticipatethat OfficeMax will continue to be our largest customer and that we willcontinue to depend on its distribution network for a substantial portion of ouruncoated free sheet sales in the future. In connection with the Acquisition,OfficeMax retained and indemnified us against certain liabilities related toour business. Furthermore, we and OfficeMax entered into an AdditionalConsideration Agreement pursuant to which OfficeMax may be required to makepayments to us. Any significant deterioration in OfficeMax’s financialcondition or our relationship with OfficeMax, or a significant change inOfficeMax’s business strategy, could result in OfficeMax ceasing to be ourcustomer or failing to satisfy its contractual obligations to us, which in turncould reduce our sales and subject us to additional material liabilities.

 

In addition, we may be required to makesubstantial payments to OfficeMax in connection with agreements we entered intorelated to the Acquisition. We currently indemnify OfficeMax for breaches ofrepresentations, warranties, and covenants made in the Asset PurchaseAgreement, as well as for all liabilities we assumed in connection with theAcquisition. Our indemnification obligations with respect to breaches ofrepresentations and warranties are, with certain exceptions, subject to adeductible of $20.7 million, and our indemnification obligations arecapped at $248.9 million in the aggregate. The Additional ConsiderationAgreement also requires us to pay OfficeMax, to the extent that the averagemarket price for a benchmark grade of cut-size office paper manufactured withinour Paper segment exceeds a specified amount, up to an aggregate amount of$125 million. If we are required to make substantial payments to OfficeMaxin respect of our indemnification obligations, the resulting outflows of cashwould adversely affect our operating results and financial condition. Inaddition, if we are required to make substantial payments to OfficeMax underthe additional consideration agreement, our financial condition would beadversely affected.

 

***Weare subject to significant environmental regulation and environmentalcompliance expenditures, as well as other potential environmental liabilities.***   Weare subject to a wide range of general and industry-specific environmental lawsand regulations, particularly with respect to air emissions, wastewaterdischarges, solid and hazardous waste management, and site remediation. Ourcapital expenditures for environmental compliance were approximately$12 million and $8 million in 2003 and 2004, respectively, and weexpect to incur approximately $18 million in 2005. We expect to continueto incur significant capital and operating expenditures in order to maintaincompliance with applicable environmental laws and regulations. On July 30, 2004, the EPApromulgated rules regulating toxic air emissions from wood panel plants. Asecond rule regulating toxic air emissions from industrial boilers at woodproducts plants and paper mills was promulgated on September 13, 2004. Weare currently developing compliance strategies at the affected operations whichwill determine the amount of capital expenditures that will be required. Weexpect to incur capital expenditures ranging from $13 million to$37 million for the period from 2005 to 2007 to comply with theseregulations. We may also be required to incur substantial additionalcapital expenditures to comply with future environmental regulations. If wefail to comply with applicable environmental laws and regulations, we may facecivil or criminal fines, penalties, or enforcement actions, including orderslimiting our operations or requiring corrective measures, installation ofpollution control equipment, or other remedial actions.

 

As owners and operators of real estate, wemay be liable under environmental laws for cleanup and other damages, includingtort liability, resulting from releases of hazardous substances on or from our

 

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properties, including asbestos. We may have liability under these lawswhether or not we knew of, or were responsible for, the presence of thesesubstances on our property, and in some cases, our liability may not be limitedto the value of the property. OfficeMax retains responsibility forenvironmental liabilities that occurred with respect to businesses, facilities,and other assets not purchased by us in the Acquisition. In addition, OfficeMaxgenerally indemnifies us for hazardous substance releases and otherenvironmental violations that occurred prior to the closing of the Acquisitionor arose out of pre-closing operations at the businesses, facilities, and otherassets purchased by us. However, OfficeMax may not have sufficient funds to fullysatisfy its indemnification obligations when required, and in some cases, wemay not be contractually entitled to indemnification by OfficeMax. Furthermore,we are not entitled to indemnification for liabilities incurred due to releasesand violations of environmental laws occurring after the closing of theAcquisition. With respect to the timberlands operations, we may haveresponsibility for certain environmental liabilities that occurred in theperiod following the Acquisition but prior to the Timberlands Sale. Anymaterial liability we incur would adversely impact our financial condition andcould preclude us from making capital expenditures that would otherwise benefitour business.

 

Enactment of new environmental laws orregulations or changes in existing laws or regulations might requiresignificant expenditures. We may be unable to generate funds or other sourcesof liquidity and capital to fund unforeseen environmental liabilities orexpenditures.

 

***Labordisruptions or increased labor costs could adversely affect our business.***   Wecould experience a material labor disruption or significantly increased laborcosts at one or more of our facilities, either in the course of negotiations ofa labor agreement or otherwise, any of which could prevent us from meetingcustomer demand, reducing our sales and profitability. As of September 30,2005, we had 10,198 employees. Approximately 5,190, or 51%, of theseemployees work pursuant to collective bargaining agreements. Several of theseagreements have recently expired or will expire in 2005, although the partiesare continuing the agreements while bargaining. In March 2005, anagreement covering approximately 860 workers in our paper facilities inSt. Helens, Oregon; Vancouver, Washington; Salem, Oregon; and Wallula,Washington, expired. We are currently in negotiations with respect toagreements covering approximately 810 workers at our St. Helens, Oregon; Salem,Oregon; and Wallula, Washington, paper facilities. In June 2005, weannounced the permanent closure of our Vancouver, Washington, facility and willnot extend that agreement beyond the February 2006 expected closure. Weare currently bargaining the effects of that decision with the union. We may beunable to renew these agreements without work stoppages or significantincreases in costs, which would reduce our operating margins and which couldrequire us to limit or cease manufacturing operations at one or morefacilities.

 

***We depend upon the continued services ofour senior management team.***   Our success depends,in part, on the efforts of our senior management and other key employees. Oursenior management team, led by Tom Stephens, our chief executive officer, hassignificant industry experience and would be difficult to replace. Theseindividuals possess sales, marketing, engineering, manufacturing, financial,and administrative skills that are critical to the operation of our business.While we are party to an employment agreement with Mr. Stephens until2007, if he were to resign prior to the expiration of the initial agreement termor fail to renew the agreement upon expiration, the implementation of ourbusiness strategy may be slowed. If we lose or suffer an extended interruptionin the services of Mr. Stephens or one of our other senior officers, wemay become unable to implement our business strategy, resulting in lowerprofitability. Moreover, the market for qualified individuals is highlycompetitive, and we may not be able to attract and retain qualified personnelto replace or succeed members of our senior management or other key employeesshould the need arise. We do not maintain any key-man or similar insurancepolicies covering any of our senior management or other key employees.

 

***Our substantialindebtedness could adversely affect our financial condition and impair our abilityto operate our business.***   We are a highlyleveraged company. As of September 30, 2005, we had $1.8 billion ofoutstanding indebtedness, including $835.8 million of indebtedness underour senior secured credit facilities (excluding unused availability under ourrevolving credit facility and outstanding and undrawn letters of credit), a$266.4 million related-party note (the related party is a guarantor of ourdebt), $250 million of senior notes, and $400 million of seniorsubordinated notes. This level of indebtedness could have importantconsequences on our business, financial condition, and operating results,including the following:

 

•                  Itmay limit our ability to borrow money or sell stock to fund our workingcapital, capital expenditures, acquisitions, and debt service requirements andother financing needs;

 

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•                  Ourinterest expense would increase if interest rates in general increase because asubstantial portion of our indebtedness, including all of our indebtednessunder our senior secured credit facilities and the senior notes, bears interestat floating rates;

 

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

 

•                  Weare more highly leveraged than some of our competitors, which may place us at acompetitive disadvantage;

 

•                  Itmay make us more vulnerable to a downturn in our business, industry, or theeconomy in general;

 

•                  Asubstantial portion of our cash flow from operations is dedicated to therepayment of our indebtedness, including indebtedness we may incur in thefuture, and will not be available for other business purposes; and

 

•                  Therewould be a material adverse effect on our business and financial condition ifwe were unable to service our indebtedness or obtain additional financing asneeded.

 

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

 

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

 

***The terms of oursenior secured credit agreement and the indenture governing our notes restrictour ability to operate our business and to pursue our business strategies.***   Oursenior secured credit agreement and the indenture governing our notes contain,and any future indebtedness of ours would likely contain, a number ofrestrictive covenants that impose significant operating and financialrestrictions on us. Our senior secured credit agreement and the indenturegoverning our notes limit our ability, among other things, to:

 

•                  Pay dividends or make distributions inrespect of our common stock or make certain other restricted payments orinvestments;

 

•                  Incuradditional indebtedness, enter into sale/leaseback transactions, or issuepreferred stock;

 

•                  Sellassets, including capital stock of subsidiaries;

 

•                  Agreeto limitations on the ability of our subsidiaries to make distributions;

 

•                  Enter into transactions with our affiliates;

 

•                  Incurliens;

 

•                  Enterinto new lines of business; and

 

•                  Engagein consolidations, mergers, or sales of substantially all of our assets.

 

Our senior secured credit agreement also requires us to achievespecified financial and operating results and maintain compliance withspecified financial ratios. Our ability to comply with these ratios may beaffected by events beyond our control.

 

The restrictions contained in our senior secured credit agreement andthe indenture could:

 

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•                  Limitour ability to plan for or react to market conditions or meet capital needs orotherwise restrict our activities or business plans; and

 

•                  Adverselyaffect our ability to finance our operations, strategic acquisitions,investments or alliances, or other capital needs or to engage in other businessactivities that would be in our interest.

 

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

 

We areexposed to risks such as changes in interest rates, commodity prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is aneconomic hedge, or we designate the derivative as a cash flow hedge or a fairvalue hedge. We formally document all relationships between hedging instrumentsand the hedged item, as well as our risk management objectives and strategy forundertaking various hedged transactions. For those derivatives designated ascash flow or fair value hedges, we formally assess, both at the hedge’sinception 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 currentincome (loss).

 

Inaccordance with SFAS No. 133, Accountingfor Derivative Instruments and Hedging Activities, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheet at fair value. Changes in the fair value of derivatives are recorded ineither income (loss) or accumulated other comprehensive income (loss), asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in accumulated other comprehensive income in the period in whichchanges in fair value occur and is reclassified to income (loss) in the sameperiod in which the hedged item affects income (loss) and any ineffectivenessis recognized currently in our Consolidated Statements of Income (Loss)**.** The gain or loss on derivatives designated as fair valuehedges and the offsetting gain or loss on the hedged item attributable to thehedged risk are included in current income (loss) in the period in whichchanges in fair value occur. The gain or loss on derivatives that have not beendesignated as hedging instruments is included in current income (loss) in theperiod in which changes in fair value occur.

 

*Interest RateRisk*

 

Our debt ispredominantly variable-rate. We manage interest rate risk on our variable-ratedebt by entering into interest rate swaps. At September 30, 2005, theestimated current market value of our fixed rate debt, based on then-currentinterest rates for similar obligations with like maturities, was approximately$24.7 million less than the amount reported on our Consolidated BalanceSheet.

 

Our obligations under our senior securedcredit facilities and senior notes expose us to changes in short-term interestrates since interest rates on this debt are variable. In November 2004, weentered into four interest rate swaps with a total notional amount of$550 million to hedge the exposure to interest rate fluctuationsassociated with our Tranche B term loan. The swaps on $300 million ofour Tranche B term loan were fixed at an average pay rate of 3.3% andexpire in December 2007, while the swaps on $250 million of ourTranche B term loan were fixed at an average pay rate of 3.5% and expirein December 2008. With the anticipated repayment of the Tranche Bterm loan, these interest rate swaps were no longer considered hedges of thevariable interest payments on that loan. As a result, during first quarter2005, we recorded the fair value of the interest rate swaps, or$15.2 million, in “Change in fair value of interest rate swaps” in ourConsolidated Statement of Income. In second quarter 2005, we redesignated the$550 million of interest rate swaps as hedges of the cash flow fromthe LIBOR-based variable interest payments on amounts borrowed under ourFacilities and recognized $5.3 million of noncash expense in “Change infair value of interest rate swaps” in our Consolidated Statement of Loss.The net $9.9 million of value that was recorded in “Other assets” on ourConsolidated Balance Sheet will result in higher interest expense over theremaining life of the interest rate swaps. The four interest rate swaps with atotal notional amount of $550 million gave us an effective interest rateof 5.3% on that debt at September 30, 2005. Ineffectiveness related to theredesignated hedges was not significant.

 

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In November 2004, we also entered intotwo 3.7% interest rate swaps with an aggregate notional amount of$250 million to hedge the exposure to floating-rate interest rate risksassociated with our senior unsecured floating-rate notes, which gave us aneffective interest rate on that debt of 6.6% at September 30, 2005. Theseswaps expire in October 2009. These swaps were designated as cash flowhedges. Accordingly, changes in the fair value of the interest rate swaps wererecorded in “Series B equity units” prior to our conversion to acorporation and in “Accumulated other comprehensive income” subsequent to ourconversion and were reclassified to “Interest expense” as interest expense wasrecognized on the LIBOR-based debt. There was no ineffectiveness relatedto these hedges.

 

*Predecessor Period*

 

As described in “Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Form 10-Q, in the predecessor periods presented, OfficeMax allocateddebt and interest costs to Boise Forest Products Operations based on itsaverage asset balances. OfficeMax occasionally used derivative financialinstruments, such as interest rate swaps, rate hedge agreements, and forwardexchange contracts, to hedge underlying debt obligations or anticipatedtransactions. The effects of these financial instruments are not included inthe predecessor financial statements other than through OfficeMax’s allocationsto our predecessor.

 

***ITEM 4.******                                                 CONTROLSAND PROCEDURES***

 

We maintain “disclosure controls andprocedures,” as Rule 13a-15(e) under the Securities and Exchange Act of 1934,as amended, defines such term. We have designed these controls and proceduresto reasonably assure that information required to be disclosed in our reportsfiled under the Exchange Act, such as this Form 10-Q, is recorded, processed,summarized and reported within the time period specified in the SEC's rules andforms. We have also designed our disclosure controls to provide reasonableassurance that such information is accumulated and communicated to our seniormanagement, including the CEO and CFO, as appropriate, to allow them to maketimely decisions regarding our required disclosures.

 

In designing and evaluating our disclosurecontrols and procedures, we recognized that disclosure controls and procedures,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the disclosure controls andprocedures are met. Additionally, in designing disclosure controls andprocedures, our management necessarily was required to apply its judgement inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. We have also designed our disclosure controls and procedures basedin part upon assumptions about the likelihood of future events, and there canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions.

 

Subject to the limitations noted above, ourmanagement, with the participation of our CEO and CFO, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the fiscal quarter covered by the quarterly reporton this Form 10-Q. Based on that evaluation, the CEO and CFO have concludedthat, as of such date, our disclosure controls and procedures are effective tomeet the objective for which they were designed and operate at the reasonableassurance level.

 

There were no changes in our internal controlover financial reporting that occured during the last fiscal quarter that havematerially affected, or are resonably likely to materially affect, our internalcontrol over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

***ITEM 1.******                                                 LEGALPROCEEDINGS***

 

*Legal Proceedings*

 

OfficeMax agreed to retain responsibility for essentially all legalproceedings related to our businesses that arose before October 29, 2004.We did, however, assume responsibility for a small number of legal proceedingsthat arose before this date.  We are alsoa party to routine legal proceedings that have arisen in our businesses after October 29,2004. Management does not believe any of the legal proceedings for which wehave responsibility will have a material adverse effect on our financialposition,  results of operations, or cashflows.

 

*Environmental Matters*

 

We are not currently involved in any material environmentalproceedings. OfficeMax retained responsibility for environmental claims andliabilities related to businesses, facilities, and other assets not purchasedby us in the Acquisition. In addition, OfficeMax indemnifies us for hazardoussubstance releases and other environmental regulatory violations that relate tothe businesses we did purchase and that occurred before the Acquisition orarose from pre-Acquisition operations. OfficeMax, however, may not havesufficient funds to satisfy in full its indemnification obligations, and insome cases, we may not be entitled to indemnification. Management does notbelieve that the potential exposure to the company for environmental matterswould have a material adverse effect on our financial position, results ofoperations, or cash flows, even if OfficeMax failed to fulfill its indemnificationresponsibilities.

 

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

 

Required exhibits are listed in the Index to Exhibits and areincorporated by reference.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                               | BOISE CASCADE COMPANY                                      |
|------------------------------------|------------------------------------------------------------|
|                               |                                                       |
|                               | /s/ Samuel K. Cotterell                                    |
|                               | Samuel K. Cotterell  Vice President and Controller         |
|                               | (As Duly Authorized Officer and Chief  Accounting Officer) |
|                               |                                                       |
|                               |                                                       |
| Date:   November 3, 2005 |                                                       |

 

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**BOISECASCADE COMPANY**

**INDEXTO EXHIBITS**

 

Filed With the Quarterly Reporton Form 10-Q for the Quarter Ended September 30, 2005

 

 
| **Number** | ** ** | **Description**                                                                                                  |
|------------|------------|------------------------------------------------------------------------------------------------------------------|
| 31.1       |       | CEO Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                |
|       |       |                                                                                                             |
| 31.2       |       | CFO Certification Pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                |
|       |       |                                                                                                             |
| 32         |       | Section 906 Certifications of Chief  Executive Officer and Chief Financial Officer of Boise Cascade Company |
|       |       |                                                                                                             |
| 99         |       | Financial Statements of Boise Land &  Timber Holdings Corp.                                             |

 

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