Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

 
| **x**                                                                                                                                                                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                              | ** ** | ** **                                                                                              |
| **For the quarterly period ended  September 30, 2008**                                                                                                                                                                                                                                                       |
| ** **                                                                                                                                                                                                                                                                                                        |
| **o**                                                                                                                                                                                                                                                                                                             | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                        |
| **For the transition period from                         to                        ** |

 

**Commission File Number:  333-122770**

 

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

(Exact name ofregistrant as specified in its charter)

 

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

 

**1111West Jefferson StreetSuite 300Boise, Idaho 83702-5389**(Address of principalexecutive offices) (Zip Code)

 

**(208)384-6161**

(Registrant’stelephone number, including area code)

 

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

 

We are a voluntary filerof reports required of companies with public securities under Sections 13or 15(d) of the Securities Exchange Act of 1934, and we have filed allreports which would have been required of us during the past 12 months hadwe been subject to such provisions.

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company (as defined by Rule 12b-2of the Exchange Act):

 

Large accelerated filer o   Accelerated filer o    Non-accelerated filer x    Smaller reporting company o

 

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

 

The registrant, a limitedliability company, has no voting or nonvoting equity held by nonaffiliates andno common stock outstanding. Equity units issued and outstanding on October 31,2008, were as follows:

 

| **Series**                  | ** ** | **Units Outstanding as of October 31, 2008** |
|-----------------------------|------------|----------------------------------------------------------------------------|
|                        |       |                                                                       |
| Series A Common  Units |       | 66,000,000                                                                 |
| Series B Common  Units |       | 535,335,427                                                                |
| Series C Common  Units |       | 22,313,569                                                                 |

 

These units areneither registered nor publicly traded.

 

 

 

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**Table of Contents**

 
| **PART I—FINANCIAL  INFORMATION** |
|---------------------------------------------|
|                                        |   |   |   |
| Item 1.                                     | Consolidated Financial  Statements | 1 |
|                                        | Notes to  Unaudited Quarterly Consolidated Financial Statements | 7 |
|                                        |   |   1. | Nature of  Operations and Basis of Presentation | 7 |
|                                        |   |   2. | Sale of Our  Paper and Packaging & Newsprint Assets | 7 |
|                                        |   |   3. | Investment in  Equity Affiliate | 9 |
|                                        |   |   4. | Assets and  Liabilities Held for Sale | 9 |
|                                        |   |   5. | Transactions  With Related Parties | 10 |
|                                        |   |   6. | Vendor and  Customer Rebates and Allowances | 11 |
|                                        |   |   7. | Other (Income) Expense,  Net | 12 |
|                                        |   |    8. | Leases | 12 |
|                                        |   |    9. | Income Taxes | 13 |
|                                        |   | 10. | Inventories | 13 |
|                                        |   | 11. | Property and  Equipment, Net | 14 |
|                                        |   | 12. | Goodwill and  Intangible Assets | 14 |
|                                        |   | 13. | Asset Retirement  Obligations | 15 |
|                                        |   | 14. | Debt | 16 |
|                                        |   | 15. | Financial Instruments | 17 |
|                                        |   | 16. | New and  Recently Adopted Accounting Standards | 19 |
|                                        |   | 17. | Retirement and  Benefit Plans | 20 |
|                                        |   | 18. | Redeemable Equity  Units | 21 |
|                                        |   | 19. | Segment Information | 21 |
|                                        |   | 20. | Commitments and  Guarantees | 24 |
|                                        |   | 21. | Consolidating  Guarantor and Nonguarantor Financial Information | 25 |
|                                        |   | 22. | Legal  Proceedings and Contingencies | 36 |
|                                        |   |   |   |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 36 |
|                                        |   | Understanding Our Financial Information | 36 |
|                                        |   | Background and Executive Overview | 36 |
|                                        |   | Sale of Our Paper and Packaging & Newsprint  Assets | 37 |
|                                        |   | Effects  of the Sale | 38 |
|                                        |   | Recent Trends and Operational Outlook | 39 |
|                                        |   | Factors That Affect Our Operating Results | 40 |
|                                        |   | Our  Operating Results | 44 |
|                                        |   | Industry Mergers and Acquisitions | 49 |
|                                        |   | Acquisitions | 49 |
|                                        |   | Divestitures | 49 |
|                                        |   | Liquidity and Capital Resources | 49 |
|                                        |   | Contractual  Obligations | 53 |
|                                        |   | Off-Balance-Sheet  Activities | 54 |
|                                        |   | Guarantees | 54 |
|                                        |   | Environmental | 54 |
|                                        |   | Critical Accounting Estimates | 54 |
|                                        |   | New and Recently Adopted Accounting Standards | 56 |
|                                        |   |   |   |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk | 57 |
|                                        |   |   |   |   |
| Item 4T.                               | Controls and  Procedures | 58 |
|                                        |   |   |   |   |
| **PART II—OTHER  INFORMATION**    |
|                                        |   |   |
| Item 1.                                | Legal Proceedings | 60 |
|                                        |   |   |   |   |
| Item 1A.                               | Risk Factors | 60 |
|                                        |   |   |   |   |
| Item 2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds | 61 |
|                                             |  |  |  |  |  |  |

 

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| Item 3.      | Defaults Upon  Senior Securities                    | 61     |
|--------------|-----------------------------------------------------|--------|
|         |                                                |   |   |
| Item 4.      | Submission of  Matters to a Vote of Securityholders | 61     |
|         |                                                |   |   |
| Item 5.      | Other Information                                   | 61     |
|         |                                                |   |   |
| Item 6. | Exhibits                                            | 61     |

 

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

 

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**PART I—FINANCIAL INFORMATION**

 
| ***ITEM  1.*** | ***CONSOLIDATED FINANCIAL STATEMENTS*** |
|----------------|-----------------------------------------|

 

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

**(unaudited)**

** **
| ** **                                                           | ** ** | **Three Months Ended  September 30** | ** **   |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|--------------|
| ** **                                                           | ** ** | **2008**                                            | ** **   | **2007** | ** ** |
| ** **                                                           | ** ** | **(thousands)**                                     | ** **   |
| **Sales**                                                            |       |                                                |         |   |   |
| Trade                                                                |       | $                                                   | 705,912      |   | $ | 1,247,563 |   |
| Related parties                                                      |       | 21,214                                              |         | 154,570 |   |
|                                                                 |       | 727,126                                             |         | 1,402,133 |   |
|                                                                 |       |                                                |         |   |   |
| **Costs  and expenses**                                              |       |                                                |         |   |   |
| Materials,  labor, and other operating expenses                      |       | 627,407                                             |         | 1,202,547 |   |
| Materials,  labor, and other operating expenses from related parties |       | 19,045                                              |         | — |   |
| Depreciation,  amortization, and depletion                           |       | 8,751                                               |         | 32,273 |   |
| Selling and  distribution expenses                                   |       | 62,537                                              |         | 72,356 |   |
| General and  administrative expenses                                 |       | 7,259                                               |         | 22,597 |   |
| General and  administrative expenses from related party              |       | 2,506                                               |         | — |   |
| Loss on sale of  Paper and Packaging & Newsprint assets     |       | 1,739                                               |         |   |   |
| Other (income)  expense, net                                         |       | (3,768                                              | )            | 390 |   |
|                                                                 |       | 725,476                                             |         | 1,330,163 |   |
|                                                                 |       |                                                |         |   |   |
| **Income  from operations**                                          |       | 1,650                                               |         | 71,970 |   |
|                                                                 |       |                                                |         |   |   |
| Equity in net  income of affiliate                                   |       | 2,148                                               |         | — |   |
| Impairment of  investment in equity affiliate                        |       | (208,074                                            | )            | — |   |
| Foreign exchange  gain (loss)                                        |       | (406                                                | )            | 2,333 |   |
| Change in fair  value of contingent value rights                     |       | 2,227                                               |         | — |   |
| Interest expense                                                     |       | (6,263                                              | )            | (23,356 | ) |
| Interest income                                                      |       | 1,469                                               |         | 1,274 |   |
|                                                                 |       | (208,899                                            | )            | (19,749 | ) |
|                                                                 |       |                                                |         |   |   |
| **Income  (loss) before income taxes**                               |       | (207,249                                            | )            | 52,221 |   |
| Income tax provision                                                 |       | (391                                                | )            | (3,056 | ) |
| **Net  income (loss)**                                               | ** ** | **$**                                               | **(207,640** | **)** | **$** | **49,165** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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** **

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

**(unaudited)**

** **
| ** **                                                           | ** ** | **Nine Months Ended   September 30** | ** **   |
|----------------------------------------------------------------------|------------|----------------------------------------------------------|--------------|
| ** **                                                           | ** ** | **2008**                                                 | ** **   | **2007** | ** ** |
| ** **                                                           | ** ** | **(thousands)**                                          | ** **   |
| **Sales**                                                            |       |                                                     |         |   |   |
| Trade                                                                |       | $                                                        | 2,330,114    |   | $ | 3,699,657 |   |
| Related parties                                                      |       | 130,782                                                  |         | 471,842 |   |
|                                                                 |       | 2,460,896                                                |         | 4,171,499 |   |
|                                                                 |       |                                                     |         |   |   |
| **Costs  and expenses**                                              | ** ** | ** **                                               | ** **   | ** ** | ** ** |
| Materials,  labor, and other operating expenses                      |       | 2,157,951                                                |         | 3,629,740 |   |
| Materials,  labor, and other operating expenses from related parties |       | 48,234                                                   |         | — |   |
| Depreciation,  amortization, and depletion                           |       | 27,470                                                   |         | 113,355 |   |
| Selling and  distribution expenses                                   |       | 183,502                                                  |         | 214,384 |   |
| General and  administrative expenses                                 |       | 29,770                                                   |         | 62,302 |   |
| General and  administrative expenses from related party              |       | 6,010                                                    |         | — |   |
| Gain on sale of  Paper and Packaging & Newsprint assets     |       | (2,996                                                   | )            | — |   |
| Other (income)  expense, net                                         |       | 3,925                                                    |         | (2,155 | ) |
|                                                                 |       | 2,453,866                                                |         | 4,017,626 |   |
|                                                                 | ** ** | ** **                                               | ** **   | ** ** | ** ** |
| **Income  from operations**                                          |       | 7,030                                                    |         | 153,873 |   |
|                                                                 |       |                                                     |         |   |   |
| Equity in net  loss of affiliate                                     |       | (15,249                                                  | )            | — |   |
| Impairment of  investment in equity affiliate                        |       | (208,074                                                 | )            | — |   |
| Foreign exchange  gain (loss)                                        |       | (129                                                     | )            | 4,595 |   |
| Change in fair  value of contingent value rights                     |       | (1,803                                                   | )            | — |   |
| Change in fair  value of interest rate swaps                         |       | (6,284                                                   | )            | 5,395 |   |
| Interest expense                                                     |       | (28,071                                                  | )            | (70,051 | ) |
| Interest income                                                      |       | 6,629                                                    |         | 2,517 |   |
|                                                                 |       | (252,981                                                 | )            | (57,544 | ) |
| ** **                                                           |       |                                                     |         |   |   |
| **Income  (loss) before income taxes**                               |       | (245,951                                                 | )            | 96,329 |   |
| Income tax  provision                                                |       | (1,523                                                   | )            | (7,729 | ) |
| **Net  income (loss)**                                               | ** ** | **$**                                                    | **(247,474** | **)** | **$** | **88,600** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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

**Consolidated Balance Sheets**

(unaudited)

 
| ** **                                        | ** ** | **September 30,**                                   | ** **    | **December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------------|---------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**                                                 | ** **    | **2007**              | ** ** |
| ** **                                        | ** ** | **(thousands****, except unit data****)** | ** **    |
| **ASSETS**                                        |       |                                                     |          |                  |       |
| ** **                                        |       |                                                     |          |                  |       |
| **Current**                                       |       |                                                     |          |                  |       |
| Cash and cash  equivalents                        |       | $                                                        | 290,092       |                  | $          | 57,623 |   |
| Receivables                                       |       |                                                     |          |                  |       |
| Trade, less  allowances of $2,798 and $1,664 |       | 144,039                                                  |          | 115,209               |       |
| Related parties                                   |       | 9,474                                                    |          | 9                     |       |
| Other                                             |       | 5,915                                                    |          | 7,458                 |       |
| Inventories                                       |       | 303,552                                                  |          | 342,015               |       |
| Assets held for  sale                             |       | —                                                   |          | 1,853,039             |       |
| Other                                             |       | 5,108                                                    |          | 5,426                 |       |
|                                              |       | 758,180                                                  |          | 2,380,779             |       |
|                                              |       |                                                     |          |                  |       |
| **Property**                                      |       |                                                     |          |                  |       |
| Property and  equipment, net                      |       | 291,968                                                  |          | 313,117               |       |
| Fiber farms and  deposits                         |       | 6,015                                                    |          | 24,010                |       |
|                                              |       | 297,983                                                  |          | 337,127               |       |
|                                              |       |                                                     |          |                  |       |
| **Investment  in equity affiliate**               |       | 59,058                                                   |          | —                |       |
| **Deferred  financing costs**                     |       | 8,227                                                    |          | 23,074                |       |
| **Goodwill**                                      |       | 12,170                                                   |          | 12,170                |       |
| **Intangible  assets, net**                       |       | 9,353                                                    |          | 9,668                 |       |
| **Other  assets**                                 |       | 6,431                                                    |          | 11,374                |       |
| **Total  assets**                                 | ** ** | **$**                                                    | **1,151,402** | ** **            | **$**      | **2,774,192** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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

**Consolidated Balance Sheets (continued)**

(unaudited, except unit data)

 
| ** **                                                                                                       | ** ** | **September 30,**                                   | ** **    | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|---------------|-----------------------|------------|
| ** **                                                                                                       | ** ** | **2008**                                                 | ** **    | **2007**              | ** ** |
| ** **                                                                                                       | ** ** | **(thousands,**** except unit data****)** | ** **    |
| **LIABILITIES  AND CAPITAL**                                                                                     |       |                                                     |          |                  |       |
| ** **                                                                                                       |       |                                                     |          |                  |       |
| **Current**                                                                                                      |       |                                                     |          |                  |       |
| Short-term  borrowings                                                                                           |       | $                                                        | —        |                  | $          | 10,500 |   |
| Current portion  of long-term debt                                                                               |       | —                                                   |          | 47,250                |       |
| Accounts payable                                                                                                 |       |                                                     |          |                  |       |
| Trade                                                                                                            |       | 126,729                                                  |          | 141,459               |       |
| Related parties                                                                                                  |       | 4,589                                                    |          | 43                    |       |
| Accrued  liabilities                                                                                             |       |                                                     |          |                  |       |
| Compensation and  benefits                                                                                       |       | 43,141                                                   |          | 36,909                |       |
| Interest payable                                                                                                 |       | 8,262                                                    |          | 7,140                 |       |
| Other                                                                                                            |       | 61,054                                                   |          | 29,959                |       |
| Liabilities  related to assets held for sale                                                                     |       | —                                                   |          | 331,636               |       |
|                                                                                                             |       | 243,775                                                  |          | 604,896               |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Debt**                                                                                                         |       |                                                     |          |                  |       |
| Long-term debt,  less current portion                                                                            |       | 315,000                                                  |          | 1,113,313             |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Other**                                                                                                        |       |                                                     |          |                  |       |
| Compensation and  benefits                                                                                       |       | 49,925                                                   |          | 46,981                |       |
| Other long-term  liabilities                                                                                     |       | 11,849                                                   |          | 17,097                |       |
|                                                                                                             |       | 61,774                                                   |          | 64,078                |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Redeemable  equity units**                                                                                     |       |                                                     |          |                  |       |
| Series B  equity units – 4,978,826 units and 16,622,421 units outstanding                    |       | 4,978                                                    |          | 16,992                |       |
| Series C  equity units – 22,313,569 units and 39,069,411 units outstanding                   |       | 7,641                                                    |          | 9,489                 |       |
|                                                                                                             |       | 12,619                                                   |          | 26,481                |       |
| ** **                                                                                                       |       |                                                     |          |                  |       |
| **Commitments  and contingent liabilities**                                                                      |       |                                                     |          |                  |       |
|                                                                                                             |       |                                                     |          |                  |       |
| **Capital**                                                                                                      |       |                                                     |          |                  |       |
| Series A  equity units – no par value; 66,000,000 units authorized and outstanding                |       | 79,885                                                   |          | 78,463                |       |
| Series B  equity units – no par value; 550,000,000 units authorized and 530,356,601  units outstanding |       | 438,349                                                  |          | 876,693               |       |
| Series C  equity units – no par value; 44,000,000 units authorized                                     |       | —                                                   |          | 10,268                |       |
| **Total  capital**                                                                                               |       | 518,234                                                  |          | 965,424               |       |
| ** **                                                                                                       |       |                                                     |          |                  |       |
| **Total  liabilities and capital**                                                                               | ** ** | **$**                                                    | **1,151,402** | ** **            | **$**      | **2,774,192** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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

**Consolidated Statements of Cash Flows**

(unaudited)

** **
| ** **                                                                       | ** ** | **Nine Months Ended  September 30** | ** **  |
|----------------------------------------------------------------------------------|------------|----------------------------------------------------|-------------|
| ** **                                                                       | ** ** | **2008**                                           | ** **  | **2007** | ** ** |
| ** **                                                                       | ** ** | **(thousands)**                                    | ** **  |
| **Cash  provided by (used for) operations**                                      |       |                                               |        |   |   |
| Net income  (loss)                                                               |       | $                                                  | (247,474    | ) | $ | 88,600 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                               |        |   |   |
| Equity in net  loss of affiliate                                                 |       | 15,249                                             |        | — |   |
| Impairment of  investment in equity affiliate                                    |       | 208,074                                            |        | — |   |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | 28,630                                             |        | 114,034 |   |
| Related-party  interest income                                                   |       | (2,760                                             | )           | — |   |
| Deferred income  taxes                                                           |       | 54                                                 |        | 3,650 |   |
| Pension and  other postretirement benefit expense                                |       | 10,616                                             |        | 18,945 |   |
| Gain on changes  in retiree healthcare programs                                  |       | —                                             |        | (4,367 | ) |
| Change in fair  value of contingent value rights                                 |       | 1,803                                              |        | — |   |
| Change in fair  value of interest rate swaps                                     |       | 6,284                                              |        | (5,395 | ) |
| Management  equity units expense                                                 |       | 1,349                                              |        | 2,337 |   |
| Gain on sale of  assets, net                                                     |       | (10,871                                            | )           | (897 | ) |
| Loss on sale of  note receivable from related party                              |       | 8,357                                              |        | — |   |
| Other                                                                            |       | 2,060                                              |        | (4,047 | ) |
| Decrease  (increase) in working capital, net of dispositions                     |       |                                               |        |   |   |
| Receivables                                                                      |       | (62,069                                            | )           | (76,577 | ) |
| Inventories                                                                      |       | 39,982                                             |        | (30,193 | ) |
| Prepaid expenses                                                                 |       | 2,068                                              |        | 786 |   |
| Accounts payable  and accrued liabilities                                        |       | (6,322                                             | )           | 18,260 |   |
| Pension and  other postretirement benefit payments                               |       | (20,820                                            | )           | (888 | ) |
| Current and  deferred income taxes                                               |       | (969                                               | )           | 2,578 |   |
| Other                                                                            |       | 1,396                                              |        | 4,507 |   |
| Cash provided by  (used for) operations                                          |       | (25,363                                            | )           | 131,333 |   |
|                                                                             |       |                                               |        |   |   |
| **Cash  provided by (used for) investment**                                      |       |                                               |        |   |   |
| Proceeds from  sale of assets, net of cash contributed                           |       | 1,269,081                                          |        | 18,270 |   |
| Proceeds from  sale of note receivable from related party, net                   |       | 52,737                                             |        | — |   |
| Expenditures for  property and equipment                                         |       | (36,748                                            | )           | (137,247 | ) |
| Increase in restricted  cash                                                     |       | (183,290                                           | )           | (200,000 | ) |
| Decrease in  restricted cash                                                     |       | 183,290                                            |        | — |   |
| Other                                                                            |       | 1,556                                              |        | 6,378 |   |
| Cash provided by  (used for) investment                                          |       | 1,286,626                                          |        | (312,599 | ) |
|                                                                             |       |                                               |        |   |   |
| **Cash  provided by (used for) financing**                                       |       |                                               |        |   |   |
| Issuances of  long-term debt                                                     |       | 240,000                                            |        | 960,000 |   |
| Payments of  long-term debt                                                      |       | (1,085,563                                         | )           | (751,525 | ) |
| Short-term  borrowings                                                           |       | (10,500                                            | )           | (3,200 | ) |
| Tax  distributions to members                                                    |       | (128,024                                           | )           | (2,753 | ) |
| Repurchase of  management equity units                                           |       | (28,634                                            | )           | (249 | ) |
| Cash paid for  termination of interest rate swaps                                |       | (11,918                                            | )           | — |   |
| Proceeds from  changes to interest rate swaps                                    |       | —                                             |        | 2,848 |   |
| Other                                                                            |       | (4,155                                             | )           | (3,416 | ) |
| Cash provided by  (used for) financing                                           |       | (1,028,794                                         | )           | 201,705 |   |
|                                                                             |       |                                               |        |   |   |
| **Increase  in cash and cash equivalents**                                       |       | 232,469                                            |        | 20,439 |   |
|                                                                             |       |                                               |        |   |   |
| **Balance  at beginning of the period**                                          |       | 57,623                                             |        | 45,169 |   |
|                                                                             |       |                                               |        |   |   |
| **Balance  at end of the period**                                                | ** ** | **$**                                              | **290,092** | ** ** | **$** | **65,608** | ** ** |

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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

**Consolidated Statements of Capital**

(unaudited)

** **
| ** **                                                       | ** ** | **Series A  Equity Units** | ** ** | **Series B  Equity Units** | ** ** | **Series C  Equity Units** | ** **  | **Total**  | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|-------------|------------|------------|
| ** **                                                       | ** ** | **Units**                            | ** ** | **Amount**                           | ** ** | **Units**                            | ** **  | **Amount** | ** ** | **Units** | ** ** | **Amount** | ** ** | **Capital** | ** ** |
| ** **                                                       | ** ** | **(thousands)**                      | ** ** |
| Balance at  December 31, 2006                               |       | 66,000                               |       | $                                    | 78,290     |                                 | 530,357     |       | $          | 724,988 |   | — |   | $ | 11,655 |   | $ | 814,933 |   |
|                                                             |       |                                 |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Net income (a)                                                   |       | —                               |       | —                               |       | —                               |        | 127,697    |       | — |   | — |   | 127,697 |   |
| Other comprehensive  income (loss), net of tax (a) (b) |       |                                 |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                                 |       | —                               |       | —                               |       | —                               |        | (3,070     | )          | — |   | — |   | (3,070 | ) |
| Unfunded  accumulated benefit obligation                         |       | —                               |       | —                               |       | —                               |        | 33,705     |       | — |   | — |   | 33,705 |   |
| Paid-in-kind  dividend                                           |       | —                               |       | 5,770                                |       | —                               |        | (5,770     | )          | — |   | — |   | — |   |
| Tax  distributions to members                                    |       | —                               |       | (5,597                               | )          | —                               |        | (1,803     | )          | — |   | — |   | (7,400 | ) |
| Allocation of  profit interest to Series C equity units     |       | —                               |       | —                               |       | —                               |        | 1,387      |       | — |   | (1,387 | ) | — |   |
| Other                                                            |       | —                               |       | —                               |       | —                               |        | (441       | )          | — |   | — |   | (441 | ) |
| **Balance  at December 31, 2007** (c)                       |       | 66,000                               |       | $                                    | 78,463     |                                 | 530,357     |       | $          | 876,693 |   | — |   | $ | 10,268 |   | $ | 965,424 |   |
|                                                             |       |                                 |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Net loss (a)                                                     |       | —                               |       | —                               |       | —                               |        | (247,474   | )          | — |   | — |   | (247,474 | ) |
| Other  comprehensive loss, net of tax (a) (b)          |       |                                 |       |                                 |       |                                 |        |       |       |   |   |   |   |   |   |
| Cash flow hedges                                                 |       | —                               |       | —                               |       | —                               |        | (133       | )          | — |   | — |   | (133 | ) |
| Unfunded  accumulated benefit obligation                         |       | —                               |       | —                               |       | —                               |        | (36,057    | )          | — |   | — |   | (36,057 | ) |
| Equity in other  comprehensive income of  equity  affiliate |       | —                               |       | —                               |       | —                               |        | 87         |       | — |   | — |   | 87 |   |
| Paid-in-kind  dividend                                           |       | —                               |       | 4,657                                |       | —                               |        | (4,657     | )          | — |   | — |   | — |   |
| Tax distributions  to members                                    |       | —                               |       | (3,235                               | )          | —                               |        | (151,954   | )          | — |   | — |   | (155,189 | ) |
| Allocation of  profit interest from Series C equity units   |       | —                               |       | —                               |       | —                               |        | 10,268     |       | — |   | (10,268 | ) | — |   |
| Fair market  value adjustment of redeemable equity units         |       | —                               |       | —                               |       | —                               |        | (11,338    | )          | — |   | — |   | (11,338 | ) |
| Other                                                            |       | —                               |       |                                 |       |                                 |        | 2,914      |       |   |   |   |   | 2,914 |   |
| **Balance  at September 30, 2008**(c)                       | ** ** | **66,000**                           | ** ** | **$**                                | **79,885** | ** **                           | **530,357** | ** ** | **$**      | **438,349** | ** ** | **—** | ** ** | **$** | **—** | ** ** | **$** | **518,234** | ** ** |

 

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(a)                                  Total comprehensive income (loss) for thethree and nine months ended September 30, 2008, was $(207.8) millionand $(283.6) million, compared with $43.6 million and$84.0 million for the three and nine months ended September 30, 2007.

 

(b)                                 Total other comprehensive loss for the threeand nine months ended September 30, 2008, was $(0.2) million and $(36.1) million,compared with $(5.5) million and $(4.6) million for the three andnine months ended September 30, 2007.

 

(c)                                  Accumulated other comprehensive income at September 30,2008, and December 31, 2007, was $35.0 million and$71.1 million, respectively.

 

Seeaccompanying notes to unaudited quarterly consolidated financial statements.

 

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

 

***1.******             Natureof Operations and Basis of Presentation***

 

Ouroperations began on October 29, 2004 (inception), when we acquired theforest products and paper assets of OfficeMax (the Forest ProductsAcquisition). Before the Forest Products Acquisition, OfficeMax was known asBoise Cascade Corporation. We acquired the name “Boise Cascade” as part of theForest Products Acquisition.

 

On February 22, 2008, Boise Cascade,L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging &Newsprint assets and most of its Corporate and Other assets (the Sale), toBoise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash and securitiesequal to $1.6 billion, plus working capital adjustments. With the Sale, weare now a focused wood products manufacturing and building productsdistribution company that remains headquartered in Boise, Idaho. Weproduce quality wood products and manage a nationwide building materialsdistribution network. After the Sale, we operate our business in thefollowing three reportable segments: Building Materials Distribution, WoodProducts, and Corporate and Other. See Note 19, Segment Information, foradditional information about our reportable segments.

 

As used in these consolidated financial statements,the terms “BC Holdings” and “we” refer to Boise Cascade Holdings, L.L.C., andits consolidated subsidiaries. In connection with the Sale, we received37.9 million, or 49%, of Boise Inc.’s shares. The equityinterest that we own in Boise Inc. represents a significant continuinginvolvement as defined in Statement of Financial Accounting Standards (SFAS) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets.*As a result, the financial data in thisreport includes the results of the Paper and Packaging & Newsprintsegments through February 21, 2008, and we did not define the sold assetsas discontinued operations.

 

The quarterly consolidated financial statements havenot been audited by an independent registered public accounting firm but, inthe opinion of management, include all adjustments, consisting only of normal,recurring adjustments, necessary to present fairly the results for the periodspresented. Net income (loss) for the three and nine months ended September 30,2008 and 2007, involved estimates and accruals. Some of our accountingestimates include the assessment of the recoverability of long-lived assets,the assessment of goodwill and intangible assets, the valuation and recognitionof share-based compensation, the valuation and recognition of pension expenseand liabilities, the evaluation of our investment in Boise Inc. forother-than-temporary impairment, and the valuation of allowance for doubtfulaccounts. Actual results may vary from those estimates. Quarterly results arenot necessarily indicative of results that may be expected for the full year.

 

Certain amounts in prior periods’ consolidatedfinancial statements have been reclassified to conform with the current period’spresentation.

 

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

 

On February 22, 2008, Boise Cascade,L.L.C., completed the Sale for $1,277.2 million of cash consideration,$277.4 million of net stock consideration, and a $41.0 millionpaid-in-kind promissory note receivable. After the Sale, the note receivablefrom Boise Inc. increased $17.3 million for working capitaladjustments, and in June 2008, we sold the note receivable for$52.7 million after selling expenses. For more information, seeNote 5, Transactions With Related Parties. In connection with the Sale, wegenerated a $5.9 million gain, of which we recognized $3.0 million inour Consolidated Statement of Loss during the nine months ended September 30,2008. In accordance with Emerging Issues Task Force (EITF) No. 01-02, *Interpretations of Accounting Principles Board (APB) Opinion No. 29,*we deferred $2.9 million of the gain as a reduction of ourinvestment in Boise Inc.

 

Immediately following the Sale, BoiseCascade, L.L.C., distributed the securities received in the transaction to us.As a result, we became a 49% owner of Boise Inc. and continue to have asignificant indirect financial interest in the results of the sold businesses.We account for our interest in Boise Inc. using the equity method ofaccounting. See Note 3, Investment in Equity Affiliate, for moreinformation.

 

The net proceeds of any disposition of the shares of Boise Inc., andthe net proceeds received from the sale of the note receivable fromBoise Inc. (see Note 5, Transactions With Related Parties), aregoverned by the terms of our senior subordinated notes indenture, including theasset disposition

 

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provisions, which may require us to use the proceeds within one year of thesale to repay senior indebtedness, reinvest in our business, or tender for all,or a portion of, the outstanding notes at par.

 

*Useof Transaction Proceeds*

 

With the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million of ourdebt. In addition to repaying a substantial amount of our indebtedness, infirst quarter 2008, we paid $11.9 million to unwind all of our interest rateswaps.

 

We make cash distributions to permit the members ofBC Holdings and affiliates to pay their taxes. On February 22, 2008,we accrued $200 million for estimated tax distributions payable to ourequity holders related to the estimated net taxable gain on the Sale. Our finaltax distribution payable to members will include the gain on the Sale and willbe partially offset by 2008 taxable losses. During the three and nine monthsended September 30, 2008, we made $0.1 million and$128.0 million of tax distributions to our equity holders. We expect tomake additional tax distributions during the remainder of the year or in firstquarter 2009.

 

In connection with the transaction, approximately75 participants in our Management Equity Plan terminated employment with us.These employees collectively held 6.6 million Series B and16.1 million Series C units. After the transaction, we paid$18.3 million to repurchase their equity units. In addition, we alsocurrently expect to pay approximately $4.2 million under the deferredcompensation agreements for employees terminated in connection with thetransaction. Of the $4.2 million, we recorded $2.6 million in “Accruedliabilities, Compensation and benefits” and $1.6 million in “Other,Compensation and benefits” on our Consolidated Balance Sheet at September 30,2008.

 

*Pro Forma*

 

The following pro formafinancial information was derived from the unaudited quarterly financialstatements of BC Holdings. The pro forma financial information gives effect tothe Sale as if it were consummated on January 1, 2007. The pro formafinancial information is intended for informational purposes only and is notnecessarily indicative of the results of operations that may have actuallyoccurred if the Sale had been consummated on January 1, 2007, or theoperating results that may be obtained in the future.

** **
| ** **         | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **         | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **         | ** ** | **(thousands)**                                     | ** ** |
| Sales              |       | $                                                   | 727,126    |                                               | $          | 847,697 |   | $ | 2,126,203 |   | $ | 2,514,714 |   |
|               |       |                                                |       |                                               |       |   |   |   |   |
| Net income  (loss) |       | $                                                   | (208,322   | )(a)                                               | $          | 24,223 | (b) | $ | (262,998 | )(a) | $ | 51,800 | (b) |

 

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(a)                                  The pro forma net loss for the three and ninemonths ended September 30, 2008, included pro forma income of$2.0 million and pro forma expense of $20.1 million related to our equityinterest in Boise Inc.; included a $208.1 million write-down of ourinvestment in Boise Inc.; included zero and $6.3 million of expenserelated to changes in the fair value of our interest rate swaps, which weterminated in February 2008; included zero and $4.1 million ofrelated-party interest income from the note receivable from Boise Inc.,which was sold in June 2008; excluded $2.2 million of income and$1.8 million of expense related to the fair value of contingent valuerights that we and Terrapin Partners Venture Partnership granted to certainBoise Inc. investors; and excluded $1.7 million of expense and$3.0 million of gain on the Sale.

 

(b)                                 Pro forma net income for the three and ninemonths ended September 30, 2007, included pro forma income of$6.2 million and pro forma expense of $6.0 million related to ourequity interest in Boise Inc.; included $2.3 million and$6.9 million of related-party interest income from the note receivablefrom Boise Inc.; included a zero and $4.4 million gain related tochanges in our retiree healthcare programs; and zero and $5.4 million ofincome related to changes in the fair value of our interest rate swaps.

 

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***3.******            ******Investmentin Equity Affiliate***

 

In connection with the Sale, we received 37.9 million, or 49%, ofBoise Inc.’s shares. We recorded our investment in “Investment in equityaffiliate” on our Consolidated Balance Sheet. This ownership interest providesus with the ability to exercise significant influence. Accordingly, we accountfor our investment under the equity method of accounting. We adjust the amountof our investment monthly for our proportionate share of Boise Inc.’s netincome or loss and our share of other comprehensive income or loss based on themost recently available financial statements. For the three and nine monthsended September 30, 2008, we recorded $2.1 million of income and$15.2 million of expense related to our investment in Boise Inc. in “Equityin net income (loss) of affiliate” in our Consolidated Statements of Loss.

 

On September 30, 2008, we concluded that our investment in Boise Inc.met the definition of other than temporarily impaired as defined in APB OpinionNo. 18, *The Equity Method of Accountingfor Investments in Common Stock.* We made this determination based onthe length of time and extent to which the fair value of our investment hasbeen trading below its carrying value. The Boise Inc. stock trading pricedeclined from $8.56 on February 21, 2008, to $1.56 on September 30,2008. Accordingly, we recorded a $208.1 million charge in “Impairment ofinvestment in equity affiliate” in our Consolidated Statements of Loss for the three and nine monthsended September 30, 2008. This charge reflects the decrease in the fairvalue of the investment below its carrying value of $7.06 at September 30,2008. The fair value of our investment in Boise Inc. was calculated based onour 37.9 million of Boise Inc. shares and Boise Inc.’s stockprice on September 30, 2008, of $1.56.

 

At September 30, 2008, the carrying value of our investment in BoiseInc. was approximately $210.3 million less than our share ofBoise Inc.’s underlying equity in net assets. The difference is due to thewrite-down of our investment in Boise Inc. at September 30, 2008. Inaccordance with APB Opinion No. 18, we will amortize the difference toincome on a straight-line basis over 10.7 years, which represents theweighted-average useful life of Boise Inc.’s assets. This will result inour recognizing approximately $20 million of income per year for the next10.7 years, which will be increased or decreased by our proportionateshare of Boise Inc.’s net income or loss.

 

The following table presents summarizedincome statement information for Boise Inc. for the period subsequent to theSale (February 22 through September 30, 2008). Summarized incomestatement information is not presented for the period of January 1 throughFebruary 21, 2008, or for the nine months ended September 30, 2007,as it is included in our Consolidated Statements of Loss for the nine monthsended September 30, 2008 and 2007.

 
| ** **              | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30, 2008** | ** ** |
| ** **              | ** ** | **(thousands)**                  | ** ** |
|                    |       |                             |       |
| Sales                   |       | $                                | 1,479,513  |   |
| Costs and  expenses     |       | $                                | 1,451,074  |   |
| Income from  operations |       | $                                | 28,439     |   |
| Net income  (loss)      |       | $                                | (30,038    | ) |

 

***4.******            ******Assetsand Liabilities Held for Sale***

 

In September 2007,in anticipation of the Sale, we reclassified the assets and liabilities of ourPaper and Packaging & Newsprint segments, as well as some of theassets and liabilities included in our Corporate and Other segment, to “Assetsheld for sale” and “Liabilities related to assets held for sale” on ourConsolidated Balance Sheet and stopped depreciating and amortizing thoseassets. As discussed in Note 2, Sale of Our Paper and Packaging &Newsprint Assets, we sold these assets to Boise Inc. on February 22,2008. The three and nine months ended September 30, 2007, includedapproximately $23.0 million and $84.5 million of depreciation andamortization expense related to the sold Paper, Packaging & Newsprint,and Corporate and Other segments that was not included in the three and ninemonths ended September 30, 2008, as a result of the Sale. Of the$23.0 million of depreciation and amortization expense recorded during thethree months ended September 30, 2007, $12.0 million related to ourPaper segment, $10.3 million related to our Packaging & Newsprintsegment, and $0.7 million related to our Corporate and Other segment.During the nine months ended September 30, 2007, $44.7 millionrelated to our Paper segment, $37.6 million related to our Packaging &Newsprint segment, and $2.2 million related to our Corporate and Othersegment.

 

The carrying amounts of the major classes of assets and liabilitiesclassified as “Assets held for sale” and “Liabilities related to assets heldfor sale” on our December 31, 2007, Consolidated Balance Sheet were asfollows:

 

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** **
| ** **                                   | ** ** | **December 31,** | ** **    |
|----------------------------------------------|------------|-----------------------|---------------|
| ** **                                   | ** ** | **2007**              | ** **    |
| ** **                                   | ** ** | **(thousands)**       | ** **    |
| Assets                                       |       |                  |          |
| Accounts  receivable, net                    |       | $                     | 227,291       |   |
| Inventories                                  |       | 324,679               |          |
| Property and  equipment, net                 |       | 1,199,618             |          |
| Fiber farms and  deposits                    |       | 17,843                |          |
| Goodwill                                     |       | 42,218                |          |
| Intangible  assets, net                      |       | 23,967                |          |
| Other                                        |       | 17,423                |          |
| Assets held for  sale                        | ** ** | **$**                 | **1,853,039** | ** ** |
|                                         |       |                  |          |
| Liabilities                                  |       |                  |          |
| Accounts payable                             |       | $                     | 178,733       |   |
| Accrued  compensation and benefits           |       | 105,583               |          |
| Other accrued  liabilities                   |       | 47,320                |          |
| Liabilities  related to assets held for sale | ** ** | **$**                 | **331,636**   | ** ** |

 

***5.******             TransactionsWith Related Parties***

 

*Sales*

 

Prior to the Sale, wesold paper and paper products to OfficeMax at sales prices that were designedto approximate market prices. For the three months ended September 30,2007, sales to OfficeMax were $154.6 million. Sales to OfficeMax were$90.1 million and $471.8 million for the nine months ended September 30,2008 and 2007, respectively. These sales are included in “Sales, Related parties”in the Consolidated Statements of Income (Loss).

 

During the three and nine months ended September 30, 2008, we sold$18.0 million and $32.7 million of fiber to Boise Inc. and$3.2 million and $8.0 million of fiber to Louisiana TimberProcurement Company, L.L.C., an unconsolidated entity that is 50% owned byBoise Cascade, L.L.C., and 50% owned by Boise Inc., at prices designed toapproximate market. Most of these sales relate to pulpwood and chip sales fromour Wood Products segment. These sales are included in “Sales, Related parties”in the Consolidated Statements of Loss.

 

*Costs andExpenses*

 

During the three and nine months ended September 30, 2008, wepurchased $17.4 million and $44.1 million of fiber from LouisianaTimber Procurement Company, L.L.C. In addition, we purchased$1.1 million and $2.8 million of transportation services fromBoise Inc. during the three and nine months ended September 30, 2008.We purchased the fiber and transportation services at prices that approximatedmarket prices. For the three and nine months ended September 30, 2008,these costs are recorded in “Materials, labor, and other operating expensesfrom related parties” in our Consolidated Statements of Loss.

 

In connection with the Sale, we entered into anOutsourcing Services Agreement under which Boise Inc. provides a number ofcorporate staff services to us at cost. These services include informationtechnology, accounting, and human resource services. The initial term of theagreement is for three years. It will automatically renew for one-year termsunless either party provides notice of termination to the other party at least12 months in advance of the applicable term. The Outsourcing ServicesAgreement also gives us (but not Boise Inc.) the right to terminate all or anyportion of the services provided to us on 30 days’ notice, subject topayment of an absorption fee. The absorption fee of $5.0 million isallocated among the services provided under the contract and declines to zeroin total and on an allocable basis over the initial three-year term of theagreement. During the three and nine months ended September 30, 2008, werecognized $3.7 million and $9.1 million of costs related to thisagreement, of which we recorded $0.6 million and $1.3 million in “Materials,labor, and other operating expenses from related parties,” $0.6 millionand $1.8 million in “Selling and distribution expenses,” and$2.5 million and $6.0 million in “General and administrative expensesfrom related party” in our Consolidated Statements of Loss.

 

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*NoteReceivable*

 

In connection with the Sale, we received a 15.75%, $41.0 millionpaid-in-kind promissory note receivable from Boise Inc. that compoundedquarterly and was scheduled to mature in August 2015. After the Sale, thenote receivable increased $17.3 million for working capital adjustments,the amount by which the working capital of our Paper and Packaging &Newsprint segments exceeded $329.0 million on the date of Sale. During thenine months ended September 30, 2008, we recorded approximately$2.8 million of interest income in our Consolidated Statement of Loss.

 

In June 2008,we sold the note receivable for $52.7 million after selling expenses. Werecorded an $8.4 million loss on the sale of the note receivable in “Other(income) expense, net” in our Consolidated Statement of Loss for the ninemonths ended September 30, 2008. We are obligated under the indenture forour 7.125% senior subordinated notes due in 2014 to use the net proceeds of thesale of the note receivable within one year to repay senior indebtedness,acquire additional assets, or make a tender offer at par for a portion of the seniorsubordinated notes. As we evaluate potential uses for the funds, the net cashproceeds received are invested in high-quality, short-term investments, whichwe record in “Cash and cash equivalents.”

 

*Tax Distributions*

 

The majority of ourbusinesses and assets are held and operated by limited liability companies,which are not subject to entity-level federal or state income taxation. We makecash distributions to permit the members of BC Holdings and affiliates topay income taxes. During the nine months ended September 30, 2008, we made$128.0 million of cash tax distributions, of which $120.7 millionrelated to the net taxable gain on the Sale. During the nine months ended September 30,2008, we paid $105.0 million to Forest Products Holdings (FPH), ourmajority owner. FPH in turn paid $94.2 million to Madison DearbornPartners, our equity sponsor; $10.4 million to management investors; and$0.4 million to nonmanagement affiliates, respectively. For the ninemonths ended September 30, 2007, we did not make any distributions to FPH.For the nine months ended September 30, 2008 and 2007, we paid$23.0 million and $2.8 million to OfficeMax to fund their taxobligations related to their investments in us.

 

***6.******             Vendorand Customer Rebates and Allowances***

 

We receive rebates and allowances from our vendorsunder a number of different programs, including vendor marketing programs. At September 30,2008, and December 31, 2007, we had $2.0 million and$2.2 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, *Accountingby a Customer (Including a Reseller) for Certain Consideration Received From aVendor*. Rebates and allowances received from our vendors arerecognized as a reduction of “Materials, labor, and other operating expenses”when the product is sold, unless the rebates and allowances are linked to aspecific incremental cost to sell a vendor’s product. Amounts received fromvendors that are linked to specific selling and distribution expenses arerecognized as a reduction of “Selling and distribution expenses” in the periodthe expense is incurred.

 

We also provide rebates to our customers based on thevolume of their purchases. We provide the rebates to increase the sell-throughof our products. The rebates provided to our customers are accounted for inaccordance with EITF 01-09, *Accounting forConsideration Given by a Vendor to a Customer*. The rebates are recordedas a decrease in sales. At September 30, 2008, and December 31, 2007,we had $11.6 million and $12.7 million, respectively, of rebatespayable to our customers recorded in “Accrued liabilities, Other” on ourConsolidated Balance Sheets.

 

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

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(thousands)**                                     | ** ** |
| Loss on sale of  note receivable from related party (a) |       | $                                                   | 44         |                                               | $          | — |   | $ | 8,357 |   | $ | — |   |
| Changes in  retiree healthcare programs                      |       | —                                              |       | —                                             |       | — |   | (4,367 | ) |
| Sales of assets,  net (b)                                    |       | (5,831                                              | )          | (95                                                | )          | (7,875 | ) | (796 | ) |
| Other, net (c)                                               |       | 2,019                                               |       | 485                                                |       | 3,443 |   | 3,008 |   |
| ** **                                                   | ** ** | **$**                                               | **(3,768** | **)**                                              | **$**      | **390** | ** ** | **$** | **3,925** | ** ** | **$** | **(2,155** | **)** |

 

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(a)                                  In June 2008, we sold the note receivablefrom Boise Inc. for $52.7 million after selling expenses, and for thenine months ended September 30, 2008, we recorded an $8.4 millionloss on the sale.

 

(b)                                 In July 2008, we sold our indirect whollyowned subsidiary in Brazil, Boise Cascade do Brasil LTDA., to Aracruz Celulose,S.A., for $45.5 million after selling expenses. For the three and ninemonths ended September 30, 2008, we recorded a $7.0 million and$5.7 million gain on the sale.

 

(c)                                  In September 2008, we permanently closedour veneer operation in St. Helens, Oregon, and recorded $2.1 millionof expenses related to the closure in “Other (income) expense, net” in ourConsolidated Statements of Loss for the three and nine months ended September 30,2008. In addition, we recorded $0.7 million of expense for the write-downof log inventories in “Materials, labor, and other operating expenses.”

 

The three and nine months ended September 30, 2007, included$0.2 million and $2.2 million of expense related to the closure ofour paper converting facility in Salem, Oregon.

 

***8.******             Leases***

 

We lease a portion of ourdistribution centers as well as other property and equipment under operatingleases. For purposes of determining straight-line rent expense, the lease term iscalculated from the date we first take possession of the facility, includingany periods of free rent and any option periods we are reasonably assured ofexercising. Straight-line rent expense is also adjusted to reflect anyallowances or reimbursements provided by the lessor. Rental expense foroperating leases was $3.3 million and $6.5 million for the three monthsended September 30, 2008 and 2007, and $12.0 million and$19.1 million for the nine months ended September 30, 2008 and 2007.Sublease rental income was not material in any of the periods presented.

 

For noncancelableoperating leases with remaining terms of more than one year, the minimum leasepayment requirements are $2.8 million for the remainder of 2008,$10.8 million in 2009, $10.0 million in 2010, $8.7 million in2011, $8.0 million in 2012, and $6.8 million in 2013, with totalpayments thereafter of $34.6 million. These future minimum lease paymentrequirements have not been reduced by sublease rentals due in the future undernoncancelable subleases. Minimum sublease income received in the future is notexpected to be material.

 

In second quarter 2007, we sold our newly constructed building materialsdistribution center in Milton, Florida, for $10.1 million, net of related feesand expenses. The proceeds were used to make debt repayments. In connectionwith the sale, we leased back the facility over a 15-year lease term. The leaseis accounted for as an operating lease. The minimum lease payment requirementsrelated to the transaction are included in the minimum lease payments disclosedabove.

 

Substantially all lease agreements have fixed payment terms based on thepassage of time. Some lease agreements provide us with the option to purchasethe leased property. Additionally, some agreements contain renewal optionsaveraging approximately three years, with fixed payment terms similar tothose in the original lease agreements.

 

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***9.******             Income Taxes***

 

*TaxDistributions*

 

The majority of our businesses and assets are held andoperated by limited liability companies, which are not subject to entity-levelfederal or state income taxation. The income taxes in respect to theseoperations are payable by our equity holders in accordance with theirrespective ownership percentages. We make cash distributions to permit themembers of BC Holdings and affiliates to pay these taxes. We made$0.1 million and $128.0 million of cash distributions for the threeand nine months ended September 30, 2008, and zero and $2.8 millionfor the three and nine months ended September 30, 2007. Relative to thenine months ended September 30, 2007, the increase in 2008 distributionsrelated to the net taxable gain on the Sale. See Note 2, Sale of Our Paperand Packaging & Newsprint Assets, for more information. Both oursenior credit facilities and the indenture governing our notes permit thesedistributions.

 

*Income Tax (Provision) Benefit*

 

For the three months ended September 30, 2008,income tax expense was $0.4 million, compared with $3.1 millionduring the same period in the prior year. Relative to the three months ended September 30,2007, the decrease in income tax expense is primarily due to no income taxexpense related to cash flow hedges in 2008. Income tax expense was$1.5 million and $7.7 million for the nine months ended September 30,2008 and 2007. The nine months ended September 30, 2007, included incometax expense related to cash flow hedges and the true-up of miscellaneous stateincome tax items. In 2008, our income tax provision consisted primarily ofincome taxes payable to states that do not allow for the income tax liabilityto be passed through to our equity holders as well as income taxes payable byour separate subsidiaries that are taxed as corporations. During the threemonths ended September 30, 2008 and 2007, our effective tax rates for ourseparate subsidiaries that are taxed as corporations were 34.0% and 35.4%. Oureffective tax rates were 35.2% and 35.0% for the nine months ended September 30,2008 and 2007. The primary reason for the difference in tax rates is the effectof state income taxes and the mix of domestic and foreign sources of income. AtSeptember 30, 2008, and December 31, 2007, we had zero and$0.6 million of deferred tax liabilities related to our taxablesubsidiaries recorded on our Consolidated Balance Sheets. In February 2008,the deferred tax liability was reduced to zero, as the taxable subsidiariesthat held the deferred tax liabilities were part of the Sale.

 

During the three months ended September 30, 2008and 2007, we paid $0.2 million and $0.5 million of tax, net of incometaxes refunded. We paid $0.8 million and $1.8 million of income taxes,net of refunds received, during the nine months ended September 30, 2008and 2007, respectively.

 

BC Holdings or one of our subsidiaries files federalincome tax returns in the U.S. and Canada and various state and foreign incometax returns in the major state jurisdictions of Alabama, Idaho, Louisiana,Oregon, Minnesota, Texas, and Washington. We are subject to tax examinationsfrom October 29, 2004 (our inception) to present. In second quarter 2008,the United States Internal Revenue Service began an audit of the BC Holdingsreturns for the 2005 and 2006 tax years. Additionally, in third quarter 2007,the Canadian Revenue Agency began an audit of Boise AllJoist for tax years 2005and 2006.

 

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

 

Inventoriesinclude the following:

 
| ** **                          | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | **(thousands)**              | ** **  |
| Finished goods  and work in process |       | $                            | 247,494     |                        | $          | 266,033 |   |
| Logs                                |       | 38,597                       |        | 56,490                      |       |
| Other raw  materials and supplies   |       | 17,461                       |        | 19,492                      |       |
| ** **                          | ** ** | **$**                        | **303,552** | ** **                  | **$**      | **342,015** | ** ** |

 

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***11.******                               Propertyand Equipment, Net***

 

Property and equipment consisted of the following asset classes:

 
| ** **                    | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** |
|-------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                    | ** ** | **(thousands)**              | ** **  |
| Land and land improvements    |       | $                            | 36,089      |                        | $          | 37,330 |   |
| Buildings and improvements    |       | 103,540                      |        | 105,835                     |       |
| Machinery and equipment       |       | 245,243                      |        | 258,333                     |       |
| Construction in progress      |       | 25,294                       |        | 15,382                      |       |
| ** **                    |       | 410,166                      |        | 416,880                     |       |
| Less accumulated depreciation |       | (118,198                     | )           | (103,763                    | )          |
|                          | ** ** | **$**                        | **291,968** | ** **                  | **$**      | **313,117** | ** ** |

 

***12.******                               Goodwilland Intangible Assets***

 

Goodwill represents the excess of purchase price and related costs overthe value assigned to the net tangible and intangible assets of businessesacquired. We account for goodwill in accordance with the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*,which requires us to assess our acquired goodwill and intangible assets withindefinite lives for impairment at least annually in the absence of anindicator of possible impairment and immediately upon an indicator of possibleimpairment. We assess goodwill and intangible assets with indefinite lives inthe fourth quarter of each year using a fair-value-based approach. We alsoevaluate the remaining useful lives of our finite-lived purchased intangibleassets to determine whether any adjustments to the useful lives are necessary.We completed our annual assessment in accordance with SFAS No. 142 infourth quarter 2007 and determined that there was no impairment.

 

Changes in the carrying amount of our goodwill by segment are asfollows:

 
| ** **                                                      | ** ** | **Building  Materials  Distribution** | ** ** | **Wood  Products** | ** ** | **Paper** | ** ** | **Packaging****&**** Newsprint** | ** ** | **Corporate  and  Other** | ** ** | **Total**  | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|-----------|------------|-------------------------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                      | ** ** | **(thousands)**                       | ** ** |
| Balance at December 31, 2006                               |       | $                                     | 5,593      |               | $          | 6,577     |       | $                                         | 1,341      |                      | $          | 8,335      |       | $ | — |   | $ | 21,846 |   |
|                                                            |       |                                  |       |               |       |      |       |                                      |       |                      |       |       |       |
| Purchase price adjustments during 2007 (a)                      |       | —                                |       | —             |       | 32,542    |       | —                                    |       | —                    |       | 32,542     |       |
| Goodwill reclassified to “Assets held for  sale” (b)  |       | —                                |       | —             |       | (33,883   | )          | (8,335                                    | )          | —                    |       | (42,218    | )          |
| Balance at December 31, 2007, and  September 30, 2008 | ** ** | **$**                                 | **5,593**  | ** **         | **$**      | **6,577** | ** ** | **$**                                     | **—** | ** **                | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **12,170** | ** ** |

 

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(a)                                  As part of the Forest Products Acquisition, we entered into an AdditionalConsideration Agreement with OfficeMax, pursuant to which we agreed to adjustthe purchase price based on changes in paper prices over the six-year periodfollowing the Forest Products Acquisition. Based on paper prices during thethird anniversary period ended October 29, 2007, we paid OfficeMax$32.5 million. This payment increased goodwill in our Paper segment, whichwe recorded in “Assets held for sale” on our December 31, 2007,Consolidated Balance Sheet. This agreement terminated in February 2008with the sale of our Paper and Packaging & Newsprint assets.

 

(b)           See Note 4, Assetsand Liabilities Held for Sale, for more information.

 

At September 30, 2008, and December 31,2007, intangible assets represent the values assigned to trade names andtrademarks and customer relationships. The trade names and trademark assetshave an indefinite life and are not amortized. Customer relationships areamortized over five years.

 

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Intangible assets consisted of thefollowing:

 
| ** **                 | ** ** | **September 30, 2008** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                 | ** ** | **(thousands)**                  | ** ** |
| Trade names and trademarks |       | $                                | 8,900      |   | $ | — |   | $ | 8,900 |   |
| Customer relationships     |       | 2,100                            |       | (1,647 | ) | 453 |   |
| ** **                 | ** ** | **$**                            | **11,000** | ** ** | **$** | **(1,647** | **)** | **$** | **9,353** |   |

 
| ** **                 | ** ** | **December 31, 2007** | ** ** |
|----------------------------|------------|---------------------------------|------------|
| ** **                 | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                 | ** ** | **(thousands)**                 | ** ** |
| Trade names and trademarks |       | $                               | 8,900      |   | $ | — |   | $ | 8,900 |   |
| Customer relationships     |       | 2,100                           |       | (1,332 | ) | 768 |   |
| ** **                 | ** ** | **$**                           | **11,000** | ** ** | **$** | **(1,332** | **)** | **$** | **9,668** |   |

 

Intangible assetamortization expense was $0.1 million and $0.3 million for the threeand nine months ended September 30, 2008, and $1.4 million and$3.8 million for the same periods in 2007. The estimated amortizationexpense is $0.1 million for the remainder of 2008 and $0.3 million in2009. We estimate no amortization expense after 2009.

 

***13.          Asset Retirement Obligations***

 

We account for asset retirementobligations in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations*, and Financial Accounting StandardsBoard (FASB) Interpretation (FIN) No. 47, *Accountingfor Conditional Asset Retirement Obligations — an Interpretation of FASBStatement No. 143*. We accrue for asset retirement obligationsin the period in which they are incurred if sufficient information is availableto reasonably estimate the fair value of the obligation. When we record theliability, we capitalize the cost by increasing the carrying amount of therelated long-lived asset. Over time, the liability is accreted to itssettlement value, and the capitalized cost is depreciated over the useful lifeof the related asset. Upon settlement of the liability, we will recognize again or loss for any difference between the settlement amount and the liabilityrecorded.

 

At September 30, 2008, and December 31,2007, we had $0.6 million and $0.8 million of asset retirementobligations recorded in “Other, Other long-term liabilities” on ourConsolidated Balance Sheets. These liabilities related primarily to landfillclosure costs. The liabilities are based on the best estimate of current costsand are updated periodically to reflect current technology, laws andregulations, inflation, and other economic factors. We do not have any assetslegally restricted for purposes of settling asset retirement obligations. Thetable below describes changes to our asset retirement obligations for the ninemonths ended September 30, 2008, and the year ended December 31,2007:

 
| ** **                                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                             | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                             | ** ** | **(thousands)**        | ** ** |
| Asset retirement obligation at beginning of  period                                                                    |       | $                      | 782        |                  | $          | 11,544 |   |
| Accretion expense                                                                                                      |       | 187                    |       | 926                   |       |
| Payments                                                                                                               |       | —                 |       | (37                   | )          |
| Revisions in estimated cash flows                                                                                      |       | —                 |       | 1,652                 |       |
| Asset retirement obligation reclassified to  “Liabilities related to assets held for sale” (See Note 4) |       | (380                   | )          | (13,303               | )          |
| Asset retirement obligation at end of  period                                                                          | ** ** | **$**                  | **589**    | ** **            | **$**      | **782** | ** ** |

 

We have additional asset retirementobligations with indeterminate settlement dates. The fair value of these assetretirement obligations cannot be estimated due to the lack of sufficientinformation to estimate the settlement dates of the obligations. These assetretirement obligations include, for example, (i) removal and disposal ofpotentially hazardous materials on equipment and/or an operating facility ifthe

 

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equipment and/or facility were to undergomajor maintenance, renovation, or demolition; (ii) wastewater treatmentponds that may be required to be drained and/or cleaned if the relatedoperating facility is closed; and (iii) storage sites or owned facilitiesfor which removal and/or disposal of chemicals and other related materials arerequired if the operating facility is closed. We will recognize a liability inthe period in which sufficient information becomes available to reasonablyestimate the fair value of these obligations.

 

***14.          Debt***

 

At September 30, 2008, and December 31, 2007, our short- andlong-term debt were as follows:

 
| ** **                                 | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**               | ** **  | **2007**              | ** ** |
| ** **                                 | ** ** | **(thousands)**        | ** **  |
| Revolving credit facility, due 2013        |       | $                      | 75,000      |                  | $          | — |   |
| Tranche E term loan, due 2014         |       | —                 |        | 521,063               |       |
| 7.125% senior subordinated notes, due 2014 |       | 240,000                |        | 400,000               |       |
| Delayed-draw term loan, due 2014           |       | —                 |        | 199,500               |       |
| Borrowings secured by receivables          |       | —                 |        | 40,000                |       |
| Current portion of long-term debt          |       | —                 |        | (47,250               | )          |
| Long-term debt, less current portion       |       | 315,000                |        | 1,113,313             |       |
| Short-term borrowings                      |       | —                 |        | 10,500                |       |
| Current portion of long-term debt          |       | —                 |        | 47,250                |       |
| Total debt                                 | ** ** | **$**                  | **315,000** | ** **            | **$**      | **1,171,063** | ** ** |

 

As discussed in Note 2, Saleof Our Paper and Packaging & Newsprint Assets, with the proceeds fromthe Sale and an initial borrowing under our asset-based revolving creditfacility, we repaid $1,085.6 million of long-term debt, including all ofthe borrowings under the previous revolving credit facility, Tranche Eterm loan, delayed-draw term loan, borrowings secured by our receivables, and$160.0 million of our 7.125% senior subordinated notes. For moreinformation related to these borrowings prior to our repaying them, seeNote 11, Debt, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of our 2007 Annual Report on Form 10-K.

 

*Asset-Based Revolving Credit Facility*

 

On February 22,2008, Boise Cascade, L.L.C., and its principal operating subsidiaries, BoiseBuilding Solutions Manufacturing, L.L.C., and Boise Building SolutionsDistribution, L.L.C., acting as borrowers, entered into a five-year $350 millionsenior secured asset-based revolving credit facility with Bank of America (theAgreement). As part of the syndication process, the Agreement was amended in April 2008to revise the pricing and incorporate additional covenants. At September 30,2008, we had $75.0 million of borrowings outstanding under the Agreement.Borrowings under the Agreement are based on either the prime rate or the LondonInterbank Offered Rate (LIBOR). Pricing is subject to quarterly adjustmentbased on the average availability under the Agreement during the prior quarter.The range of borrowing costs under the pricing grid is:  (i) prime plus 1.00% to 1.50% or (ii) LIBORplus 2.50% to 3.00%. For the period of February 22, 2008, through September 30,2008, the average interest rate for our borrowings under the Agreement was5.1%. Letters of credit are subject to a 0.125% fronting fee payable to theissuing bank and a fee payable to the lenders equal to the product of theinterest rate spread applicable to LIBOR borrowings under the Agreementand the daily average amount available for drawing under the outstandingletters of credit. The minimum and maximum borrowings under the Agreement were$64.1 million and $75.0 million between February 22, 2008, and September 30,2008. The weighted average amount of borrowings outstanding under the Agreementduring the period from February 22, 2008, through September 30, 2008,was $71.8 million. The Agreement provides for a commitment fee of 0.50%per annum payable to the lenders on the average daily unused portion of theAgreement.

 

The revolvingcredit facility is guaranteed by our domestic subsidiaries (other than thethree borrowers noted above) and is secured by a first-priority securityinterest in the stock of our foreign subsidiaries and substantially all of ourdomestic assets, except for property, plant, and equipment. At September 30,2008, we had $75.0 million of outstanding loans under the Agreement. Borrowingsunder the Agreement are constrained by a borrowing base formula dependent uponlevels of eligible inventory and receivables reduced by outstanding letters ofcredit and, when our fixed charge coverage ratio is below 1:1, as it was on September 30,2008, by a further requirement that we maintain a combination of unrestrictedcash and borrowing base less outstanding loans at or in excess of the greaterof $45 million or 15% of the borrowing base determined under the Agreement.

 

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The Agreement contains a covenantrequiring that we maintain a fixed charge coverage ratio of 1:1 whenever thecombination of our unrestricted cash and the borrowing base less outstandingloans under the Agreement is less than $45 million. In addition the Agreementcontains a restriction on capital investments that is applicable when a minimumavailability threshold is not met. That covenant was not applicable on September 30,2008. The Agreement also contains customary nonfinancial covenants, including anegative pledge covenant and restrictions on distributions to equity holders,acquisitions, and divestitures. These covenants will become more restrictive ifa minimum availability threshold is not maintained.

 

*Letters of Credit*

 

At September 30,2008, we had $13.3 million of letters of credit outstanding. These lettersof credit reduce our borrowing capacity under our asset-based revolving creditfacility.

 

*Senior Subordinated Notes*

 

In October 2004,Boise Cascade, L.L.C., issued $400.0 million of 7.125% senior subordinatednotes due in 2014. Net proceeds from the notes were used to fund a portion ofthe purchase price for the Forest Products Acquisition. In July 2005, wecompleted an exchange offer whereby all of our senior subordinated notes wereexchanged for registered securities with identical terms (other than termsrelating to registration rights) to the notes issued in October 2004. Wemay redeem all or part of the notes at any time at redemption prices set forthin the indenture. If we sell specific assets or experience specific kinds ofchanges in control, we must offer to purchase the notes. Inconnection with the Sale, we repurchased $160.0 million of the notes on April 15,2008.

 

*Other*

 

At September 30, 2008, and December 31,2007, we had $8.2 million and $23.1 million of costs recorded in “Deferredfinancing costs” on our Consolidated Balance Sheets. With the proceeds from theSale, we repaid a significant portion of our debt. In connection with repayingthe debt, we expensed approximately zero and $17.6 million of deferredfinancing costs for the three and nine months ended September 30, 2008. Werecorded the charges in “Gain on sale of Paper and Packaging &Newsprint assets” in our Consolidated Statement of Loss. In addition, weincurred approximately $4.1** **millionof financing costs related to our asset-based revolving credit facility, whichare included in “Deferred financing costs” on our September 30, 2008,Consolidated Balance Sheet.

 

For the nine months ended September 30,2008 and 2007, cash payments for interest, net of interest capitalized, were$25.8 million and $62.2 million, respectively.

 

***15.******                               FinancialInstruments***

 

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

 

In accordance with SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, as amended, we record all derivative instrumentsas assets or liabilities on our Consolidated Balance Sheets at fair value.Changes in the fair value of derivatives are recorded in either “Net income(loss)” or “Other comprehensive income (loss),” as appropriate. The gain or losson derivatives designated as cash flow hedges is included in “Othercomprehensive income (loss)” in the period in which changes in fair value occurand is reclassified to income (loss) in the period in which the hedged itemaffects income (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). The gain or loss on derivativesdesignated as fair value hedges and the offsetting gain or loss on the

 

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hedged item attributable to the hedged risk are included inincome (loss) in the period in which changes in fair value occur. The gain orloss on derivatives that have not been designated as hedging instruments isincluded in income (loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

After the Sale, our debt is predominantly fixed-rate. At September 30,2008, the estimated current market value of our fixed-rate debt, based onthen-current interest rates for similar obligations with like maturities, wasapproximately $79.1 million less than the amount reported on ourConsolidated Balance Sheet.

 

With the proceeds from the Sale, wesignificantly decreased our variable-rate debt. As a result, we terminated allof our interest rate swap agreements for approximately $11.9 million in February 2008.The interest rate swaps were considered economic hedges. Duringthe nine months ended September 30, 2008 and 2007, we recorded the fairvalue of the interest rate swaps, or $6.3 million of expense and$5.4 million of income, in “Change in fair value of interest rate swaps”in our Consolidated Statements of Income (Loss).

 

*Energy Risk*

 

Occasionally,we enter into natural gas swaps, options, or a combination of these instrumentsto hedge the variable cash flow risk of natural gas purchases at index prices.As of September 30, 2008, we had no material derivative instrumentsrelated to our forecasted natural gas purchases.

 

*Contingent Value Rights*

 

As part of theSale, Terrapin Partners Venture Partnership and Boise Cascade, L.L.C.(collectively the Grantors) issued 21.2 million contingent value rights(CVRs) to holders of Boise Inc.’s stock. The CVRs are governed by a ContingentValue Rights Agreement (the CVR Agreement). The term of the CVR Agreement isfrom February 5, 2008, through February 5, 2009, and allows investorsto receive payments in cash, shares of common stock, or a combination of cashand shares, as elected by us, based upon the performance of Boise Inc.’s stock.If at any time during the year, Boise Inc.’s stock price is at least $10.50 for(1) any 20 days of any period of 30 consecutive days or (2) any10 consecutive trading days, then the CVRs have no value. If neither ofthe preceding conditions is met over the one-year period, the holder receives avalue equal to the lesser of $1.00 or the amount by which the $10.50 exceedsthe average stock price for the 30-day period ending February 5, 2009 (theAnniversary Price). If we elect to settle our obligation under the CVRAgreement using Boise Inc. shares, the CVR Agreement provides that our shareswill be valued at the greater of the Anniversary Price or $9.00 per share. As aresult, the maximum number of Boise Inc. shares we would be required to deliverto the rights holders would be 2.4 million, assuming Terrapin PartnersVenture Partnership failed to perform its obligations.

 

We recorded the fair value of theliability on the grant date based on a simulation analysis that considered thelikelihood of Boise Inc. investors receiving payment under the Agreement. Weupdate the simulation model each quarter and revalue the liability based on itsresults. The Grantors are jointly and severally liable to the investors for theCVR payment, but between the Grantors, each Grantor is individually liable for50% of the CVR payment. Because we are jointly and severally liable toinvestors, at September 30, 2008, we recorded a liability for 100% of thefair value of the CVRs, or $3.6 million, in “Accrued liabilities, Other”on our Consolidated Balance Sheet. We also recorded $2.2 million of incomeand $1.8 million of expense in “Change in fair value of contingent valuerights” in our Consolidated Statements of Loss for the three and nine monthsended September 30, 2008, and a $1.8 million receivable in “Receivables,Other” on our Consolidated Balance Sheet at September 30, 2008.

 

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*FinancialInstrument Fair Value Reconciliation*

 

The followingtable reconciles the beginning and ending balances of the instruments for whichwe measured the fair value using unobservable inputs (Level 3 in the fair valuehierarchy) as of September 30, 2008:

 
| ** **                                                                                                                                 | ** ** | **Contingent**  | ** ** | **Interest** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|------------|------------|
| ** **                                                                                                                                 | ** ** | **Value**       | ** ** | **Rate**     | ** ** | ** ** | ** ** |
| ** **                                                                                                                                 | ** ** | **Rights**      | ** ** | **Swaps**    | ** ** | **Total**  | ** ** |
| ** **                                                                                                                                 | ** ** | **(thousands)** | ** ** |
| ** **                                                                                                                                 | ** ** | ** **      | ** ** | ** **   | ** ** | ** ** | ** ** |
| Beginning balance at December 31, 2007                                                                                                     |       | $               | —     |         | $          | 5,634      |       | $ | 5,634 |   |
|                                                                                                                                       |       |            |       |         |       |       |       |
| Losses included in earnings                                                                                                                |       | 1,803           |       | 6,284        |       | 8,087      |       |
| Receivable from Terrapin Partners                                                                                                          |       | 1,803           |       | —       |       | 1,803      |       |
| Termination of interest rate swaps                                                                                                         |       | —          |       | (11,918      | )          | (11,918    | )          |
| Ending balance at September 30, 2008                                                                                                       | ** ** | **$**           | **3,606**  | ** **   | **$**      | **—** | ** ** | **$** | **3,606** | ** ** |
| Total losses included in earnings  attributable to the change in unrealized gains or losses relating to assets  held at September 30, 2008 |       | **$**           | **1,803**  | ** **   | **$**      | **—** | ** ** | **$** | **1,803** | ** ** |

 

***16.******                               Newand Recently Adopted Accounting Standards***

 

In October 2008, the FASB issued FASB Staff Position (FSP) No. 157-3,*Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active*, which clarifiesthe application of SFAS No. 157 in a market that is not active andprovides an example to illustrate key considerations in determining the fairvalue of a financial asset when the market for that financial asset is notactive. FSP 157-3 became effective on October 10, 2008, and itsadoption did not have a material impact on our financial position or results ofoperations.

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples.* The standard is intended to improve financial reportingby identifying a consistent framework, or hierarchy, for selecting accountingprinciples to be used in preparing financial statements that are presented inconformity with U.S. generally accepted accounting principles. SFAS No. 162is effective 60 days following the approval by the Securities and ExchangeCommission (SEC) of the Public Company Accounting Oversight Board amendments toAU Section 411, *The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles.*We do not expect the adoption to have a material impact on our financialposition or results of operations.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosures About Derivative Instruments and Hedging Activities*.SFAS No. 161 requires enhanced disclosures about derivative instrumentsand hedging activities to enable investors to better understand their effectson financial position, financial performance, and cash flows. Theserequirements include the disclosure of the fair values of derivativeinstruments and their gains and losses in a tabular format. SFAS No. 161is effective for fiscal years beginning after November 15, 2008, whichwill require us to adopt these provisions in 2009. Early adoption of SFAS No. 161is permitted. We are currently evaluating the impact SFAS No. 161will have on our consolidated financial statements.

 

In January 2008, we adopted SFAS No. 157,*Fair Value Measurements*. The adoption didnot have a material impact on our financial position or results of operations.The statement established a framework for measuring fair value, and it enhancedthe disclosures for fair value measurements. The statement applies when otheraccounting pronouncements require or permit fair value measurements, but itdoes not require new fair value measurements. In accordance with the standard,in Note 15, Financial Instruments, we expanded our disclosures about fairvalue measurements. In accordance with the provisions of FSP No. 157-2, *Effective Date of FASB Statement No. 157*, we elected todefer adoption of SFAS No. 157 as it relates to nonfinancial assets andnonfinancial liabilities that are recognized and disclosed at fair value in thefinancial statements on a nonrecurring basis until January 1, 2009.

 

In December 2007, the FASBissued SFAS No. 141(R), *BusinessCombinations,*and SFAS No. 160, *Accounting and Reporting of Noncontrolling Interests in ConsolidatedFinancial Statements, an*

 

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*Amendment of Accounting Research Bulletin No. 51.* These newstandards will significantly change the accounting for and reporting ofbusiness combination transactions and noncontrolling (minority) interests inconsolidated financial statements. We are required to adopt SFAS Nos. 141(R) and 160simultaneously on January 1, 2009. Earlier adoption is prohibited. Theimpact of adopting these standards will be limited to business combinationsoccurring on or after January 1, 2009.

 

***17.          Retirement andBenefit Plans***

 

EffectiveJanuary 1, 2008, we spun off the portion of each benefit plan attributableto employees or retirees of the Paper and Packaging & Newsprintbusinesses. Effective February 22, 2008, under the terms of the Purchaseand Sale Agreement with Boise Inc., we transferred sponsorship of the spunoffplans to Boise Paper Holdings, L.L.C., a subsidiary of Boise Inc.,and only those employees, terminated vested participants, and retirees whoseemployment was with our Wood Products, Building Materials Distribution, andsome corporate and discontinued operations continue to be covered under theplans remaining with us.

 

The following table presents the pension and postretirement benefitcosts:

 
| ** **                                     | ** ** | **Pension Benefits**                           | ** ** | **Other Benefits**                             | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **Three Months Ended  September 30** | ** ** | **Three Months Ended  September 30** | ** ** |
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                     | ** ** |
| Service cost  (gain)                           |       | $                                                   | 2,752      |                                                | $          | 5,909 |   | $ | — |   | $ | (9 | ) |
| Interest cost                                  |       | 4,615                                               |       | 9,743                                               |       | 2 |   | 10 |   |
| Expected return on plan assets                 |       | (4,542                                              | )          | (9,786                                              | )          | — |   | — |   |
| Recognized actuarial (gain) loss               |       | (40                                                 | )          | 130                                                 |       | — |   | (34 | ) |
| Amortization of prior service costs and  other |       | 32                                                  |       | 322                                                 |       | — |   | — |   |
| Company-sponsored plans                        |       | 2,817                                               |       | 6,318                                               |       | 2 |   | (33 | ) |
| Multiemployer pension plans                    |       | 10                                                  |       | 122                                                 |       | — |   | — |   |
| Net periodic benefit cost                      | ** ** | **$**                                               | **2,827**  | ** **                                          | **$**      | **6,440** | ** ** | **$** | **2** | ** ** | **$** | **(33** | **)** |

 
| ** **                                     | ** ** | **Pension Benefits**                          | ** ** | **Other Benefits**                            | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **Nine Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                     | ** ** | **2008**                                           | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                    | ** ** |
| Service cost                                   |       | $                                                  | 9,821      |                                               | $          | 17,271 |   | $ | 1 |   | $ | 75 |   |
| Interest cost                                  |       | 17,299                                             |       | 28,550                                             |       | 25 |   | 237 |   |
| Expected return on plan assets                 |       | (17,078                                            | )          | (28,600                                            | )          | — |   | — |   |
| Recognized actuarial (gain) loss               |       | (244                                               | )          | 390                                                |       | (13 | ) | (34 | ) |
| Amortization of prior service costs and  other |       | 288                                                |       | 867                                                |       | — |   | — |   |
| Curtailment (gain) loss                        |       | 404                                                |       | (181                                               | )          | — |   | — |   |
| Company-sponsored plans                        |       | 10,490                                             |       | 18,297                                             |       | 13 |   | 278 |   |
| Multiemployer pension plans                    |       | 113                                                |       | 370                                                |       | — |   | — |   |
| Net periodic benefit cost                      | ** ** | **$**                                              | **10,603** | ** **                                         | **$**      | **18,667** | ** ** | **$** | **13** | ** ** | **$** | **278** | ** ** |

 

In February 2008, we made a $20 million contribution to ourpension plans, which was included in the pension assets for purposes ofdetermining the spinoff amounts. During the remainder of 2008, we are notrequired to make any additional minimum contributions to our pension plans;however, we may elect to make additional voluntary contributions.

 

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***18.          Redeemable Equity Units***

 

We account for awards granted under our management equity plan inaccordance with SFAS 123(R). For more information, see Note 14,Redeemable Equity Units, of the Notes to Consolidated Financial Statements in “Item 8.Financial Statements and Supplementary Data” of our 2007 Annual Report on Form 10-K.

 

In connectionwith the Sale, approximately 75 participants in our Management Equity Planterminated employment with us. These employees collectively held6.6 million Series B and 16.1 million Series C units. In March 2008,we paid $18.3 million to repurchase their equity units.

 

In connectionwith the Sale, for the nine months ended September 30, 2008, we recorded$3.1 million of expense to adjust the value of the immature equity units(units that have not been at risk for at least six months) to redemption valueand $1.9 million of expense related to nonrefundable tax distributionspaid to management investors in connection with their investments in us thatwill not vest. We recorded the charges in “Gain on sale of Paper and Packaging &Newsprint Assets” in our Consolidated Statement of Loss. In addition, duringthe nine months ended September 30, 2008, pursuant to the Sale, werecorded a $6.3 million adjustment to the value of the mature equity units(vested units and units that had been at risk for at least six months) toreflect redemption value in the capital section of our Consolidated BalanceSheet and Consolidated Statement of Capital.

 

*Repurchaseand Amendment*

 

In May 2008,our parent company, Forest Products Holdings (FPH), entered into a RepurchaseAgreement and Amendment No. 1 to our Management Equity Agreement (theRepurchase and Amendment Agreements) with each member of management holding Series Band Series C equity units. Under the redemption provisions of theRepurchase and Amendment Agreements, FPH repurchased 48.5% of each managementinvestor’s Series B units for an amount equal to such manager’s originalinvestment in FPH, totaling $9.7 million of cash. The repurchase was atthe electionof the individual participant and was offered for a short period of time.Accordingly, we accounted for the repurchase as a “short-term inducement” underSFAS No. 123(R), using the equity method of accounting. During the ninemonths ended September 30, 2008, we recognized $0.4 million ofcompensation expense for the amount that the repurchase exceeded the fair valueof the awards.

 

FPH amended theManagement Equity Agreement (the Plan) such that:  (i) 62.9% of themarket-condition Series C equity units were converted to time-vestingunits and vest on a daily basis from February 22, 2008, through December 31,2010; (ii) 37.1% of the market-condition Series C equity units remainsubject to the Plan’s internal rate of return formula, but the vesting periodwas extended one year to December 2010; and (iii) the vesting periodfor the unvested time-vesting Series C equity units was extended one yearto December 2010. The amendments had no impact on the Series B units.In accordance with SFAS No. 123(R), we measured the value of the awardbefore and after the modification, and as a result, we will recognize anincremental $2.0 million of compensation expense related to themodification. Of the $2.0 million of incremental compensation expense, werecognized approximately $0.2 million and $0.4 million during thethree and nine months ended September 30, 2008, and we will recognize theremaining $1.6 million prospectively over the remaining vesting period.

 

***19.        Segment Information***

 

Prior to the Sale, we operated our business using five reportablesegments:  Building MaterialsDistribution, Wood Products, Paper, Packaging & Newsprint, andCorporate and Other. Following the Sale, we operate our business using threereportable segments:  Building MaterialsDistribution, Wood Products, and Corporate and Other. There are no differencesin our basis of measurement of segment profit or loss from those disclosed inNote 16, Segment Information, of the Notes to Consolidated FinancialStatements and Supplementary Data in “Item 8. Consolidated FinancialStatements and Supplementary Data” in our 2007 Annual Report on Form 10-K.The 49% equity interest we own in Boise Inc. after the Sale represents asignificant continuing involvement as defined in SFAS No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*Asa result, we continue to show the results of the Paper and Packaging &Newsprint segments through February 21, 2008, and we do not define thesold assets as discontinued operations.

 

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Ananalysis of our operations by segment is as follows:

 
| ** **                                        | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------|------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|
| ** **                                        | ** ** | **Sales**      | ** ** | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** **     | ** ** | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| ** **                                        | ** ** | **Trade**      | ** ** | **Party**   | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(f)**    | ** ** |
| ** **                                        | ** ** | **(millions)** | ** ** |
| **Three Months Ended September 30, 2008**    |       |           |       |        |       |              |       |       |       |       |       |              |       |       |       |
| Building Materials Distribution                   |       | $              | 583.5      |        | $          | —            |       | $          | 0.6        |       | $          | 584.1             |       | $          | 10.2       |   | $ | 1.9 |   | $ | 12.1 |   |
| Wood Products (a)                                 |       | 122.4          |       | 21.2        |       | 71.5              |       | 215.1      |       | (3.1       | )          | 6.8               |       | 3.6        |       |
| Corporate and Other                               |       | —         |       | —      |       | —            |       | —     |       | (5.9       | )          | 0.1               |       | (5.7       | )          |
|                                              |       | 705.9          |       | 21.2        |       | 72.1              |       | 799.2      |       | 1.2        |       | 8.8               |       | 10.0       |       |
| Intersegment eliminations                         |       | —         |       | —      |       | (72.1             | )          | (72.1      | )          | —     |       | —            |       | —     |       |
| Equity in net income of affiliate                 |       | —         |       | —      |       | —            |       | —     |       | 2.1        |       | —            |       | 2.1        |       |
| Impairment of investment in equity  affiliate (b) |       | —         |       | —      |       | —            |       | —     |       | (208.1     | )          | —            |       | (208.1     | )          |
| Change in fair value of contingent value  rights  |       | —         |       | —      |       | —            |       | —     |       | 2.2        |       | —            |       | —     |       |
| Interest expense                                  |       | —         |       | —      |       | —            |       | —     |       | (6.3       | )          | —            |       | —     |       |
| Interest income                                   |       | —         |       | —      |       | —            |       | —     |       | 1.5        |       | —            |       | —     |       |
| ** **                                        | ** ** | **$**          | **705.9**  | ** **  | **$**      | **21.2**          | ** ** | **$**      | **—** | ** ** | **$**      | **727.1**         | ** ** | **$**      | **(207.2** | **)** | **$** | **8.8** | ** ** | **$** | **(195.9** | **)** |

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

 

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| ** **                                        | ** ** | **Sales**      | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|----------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                        | ** ** | **Trade**      | ** **  | **Related  Party** | ** ** | **Inter-  segment**              | ** ** | **Total**  | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (f)** | ** ** |
| ** **                                        | ** ** | **(millions)** | ** **  |
| **Nine Months Ended September 30, 2008**     | ** ** | ** **     | ** **  | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building Materials Distribution                   |       | $              | 1,697.1     |               | $          | —                           |       | $          | 0.9        |   | $ | 1,698.0 |   | $ | 24.3 |   | $ | 5.8 |   | $ | 30.1 |   |
| Wood Products (a)                                 |       | 374.6          |        | 40.7               |       | 224.5                            |       | 639.8      |       | (23.6 | ) | 21.0 |   | (2.7 | ) |
| Paper (c)                                         |       | 154.4          |        | 90.1               |       | 9.0                              |       | 253.5      |       | 20.7 |   | 0.3 |   | 21.1 |   |
| Packaging & Newsprint (c)           |       | 102.2          |        | —             |       | 11.3                             |       | 113.5      |       | 5.7 |   | 0.1 |   | 5.7 |   |
| Corporate and Other (d)                           |       | 1.8            |        | —             |       | 6.8                              |       | 8.6        |       | (20.2 | ) | 0.3 |   | (19.8 | ) |
|                                              |       | 2,330.1        |        | 130.8              |       | 252.5                            |       | 2,713.4    |       | 6.9 |   | 27.5 |   | 34.4 |   |
| Intersegment eliminations                         |       | —         |        | —             |       | (252.5                           | )          | (252.5     | )          | — |   | — |   | — |   |
| Equity in net loss of affiliate                   |       | —         |        | —             |       | —                           |       | —     |       | (15.2 | ) | — |   | (15.2 | ) |
| Impairment of investment in equity  affiliate (b) |       | —         |        | —             |       | —                           |       | —     |       | (208.1 | ) | — |   | (208.1 | ) |
| Change in fair value of contingent value  rights  |       | —         |        | —             |       | —                           |       | —     |       | (1.8 | ) | — |   | — |   |
| Change in fair value of interest rate swaps       |       | —         |        | —             |       | —                           |       | —     |       | (6.3 | ) | — |   | — |   |
| Interest expense                                  |       | —         |        | —             |       | —                           |       | —     |       | (28.1 | ) | — |   | — |   |
| Interest income                                   |       | —         |        | —             |       | —                           |       | —     |       | 6.6 |   | — |   | — |   |
| ** **                                        | ** ** | **$**          | **2,330.1** | ** **         | **$**      | **130.8**                        | ** ** | **$**      | **—** | ** ** | **$** | **2,460.9** | ** ** | **$** | **(246.0** | **)** | **$** | **27.5** | ** ** | **$** | **(189.0** | **)** |

 
| ** **                                    | ** ** | **Sales**      | ** **  | **Income  (Loss)** | ** ** | **Depreciation,  Amortization,** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------|-------------|--------------------|------------|----------------------------------|------------|------------|------------|
| ** **                                    | ** ** | **Trade**      | ** **  | **Related  Party** | ** ** | **Inter-  segment**              | ** ** | **Total**  | ** ** | **Before  Taxes** | ** ** | **and   Depletion** | ** ** | **EBITDA  (f)** | ** ** |
| ** **                                    | ** ** | **(millions)** | ** **  |
| **Nine Months Ended September 30, 2007** | ** ** | ** **     | ** **  | ** **         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Building Materials Distribution               |       | $              | 2,018.8     |               | $          | —                           |       | $          | 0.2        |   | $ | 2,019.0 |   | $ | 47.0 |   | $ | 5.6 |   | $ | 52.5 |   |
| Wood Products                                 |       | 465.0          |        | —             |       | 329.2                            |       | 794.2      |       | 28.6 |   | 22.0 |   | 50.6 |   |
| Paper                                         |       | 680.6          |        | 471.8              |       | 45.9                             |       | 1,198.3    |       | 80.7 |   | 44.7 |   | 125.4 |   |
| Packaging & Newsprint                |       | 524.4          |        | —             |       | 55.5                             |       | 579.9      |       | 14.6 |   | 37.6 |   | 52.2 |   |
| Corporate and Other (e)                       |       | 10.9           |        | —             |       | 32.6                             |       | 43.5       |       | (12.4 | ) | 3.5 |   | (8.9 | ) |
|                                          |       | 3,699.7        |        | 471.8              |       | 463.4                            |       | 4,634.9    |       | 158.5 |   | 113.4 |   | 271.8 |   |
| Intersegment eliminations                     |       | —         |        | —             |       | (463.4                           | )          | (463.4     | )          | — |   | — |   | — |   |
| Change in fair value of interest rate swaps   |       | —         |        | —             |       | —                           |       | —     |       | 5.4 |   | — |   | — |   |
| Interest expense                              |       | —         |        | —             |       | —                           |       | —     |       | (70.1 | ) | — |   | — |   |
| Interest income                               |       | —         |        | —             |       | —                           |       | —     |       | 2.5 |   | — |   | — |   |
| ** **                                    | ** ** | **$**          | **3,699.7** | ** **         | **$**      | **471.8**                        | ** ** | **$**      | **—** | ** ** | **$** | **4,171.5** | ** ** | **$** | **96.3** | ** ** | **$** | **113.4** | ** ** | **$** | **271.8** | ** ** |

 

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| (a)    |   | Included a  $5.7 million net gain on the sale of our wholly owned subsidiary in  Brazil and $2.8 million of expenses related to the closure of our veneer  operation in St. Helens, Oregon.                                                                                                                                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (b)    |   | On September 30, 2008,  we concluded that our investment in Boise Inc. met the definition of other  than temporarily impaired as defined in APB Opinion No. 18. Accordingly,  we recorded a $208.1 million charge in “Impairment of investment in  equity affiliate” in our Consolidated Statements of Loss for the three and nine months ended September 30,  2008. See Note 3, Investment in Equity Affiliate, for more information. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (c)    |   | The  nine months ended September 30, 2008, included the results of the Paper  and Packaging & Newsprint segments through February 21, 2008.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (d)    |   | Included an $8.4 million loss on the sale  of the note receivable from Boise Inc. See Note 5, Transactions With  Related Parties, for more information.                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   | The  nine months ended September 30, 2008, included a $3.0 million gain  on the Sale. See Note 2, Sale of Our Paper and Packaging &  Newsprint Assets, for more information.                                                                                                                                                                                                                                                                      |

 

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(e)                                  Included a $4.4 million gain for changesin our retiree healthcare programs.

 

(f)                                    EBITDA represents income (loss) beforeinterest (interest expense, interest income, and change in fair value ofinterest rate swaps and contingent value rights), income taxes, anddepreciation, amortization, and depletion. EBITDA is the primary measure usedby our chief operating decision makers to evaluate segment operatingperformance and to decide how to allocate resources to segments. We believeEBITDA is useful to investors because it provides a means to evaluate theoperating performance of our segments and our company on an ongoing basis usingcriteria that are used by our internal decision makers and because it isfrequently used by investors and other interested parties in the evaluation ofa wide range of companies. We believe EBITDA is a meaningful measure because itpresents a transparent view of our recurring operating performance and allowsmanagement to readily view operating trends, perform analytical comparisons,and identify strategies to improve operating performance. For example, webelieve that the inclusion of items such as taxes, interest expense, andinterest income distorts management’s ability to assess and view the coreoperating trends in our segments. EBITDA, however, is not a measure of ourliquidity or financial performance under U.S. generally accepted accountingprinciples (GAAP) and should not be considered as an alternative to net income(loss), income (loss) from operations, or any other performance measure derivedin accordance with GAAP or as an alternative to cash flow from operatingactivities as a measure of our liquidity. The use of EBITDA instead of netincome (loss) or segment income (loss) has limitations as an analytical tool,including the inability to determine profitability; the exclusion of interestexpense, interest income, and change in fair value of interest rate swaps andcontingent value rights, and associated significant cash requirements; and theexclusion of depreciation, amortization, and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying on our GAAP results.Our measures of EBITDA are not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the methods ofcalculation.

 

Thefollowing is a reconciliation of net income (loss) to EBITDA:

 
| ** **                                       | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(millions)**                                      | ** ** |
| Net income (loss)                                |       | $                                                   | (207.6     | )                                                  | $          | 49.2 |   | $ | (247.5 | ) | $ | 88.6 |   |
| Change in fair value of contingent value  rights |       | (2.2                                                | )          | —                                             |       | 1.8 |   | — |   |
| Change in fair value of interest rate swaps      |       | —                                              |       | —                                             |       | 6.3 |   | (5.4 | ) |
| Interest expense                                 |       | 6.3                                                 |       | 23.4                                               |       | 28.1 |   | 70.1 |   |
| Interest income                                  |       | (1.5                                                | )          | (1.3                                               | )          | (6.6 | ) | (2.5 | ) |
| Income tax provision                             |       | 0.4                                                 |       | 3.1                                                |       | 1.5 |   | 7.7 |   |
| Depreciation, amortization, and depletion        |       | 8.8                                                 |       | 32.3                                               |       | 27.5 |   | 113.4 |   |
| EBITDA                                           | ** ** | **$**                                               | **(195.9** | **)**                                              | **$**      | **106.6** | ** ** | **$** | **(189.0** | **)** | **$** | **271.8** | ** ** |

 

***20.          Commitmentsand Guarantees***

 

*Commitments*

 

We havecommitments for leases and long-term debt that are discussed further inNote 8, Leases, and Note 14, Debt. We are a party to a number oflong-term log and fiber supply agreements that are discussed in Note 20,Commitments and Guarantees, of the Notes to Consolidated FinancialStatements in “Item 1. Consolidated Financial Statements” discussed inour Quarterly Report on Form 10-Q for the quarter ended March 31,2008. In addition, we have purchase obligations for goods and services, capitalexpenditures, and raw materials entered into in the normal course of business.At September 30, 2008, there have been no material changes to our commitments.

 

# *Guarantees*

# * *

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FIN No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.Note 20, Commitments and Guarantees, of the Notesto Consolidated Financial Statements in “Item 1. Consolidated FinancialStatements” in our Quarterly Report on Form 10-Q for the quarter ended March 31,2008, describes the nature of our guarantees, including the approximate termsof the guarantees, how the guarantees arose, the events or

 

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circumstances that would require us toperform under the guarantees, and the maximum potential undiscounted amounts offuture payments we could be required to make. As of September 30, 2008,there have been no material changes to the guarantees disclosed in the QuarterlyReport on Form 10-Q for the quarter ended March 31, 2008, except thatin July 2008, in connection with the sale of our Brazil operations, thebuyer agreed to indemnify us against any and all claims under the Guarantee,Marketing, and Take if Required Agreement, as amended, with Global ForestPartners.

 

***21.          ConsolidatingGuarantor and Nonguarantor Financial Information***

 

The following consolidating financial information presents theStatements of Income (Loss), Balance Sheets, and Cash Flows related to ourbusiness. The senior notes are guaranteed on a senior basis jointly andseverally by Boise Cascade, L.L.C., and each of its existing and futuresubsidiaries (other than the co-issuers, Boise Cascade, L.L.C., and BoiseCascade Finance Corporation). The nonguarantors include our foreignsubsidiaries and Birch Creek Investments, L.L.C., which was dissolved on March 31,2008. Other than the consolidated financial statements and footnotes for BoiseCascade Holdings, L.L.C., financial statements and other disclosures concerningthe guarantors have not been presented because management believes that suchinformation is not material to investors.

 

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**Boise Cascade Holdings, L.L.C.,and SubsidiariesConsolidating Statements of Income (Loss)For the Three Months Ended September 30, 2008**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **   | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|--------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **   |
| **Sales**                                                                            |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —       |                        | $          | —                      |       | $                               | 702,604    |             | $          | 3,308            |       | $ | — |   | $ | 705,912 |   |
| Intercompany                                                                         |       | —                                          |         | —                      |       | —                      |       | 4,147                           |       | (4,147           | )          | —           |       |
| Related parties                                                                      |       | —                                          |         | —                      |       | 21,214                      |       | —                          |       | —           |       | 21,214           |       |
|                                                                                 |       | —                                          |         | —                      |       | 723,818                     |       | 7,455                           |       | (4,147           | )          | 727,126          |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |         | (138                        | )          | 623,427                     |       | 8,265                           |       | (4,147           | )          | 627,407          |       |
| Materials,  labor, and other operating expenses from related parties                 |       | —                                          |         | —                      |       | 19,045                      |       | —                          |       | —           |       | 19,045           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |         | 88                          |       | 8,178                       |       | 485                             |       | —           |       | 8,751            |       |
| Selling and  distribution expenses                                                   |       | —                                          |         | —                      |       | 61,967                      |       | 570                             |       | —           |       | 62,537           |       |
| General and  administrative expenses                                            |       | —                                          |         | 1,115                       |       | 6,143                       |       | 1                               |       | —           |       | 7,259            |       |
| General and  administrative expenses from related party                         |       | —                                          |         | 2,506                       |       | —                      |       | —                          |       | —           |       | 2,506            |       |
| Loss on sale of  Paper and Packaging & Newsprint assets                     |       | —                                          |         | 1,739                       |       | —                      |       | —                          |       | —           |       | 1,739            |       |
| Other (income)  expense, net                                                         |       | 44                                              |         | 92                          |       | (2,645                      | )          | (1,259                          | )          | —           |       | (3,768           | )          |
|                                                                                 |       | 44                                              |         | 5,402                       |       | 716,115                     |       | 8,062                           |       | (4,147           | )          | 725,476          |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | (44                                             | )            | (5,402                      | )          | 7,703                       |       | (607                            | )          | —           |       | 1,650            |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Equity in net  income of Boise Inc.                                             |       | 2,148                                           |         | —                      |       | —                      |       | —                          |       | —           |       | 2,148            |       |
| Impairment of  investment in Boise Inc.                                         |       | (208,074                                        | )            | —                      |       | —                      |       | —                          |       | —           |       | (208,074         | )          |
| Foreign exchange  gain (loss)                                                        |       | —                                          |         | (343                        | )          | 42                          |       | (105                            | )          | —           |       | (406             | )          |
| Change in fair  value of contingent value rights                                     |       | —                                          |         | 2,227                       |       | —                      |       | —                          |       | —           |       | 2,227            |       |
| Interest expense                                                                     |       | —                                          |         | (6,263                      | )          | —                      |       | —                          |       | —           |       | (6,263           | )          |
| Interest  expense—intercompany                                                  |       | —                                          |         | —                      |       | —                      |       | (15                             | )          | 15               |       | —           |       |
| Interest income                                                                      |       | —                                          |         | 1,381                       |       | 88                          |       | —                          |       | —           |       | 1,469            |       |
| Interest  income—intercompany                                                   |       | —                                          |         | 15                          |       | —                      |       | —                          |       | (15              | )          | —           |       |
|                                                                                 |       | (205,926                                        | )            | (2,983                      | )          | 130                         |       | (120                            | )          | —           |       | (208,899         | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | (205,970                                        | )            | (8,385                      | )          | 7,833                       |       | (727                            | )          | —           |       | (207,249         | )          |
| Income tax  (provision) benefit                                                      |       | —                                          |         | (361                        | )          | (30                         | )          | —                          |       | —           |       | (391             | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (205,970                                        | )            | (8,746                      | )          | 7,803                       |       | (727                            | )          | —           |       | (207,640         | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | (1,670                                          | )            | 7,076                       |       | —                      |       | —                          |       | (5,406           | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **(207,640** | **)**                       | **$**      | **(1,670**                  | **)**      | **$**                           | **7,803**  | ** **       | **$**      | **(727**         | **)**      | **$** | **(5,406** | **)** | **$** | **(207,640** | **)** |

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Three Months Ended September 30,2007**

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

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Nine Months Ended September 30,2008**

 
| ** **                                                                           | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **   | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|--------------|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                           | ** ** | **(thousands)**                                 | ** **   |
| **Sales**                                                                            |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Trade                                                                                |       | $                                               | —       |                        | $          | —                      |       | $                               | 2,316,309  |             | $          | 13,805           |       | $ | — |   | $ | 2,330,114 |   |
| Intercompany                                                                         |       | —                                          |         | —                      |       | 2                           |       | 20,291                          |       | (20,293          | )          | —           |       |
| Related parties                                                                      |       | —                                          |         | —                      |       | 130,782                     |       | —                          |       | —           |       | 130,782          |       |
|                                                                                 |       | —                                          |         | —                      |       | 2,447,093                   |       | 34,096                          |       | (20,293          | )          | 2,460,896        |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Costs  and expenses**                                                              |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Materials,  labor, and other operating expenses                                      |       | —                                          |         | 1,673                       |       | 2,136,347                   |       | 35,298                          |       | (15,367          | )          | 2,157,951        |       |
| Materials,  labor, and other operating expenses from related parties                 |       | —                                          |         | —                      |       | 48,234                      |       | —                          |       | —           |       | 48,234           |       |
| Depreciation,  amortization, and depletion                                           |       | —                                          |         | 348                         |       | 25,259                      |       | 1,863                           |       | —           |       | 27,470           |       |
| Selling and  distribution expenses                                                   |       | —                                          |         | —                      |       | 181,350                     |       | 2,152                           |       | —           |       | 183,502          |       |
| General and  administrative expenses                                            |       | 1                                               |         | 6,877                       |       | 27,581                      |       | 237                             |       | (4,926           | )          | 29,770           |       |
| General and  administrative expenses from related party                         |       | —                                          |         | 6,010                       |       | —                      |       | —                          |       | —           |       | 6,010            |       |
| Gain on sale of  Paper and Packaging & Newsprint assets                     |       | —                                          |         | (2,996                      | )          | —                      |       | —                          |       | —           |       | (2,996           | )          |
| Other (income)  expense, net                                                         |       | 8,357                                           |         | 354                         |       | (5,863                      | )          | 1,077                           |       | —           |       | 3,925            |       |
|                                                                                 |       | 8,358                                           |         | 12,266                      |       | 2,412,908                   |       | 40,627                          |       | (20,293          | )          | 2,453,866        |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) from operations**                                                   |       | (8,358                                          | )            | (12,266                     | )          | 34,185                      |       | (6,531                          | )          | —           |       | 7,030            |       |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| Equity in net  loss of Boise Inc.                                               |       | (15,249                                         | )            | —                      |       | —                      |       | —                          |       | —           |       | (15,249          | )          |
| Impairment of  investment in Boise Inc.                                         |       | (208,074                                        | )            | —                      |       | —                      |       | —                          |       | —           |       | (208,074         | )          |
| Foreign exchange  gain (loss)                                                        |       | —                                          |         | (540                        | )          | (100                        | )          | 511                             |       | —           |       | (129             | )          |
| Change in fair  value of contingent value rights                                     |       | —                                          |         | (1,803                      | )          | —                      |       | —                          |       | —           |       | (1,803           | )          |
| Change in fair  value of interest rate swaps                                         |       | —                                          |         | (6,284                      | )          | —                      |       | —                          |       | —           |       | (6,284           | )          |
| Interest expense                                                                     |       | —                                          |         | (27,226                     | )          | —                      |       | (845                            | )          | —           |       | (28,071          | )          |
| Interest  expense—intercompany                                                  |       | —                                          |         | (158                        | )          | (2                          | )          | (1,434                          | )          | 1,594            |       | —           |       |
| Interest income                                                                      |       | 2,760                                           |         | 3,646                       |       | 209                         |       | 14                              |       | —           |       | 6,629            |       |
| Interest  income—intercompany                                                   |       | —                                          |         | 67                          |       | 1,527                       |       | —                          |       | (1,594           | )          | —           |       |
|                                                                                 |       | (220,563                                        | )            | (32,298                     | )          | 1,634                       |       | (1,754                          | )          | —           |       | (252,981         | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) before income taxes and equity in net income (loss) of affiliates** |       | (228,921                                        | )            | (44,564                     | )          | 35,819                      |       | (8,285                          | )          | —           |       | (245,951         | )          |
| Income tax  provision                                                                |       | —                                          |         | (1,256                      | )          | (267                        | )          | —                          |       | —           |       | (1,523           | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Income  (loss) before equity in net income (loss) of affiliates**                  |       | (228,921                                        | )            | (45,820                     | )          | 35,552                      |       | (8,285                          | )          | —           |       | (247,474         | )          |
|                                                                                 |       |                                            |         |                        |       |                        |       |                            |       |             |       |             |       |
| **Equity  in net income (loss) of affiliates**                                       |       | (18,553                                         | )            | 27,267                      |       | —                      |       | —                          |       | (8,714           | )          | —           |       |
| **Net  income (loss)**                                                               | ** ** | **$**                                           | **(247,474** | **)**                       | **$**      | **(18,553**                 | **)**      | **$**                           | **35,552** | ** **       | **$**      | **(8,285**       | **)**      | **$** | **(8,714** | **)** | **$** | **(247,474** | **)** |

 

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

**ConsolidatingStatements of Income (Loss)**

**For the Nine Months Ended September 30,2007**

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

 

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

**ConsolidatingBalance Sheets at September 30, 2008**

 
| ** **                                       | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **(thousands)**                                 | ** **  |
| **ASSETS**                                       | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
|                                             |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Current**                                      |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Cash and cash  equivalents                       |       | $                                               | 1           |                        | $          | 290,028                     |       | $                                 | 20          |             | $          | 43               |       | $ | — |   | $ | 290,092 |   |
| Receivables                                      |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Trade, less  allowances                          |       | —                                          |        | —                      |       | 143,527                     |       | 512                               |        | —           |       | 144,039          |       |
| Intercompany                                     |       | —                                          |        | —                      |       | 56                          |       | —                            |        | (56              | )          | —           |       |
| Related parties                                  |       | —                                          |        | 46                          |       | 9,428                       |       | —                            |        | —           |       | 9,474            |       |
| Other                                            |       | —                                          |        | 1,900                       |       | 3,670                       |       | 345                               |        | —           |       | 5,915            |       |
| Inventories                                      |       | —                                          |        | —                      |       | 296,023                     |       | 7,529                             |        | —           |       | 303,552          |       |
| Other                                            |       | —                                          |        | 2,308                       |       | 2,638                       |       | 162                               |        | —           |       | 5,108            |       |
|                                             |       | 1                                               |        | 294,282                     |       | 455,362                     |       | 8,591                             |        | (56              | )          | 758,180          |       |
|                                             |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Property**                                     |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Property and  equipment, net                     |       | —                                          |        | 2,327                       |       | 276,172                     |       | 13,469                            |        | —           |       | 291,968          |       |
| Fiber farms and  deposits                        |       | —                                          |        | —                      |       | 6,015                       |       | —                            |        | —           |       | 6,015            |       |
|                                             |       | —                                          |        | 2,327                       |       | 282,187                     |       | 13,469                            |        | —           |       | 297,983          |       |
|                                             |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Investment  in equity affiliate (Boise Inc.)** |       | 59,058                                          |        | —                      |       | —                      |       | —                            |        | —           |       | 59,058           |       |
| **Deferred  financing costs**                    |       | —                                          |        | 8,227                       |       | —                      |       | —                            |        | —           |       | 8,227            |       |
| **Goodwill**                                     |       | —                                          |        | —                      |       | 12,170                      |       | —                            |        | —           |       | 12,170           |       |
| **Intangible  assets, net**                      |       | —                                          |        | —                      |       | 9,353                       |       | —                            |        | —           |       | 9,353            |       |
| **Other  assets**                                |       | —                                          |        | 66                          |       | 6,365                       |       | —                            |        | —           |       | 6,431            |       |
| **Investments  in affiliates**                   |       | 471,794                                         |        | 954,937                     |       | —                      |       | —                            |        | (1,426,731       | )          | —           |       |
| **Total  assets**                                | ** ** | **$**                                           | **530,853** | ** **                  | **$**      | **1,259,839**               | ** ** | **$**                             | **765,437** | ** **       | **$**      | **22,060**       | ** ** | **$** | **(1,426,787** | **)** | **$** | **1,151,402** | ** ** |

 

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

**ConsolidatingBalance Sheets at September 30, 2008 (continued)**

 
| ** **                                  | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **  | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|-------------|------------------|------------|------------------|------------|
| ** **                                  | ** ** | **(thousands)**                                 | ** **  |
| **LIABILITIES  AND CAPITAL**                | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Current**                                 |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Accounts payable                            |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Trade                                       |       | $                                               | —      |                        | $          | 8,599                       |       | $                                 | 117,475     |             | $          | 655              |       | $ | — |   | $ | 126,729 |   |
| Intercompany                                |       | —                                          |        | —                      |       | —                      |       | 56                                |        | (56              | )          | —           |       |
| Related parties                             |       | —                                          |        | 1,787                       |       | 2,802                       |       | —                            |        | —           |       | 4,589            |       |
| Accrued  liabilities                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Compensation and  benefits                  |       | —                                          |        | 16,851                      |       | 25,954                      |       | 336                               |        | —           |       | 43,141           |       |
| Interest payable                            |       | —                                          |        | 8,262                       |       | —                      |       | —                            |        | —           |       | 8,262            |       |
| Other                                       |       | —                                          |        | 39,995                      |       | 20,517                      |       | 542                               |        | —           |       | 61,054           |       |
|                                        |       | —                                          |        | 75,494                      |       | 166,748                     |       | 1,589                             |        | (56              | )          | 243,775          |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Debt**                                    |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Long-term debt                              |       | —                                          |        | 315,000                     |       | —                      |       | —                            |        | —           |       | 315,000          |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Other**                                   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                  |       | —                                          |        | 49,925                      |       | —                      |       | —                            |        | —           |       | 49,925           |       |
| Other long-term  liabilities                |       | —                                          |        | 7,674                       |       | 4,175                       |       | —                            |        | —           |       | 11,849           |       |
|                                        |       | —                                          |        | 57,599                      |       | 4,175                       |       | —                            |        | —           |       | 61,774           |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Due to  (from) affiliates**               |       | —                                          |        | 339,952                     |       | (284,012                    | )          | (55,940                           | )           | —           |       | —           |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Redeemable  equity units**                |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| Series B  equity units                 |       | 4,978                                           |        | —                      |       | —                      |       | —                            |        | —           |       | 4,978            |       |
| Series C  equity units                 |       | 7,641                                           |        | —                      |       | —                      |       | —                            |        |             |       | 7,641            |       |
| Redeemable  equity units                    |       | —                                          |        | 12,619                      |       | —                      |       | —                            |        | (12,619          | )          | —           |       |
|                                        |       | 12,619                                          |        | 12,619                      |       | —                      |       | —                            |        | (12,619          | )          | 12,619           |       |
|                                        |       |                                            |        |                        |       |                        |       |                              |        |             |       |             |       |
| **Commitments  and contingent liabilities** | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| ** **                                  | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                 | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **  | ** **       | ** ** | ** **       | ** ** |
| Series A  equity units                 |       | 79,885                                          |        | —                      |       | —                      |       | —                            |        | —           |       | 79,885           |       |
| Series B  equity units                 |       | 438,349                                         |        | —                      |       | —                      |       | —                            |        | —           |       | 438,349          |       |
| Series C  equity units                 |       | —                                          |        | —                      |       | —                      |       | —                            |        | —           |       | —           |       |
| Subsidiary  equity                          |       | —                                          |        | 459,175                     |       | 878,526                     |       | 76,411                            |        | (1,414,112       | )          | —           |       |
| **Total  capital**                          |       | 518,234                                         |        | 459,175                     |       | 878,526                     |       | 76,411                            |        | (1,414,112       | )          | 518,234          |       |
| **Total  liabilities and capital**          |       | **$**                                           | **530,853** |                        | **$**      | **1,259,839**               |       | **$**                             | **765,437** |             | **$**      | **22,060**       |       | **$** | **(1,426,787** | **)** | **$** | **1,151,402** |   |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2007**

 
| ** **                     | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | **(thousands)**                                 | ** **  |
| **ASSETS**                     | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                           |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                    |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Cash and cash  equivalents     |       | $                                               | 1           |                        | $          | 56,588                      |       | $                                 | 21            |             | $          | 1,013            |       | $ | — |   | $ | 57,623 |   |
| Receivables                    |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade, less  allowances        |       | —                                          |        | —                      |       | (1,939                      | )          | 117,148                           |          | —           |       | 115,209          |       |
| Intercompany                   |       | —                                          |        | —                      |       | 56                          |       | —                            |          | (56              | )          | —           |       |
| Related parties                |       | —                                          |        | 9                           |       | —                      |       | —                            |          | —           |       | 9                |       |
| Other                          |       | —                                          |        | 995                         |       | 3,721                       |       | 2,742                             |          | —           |       | 7,458            |       |
| Inventories                    |       | —                                          |        | 10                          |       | 325,804                     |       | 16,201                            |          | —           |       | 342,015          |       |
| Assets held for  sale          |       | —                                          |        | 13,118                      |       | 1,638,706                   |       | 201,215                           |          | —           |       | 1,853,039        |       |
| Other                          |       | —                                          |        | 3,072                       |       | 1,632                       |       | 722                               |          | —           |       | 5,426            |       |
|                           |       | 1                                               |        | 73,792                      |       | 1,968,001                   |       | 339,041                           |          | (56              | )          | 2,380,779        |       |
|                           |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Property**                   |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Property and  equipment, net   |       | —                                          |        | 3,280                       |       | 279,928                     |       | 29,909                            |          | —           |       | 313,117          |       |
| Fiber farms and  deposits      |       | —                                          |        | —                      |       | 7,976                       |       | 16,034                            |          | —           |       | 24,010           |       |
|                           |       | —                                          |        | 3,280                       |       | 287,904                     |       | 45,943                            |          | —           |       | 337,127          |       |
| ** **                     |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Deferred  financing costs**  |       | —                                          |        | 22,927                      |       | —                      |       | 147                               |          | —           |       | 23,074           |       |
| **Goodwill**                   |       | —                                          |        | —                      |       | 12,170                      |       | —                            |          | —           |       | 12,170           |       |
| **Intangible assets, net**     |       | —                                          |        | —                      |       | 9,668                       |       | —                            |          | —           |       | 9,668            |       |
| **Investments  in affiliates** |       | 991,904                                         |        | 927,670                     |       | —                      |       | —                            |          | (1,919,574       | )          | —           |       |
| **Other  assets**              |       | —                                          |        | 5,014                       |       | 3,261                       |       | 3,099                             |          | —           |       | 11,374           |       |
| **Total  assets**              | ** ** | **$**                                           | **991,905** | ** **                  | **$**      | **1,032,683**               | ** ** | **$**                             | **2,281,004** | ** **       | **$**      | **388,230**      | ** ** | **$** | **(1,919,630** | **)** | **$** | **2,774,192** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Balance Sheets at December 31, 2007 (continued)**

 
| ** **                                   | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** **  | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** **    | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|-------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|---------------|------------------|------------|------------------|------------|
| ** **                                   | ** ** | **(thousands)**                                 | ** **  |
| **LIABILITIES  AND CAPITAL**                 | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Current**                                  |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Short-term  borrowings                       |       | $                                               | —      |                        | $          | 10,500                      |       | $                                 | —        |             | $          | —           |       | $ | — |   | $ | 10,500 |   |
| Current portion  of long-term debt           |       | —                                          |        | 7,250                       |       | —                      |       | 40,000                            |          | —           |       | 47,250           |       |
| Accounts payable                             |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Trade                                        |       | —                                          |        | 30,120                      |       | 105,550                     |       | 5,789                             |          | —           |       | 141,459          |       |
| Related parties                              |       | —                                          |        | 43                          |       | —                      |       | —                            |          | —           |       | 43               |       |
| Intercompany                                 |       | —                                          |        | —                      |       | —                      |       | 56                                |          | (56              | )          | —           |       |
| Accrued  liabilities                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Compensation and  benefits                   |       | —                                          |        | 9,811                       |       | 26,084                      |       | 1,014                             |          | —           |       | 36,909           |       |
| Interest payable                             |       | —                                          |        | 6,604                       |       | —                      |       | 536                               |          | —           |       | 7,140            |       |
| Other                                        |       | —                                          |        | 10,106                      |       | 17,057                      |       | 2,796                             |          | —           |       | 29,959           |       |
| Liabilities  related to assets held for sale |       | —                                          |        | 87,678                      |       | 243,958                     |       | —                            |          | —           |       | 331,636          |       |
|                                         |       | —                                          |        | 162,112                     |       | 392,649                     |       | 50,191                            |          | (56              | )          | 604,896          |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Debt**                                     |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Long-term debt,  less current portion        |       | —                                          |        | 1,113,313                   |       | —                      |       | —                            |          | —           |       | 1,113,313        |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Other**                                    | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Compensation and  benefits                   |       | —                                          |        | 46,981                      |       | —                      |       | —                            |          | —           |       | 46,981           |       |
| Other long-term  liabilities                 |       | —                                          |        | 12,704                      |       | 4,393                       |       | —                            |          | —           |       | 17,097           |       |
|                                         |       | —                                          |        | 59,685                      |       | 4,393                       |       | —                            |          | —           |       | 64,078           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Due to  (from) affiliates**                |       | —                                          |        | (1,294,331                  | )          | 1,040,988                   |       | 253,343                           |          | —           |       | —           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Redeemable  equity units**                 |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| Series B  equity units                  |       | 16,992                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 16,992           |       |
| Series C  equity units                  |       | 9,489                                           |        | —                      |       | —                      |       | —                            |          | —           |       | 9,489            |       |
| Redeemable  equity units                     |       | —                                          |        | 26,481                      |       | —                      |       | —                            |          | (26,481          | )          | —           |       |
|                                         |       | 26,481                                          |        | 26,481                      |       | —                      |       | —                            |          | (26,481          | )          | 26,481           |       |
|                                         |       |                                            |        |                        |       |                        |       |                              |          |             |       |             |       |
| **Commitment  and contingent liabilities**   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| ** **                                   | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| **Capital**                                  | ** ** | ** **                                      | ** **  | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** **    | ** **       | ** ** | ** **       | ** ** |
| Series A  equity units                  |       | 78,463                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 78,463           |       |
| Series B  equity units                  |       | 876,693                                         |        | —                      |       | —                      |       | —                            |          | —           |       | 876,693          |       |
| Series C  equity units                  |       | 10,268                                          |        | —                      |       | —                      |       | —                            |          | —           |       | 10,268           |       |
| Subsidiary  equity                           |       | —                                          |        | 965,423                     |       | 842,974                     |       | 84,696                            |          | (1,893,093       | )          | —           |       |
| **Total  capital**                           |       | 965,424                                         |        | 965,423                     |       | 842,974                     |       | 84,696                            |          | (1,893,093       | )          | 965,424          |       |
| **Total  liabilities and capital**           | ** ** | **$**                                           | **991,905** | ** **                  | **$**      | **1,032,683**               | ** ** | **$**                             | **2,281,004** | ** **       | **$**      | **388,230**      | ** ** | **$** | **(1,919,630** | **)** | **$** | **2,774,192** | ** ** |

 

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**BoiseCascade Holdings, L.L.C., and SubsidiariesConsolidating Statements of Cash FlowsFor the Nine Months Ended September 30, 2008**

** **
| ** **                                                                              | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                        |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Net income  (loss)                                                                      |       | $                                               | (247,474   | )                           | $          | (18,553                     | )          | $                                 | 35,552     |             | $          | (8,285           | )          | $ | (8,714 | ) | $ | (247,474 | ) |
| Items in net  income (loss) not using (providing) cash                                  |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  loss of Boise Inc.                                                       |       | 15,249                                          |       | —                      |       | —                      |       | —                            |       | —           |       | 15,249           |       |
| Impairment of  investment in Boise Inc.                                            |       | 208,074                                         |       | —                      |       | —                      |       | —                            |       | —           |       | 208,074          |       |
| Equity in net  (income) loss of affiliates                                              |       | 18,553                                          |       | (27,267                     | )          | —                      |       | —                            |       | 8,714            |       | —           |       |
| Depreciation,  depletion, and amortization of  deferred  financing costs and other |       | —                                          |       | 1,494                       |       | 25,259                      |       | 1,877                             |       | —           |       | 28,630           |       |
| Related-party  interest expense                                                         |       | —                                          |       | 158                         |       | 2                           |       | 1,434                             |       | (1,594           | )          | —           |       |
| Related-party  interest income                                                          |       | (2,760                                          | )          | (67                         | )          | (1,527                      | )          | —                            |       | 1,594            |       | (2,760           | )          |
| Deferred income  taxes                                                                  |       | —                                          |       | 43                          |       | 11                          |       | —                            |       | —           |       | 54               |       |
| Pension and  other postretirement benefit expense                                       |       | —                                          |       | 10,616                      |       | —                      |       | —                            |       | —           |       | 10,616           |       |
| Change in fair  value of contingent rights                                              |       | —                                          |       | 1,803                       |       | —                      |       | —                            |       | —           |       | 1,803            |       |
| Change in fair  value of interest rate swaps                                            |       | —                                          |       | 6,284                       |       | —                      |       | —                            |       | —           |       | 6,284            |       |
| Management  equity units expense                                                   |       | —                                          |       | 1,349                       |       | —                      |       | —                            |       | —           |       | 1,349            |       |
| (Gain) loss on  sale of assets, net                                                     |       | —                                          |       | (2,996                      | )          | (7,875                      | )          | —                            |       | —           |       | (10,871          | )          |
| Loss on sale of  note receivable from related party                                     |       | 8,357                                           |       | —                      |       | —                      |       | —                            |       | —           |       | 8,357            |       |
| Other                                                                                   |       | —                                          |       | 540                         |       | 2,031                       |       | (511                              | )          | —           |       | 2,060            |       |
| Decrease  (increase) in working capital, net of dispositions                            |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                             |       | —                                          |       | (8,554                      | )          | (372,577                    | )          | 319,062                           |       | —           |       | (62,069          | )          |
| Inventories                                                                             |       | —                                          |       | 5,611                       |       | 29,112                      |       | 5,259                             |       | —           |       | 39,982           |       |
| Prepaid expenses                                                                        |       | —                                          |       | 1,151                       |       | 415                         |       | 502                               |       | —           |       | 2,068            |       |
| Accounts payable  and accrued liabilities                                          |       | —                                          |       | (9,586                      | )          | 10,610                      |       | (7,346                            | )          | —           |       | (6,322           | )          |
| Pension and  other postretirement benefit payments                                      |       | —                                          |       | (20,820                     | )          | —                      |       | —                            |       | —           |       | (20,820          | )          |
| Current and  deferred income taxes                                                      |       | —                                          |       | (514                        | )          | 203                         |       | (658                              | )          | —           |       | (969             | )          |
| Other                                                                                   |       | —                                          |       | 5,956                       |       | (4,332                      | )          | (228                              | )          | —           |       | 1,396            |       |
| Cash provided by  (used for) operations                                                 |       | (1                                              | )          | (53,352                     | )          | (283,116                    | )          | 311,106                           |       | —           |       | (25,363          | )          |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                        |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Proceeds from  sale of assets, net of cash contributed                                  |       | —                                          |       | 1,200,795                   |       | 22,750                      |       | 45,536                            |       | —           |       | 1,269,081        |       |
| Proceeds from  sale of note receivable from related party, net                          |       | 52,737                                          |       | 52,737                      |       | —                      |       | —                            |       | (52,737          | )          | 52,737           |       |
| Expenditures for  property and equipment                                           |       | —                                          |       | (905                        | )          | (32,998                     | )          | (2,845                            | )          | —           |       | (36,748          | )          |
| Increase in  restricted cash                                                            |       | —                                          |       | (183,290                    | )          | —                      |       | —                            |       | —           |       | (183,290         | )          |
| Decrease in  restricted cash                                                            |       | —                                          |       | 183,290                     |       | —                      |       | —                            |       | —           |       | 183,290          |       |
| Investments in  affiliates                                                              |       | 103,922                                         |       | 27,267                      |       | —                      |       | —                            |       | (131,189         | )          | —           |       |
| Other                                                                                   |       | —                                          |       | 137                         |       | 1,446                       |       | (27                               | )          | —           |       | 1,556            |       |
| Cash provided by  (used for) investment                                            |       | 156,659                                         |       | 1,280,031                   |       | (8,802                      | )          | 42,664                            |       | (183,926         | )          | 1,286,626        |       |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                              | ** ** | ** **                                      | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Issuances of  long-term debt                                                            |       | —                                          |       | 115,000                     |       | —                      |       | 125,000                           |       | —           |       | 240,000          |       |
| Payments of  long-term debt                                                             |       | —                                          |       | (920,563                    | )          | —                      |       | (165,000                          | )          | —           |       | (1,085,563       | )          |
| Short-term  borrowings                                                                  |       | —                                          |       | (10,500                     | )          | —                      |       | —                            |       | —           |       | (10,500          | )          |
| Tax  distributions to members                                                           |       | (128,024                                        | )          | —                      |       | —                      |       | —                            |       | —           |       | (128,024         | )          |
| Tax  distributions to Boise Cascade Holdings, L.L.C.                               |       | —                                          |       | (128,024                    | )          | —                      |       | —                            |       | 128,024          |       | —           |       |
| Repurchase of  management equity units                                                  |       | (28,634                                         | )          | (28,634                     | )          | —                      |       | —                            |       | 28,634           |       | (28,634          | )          |
| Cash paid for  termination of interest rate swaps                                  |       | —                                          |       | (11,918                     | )          | —                      |       | —                            |       | —           |       | (11,918          | )          |
| Other                                                                                   |       | —                                          |       | (4,155                      | )          | —                      |       | —                            |       | —           |       | (4,155           | )          |
| Cash provided by  (used for) financing                                             |       | (156,658                                        | )          | (988,794                    | )          | —                      |       | (40,000                           | )          | 156,658          |       | (1,028,794       | )          |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Due to (from) affiliates                                                                |       | —                                          |       | (4,445                      | )          | 291,917                     |       | (314,740                          | )          | 27,268           |       | —           |       |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                                   |       | —                                          |       | 233,440                     |       | (1                          | )          | (970                              | )          | —           |       | 232,469          |       |
| **Balance  at beginning of the period**                                                 |       | 1                                               |       | 56,588                      |       | 21                          |       | 1,013                             |       | —           |       | 57,623           |       |
| **Balance  at end of the period**                                                       | ** ** | **$**                                           | **1**      | ** **                  | **$**      | **290,028**                 | ** ** | **$**                             | **20**     | ** **       | **$**      | **43**           | ** ** | **$** | **—** | ** ** | **$** | **290,092** | ** ** |

 

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

** **
| ** **                                                                              | ** ** | **Boise  Cascade  Holdings,  L.L.C.  (Parent)** | ** ** | **Boise  Cascade,  L.L.C.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Non-  guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **(thousands)**                                 | ** ** |
| **Cash  provided by (used for) operations**                                        |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Net income  (loss)                                                                      |       | $                                               | 88,600     |                        | $          | 88,600                      |       | $                                 | 171,714    |             | $          | (29,866          | )          | $ | (230,448 | ) | $ | 88,600 |   |
| Items in net  income (loss) not using (providing) cash                             |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Equity in net  income of affiliates                                                     |       | (88,600                                         | )          | (141,848                    | )          | —                      |       | —                            |       | 230,448          |       | —           |       |
| Depreciation,  depletion, and amortization of  deferred  financing costs and other |       | —                                          |       | 3,285                       |       | 107,490                     |       | 3,259                             |       | —           |       | 114,034          |       |
| Related-party  interest expense                                                         |       | —                                          |       | 469                         |       | —                      |       | 15,554                            |       | (16,023          | )          | —           |       |
| Related-party  interest income                                                          |       | —                                          |       | (61                         | )          | (15,962                     | )          | —                            |       | 16,023           |       | —           |       |
| Deferred income  taxes                                                                  |       | —                                          |       | 3,555                       |       | 95                          |       | —                            |       | —           |       | 3,650            |       |
| Pension and  other postretirement benefit  expense                                 |       | —                                          |       | 18,945                      |       | —                      |       | —                            |       | —           |       | 18,945           |       |
| Gain on changes  in retiree healthcare programs                                         |       | —                                          |       | (4,367                      | )          | —                      |       | —                            |       | —           |       | (4,367           | )          |
| Change in fair  value of interest rate swaps                                            |       | —                                          |       | (5,395                      | )          | —                      |       | —                            |       | —           |       | (5,395           | )          |
| Management  equity units expense                                                   |       | —                                          |       | 2,337                       |       | —                      |       | —                            |       | —           |       | 2,337            |       |
| (Gain) loss on  sale of assets, net                                                     |       | —                                          |       | 37                          |       | (993                        | )          | 59                                |       | —           |       | (897             | )          |
| Other                                                                                   |       | —                                          |       | (29,015                     | )          | (1,779                      | )          | 26,747                            |       | —           |       | (4,047           | )          |
| Decrease  (increase) in working capital, net of disposals                               |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Receivables                                                                             |       | —                                          |       | 1,209                       |       | (5,157                      | )          | (68,228                           | )          | (4,401           | )          | (76,577          | )          |
| Inventories                                                                             |       | —                                          |       | 3                           |       | (29,164                     | )          | (1,032                            | )          | —           |       | (30,193          | )          |
| Prepaid expenses                                                                        |       | —                                          |       | 3,037                       |       | (2,121                      | )          | (130                              | )          | —           |       | 786              |       |
| Accounts payable  and accrued liabilities                                          |       | —                                          |       | (5,606                      | )          | 20,566                      |       | (1,101                            | )          | 4,401            |       | 18,260           |       |
| Pension and  other postretirement benefit payments                                      |       | —                                          |       | (888                        | )          | —                      |       | —                            |       | —           |       | (888             | )          |
| Current and  deferred income taxes                                                      |       | —                                          |       | 2,180                       |       | 612                         |       | (214                              | )          | —           |       | 2,578            |       |
| Other                                                                                   |       | —                                          |       | 4,299                       |       | 216                         |       | (8                                | )          | —           |       | 4,507            |       |
| Cash provided by  (used for) operations                                                 |       | —                                          |       | (59,224                     | )          | 245,517                     |       | (54,960                           | )          | —           |       | 131,333          |       |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) investment**                                        |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Proceeds from  sales of assets, net of cash contributed                                 |       | —                                          |       | 11                          |       | 18,259                      |       | —                            |       | —           |       | 18,270           |       |
| Expenditures for  property and equipment                                           |       | —                                          |       | (3,460                      | )          | (131,175                    | )          | (2,612                            | )          | —           |       | (137,247         | )          |
| Increase in  restricted cash held for bond redemption                                   |       | —                                          |       | (200,000                    | )          | —                      |       | —                            |       | —           |       | (200,000         | )          |
| Investments in  affiliates                                                              |       | 3,002                                           |       | 141,848                     |       | —                      |       | —                            |       | (144,850         | )          | —           |       |
| Other                                                                                   |       | —                                          |       | 29,179                      |       | 4,220                       |       | (27,021                           | )          | —           |       | 6,378            |       |
| Cash provided by  (used for) investment                                            |       | 3,002                                           |       | (32,422                     | )          | (108,696                    | )          | (29,633                           | )          | (144,850         | )          | (312,599         | )          |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Cash  provided by (used for) financing**                                              |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| Issuances of  long-term debt                                                            |       | —                                          |       | 725,000                     |       | —                      |       | 235,000                           |       | —           |       | 960,000          |       |
| Payments of  long-term debt                                                             |       | —                                          |       | (541,525                    | )          | —                      |       | (210,000                          | )          | —           |       | (751,525         | )          |
| Short-term  borrowings                                                                  |       | —                                          |       | (3,200                      | )          | —                      |       | —                            |       | —           |       | (3,200           | )          |
| Tax  distributions to members                                                           |       | (2,753                                          | )          | —                      |       | —                      |       | —                            |       | —           |       | (2,753           | )          |
| Tax distribution  to Boise Cascade Holdings, L.L.C.                                |       | —                                          |       | (2,753                      | )          | —                      |       | —                            |       | 2,753            |       | —           |       |
| Repurchases of  management equity units                                                 |       | (249                                            | )          | (249                        | )          | —                      |       | —                            |       | 249              |       | (249             | )          |
| Proceeds from  changes to interest rate swaps                                           |       | —                                          |       | 2,848                       |       | —                      |       | —                            |       | —           |       | 2,848            |       |
| Other                                                                                   |       | 1                                               |       | (3,417                      | )          | —                      |       | —                            |       | —           |       | (3,416           | )          |
| Cash provided by  (used for) financing                                             |       | (3,001                                          | )          | 176,704                     |       | —                      |       | 25,000                            |       | 3,002            |       | 201,705          |       |
| Due to (from)  affiliates                                                               |       | —                                          |       | (62,659                     | )          | (136,832                    | )          | 57,643                            |       | 141,848          |       | —           |       |
|                                                                                    |       |                                            |       |                        |       |                        |       |                              |       |             |       |             |       |
| **Increase  (decrease) in cash and cash equivalents**                                   |       | 1                                               |       | 22,399                      |       | (11                         | )          | (1,950                            | )          | —           |       | 20,439           |       |
| **Balance  at beginning of the year**                                                   |       | —                                          |       | 42,962                      |       | 32                          |       | 2,175                             |       | —           |       | 45,169           |       |
| **Balance  at end of the year**                                                         | ** ** | **$**                                           | **1**      | ** **                  | **$**      | **65,361**                  | ** ** | **$**                             | **21**     | ** **       | **$**      | **225**          | ** ** | **$** | **—** | ** ** | **$** | **65,608** | ** ** |

 

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***22.          Legal Proceedings and Contingencies***

 

We are a party to routine legal proceedings that arisein the ordinary course of our business. We are not currently a party to anylegal proceedings or environmental claims that we believe would have a materialadverse effect on our financial position, results of operations, or cash flows.

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

 

***Understanding Our FinancialInformation***

 

The following discussion and analysisprovides information management believes to be relevant to understanding ourfinancial condition and results of operations. We begin this discussionand analysis with a general background related to our company and an overviewof the effects of the “Sale of Our Paper and Packaging & NewsprintAssets.” “Recent Trends and Operational Outlook” and “Factors That Affect OurOperating Results” are intended to give the reader context that may be helpfulin understanding the opportunities and challenges our businesses face as wecompete in the marketplace. The analysis then reviews “Our Operating Results”for the three and nine months ended September 30, 2008, compared with thesame periods in 2007. Following the analysis of our results, relevant mergeractivity in our industry is discussed in “Industry Mergers and Acquisitions,”as well as in “Acquisitions” and “Divestitures.”

 

We discuss ourbalance sheet, cash flows, and financial commitments in the section entitled “Liquidityand Capital Resources.” The analysis then refers you to “ContractualObligations” and “Critical Accounting Estimates” that are discussed in detailin “Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in our Form 10-Q for the quarter ended March 31,2008. Critical accounting estimates are those estimates that our managementbelieves are important to understanding the assumptions and judgmentsincorporated in our reported financial results.

 

This discussion and analysis includes statements regarding our expectationswith respect to our future performance, liquidity, and capital resources. Suchstatements, along with any other nonhistorical statements in the discussion,are forward-looking. These forward-looking statements are subject to numerousrisks and uncertainties, including, but not limited to, the risks anduncertainties described in “Part II, Item 1A. Risk Factors” of our Form 10-Qfor the quarter ended March 31, 2008, as well as the factors listed inother documents we file with the Securities and Exchange Commission (SEC). See “Part II,Item 1A. Risk Factors” of this Form 10-Q for an update on our view of riskfactors. We do not assume an obligation to update any forward-lookingstatement. Our future actual results may differ materially from those containedin or implied by any of the forward-looking statements in this Form 10-Q.

 

***Background and Executive Overview***

 

Our operations began on October 29, 2004(inception), when we acquired the forest products and paper assets of OfficeMax(the Forest Products Acquisition). Before the Forest Products Acquisition,OfficeMax was known as Boise Cascade Corporation. We acquired the name “BoiseCascade” as part of the Forest Products Acquisition.

 

On February 22, 2008, Boise Cascade,L.L.C., our wholly owned direct subsidiary, sold its Paper and Packaging &Newsprint assets and most of its Corporate and Other assets (the Sale) toBoise Inc. (formerly Aldabra 2 Acquisition Corp.) for cash andsecurities equal to $1.6 billion, plus working capital adjustments.Immediately following the Sale, Boise Cascade, L.L.C., distributed thesecurities received in the transaction to us. As a result, we became a 49%owner of Boise Inc. and continue to have a significant indirect financialinterest in the results of the sold businesses. We account for ourinterest in Boise Inc. using the equity method of accounting. On September 30,2008, we concluded that our investment in Boise Inc. met the definition ofother than temporarily impaired as defined in Accounting Principles Board (APB)Opinion No. 18, *The Equity Method ofAccounting for Investments in Common Stock*. Accordingly, we recordeda $208.1 million charge in “Impairment of investment in equity affiliate”in our Consolidated Statements of Loss for the three and nine months ended September 30,2008. See our “Operating Results, Income (Loss) From Operations, Other, Impairmentof investment in equity affiliate” for more information related to thewrite-down of our investment in Boise Inc.

 

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Boise Cascade, L.L.C., is now solelyfocused on wood products manufacturing and building products distribution andis headquartered in Boise, Idaho. After the Sale, we operate ourbusiness in the following three reportable segments: Building MaterialsDistribution, Wood Products, and Corporate and Other. See Note 19, SegmentInformation, of the Notes to Unaudited Quarterly Consolidated FinancialStatements in “Item 1. Consolidated Financial Statements” of this Form 10-Qfor additional information about our reportable segments.

 

Recent results for our business segments remain weak,compared with those we achieved in the periods of 2004 through the first halfof 2007, when single-family housing starts were more robust. We do not expecthousing starts to meaningfully improve over the next several quarters. At thispoint, our outlook is for relatively weak end-product demand in the near term.See additional comments below in “Recent Trends and Operational Outlook.”

 

***Sale of Our Paper and Packaging & NewsprintAssets***

 

On February 22, 2008, Boise Cascade,L.L.C., completed the Sale for $1,277.2 million of cash consideration,$277.4 million of net stock consideration, and a $41.0 millionpaid-in-kind promissory note receivable. After the Sale, the note receivablefrom Boise Inc. increased $17.3 million for working capitaladjustments, and in June 2008, we sold the note receivable for$52.7 million after selling expenses. For more information, seeNote 5, Transactions With Related Parties in “Item 1. ConsolidatedFinancial Statements” of this Form 10-Q. In connection with the Sale, wegenerated a $5.9 million gain, of which we recognized $3.0 million inour Consolidated Statement of Loss during the nine months ended September 30,2008. In accordance with Emerging Issues Task Force (EITF) No. 01-02, *Interpretations of APB Opinion No. 29,*we deferred$2.9 million of the gain as a reduction of our investment in Boise Inc.

 

Immediately following the Sale, BoiseCascade, L.L.C., distributed the securities received in the transaction to us.As a result, we became a 49% owner of Boise Inc. and continue to have asignificant indirect financial interest in the results of the sold businesses.We account for our interest in Boise Inc. using the equity method ofaccounting. See Note 3, Investment in Equity Affiliate, in “Item 1.Consolidated Financial Statements” of this Form 10-Q for more information.

 

The net proceeds of any disposition of the shares of Boise Inc., andthe net proceeds received from the sale of the note receivable fromBoise Inc. (see Note 5, Transactions With Related Parties in “Item 1.Consolidated Financial Statements” of this Form 10-Q for moreinformation), are governed by the terms of our senior subordinated notesindenture, including the asset disposition provisions, which may require us touse the proceeds within one year of the sale to repay senior indebtedness,reinvest in our business, or tender for all, or a portion of, the outstandingnotes at par.

 

*Useof Transaction Proceeds*

 

With the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million of long-termdebt. In addition to repaying a substantial amount of our indebtedness, infirst quarter 2008, we paid $11.9 million to unwind all of our interestrate swaps.

 

We make cash distributions to permit the members ofBoise Cascade Holdings, L.L.C. (BC Holdings) and affiliates to paytheir taxes. On February 22, 2008, we accrued $200 million forestimated tax distributions payable to our equity holders related to theestimated net taxable gain on the Sale. Our final tax distribution payable tomembers will include the gain on the Sale and will be partially offset by 2008taxable losses. During the three and nine months ended September 30, 2008,we made $0.1 million and $128.0 million of tax distributions to ourequity holders. We expect to make additional tax distributions during theremainder of the year or in first quarter 2009.

 

In connection with the transaction, approximately75 participants in our Management Equity Plan terminated employment withus. These employees collectively held 6.6 million Series B and16.1 million Series C units. After the transaction, we paid$18.3 million to repurchase their equity units. In addition, we alsocurrently expect to pay approximately $4.2 million under the deferredcompensation agreements for employees terminated in connection with thetransaction. Of the $4.2 million, we recorded $2.6 million in “Accruedliabilities, Compensation and benefits” and $1.6 million in “Other,Compensation and benefits” on our Consolidated Balance Sheet at September 30,2008.

 

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*Pro Forma*

 

The following pro formafinancial information was derived from the unaudited quarterly financialstatements of BC Holdings. The pro forma financial information gives effect tothe Sale as if it were consummated on January 1, 2007. The pro formafinancial information is intended for informational purposes only and is notnecessarily indicative of the results of operations that may have actuallyoccurred if the Sale had been consummated on January 1, 2007, or theoperating results that may be obtained in the future.

** **
| ** **         | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended**

**September 30** | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **         | ** ** | **2008**                                            | ** ** | **2007**                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **         | ** ** | **(millions)**                                      | ** ** |
|               |       |                                                |       |                                                   |       |   |   |   |   |
| Sales              |       | $                                                   | 727.1      |                                                   | $          | 847.7 |   | $ | 2,126.2 |   | $ | 2,514.7 |   |
|               |       |                                                |       |                                                   |       |   |   |   |   |
| Net income  (loss) |       | $                                                   | (208.3     | )(a)                                                   | $          | 24.2 | (b) | $ | (263.0 | )(a) | $ | 51.8 | (b) |

 

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(a)                                  The pro forma net loss for the three and ninemonths ended September 30, 2008, included pro forma income of$2.0 million and pro forma expense of $20.1 million related to ourequity interest in Boise Inc.; included a $208.1 million write-downof our investment in Boise Inc.; included zero and $6.3 million ofexpense related to changes in the fair value of our interest rate swaps, whichwe terminated in February 2008; included zero and $4.1 million ofrelated-party interest income from the note receivable from Boise Inc.,which was sold in June 2008; excluded $2.2 million of income and$1.8 million of expense related to the fair value of contingent valuerights that we and Terrapin Partners Venture Partnership granted to certainBoise Inc. investors; and excluded $1.7 million of expense and$3.0 million of gain on the Sale.

 

(b)                                 Pro forma net income for the three and ninemonths ended September 30, 2007, included pro forma income of$6.2 million and pro forma expense of $6.0 million related to ourequity interest in Boise Inc.; included $2.3 million and$6.9 million of related-party interest income from the note receivablefrom Boise Inc.; included a zero and $4.4 million gain related tochanges in our retiree healthcare programs; and zero and $5.4 million ofincome related to changes in the fair value of our interest rate swaps.

 

***Effects of the Sale***

 

*OutsourcingAgreement*

 

In connection with the Sale, weentered into an Outsourcing Services Agreement under which Boise Inc. providesa number of corporate staff services to us at cost. These services includeinformation technology, accounting, and human resource services. The initialterm of the agreement is for three years. It will automatically renew forone-year terms unless either party provides notice of termination to the otherparty at least 12 months in advance of the applicable term. TheOutsourcing Services Agreement also gives us (but not Boise Inc.) the right toterminate all or any portion of the services provided to us on 30 days’notice, subject to payment of an absorption fee. The absorption fee of$5.0 million is allocated among the services provided under the contractand declines to zero in total and on an allocable basis over the initialthree-year term of the agreement. During the three and nine months ended September 30,2008, we recognized $3.7 million and $9.1 million of costs related tothis agreement, of which we recorded $0.6 million and $1.3 million in“Materials, labor, and other operating expenses from related parties,”$0.6 million and $1.8 million in “Selling and distribution expenses,”and $2.5 million and $6.0 million in “General and administrativeexpenses from related party” in our Consolidated Statements of Loss.

 

*DecreasedLeverage*

 

With the proceeds from the Sale and an initial borrowing under ourasset-based revolving credit facility, we repaid $1,085.6 million oflong-term debt, including all of the borrowings under the previous revolvingcredit facility, Tranche E term loan, delayed-draw term loan, borrowingssecured by our receivables, and $160.0 million of our 7.125% seniorsubordinated notes. We repaid the amounts primarily with the proceeds from theSale and, to a lesser extent, with borrowings under our $350 millionsenior secured asset-based revolving credit facility. At September 30,2008, we had $315.0 million of debt outstanding. For moreinformation, see “Financing Activities” under Liquidity and Capital Resourcesin this Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.

 

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*Segments*

 

Prior to the Sale, weoperated our business using five reportable segments:  Building Materials Distribution, WoodProducts, Paper, Packaging & Newsprint, and Corporate and Other.Following the Sale, we operate our business using three reportablesegments:  Building MaterialsDistribution, Wood Products, and Corporate and Other. There are no differencesin our basis of measurement of segment profit or loss from those disclosed inNote 16, Segment Information, of the Notes to Consolidated FinancialStatements in “Item 8. Consolidated Financial Statements and SupplementaryData” in our 2007 Annual Report on Form 10-K. The equity interest we ownin Boise Inc. after the Sale represents a significant continuing involvement asdefined in Statement of Financial Accounting Standards (SFAS) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets.*Asa result, we continue to show the results of the Paper and Packaging &Newsprint segments through February 21, 2008, and we do not define thesold assets as discontinued operations.

 

*Pensionand Benefit Plans*

 

Effective January 1, 2008, we spunoff the portion of each benefit plan attributable to employees or retirees ofthe Paper and Packaging & Newsprint businesses. Effective February 22,2008, under the terms of the Purchase and Sale Agreement with Boise Inc., wetransferred sponsorship of the spunoff plans to Boise Paper Holdings, L.L.C., asubsidiary of Boise Inc., and only those employees, terminated vestedparticipants, and retirees whose employment was with our Wood Products,Building Materials Distribution, and some corporate and discontinued operationscontinue to be covered under the plans remaining with us. As a result of theSale, our annual pension expense and contributions to the plans going forwardwill be less than the amounts included in prior periods.

 

***Recent Trends and Operational Outlook***

 

As of October 2008, the Blue Chip Economicconsensus forecast for 2008 housing starts in the U.S. was approximately0.96 million units, which is significantly below historical trends ofapproximately 1.7 million units per year over the prior ten years. Housingstarts in 2004 and 2005 were approximately 2.0 million per year, with 2006coming in around 1.8 million units. This above-trend period was fueled bylow mortgage rates, a strong economy with low unemployment, and the growth of thesubprime mortgage market and the various mortgage securitization mechanismsdeveloped by financial institutions. In the second half of 2007, turbulence inthe mortgage market and a significant oversupply of homes for sale led to asharp drop-off in housing construction and demand for our products. Housingstarts in 2007 were approximately 1.3 million units. The inventory ofunsold homes is elevated relative to historical levels, and foreclosure rateshave increased as home prices have declined in many parts of the United States.Housing markets across the country have been affected negatively by recentevents. 

 

While our products are used in repair-and-remodelactivities, as well as light commercial construction, our results areprincipally driven by new single-family home construction. In many parts of thecountry, demand for building products continues to be weak, and there isongoing pricing pressure as suppliers compete for the limited businessavailable.

 

Input costs are another key factor of our recentresults. Energy costs, including electricity, natural gas, and diesel fuel,continued to be higher than historical norms in the early part of the thirdquarter. This raised our freight and manufacturing costs both directly andindirectly by raising key variable-cost inputs, such as glues and resins.Global supply and demand factors, as well as the weak U.S. dollar, appeared tobe contributing to the persistence of the recent higher energy and othercommodity price trends. These trends in energy prices have recently begun toreverse as the markets anticipate a global economic slowdown. Our log costshave started to decline but have not fallen as sharply as we have experiencedin prior periods of weak industry manufacturing output. Some of this is a resultof higher cutting and hauling costs due to the energy issues mentioned above.

 

The turbulence in world financial markets that hasoccurred since late in the third quarter of 2008 has resulted in significantdeclines in natural gas and oil prices and a marked strengthening of the U.S.dollar against many currencies, including the Canadian dollar. Our business andresults are relatively sensitive to changes in these major economic factors.These changes are so recent that we have not yet seen significant impacts onour business. However, if they remain in place we may see reductions in

 

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certain rawmaterial costs and energy costs and we may see increases in foreigncompetition. Given the current volatility and uncertainty of financial andcommodity markets no assurance can be given as to whether these trends willcontinue and as to what their eventual impact on our results may be.

 

We expect market conditions during the balance of 2008and at least the beginning of 2009 to remain difficult. During the threequarters of 2008, we took rolling curtailments at a number of our wood productsoperations to maintain appropriate inventory levels, while trying to minimizethe negative impact of the curtailments on our employees and our operatingresults. Earlier in the year, we permanently closed our White City, Oregon,lumber operation; in July 2008, we sold our Brazilian subsidiary; and in September 2008,we permanently closed our St. Helens, Oregon, veneer operation. It is likelythat we will need to continue our practice of rolling curtailments at a numberof our facilities, doing so in a manner that allows us to retain our skilledworkforce and keep our inventories in balance with demand. We will continue toevaluate the long-term viability and value to our business strategy of ourremaining operating facilities and may conclude that additional facilitiesshould be closed or sold in response to market conditions.

 

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

 

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

 

·                  General economicconditions, including but not limited to housing starts, repair-and-remodelactivity and nonresidential construction, and relative currency values;

 

·                  Mortgage pricingand availability, as well as other consumer financing mechanisms, thatultimately impact demand for our products;

 

·                  Volatility inraw material costs, including energy prices and log costs;

 

·                  The commoditynature of our products and their price movements, which are driven largely bysupply and demand;

 

·                  Pricingvolatility in our distribution business;

 

·                  Industry cyclesand capacity utilization rates;

 

·                  The cost andability to obtain necessary financing;

 

·                  Continuedcompliance with government regulations;

 

·                  Legislative orregulatory environments, requirements, or changes affecting the businesses inwhich we are engaged;

 

·                  Labor andpersonnel relations and shortages of skilled and technical labor;

 

·                  Credit orcurrency risks affecting our revenue and profitability;

 

·                  Major equipmentfailure;

 

·                  Severe weatherphenomena such as drought, hurricanes, tornadoes, and fire;

 

·                  Our ability toimplement our strategies;

 

·                  Actionsof suppliers, customers, and competitors, including merger and acquisitionactivities;

 

·                  Financialresults of Boise Inc., which we account for under the equity method ofaccounting;

 

·                  Boise Inc.’sperformance under the administrative services outsourcing agreement; and

 

·                  Theother factors described in “Part II, Item 1A. Risk Factors” of our Form 10-Qfor the quarter ended March 31, 2008, and updated in “Part II,Item 1A. Risk Factors” in this Form 10-Q.

 

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*Commodity and DifferentiatedProducts and Services*

 

Many of the products wemanufacture and distribute are widely available and can be readily produced ordistributed by our competitors. Because commodity products have fewdistinguishing qualities from producer to producer, competition for theseproducts is based primarily on price, which is determined by supply relative todemand. Generally, market conditions beyond our control determine the price forour commodity products, and the price for any one or more of these products mayfall below our cash production costs or our cost of procurement. Therefore, ourprofitability with respect to these products depends on managing our coststructure, particularly raw material and energy costs, which also exhibitcommodity characteristics.

 

Not all of our productsare viewed as commodities in the marketplace. Our engineered wood products(EWP) are differentiated from competing products based on quality and productdesign, as well as related customer service. In the case of EWP products, weare generally able to influence price based on the strength of differentiationand levels of customer service and are generally able to sell these products athigher margins than our commodity products. A fundamental component of ourstrategy is to grow EWP as a share of our total Wood Products segment sales. Webelieve this product is less susceptible to commodity pricing dynamics.

 

Comparing third quarter2008 with the same period in 2007, sales of EWP from our Wood Products segmentdecreased from approximately 41% of segment sales in 2007 to 32% of sales in2008. The ongoing weakness in new residential construction has impeded ourability to grow our EWP sales. Comparing the three months ended September 30,2008, with the same period in 2007, our laminated veneer lumber (LVL) andI-joist sales volumes decreased 30% and 35%, respectively.

 

Our Building MaterialsDistribution segment distributes a significant number of commodity and brandedbuilding materials. While we must be competitive on price, our associates andmanagement team understand the positive impact excellent customer service,process innovation, and local market adaptation can have on differentiating ourfunction in the marketplace and generating superior returns on investedcapital.

 

*Demand*

 

Historically, demand forthe products we manufacture, as well as the products we purchase anddistribute, has been closely correlated with new residential construction inthe United States. Demand for new residential construction is influenced byseasonal weather factors, mortgage availability and rates, unemployment levels,immigration rates, homeowner vacancies, demand for second homes, existing homeprices, consumer confidence, and other general economic factors. Industrysupply is influenced primarily by operating rates of existing facilities but isalso influenced over time by the introduction of new product technologies andcapacity additions. The balance of supply and demand in the U.S. is alsoheavily influenced by imported products, principally from Canada.

 

U.S. housing starts havefallen dramatically since early 2006, resulting in much lower building productsshipments and pricing for us and many others in the industry. The length andmagnitude of industry cycles have varied over time, and we are uncertain as tohow long the current supply-demand imbalances will persist. Many of the woodproducts we produce or distribute, including oriented strand board (OSB),plywood, lumber, and particleboard, are commodities that are widely availablefrom other producers or distributors. Even our noncommodity products, such asEWP, are affected by commodity prices since the cost of producing EWP isaffected by veneer and OSB prices. Commodity products have few distinguishingqualities from producer to producer, and as a result, competition for theseproducts is based primarily on price, which is determined by supply relative todemand.

 

Demand for buildingproducts also depends on light commercial construction and residentialrepair-and-remodeling activity, which are affected by demographic trends,interest rate levels, weather, and general economic conditions.

 

*Supply*

 

Industry supply ofcommodity wood products is affected by the number of operational or idledfacilities, the building of new capacity, and the shutting down of existingcapacity. Capacity also tends to 

 

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increase gradually over time without significant capital expenditures,as manufacturers improve production efficiencies. Generally, more capacity isadded or employed when supply is tight and margins are relatively high, andcapacity is idled or eliminated when capacity significantly exceeds demand andmargins are poor.

 

While new capacity additionsare constrained by the high capital investment and long lead times required toplan, obtain regulatory approvals for, and build a new mill, a favorablepricing environment may prompt manufacturers to initiate expansion projects.

 

Some major OSB producershave announced indefinite shutdowns or permanent closures of existingfacilities, and others have announced delays in previously announced capacityadditions. A number of OSB producers have announced the intention to produce astrand lumber product that is intended to be a substitute for EWP in someapplications. One of the strand lumber mills recently announced commencement ofproduction. The ability of the facility to cost-effectively produce such aproduct that meets required performance standards and its impact on the EWPmarket are uncertain.

 

Industry supply ofcommodity wood products is also influenced by the level of imports and overseasproduction capacity, which has grown in recent years. The relative weakness ofthe U.S. dollar has mitigated the level of imports in recent years.

 

*Operating Costs*

 

Our major costs in ourWood Products segment are labor, wood fiber, energy, and chemicals. Given thesignificance of raw material and energy costs to our total operating expensesand our limited ability to control these costs, volatility in these costs canmaterially affect our margins. In addition, the timing and degree of pricecycles of raw materials and energy differ with respect to each type of rawmaterial and energy we use.

 

In our Building MaterialsDistribution segment, the primary cost is for products procured for resale,which represents over 90% of our total costs. Occupancy, labor, and delivery costs are also important factors thatimpact our earnings in this segment.

 

*Labor.*Ourlabor costs tend to increase steadily due to inflation in healthcare and wagecosts.

 

As of September 30, 2008, we had approximately4,900 employees. Approximately 1,770, or 36%, of these employees workpursuant to collective bargaining agreements. A four-year agreement (runningthrough May 31, 2012) covering our Northwest wood products facilities wasratified in early September. This agreement affects eight contracts coveringapproximately 900 employees at the following locations:  La Grande, Oregon, sawmill and particleboardplant; Elgin, Oregon, plywood plant and stud mill; Emmett, Idaho, laminatedbeam plant; Kettle Falls, Washington, plywood plant and small log mill; andWoodinville, Washington, building materials distribution center. Laborcontracts covering approximately 700 employees with the CarpentersIndustrial Council expire on July 15, 2009, at our Florien and Oakdale,Louisiana, plywood plants. We do not anticipate that we will start bargainingthese contracts until late second quarter of 2009. We do not expect materialwork interruptions or increases in our costs during the course of thenegotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

 

*Woodfiber.*Our primary raw material is wood fiber. For the ninemonths ended September 30, 2008 and 2007, wood fiber accounted for 39% and42% of materials, labor, and other operating expenses, including relatedparties, in our Wood Products segment.

 

Our primary sources oflogs and wood fiber are timber and byproducts of timber, such as wood shavingsand sawdust. Our wood fiber costs also include purchases of semifinishedmaterials, such as OSB and lumber, for use in EWP production. We acquiresubstantially all of our fiber from outside sources. In our Wood Productssegment, we convert logs into lumber and veneer, and in turn, we convert veneerinto EWP and plywood. Logs are a lower percentage of the total cost ofmaterials, labor, and other operating expenses in producing EWP than commodityproducts, such as lumber and plywood. While log costs are still a significantcomponent of costs, as we produce more EWP relative to commodity products overtime, direct-log costs decline as a percentage of the total cost of materials,labor, and other 

 

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operating expenses. We also convert residual wood fiber from ouroperations, as well as from third parties, into particleboard.

 

Logs and wood fiber arecommodities, and prices for logs and wood fiber have historically been cyclicaldue to changing levels of demand. Log and fiber supply may be limited by publicpolicy or government regulation as well as fire, insect infestation, disease,ice storms, windstorms, hurricanes, flooding, other weather conditions, andother natural and man-made causes. Residual fiber supply may be limited due toreduction in primary manufacturing at sawmills and plywood plants. Declines inlog and fiber supply, driven primarily by changes in public policy andgovernment regulation, have been severe enough to cause the closure of numerousfacilities in some of the regions in which we operate. Any sustainedundersupply and resulting increase in wood fiber prices could decrease ourproduction volumes and/or increase our operating costs. Prices for our productsmight not reflect increases or decreases in log and wood fiber prices, and as aresult, our operating margins could fluctuate. Further curtailments of solidwood manufacturing in the Northwest have led to limited availability and higherprices for residual fiber in 2008, which raises input costs for ourparticleboard operations but also results in higher realizations from ourbyproducts sales of wood chips from our lumber, veneer, and plywood operations.

 

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

 

Our costs for raw materials are influenced by increases in energycosts. Specifically, some of our key chemicals, including glues and resinsconsumed in our Wood Products segment, are heavily influenced by energy costs.A number of our major suppliers have obtained price increases tied to theirincreased energy costs. For our commodity products, the relationship betweenindustry supply and demand, rather than changes in the cost of raw materials,determines our ability to increase prices. Consequently, we may be unable topass increases in our operating costs to our customers in the short term.

 

*Energy. *Prices for energy,particularly electricity, natural gas, and diesel, have been volatile in recentyears, at times substantially exceeding historical averages. For the ninemonths ended September 30, 2008 and 2007, energy costs representedapproximately 5% and 4% of materials, labor, and other operating expenses,including from related parties, in our Wood Products segment. Relative to theprior year, fuel costs increased in our Building Materials Distributionsegment.

 

*Chemicals. *Importantchemicals we use in the production of our wood products are resins and glues.For the nine months ended September 30, 2008 and 2007, purchases ofchemicals represented 7% of materials, labor, and other operating expenses,including from related parties, in our Wood Products segment. We experienced higher chemicalcosts during the first nine months of 2008, compared with the same period ayear ago, due primarily to chemical market supply-demand dynamics and theimpact that higher energy prices are having on the cost structure of chemicalproducers.

 

*Inflationary and seasonal influences. *Our major costs of production are labor, wood fiber, energy, andchemicals. Fiber markets in the Pacific Northwest are still relatively high byhistorical standards. Energy costs, particularly for electricity, natural gas,and fuel oil, have been volatile in recent years and currently exceedhistorical standards. We have also seen higher chemical costs in the currentyear, compared with historical standards, due primarily to chemical marketsupply and demand dynamics. Seasonal changes in levels of buildingactivity affect our building products businesses. We typically have highersales and working capital in the second and third quarters because of warmerweather. In addition, seasonally cold weather increases costs, especiallyenergy consumption, at our manufacturing facilities.

 

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***OurOperating Results***

 

The following tables setforth our operating results in dollars and as a percentage of sales for thethree and nine months ended September 30, 2008 and 2007:
| ** **                                                                      |       |                                                |       |                                               |       |     |       |     |       |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                      | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
| ** **                                                                      | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | **(millions)**                                      | ** ** |
| **Sales**                                                                       |       |                                                |       |                                               |       |     |       |     |       |
| Trade                                                                           |       | $                                                   | 705.9      |                                               | $          | 1,247.5  |       | $        | 2,330.1    |   | $ | 3,699.7 |   |
| Related parties                                                                 |       | 21.2                                                |       | 154.6                                              |       | 130.8    |       | 471.8    |       |
|                                                                            |       | 727.1                                               |       | 1,402.1                                            |       | 2,460.9  |       | 4,171.5  |       |
|                                                                            |       |                                                |       |                                               |       |     |       |     |       |
| **Costs  and expenses**                                                         |       |                                                |       |                                               |       |     |       |     |       |
| Materials,  labor, and other operating expenses                                 |       | 627.4                                               |       | 1,202.5                                            |       | 2,158.0  |       | 3,629.7  |       |
| Materials,  labor, and other operating expenses from related parties            |       | 19.0                                                |       | —                                             |       | 48.2     |       | —   |       |
| Depreciation,  amortization, and depletion                                      |       | 8.8                                                 |       | 32.3                                               |       | 27.5     |       | 113.4    |       |
| Selling and  distribution expenses                                              |       | 62.5                                                |       | 72.3                                               |       | 183.5    |       | 214.4    |       |
| General and  administrative expenses                                            |       | 7.3                                                 |       | 22.6                                               |       | 29.8     |       | 62.3     |       |
| General and  administrative expenses from related party                         |       | 2.5                                                 |       | —                                             |       | 6.0      |       | —   |       |
| (Gain) loss on  sale of Paper and Packaging & Newsprint assets         |       | 1.7                                                 |       | —                                             |       | (3.0     | )          | —   |       |
| Other (income)  expense, net                                                    |       | (3.8                                                | )          | 0.4                                                |       | 3.9      |       | (2.2     | )          |
|                                                                            |       | 725.4                                               |       | 1,330.1                                            |       | 2,453.9  |       | 4,017.6  |       |
|                                                                            |       |                                                |       |                                               |       |     |       |     |       |
| **Income  from operations**                                                     | ** ** | **$**                                               | **1.7**    | ** **                                         | **$**      | **72.0** | ** ** | **$**    | **7.0**    | ** ** | **$** | **153.9** | ** ** |
|                                                                            |       |                                                |       |                                               |       |     |       |     |       |
| ** **                                                                      | ** ** | **(percentage of sales)**                           | ** ** |
| **Sales**                                                                       |       |                                                |       |                                               |       |     |       |     |       |
| Trade                                                                           |       | 97.1                                                | %          | 89.0                                               | %          | 94.7     | %          | 88.7     | %          |
| Related parties                                                                 |       | 2.9                                                 |       | 11.0                                               |       | 5.3      |       | 11.3     |       |
|                                                                            |       | 100.0                                               | %          | 100.0                                              | %          | 100.0    | %          | 100.0    | %          |
|                                                                            |       |                                                |       |                                               |       |     |       |     |       |
| **Costs  and expenses**                                                         |       |                                                |       |                                               |       |     |       |     |       |
| Materials,  labor, and other operating expenses, including from related parties |       | 88.9                                                | %          | 85.8                                               | %          | 89.6     | %          | 87.0     | %          |
| Depreciation,  amortization, and depletion                                      |       | 1.2                                                 |       | 2.3                                                |       | 1.1      |       | 2.7      |       |
| Selling and  distribution expenses                                              |       | 8.6                                                 |       | 5.2                                                |       | 7.4      |       | 5.1      |       |
| General and  administrative expenses, including from related party              |       | 1.3                                                 |       | 1.6                                                |       | 1.5      |       | 1.5      |       |
| (Gain) loss on  sale of Paper and Packaging & Newsprint assets         |       | 0.3                                                 |       | —                                             |       | (0.1     | )          | —   |       |
| Other (income)  expense, net                                                    |       | (0.5                                                | )          | —                                             |       | 0.2      |       | —   |       |
|                                                                            |       | 99.8                                                | %          | 94.9                                               | %          | 99.7     | %          | 96.3     | %          |
|                                                                            |       |                                                |       |                                               |       |     |       |     |       |
| **Income  from operations**                                                     | ** ** | **0.2**                                             | **%**      | **5.1**                                            | **%**      | **0.3**  | **%**      | **3.7**  | **%**      |

 

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***Sales Volumes and Prices***

 

Set forth below are our segment sales volumes and averagenet selling prices for our principal products for the three and nine monthsended September 30, 2008 and 2007.

 
| ** **                                       | ** ** | **Three Months Ended  September 30**        | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                       | ** ** | **2008**                                                   | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                       | ** ** | **(millions)**                                             | ** ** |
| **Building  Materials Distribution**             |       |                                                       |       |                                               |       |   |   |   |   |
| Sales dollars                                    |       | $                                                          | 584.1      |                                               | $          | 686.6 |   | $ | 1,698.0 |   | $ | 2,019.0 |   |
|                                             |       |                                                       |       |                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(percentage of Building Materials  Distribution sales)** | ** ** |
|                                             |       |                                                       |       |                                               |       |   |   |   |   |
| **Product  Line Sales**                          |       |                                                       |       |                                               |       |   |   |   |   |
| Commodity                                        |       | 47.1                                                       | %          | 44.3                                               | %          | 45.5 | % | 43.6 | % |
| Engineered wood                                  |       | 12.2                                                       |       | 14.8                                               |       | 12.1 |   | 15.0 |   |
| General line                                     |       | 40.7                                                       |       | 40.9                                               |       | 42.4 |   | 41.4 |   |
|                                             |       |                                                       |       |                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(millions)**                                             | ** ** |
| **Sales  Volumes**                               |       |                                                       |       |                                               |       |   |   |   |   |
| **Wood  Products**                               |       |                                                       |       |                                               |       |   |   |   |   |
| Laminated veneer  lumber (LVL) (cubic feet)      |       | 2.0                                                        |       | 2.8                                                |       | 6.2 |   | 8.7 |   |
| I-joists  (equivalent lineal feet)               |       | 31                                                         |       | 48                                                 |       | 98 |   | 155 |   |
| Plywood (sq.  ft.) (3/8” basis)        |       | 311                                                        |       | 306                                                |       | 941 |   | 915 |   |
| Lumber (board  feet)                             |       | 48                                                         |       | 60                                                 |       | 155 |   | 179 |   |
| Particleboard  (sq. ft.) (3/4” basis)  |       | 29                                                         |       | 40                                                 |       | 83 |   | 113 |   |
|                                             |       |                                                       |       |                                               |       |   |   |   |   |
| ** **                                       | ** ** | **(dollars per unit)**                                     | ** ** |
| **Average  Net Selling Prices**                  | ** ** | ** **                                                 | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Wood  Products**                               | ** ** | ** **                                                 | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Laminated veneer  lumber (LVL) (100 cubic feet)  |       | $                                                          | 1,569      |                                               | $          | 1,685 |   | $ | 1,595 |   | $ | 1,719 |   |
| I-joists (1,000  equivalent lineal feet)         |       | 937                                                        |       | 1,020                                              |       | 953 |   | 1,033 |   |
| Plywood (1,000  sq. ft.) (3/8” basis)       |       | 261                                                        |       | 287                                                |       | 254 |   | 264 |   |
| Lumber (1,000  board feet)                       |       | 368                                                        |       | 438                                                |       | 374 |   | 441 |   |
| Particleboard  (1,000 sq. ft.) (3/4” basis) |       | 368                                                        |       | 304                                                |       | 359 |   | 319 |   |

 

***Operating Results***

 

# ***Sales***

# * *

For the three months ended September 30, 2008,total sales decreased $675.0 million, or 48%, to $727.1 million from$1,402.1 million during the three months ended September 30, 2007.For the nine months ended September 30, 2008, total sales decreased$1.7 billion, or 41%, to $2.5 billion from $4.2 billion in theprior year. Relative to the three and nine months ended September 30,2008, the decrease was driven primarily by the sale of our Paper and Packaging &Newsprint assets in first quarter 2008. The sold businesses had sales of$583.7 million and $1.7 billion during the three and nine monthsended September 30, 2007. For the period of January 1 through February 21,2008, the sold businesses had sales of $359.9 million. The decrease insales was also attributable to lower sales in our Building MaterialsDistribution and Wood Products segments due to weaker product demand and pricesas U.S. new residential housing demand declined.

 

*Building Materials Distribution.*  Sales decreased $102.5 million, or 15%,to $584.1 million for thethree months ended September 30, 2008, from $686.6 million for thethree months ended September 30, 2007. During the nine months ended September 30,2008, sales decreased $321.0 million, or 16%, to $1,698.0 millionfrom $2,019.0 million in the prior year. Relative to the three and ninemonths ended September 30, 2007, the decrease was driven primarily by a22% and 17% decline, respectively, in the volume of product sold, offset inpart by an increase in product prices of 9% and 1%, respectively. The reducedvolumes were the result of decreased demand in new residential constructionmarkets. Relative to the three and nine months ended September 30, 2007,EWP represented a lower percentage of our overall Building MaterialsDistribution sales as EWP sales are more dependent on new residentialconstruction than the commodity products we sell.

 

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*WoodProducts.* Salesdecreased $46.5 million, or 18%, to $215.1 million for the three months ended September 30,2008, from $261.6 million for the three months ended September 30,2007. During the nine months ended September 30, 2008, sales decreased$154.4 million, or 19%, to $639.8 million from $794.2 million inthe same period a year ago. Relative to the three and nine months ended September 30,2007, the decrease in sales was driven primarily by lower volumes and/or pricesfor all of our products. In both periods, the decline in EWP volumes and priceshad the biggest impact on our reported sales. Compared with the three monthsended September 30, 2007, sales volumes for LVL and I-joists declined 30%and 35%, respectively, while average net selling prices decreased approximately7% and 8%, respectively. Compared with the nine months ended September 30,2007, sales volumes for LVL and I-joists declined 29% and 36%, respectively,while prices decreased 7% and 8%, respectively. Also contributing to thedecrease in sales during both the three and nine months ended September 30,2008, were lower sales prices for plywood, lower sales volumes forparticleboard, and lower sales volumes and prices for lumber.

 

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

##### *** ***

Materials, labor, and other operating expenses,including from related parties, decreased $556.1 million, or 46%, to$646.4 million for thethree months ended September 30, 2008, compared with $1.2 billionduring the same period in the prior year. For the nine months ended September 30,2008, these expenses decreased $1.4 billion, or 39%, to $2.2 billion,compared with $3.6 billion in the same period in the prior year. Relativeto the three and nine months ended September 30, 2007, the decrease wasdriven primarily by the sale of our Paper and Packaging & Newsprintassets in first quarter 2008. The sold businesses had materials, labor, andother operating expenses, including from related parties, of$482.4 million during the three months ended September 30, 2007.During the nine months ended September 30, 2008, the sold businessesincurred $321.6 million of materials, labor, and other operating expenses,including from related parties, compared with $1,495.1 million for thesame period in the prior year. In our building products businesses, materials,labor, and other operating expenses, including from related parties, decreasedduring both the three and nine months ended September 30, 2008, because oflower purchased materials costs in our Building Materials Distribution segmentdue to lower sales volumes and lower log costs in our Wood Products segment.Fiber costs for our Wood Products segment declined primarily due to lower logprices and lower log consumption.

 

Depreciation, amortization, and depletion expenses decreased$23.5 million, or 73%, to $8.8 million for the three months ended September 30,2008, compared with $32.3 million for the same period in the prior year.Relative to the nine months ended September 30, 2007, these expenses decreased$85.9 million,or 76%, to $27.5 million, compared with $113.4 million in the prioryear. The three and nine months ended September 30, 2007, included$23.0 million and $84.5 million of depreciation expense related tothe sold Paper, Packaging & Newsprint, and Corporate and Othersegments that was not included in the three and nine months ended September 30,2008, because the assets were sold on February 22, 2008, and because,prior to the Sale, we had discontinued depreciation on the assets as a resultof classifying them as held for sale.

 

Selling and distributionexpenses decreased $9.8 million, or 14%, to $62.5 million for the three months ended September 30,2008, compared with $72.3 million for the same period in the prior year.During the nine months ended September 30, 2008, these costs decreased $30.9 million, or 14%,to $183.5 million, compared with $214.4 million during the sameperiod a year ago. Relative to the three and nine months ended September 30,2007, selling and distribution expenses decreased $14.7 million and$34.5 million as a result of the sale of our Paper and Packaging &Newsprint assets in first quarter 2008. Relative to the three and nine monthsended September 30, 2007, selling and distribution expenses increased inour Building Materials Distribution segment primarily due to higher fuel costs.Selling and distribution expenses decreased in our Wood Products segment due tolower sales activity; however, selling and distribution expenses were higher asa percentage of sales, as these costs did not decline at the same pace assales.

 

General andadministrative expenses, including from related party, decreased $12.8 million, or 57%, to$9.8 million for the threemonths ended September 30, 2008, compared with $22.6 million for thesame period in the prior year. For the nine months ended September 30,2008, general and administrative expenses decreased $26.5 million, or 43%, to $35.8 million,compared with $62.3 million a year ago. In both periods, the decrease wasdriven primarily by lower compensation costs associated with operating as asmaller company.

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                            | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                   | ** ** | **(millions)**                                      | ** ** |
|                                                         |       |                                                |       |                                               |       |   |   |   |   |
| Loss on sale of  note receivable from related party (a) |       | $                                                   | —     |                                               | $          | — |   | $ | 8.4 |   | $ | — |   |
| Changes in retiree  healthcare programs                      |       | —                                              |       | —                                             |       | — |   | (4.4 | ) |
| Sales of assets,  net (b)                                    |       | (5.8                                                | )          | (0.1                                               | )          | (7.9 | ) | (0.8 | ) |
| Other, net (c)                                               |       | 2.0                                                 |       | 0.5                                                |       | 3.4 |   | 3.0 |   |
| ** **                                                   | ** ** | **$**                                               | **(3.8**   | **)**                                              | **$**      | **0.4** | ** ** | **$** | **3.9** | ** ** | **$** | **(2.2** | **)** |

 

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(a)                                  In June 2008, we sold the note receivablefrom Boise Inc. for $52.7 million after selling expenses, and for thenine months ended September 30, 2008, we recorded an $8.4 millionloss on the sale.

 

(b)                                 In July 2008, we sold our indirect whollyowned subsidiary in Brazil, Boise Cascade do Brasil LTDA., to Aracruz Celulose,S.A., for $45.5 million after selling expenses. For the three and ninemonths ended September 30, 2008, we recorded a $7.0 million and$5.7 million gain on the sale.

 

(c)                                  In September 2008, we permanently closedour veneer operation in St. Helens, Oregon, and recorded $2.1 millionof expenses related to the closure in “Other (income) expense, net” in ourConsolidated Statements of Loss for the three and nine months ended September 30,2008. In addition, we recorded $0.7 million of expense for the write-down oflog inventories in “Materials, labor, and other operating expense.”

 

Thethree and nine months ended September 30, 2007, included $0.2 millionand $2.2 million of expense related to the closure of our paper convertingfacility in Salem, Oregon.

 

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

 

Income from operations decreased $70.3 million, or 98%,to $1.7 million for thethree months ended September 30, 2008, from income of $72.0 millionin the same period a year ago. Income from operations decreased $146.9 million, or 95%, to $7.0 million forthe nine months ended September 30, 2008, compared with$153.9 million during the same period in the prior year. In both periods,the decrease was driven primarily by the sale of our Paper and Packaging &Newsprint assets in first quarter 2008, which reported $50.7 million and$90.0 million of income from operations during the three and nine monthsended September 30, 2007. We also reported lower operating income in theBuilding Materials Distribution and Wood Products segments as discussed in moredetail below.

 

*BuildingMaterials Distribution.* Segment income decreased $5.9 million,or 37%, to $10.2 million forthe three months ended September 30, 2008, from $16.1 million for thethree months ended September 30, 2007. During the nine months ended September 30,2008, segment income decreased $22.7 million,or 48%, to $24.3 million from $47.0 million in the same period a yearago. The decreases in both periods were driven primarily by lower gross margindollars available to cover relatively fixed expenses such as occupancy,payroll, and delivery costs, as sales volumes declined from the same periods ayear ago.

 

*WoodProducts. *Segment income decreased $12.3 million, or 134%,to a $3.1 million loss forthe three months ended September 30, 2008, compared with income of $9.2 million for the three monthsended September 30, 2007.During the nine months ended September 30, 2008, segment income decreased$52.2 million, or 183%, to a loss of $23.6 million, compared withincome of $28.6 million in the same period a year ago. In both periods,the decreases were driven primarily by a combination of lower sales volumesand/or prices for most of our products, coupled with higher conversion costs.These negatives were slightly offset by lower log costs and higher logbyproduct income. In addition, during the three and nine months ended September 30,2008, the Wood Products segment recorded a $3.1 million and$2.7 million net gain related to miscellaneous asset sales, net of sellingexpenses and costs incurred to permanently close some of our other operations.For more information related to our 2008 asset sales and closures, see “RecentTrends and Operational Outlook” in this Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

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*Other*

 

*Equity in net income (loss) of affiliate. *In connection with theSale, we received 37.9 million, or 49%, of Boise Inc.’s shares. Werecorded our investment in “Investment in equity affiliate” on our Consolidated BalanceSheet. This ownership interest provides us with the ability to exercisesignificant influence. Accordingly, we account for our investment under theequity method of accounting. We adjust the amount of our investment monthly forour proportionate share of Boise Inc.’s net income or loss and our share ofother comprehensive income or loss based on the most recently availablefinancial statements. For the three and nine months ended September 30,2008, we recorded $2.1 million of income and $15.2 million of expenserelated to our investment in Boise Inc. in “Equity in net income (loss) ofaffiliate” in our Consolidated Statements of Loss.

 

*Impairment of investment in equity affiliate. *On September 30, 2008,we concluded that our investment in Boise Inc. met the definition of other thantemporarily impaired as defined in APB Opinion No. 18*.* We made this determination based on thelength of time and extent to which the fair value of our investment has beentrading below its carrying value. The Boise Inc. stock trading price declinedfrom $8.56 on February 21, 2008, to $1.56 on September 30, 2008.Accordingly, we recorded a $208.1 million charge in “Impairment ofinvestment in equity affiliate” in our Consolidated Statements of Loss for thethree and nine months ended September 30, 2008. This charge reflects thedecrease in the fair value of our investment below its carrying value of $7.06 atSeptember 30, 2008. The fair value of our investment in Boise Inc. wascalculated based on our 37.9 million of Boise Inc. shares andBoise Inc.’s stock price on September 30, 2008, of $1.56.

 

At September 30, 2008, the carrying value of our investment inBoise Inc. was approximately $210.3 million less than our share ofBoise Inc.’s underlying equity in net assets. The difference is due to thewrite-down of our investment in Boise Inc. at September 30, 2008. Inaccordance with APB Opinion No. 18, we will amortize the difference toincome on a straight-line basis over 10.7 years, which represents theweighted-average useful life of Boise Inc.’s assets. This willresult in our recognizing approximately $20 million of income per year forthe next 10.7 years, which will be increased or decreased by ourproportionate share of Boise Inc.’s net income or loss.

 

*Change in fair value of contingent valuerights. *The threeand nine months ended September 30, 2008, included $2.2 million ofincome and $1.8 million of expense related to the fair value of thecontingent value rights (CVRs) that we and Terrapin Partners VenturePartnership granted to certain Boise Inc. investors. For more informationrelated to the CVRs, see “Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk” of this Form 10-Q.

 

*Changein fair value of interest rate swaps. *The ninemonths ended September 30, 2008 and 2007, included $6.3 million ofexpense and $5.4 million of income related to changes in the fair value ofour interest rate swaps. We terminated all of the swaps in February 2008.

 

*Interest expense. *For thethree months ended September 30, 2008, interest expense was$6.3 million, compared with $23.4 million for the same period a yearago. For the nine months ended September 30, 2008, interest expense was$28.1 million, compared with $70.1 million for the same period in2007. The decrease in interest expense is primarily attributable to thesignificant reduction in our long-term debt. At September 30, 2008, ourlong-term debt was $315.0 million, compared with $1.2 billion a yearago. The decrease in long-term debt is primarily attributable to the useof the majority of the proceeds from the sale of the Paper and Packaging &Newsprint assets to reduce debt. For more information, see “FinancingActivities” under “Liquidity and Capital Resources” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

*Income tax (provision) benefit.* For the three months ended September 30,2008, income tax expense was $0.4 million, compared with $3.1 millionduring the same period in the prior year. Relative to the three months ended September 30,2007, the decrease in income tax expense is primarily due to no income taxexpense related to cash flow hedges in 2008. Income tax expense was$1.5 million and $7.7 million for the nine months ended September 30,2008 and 2007. The nine months ended September 30, 2007, included incometax expense related to cash flow hedges and the true-up of miscellaneous stateincome tax items. In 2008, our income tax provision consisted primarily ofincome taxes payable to states that do not allow for the income tax liabilityto be passed through to our equity holders as well as income taxes payable byour separate subsidiaries that are taxed as corporations.

 

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During the three monthsended September 30, 2008 and 2007, our effective tax rates for ourseparate subsidiaries that are taxed as corporations were 34.0% and 35.4%. Oureffective tax rates were 35.2% and 35.0% for the nine months ended September 30,2008 and 2007. The primary reason for the difference in tax rates is the effectof state income taxes and the mix of domestic and foreign sources of income.

 

***Industry Mergers andAcquisitions***

 

Wehave not seen significant merger and acquisition activity in the buildingproducts area other than the acquisition of International Paper’s wood productsfacilities by Georgia-Pacific in 2007.

 

***Acquisitions***

 

Weaccount for acquisitions using the purchase method of accounting. Accordingly,the purchase price is allocated to the tangible and intangible assets acquiredand liabilities assumed based on their respective fair values as of the date ofthe acquisition.

 

***Divestitures***

 

We may engage in divestiture discussions, includingthose entered into during the year, as discussed in “Sale of Our Paper andPackaging & Newsprint Assets” in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations, with other companiesand make divestitures from time to time. We review our operations and disposeof assets that fail to meet our criteria for return on investment or cease towarrant retention for other reasons. We decided to permanently close our WhiteCity, Oregon, lumber operation in January 2008, and we permanently closedour St. Helens, Oregon, veneer mill in September 2008. In July 2008,we sold our Brazilian subsidiary. For additional information related to thesale of our Brazil operations, see the discussion of “Other (income) expense,net” in “Costs and Expenses” under “Our Operating Results” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

***Liquidity and Capital Resources***

 

During the three months ended September 30, 2008,our liquidity position continued to strengthen with the sale of our indirectwholly owned subsidiary in Brazil for $45.5 million after sellingexpenses. At September 30, 2008, we had $290.1 million of cash,compared with $57.6 million at December 31, 2007. We are obligatedunder our 7.125% senior subordinated notes to use the net proceeds from thesale of the Brazil operations, as well as the $52.7 million net proceedsfrom the sale of the note receivable from Boise Inc. in the second quarterof 2008, within one year to repay senior indebtedness, acquire additionalassets, or make a tender offer at par for a portion of the senior subordinatednotes.

 

As we evaluate potential uses for the funds, the netcash proceeds received are invested in high-quality, short-term investments,which we record in “Cash and cash equivalents.” The securities in which we areinvesting include money market funds that invest solely in U.S. Treasurysecurities, commercial paper issued by leading financial institutions rated atleast upper medium grade (A-1) or prime (P-1), commercial paper issued byasset-backed conduits where the backup liquidity facility is provided by aleading financial institution and the program is rated at least A-1 or P-1, andsimilar instruments where we believe the risk of default or illiquidity isminimal. We diversify our short-term investments to reduce our credit exposureto a single obligor.

 

We believe that our cash and short-term investments,as well as our available borrowing capacity, will be adequate to fund debtservice requirements and provide cash, as required, to support our ongoingoperations, capital expenditures, and working capital needs for the next12 months. In the circumstance where a contractually committed lenderfailed to honor its commitment under our $350 million revolving credit facility(the Agreement), the other lenders would remain committed for their portion ofthe total facility. A total of 12 lenders participated in our revolvingcredit facility as of September 30, 2008, and the largest singlecommitment under the Agreement was $75 million. At September 30,2008, we had $75.0 million of outstanding loans under the Agreement.  Borrowings under the Agreement areconstrained by a borrowing base formula dependent upon levels of eligibleinventory and receivables reduced by outstanding letters of credit and, whenour fixed charge coverage ratio is below 1:1, as it was on September 30,2008, by a further requirement that we maintain a combination of unrestrictedcash and borrowing base less outstanding loans at or in excess of the greaterof $45 million or 15% of the borrowing base determined under the Agreement.Thus, at September 30, 2008, our aggregate liquidity from unrestrictedcash and short term investments and unused borrowing capacity under theAgreement totaled $412.8 million.

 

The significant decline in global equity markets sincethe beginning of 2008 has negatively affected the value of our pensioninvestments, as our target asset allocation is approximately 67% publiclytraded equity securities. Some of our fixed-income investments have also beenadversely affected by turmoil in the credit markets. We are unable to predictthe timing of any recovery in the global

 

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capital markets or whether markets will continue todeteriorate over the remainder of the year. Without a material recovery in thevalue of our pension investments, a substantial increase in the alloweddiscount rate used to value our pension liabilities for the purpose ofdetermining minimum funding requirements, or legislative changes, our minimumrequired pension contributions for 2009 and 2010 will increase substantially.As of October 31, 2008, our pension assets had a market value of $177 million,compared with $252 million at the beginning of the year, after taking intoconsideration the spinoff of the pension assets related to the Sale. During theremainder of the year, we are not required to make any additional minimumcontributions to our pension plans; however, we may elect to make additionalvoluntary contributions.

 

Our ability to continue to fund our debt servicerequirements and operations may be affected by general economic, financial,competitive, legislative, and regulatory factors, and as a result, we cannotassure that our business will generate sufficient cash flow from operations orthat future borrowings will be available for use under our revolving creditfacility in an amount sufficient to enable us to pay our indebtedness or tofund our other liquidity needs.

 

***OperatingActivities***

 

We operate in a cyclical industry, and our operating cash flows varyaccordingly. Our principal operating cash expenditures are for purchasedinventories, compensation, fiber, energy, and interest.

 

*2008*

 

For the nine months ended September 30,2008 and 2007, our operating activities used $25.4 million and provided$131.3 million of cash, respectively. Relative to the nine monthsended September 30, 2007, the decrease in cash provided by operationsrelates primarily to the following:

 

·                  *Items in net income (loss) provided $21.4 million of cash duringthe nine months ended September 30, 2008, compared with$212.9 million during the same period in 2007*. The decrease isdue to the Sale of our Paper and Packaging & Newsprint assets in firstquarter 2008 and lower income in our Building Materials Distribution and WoodProducts segments. As discussed under “Our Operating Results” above, this lower income wasdriven primarily by lower sales activity, resulting in fewer gross margindollars being generated to cover cash operating costs, in our BuildingMaterials Distribution segment and by a combination of lower sales volumesand/or prices for most of our products, coupled with higher conversion costs inour Wood Products segment.

 

·                  *Changes in working capital*. Unfavorable changes in working capital used $26.3 million of cash fromoperations. Working capital is subject to cyclical operating needs, the timingof the collection of receivables, the payment of payables and expenses, andseasonal fluctuations in our operations. During the nine months ended September 30,2008, the increase in working capital was primarily attributable to higherreceivables in our Building Materials Distribution and Wood Products segmentsand a decrease in overall accounts payable. These negative working capital changeswere partially offset by a decrease in inventory in both operating segments.Higher receivables in our Building Materials Distribution and Wood Productssegments reflect increased sales of approximately 30% and 17%, comparing salesfor the month of September 2008 with sales for the month of December 2007.The decrease in overall accounts payable reflects seasonal changes. Thedecrease in inventory in our Wood Products segment was primarily in finishedgoods and log inventories. To maintain appropriate inventory levels, we tookrolling production curtailments and decreased log inventories at a number ofour Wood Products operations.

 

·                  *More cash contributions to our pension and postretirement benefitplans.*  During thenine months ended September 30, 2008, we used $20.8 million of cashto make pension contributions and other postretirement benefit payments,compared with $0.9 million during the nine months ended September 30,2007. The 2008 contribution was included in the pension assets prior to theSale.

 

*2007*

 

For the nine months ended September 30, 2007, our operating activitiesprovided $131.3 million of cash. In 2007, items included in net incomeprovided $212.9 million of cash. Unfavorable changes in

 

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working capital and other items used $81.4 million of cash fromoperations. During the nine months ended September 30, 2007, the increasein working capital was primarily attributable to higher receivables in BuildingMaterials Distribution and Paper, and to a lesser extent, higher inventories,primarily in Building Materials Distribution. Higher receivables in BuildingMaterials Distribution and Paper reflected increased sales, comparing September 2007sales with December 2006 sales. The increase in inventories in BuildingMaterials Distribution reflected seasonal inventory builds. This increase inreceivables and inventories was partially offset by higher overall accountspayable and accrued liabilities.

 

***InvestmentActivities***

 

Cash investing activities provided$1,286.6 million for the nine months ended September 30, 2008. In2008, we received approximately $1,321.8 million of net cash from the saleof assets as follows:

 
| ** **                                                             | ** ** | **(millions)** | ** **  |
|------------------------------------------------------------------------|------------|----------------|-------------|
|                                                                   |       |           |        |
| Proceeds from  sale of Paper and Packaging & Newsprint assets |       | $              | 1,277.2     |   |
| Selling expenses                                                       |       | (38.4          | )           |
| Cash contributed  to Boise Inc.                                        |       | (38.0          | )           |
| Sales proceeds,  net of selling expenses and cash contributed          |       | 1,200.8        |        |
| Net proceeds  from other asset sales                                   |       | 68.3           |        |
|                                                                   |       | 1,269.1        |        |
| Proceeds from  the sale of note receivable from Boise Inc., net   |       | 52.7           |        |
| ** **                                                             |       | **$**          | **1,321.8** |   |

 

In connection with the sale of our Paper and Packaging &Newsprint assets, we received $1,200.8 million, which is net of$38.0 million of cash contributed to Boise Inc. and $38.4 million ofselling expenses, which included $24.9 million of financing costs that weagreed to pay for Boise Inc. We also received approximately $68.3 millionof cash for the sale of our Vancouver, Washington, and Independence, Oregon,mill sites, the sale of our Brazil operations, and other miscellaneous assets.During the nine months ended September 30, 2008, cashinvesting activities also included $52.7 million of net proceeds from thesale of the note receivable from Boise Inc. We used $36.7 millionof cash for purchases of property, plant, and equipment ($10.2 million ofwhich was invested in the Paper and Packaging & Newsprint businesseswe sold on February 22, 2008).

 

Cash investing activities used $312.6 million forthe nine months ended September 30, 2007. In 2007, investing activitiesincluded a $200.0 million increase in restricted cash held for bondredemption. The $200.0 million was invested in preparation for therepayment of the $250 million senior unsecured floating-rate notes in October 2007.Investing activities also included $137.2 million of cash for the purchaseof property, plant, and equipment. Approximately$106 million of these expenditures related to the Paper and Packaging &Newsprint businesses we sold on February 22, 2008. Investingactivities also included $18.3 million of proceeds from the sale ofassets, which included $10.1 million of net proceeds from the sale of ournewly constructed building materials distribution center in Milton, Florida,which we completed during the second quarter. In connection with the sale ofour Milton facility, we leased it back over a 15-year lease term.

 

We expect capital investments in 2008 to totalapproximately $45 million to $50 million, excluding acquisitions($10.2 million of which was invested in the Paper and Packaging &Newsprint businesses we sold on February 22, 2008). This level of capitalexpenditures could increase or decrease as a result of a number of factors,including our financial results and future economic conditions. Our capitalspending in 2008 will be for expansion, business improvement andquality/efficiency projects, replacement projects, and ongoing environmentalcompliance. During 2007, we spent $9 million on environmental complianceand expect to spend approximately the same amount in 2008.

 

***Financing Activities***

 

Cash used for financing activities was$1,028.8 million for the nine months ended September 30, 2008,compared with $201.7 million of cash provided by financing activitiesduring the same period in 2007. In 2008, cash used for financing activitiesrelated primarily to the repayment of long-term debt.

 

During the period of January 1 to February 21,2008, we borrowed $125.0 million under our receivables securitizationfacility and $40.0 million under our revolving credit facility to make$7.4 million of tax distributions to our equity holders, contribute$20.0 million to our pension plans, and fund working

 

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capital and other operating requirements. On February 22,2008, we repaid all of the borrowings under the revolving credit facility,Tranche E term loan, delayed-draw term loan, and the borrowings secured byour receivables, and in April 2008, we repaid $160.0 million of our7.125% senior subordinated notes. With proceeds from the Sale and an initialborrowing under our asset-based revolving credit facility, we have repaid$1,085.6 million of outstanding debt and terminated all of our creditfacilities with the exception of our 7.125% senior subordinated notes and ourasset-based revolving credit facility.

 

As a result of the significant decrease in ourvariable-rate debt, we terminated all of our interest rate swap agreements forapproximately $11.9 million. We also made $128.0 million of taxdistributions to our equity holders and paid $28.6 million to repurchaseequity units from management investors.

 

Cash provided by financing activities was $201.7 million for the ninemonths ended September 30, 2007. During the nine months ended September 30,2007, financing activities included $538.9 million of debt prepaymentsrelated to our Tranche D term loan, which was paid down primarily with theproceeds from our new $525.0 million Tranche E term loan. Cashprovided by financing also included $200 million for a delayed-draw termloan, which we borrowed against in September 2007. Cash provided byfinancing activities also included a $25.0 million net increase inborrowings under our accounts receivable securitization program,$2.8 million of proceeds from unwinding two of our interest rate swapagreements that were scheduled to begin in 2009, $3.2 million of cash forthe repayment of short-term borrowings, and $2.8 million of cash used topay one of our equity investors to fund its tax obligations related to itsinvestment in us.

 

The following discussion describes our debttransactions in more detail.

 

*Debt Transactions*

 

At September 30, 2008, and December 31,2007, our short- and long-term debt were as follows:

 
| ** **                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                  | ** ** | **(millions)**         | ** ** |
|                                        |       |                   |       |                  |       |
| Revolving credit  facility, due 2013        |       | $                      | 75.0       |                  | $          | — |   |
| Tranche E  term loan, due 2014         |       | —                 |       | 521.1                 |       |
| 7.125% senior  subordinated notes, due 2014 |       | 240.0                  |       | 400.0                 |       |
| Delayed-draw  term loan, due 2014           |       | —                 |       | 199.5                 |       |
| Borrowings  secured by receivables          |       | —                 |       | 40.0                  |       |
| Current portion  of long-term debt          |       | —                 |       | (47.3                 | )          |
| Long-term debt,  less current portion       |       | 315.0                  |       | 1,113.3               |       |
| Short-term  borrowings                      |       | —                 |       | 10.5                  |       |
| Current portion  of long-term debt          |       | —                 |       | 47.3                  |       |
| Total debt                                  | ** ** | **$**                  | **315.0**  | ** **            | **$**      | **1,171.1** | ** ** |

 

As discussed in “Sale of Our Paper andPackaging & Newsprint Assets” above, with the proceeds from the Saleand an initial borrowing under our asset-based revolving credit facility, werepaid $1,085.6 million of long-term debt, including all of the borrowingsunder the previous revolving credit facility, Tranche E term loan, delayed-drawterm loan, borrowings secured by our receivables, and $160.0 million ofour 7.125% senior subordinated notes. For more information related to theseborrowings prior to our repaying them, see Note 11, Debt, of the Notes toConsolidated Financial Statements in “Item 8. Financial Statements andSupplementary Data” of our 2007 Annual Report on Form 10-K.

 

*Asset-BasedRevolving Credit Facility*

 

On February 22, 2008, Boise Cascade, L.L.C., andits principal operating subsidiaries, Boise Building Solutions Manufacturing,L.L.C., and Boise Building Solutions Distribution, L.L.C., acting as borrowers,entered into a five-year $350 million senior secured asset-based revolvingcredit facility with Bank of America. As part of the syndication process, theAgreement was amended in April 2008 to revise the pricing and incorporateadditional covenants. At September 30, 2008, we had $75.0 million ofborrowings outstanding under the Agreement. Borrowings under the Agreement arebased on either the prime rate or the London Interbank Offered Rate (LIBOR).Pricing is subject to quarterly adjustment based on the average availabilityunder the Agreement during the prior quarter. The range of borrowing costsunder the pricing grid is:  (i) primeplus 1.00% to 1.50% or (ii) LIBOR plus

 

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2.50% to 3.00%. For the period of February 22,2008, through September 30, 2008, the average interest rate for ourborrowings under the Agreement was 5.1%. Letters of credit are subject to a0.125% fronting fee payable to the issuing bank and a fee payable to thelenders equal to the product of the interest rate spread applicableto LIBOR borrowings under the Agreement and the daily average amount availablefor drawing under the outstanding letters of credit. The minimum and maximumborrowings under the Agreement were $64.1 million and $75.0 millionbetween February 22, 2008, and September 30, 2008. The weightedaverage amount of borrowings outstanding under the Agreement during the periodfrom February 22, 2008, through September 30, 2008, was$71.8 million. The Agreement provides for a commitment fee of 0.50% perannum payable to the lenders on the average daily unused portion of theAgreement.

 

The revolving credit facility is guaranteed by ourdomestic subsidiaries (other than the three borrowers noted above) and issecured by a first-priority security interest in the stock of our foreignsubsidiaries and substantially all of our domestic assets, except for property,plant, and equipment. At September 30, 2008, we had $75.0 million ofoutstanding loans under the Agreement. Borrowings under the Agreement areconstrained by a borrowing base formula dependent upon levels of eligibleinventory and receivables reduced by outstanding letters of credit and, whenour fixed charge coverage ratio is below 1:1, as it was on September 30,2008, by a further requirement that we maintain a combination of unrestrictedcash and borrowing base less outstanding loans at or in excess of the greaterof $45 million or 15% of the borrowing base determined under the Agreement.

 

The Agreement contains a covenant requiring that we maintain a fixed chargecoverage ratio of 1:1 whenever the combination of our unrestricted cash and theborrowing base less outstanding loans under the Agreement is less than $45million. In addition the Agreement contains a restriction on capitalinvestments that is applicable when a minimum availability threshold is notmet. That covenant was not applicable on September 30, 2008.TheAgreement also contains customary nonfinancial covenants, including a negativepledge covenant and restrictions on distributions to equity holders,acquisitions, and divestitures. These covenants will become more restrictive ifa minimum availability threshold is not maintained.

 

*Letters of Credit*

 

At September 30, 2008, we had $13.3 millionof letters of credit outstanding. These letters of credit reduce our borrowingcapacity under our asset-based revolving credit facility.

 

*Senior Subordinated Notes*

 

In October 2004, Boise Cascade, L.L.C., issued$400.0 million of 7.125% senior subordinated notes due in 2014. Netproceeds from the notes were used to fund a portion of the purchase price forthe Forest Products Acquisition. In July 2005, we completed an exchangeoffer whereby all of our senior subordinated notes were exchanged forregistered 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 set forth in theindenture. If we sell specific assets or experience specific kinds of changesin control, we must offer to purchase the notes. Inconnection with the Sale, we repurchased $160.0 million of the notes on April 15,2008.

 

*Other*

 

At September 30, 2008, and December 31, 2007, we had$8.2 million and $23.1 million of costs recorded in “Deferredfinancing costs” on our Consolidated Balance Sheets. With the proceeds from theSale, we repaid a significant portion of our debt. In connection with repayingthe debt, we expensed approximately zero and $17.6 million of deferredfinancing costs for the three and nine months ended September 30, 2008. Werecorded the charges in “Gain on sale of Paper and Packaging &Newsprint assets” in our Consolidated Statement of Loss. In addition, weincurred approximately $4.1** **millionof financing costs related to our asset-based revolving credit facility, whichare included in “Deferred financing costs” on our September 30, 2008,Consolidated Balance Sheet.

 

For the nine months ended September 30, 2008 and 2007, cash paymentsfor interest, net of interest capitalized, were $25.8 million and$62.2 million, respectively.

 

***Contractual Obligations***

 

For information oncontractual obligations, see Contractual Obligations in “Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our Quarterly Report on Form 10-Q for the quarter ended March 31,2008. For the period ended September 30, 2008, there have been no materialchanges to our contractual obligations outside the normal course of business, except asdisclosed in “Financing Activities” in this Management’s Discussion andAnalysis of Financial Condition and Results of Operations related to thepayment of $160.0 million of our 7.125% senior subordinated 

 

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notes in April 2008and those amounts disclosed in “Item 3. Quantitative and QualitativeDisclosures About Market Risks” related to the fair value of the liability forthe contingent value rights.

 

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

 

At September 30,2008, and December 31, 2007, we had no material off-balance-sheetarrangements with unconsolidated entities.

 

***Guarantees***

 

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*.Note 20, Commitments and Guarantees, of the Notes to ConsolidatedFinancial Statements in “Item 1. Consolidated Financial Statements” in ourQuarterly Report on Form 10-Q for the quarter ended March 31, 2008,describes the nature of our guarantees, including the approximate terms of theguarantees, how the guarantees arose, the events or circumstances that wouldrequire us to perform under the guarantees, and the maximum potentialundiscounted amounts of future payments we could be required to make. As of September 30,2008, there have been no material changes to the guarantees disclosed in theQuarterly Report on Form 10-Q for the quarter ended March 31, 2008,except that in connection with the sale of our Brazil operations, the buyeragreed to indemnify us against any and all claims under the Guarantee,Marketing, and Take if Required Agreement, as amended, with Global ForestPartners.

 

***Environmental***

 

For information on environmental issues, seeEnvironmental in “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2007 Annual Report on Form 10-K.

 

***Critical Accounting Estimates***

 

Critical accounting estimates are those that are most important to theportrayal of our financial condition and results. These estimates requiremanagement’s most difficult, subjective, or complex judgments, often as aresult of the need to estimate matters that are inherently uncertain. We reviewthe development, selection, and disclosure of our critical accounting estimateswith the Audit Committee of our board of directors. For information aboutcritical accounting estimates, see Critical Accounting Estimates in “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in our 2007 Annual Report on Form 10-K.

 

As of September 30, 2008, there have been no changes to our criticalaccounting estimates except as follows.

 

***Other-Than-Temporary Impairment ofEquity Method Investment***

 

We account for the impairment of our equity method investment in accordancewith APB Opinion No. 18, *The EquityMethod of Accounting**forInvestments in Common Stock*. An equity method investment is impairedif the fair value of the investment is less than its carrying value. Once aninvestment is determined to be impaired, the investor is required to evaluatewhether the impairment is other than temporary.

 

This is a critical accounting estimate because judgment is required forpurposes of determining whether an impairment of an equity method investment isother than temporary. Factors to consider in making the determination include:

 

(i)                                     The lengthof time and extent to which the fair value of the investment is less than itscarrying amount;

 

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| (ii)   |   | The financial condition and near-term prospects of the equity method investee,  including recent operating losses or specific events that may negatively  influence the future earnings potential of the investee; and |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                   |
| (iii)  |   | Whether we intend to sell the impaired equity method investment before it  recovers to its carrying amount.                                                                                                            |

 

In connection with the Sale, we received 37.9 million, or 49%, ofBoise Inc.’s shares. We account for the equity interest that we own inBoise Inc. using the equity method of accounting. At September 30, 2008,the carrying value of our investment in Boise Inc. was $7.06, andBoise Inc.’s stock closed at $1.56 on that date. We evaluated items (i) through(iii) above and concluded that our investment in Boise Inc. was other thantemporarily impaired at September 30, 2008. Accordingly, werecorded a $208.1 million charge in “Impairment of investment in equityaffiliate” in our Consolidated Statements of Loss for the three and nine monthsended September 30, 2008. This charge reflects the decrease in the fairvalue of the investment below its carrying value of $7.06 at September 30,2008. The fair value of our investment in Boise Inc. was calculated basedon our 37.9 million of Boise Inc. shares and Boise Inc.’s stockprice on September 30, 2008, of $1.56.

 

Since September 30, 2008, Boise Inc.’s stockprice has continued to decline. We will continue to monitor the value ofBoise Inc.’s stock and our carrying value. Should market conditions and/orBoise Inc.’s financial performance deteriorate or should we decide to sell ourequity method investment before it recovers to its carrying value, it ispossible that we will be required to record another noncash impairment chargethat could have a material impact on our Consolidated Statements of Income(Loss). As additional information becomes known, we may change our estimates.

 

***Allowance for Doubtful Accounts***

 

We make ongoing estimates relating to thecollectability of our accounts receivable and maintain a reserve for estimatedlosses resulting from the inability of our Building Materials Distribution andWood Products segments’ customers to meet their financial obligations to us. AtSeptember 30, 2008 and December 31, 2007, we had $2.8 millionand $1.7 million recorded as an allowance for doubtful accounts. Indetermining the amount of the reserve, we consider our historical level ofcredit losses, customer concentrations, current economic trends, and changes incustomer payment tendencies. We also make judgments about the creditworthinessof significant customers based on ongoing credit evaluations. The uncertainoutlook for new residential construction in the U.S., as well as disruptions inthe capital markets and the impact that is having on the ability of ourcustomers and our customers’ customers to fund their operations, makes it moredifficult to estimate future credit losses. Our actual future losses fromuncollectible accounts may differ materially from our current estimates.

 

As additional information becomes known, we may changeour estimates. In the event we determine that a change in the reserve is appropriate,we will record a charge to “Selling and distribution expenses” in ourConsolidated Statements of Income (Loss) in the period we make such adetermination.

 

***Pension Expense***

 

As of September 30, 2008, there have been no changes to the discussionof our pension critical accounting estimate included in our 2007 Annual Reporton Form 10-K except for the amounts disclosed for 2008 expected pensionexpense and related sensitivities.

 

As a result of the Sale, our expectedannual pension expense decreased, and a 0.25% change in either direction to thediscount rate, the expected rate of return on plan assets, or the rate ofcompensation increases would have the following effect on 2008 pension expense:

 

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| ** **                              | ** ** | ** **        | ** ** | **Increase (Decrease)  in Pension Expense** | ** ** |
|-----------------------------------------|------------|-------------------|------------|------------------------------------------------------------|------------|
| ** **                              | ** ** | **Base  Expense** | ** ** | **0.25 %  Increase**                                  | ** ** | **0.25%  Decrease** | ** ** |
| ** **                              | ** ** | **(millions)**    | ** ** |
| ** **                              | ** ** | ** **        | ** ** |
| **2008  Expense**                       |       |              |       |                                                       |       |   |   |
| Discount rate                           |       | $                 | 12.8       |                                                       | $          | (1.9 | ) | $ | 1.0 |   |
| Expected rate of  return on plan assets |       | 12.8              |       | (0.7                                                       | )          | 0.7 |   |
| Rate of  compensation increases         |       | 12.8              |       | 0.2                                                        |       | (0.4 | ) |
|                                         |            |                   |            |                                                            |            |  |  |  |  |  |

 

***New and RecentlyAdopted Accounting Standards***

 

In October 2008,the FASB issued FASB Staff Position (FSP) No. 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active*, which clarifies theapplication of SFAS No. 157 in a market that is not active and provides anexample to illustrate key considerations in determining the fair value of afinancial asset when the market for that financial asset is not active.FSP 157-3 became effective on October 10, 2008, and its adoption didnot have a material impact on our financial position or results of operations.

 

In May 2008,the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles.* The standardis intended to improve financial reporting by identifying a consistentframework, or hierarchy, for selecting accounting principles to be used inpreparing financial statements that are presented in conformity with U.S.generally accepted accounting principles. SFAS No. 162 is effective60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.* We do not expect the adoption to have amaterial impact on our financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures About Derivative Instruments andHedging Activities*. SFAS No. 161 requires enhanced disclosuresabout derivative instruments and hedging activities to enable investors tobetter understand their effects on financial position, financial performance,and cash flows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. SFAS No. 161is effective for fiscal years beginning after November 15, 2008, whichwill require us to adopt these provisions in 2009. Early adoption of SFAS No. 161is permitted. We are currently evaluating the impact SFAS No. 161will have on our consolidated financial statements.

 

In January 2008,we adopted SFAS No. 157,*FairValue Measurements*. The adoption did not have a material impact onour financial position or results of operations. The statement established aframework for measuring fair value, and it enhanced the disclosures for fairvalue measurements. The statement applies when other accounting pronouncementsrequire or permit fair value measurements, but it does not require new fairvalue measurements. In accordance with the standard, in Note 15, FinancialInstruments, of the Notes to Unaudited Quarterly Consolidated FinancialStatements in “Item 1. Financial Statements” of this Form 10-Q, weexpanded our disclosures about fair value measurements. In accordance with theprovisions of FSP No. 157-2, *Effective Date of FASBStatement No. 157*, we elected to defer adoption of SFAS No. 157as it relates to nonfinancial assets and nonfinancial liabilities that arerecognized and disclosed at fair value in the financial statements on anonrecurring basis until January 1, 2009.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations,*and SFAS No. 160,*Accounting and Reporting of NoncontrollingInterests in Consolidated Financial Statements, an Amendment of AccountingResearch Bulletin No. 51.* These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. We are required to adopt SFAS Nos. 141(R) and 160simultaneously on January 1, 2009. Earlier adoption is prohibited. Theimpact of adopting these standards will be limited to business combinationsoccurring on or after January 1, 2009.

 

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

 

We are exposed to risks such as changes in interest rates,energy prices, and foreign currency exchange rates. We employ a variety ofpractices to manage these risks, including operating and financing activitiesand, where deemed appropriate, the use of derivative instruments. Derivativeinstruments are used only for risk management purposes and not for speculationor trading. Derivatives are such that a specific debt instrument, contract, oranticipated purchase determines the amount, maturity, and other specifics ofthe hedge. If a derivative contract is entered into, we either determine thatit is an economic hedge or we designate the derivative as a cash flow or fairvalue hedge. We formally document all relationships between hedging instrumentsand the hedged items, as well as our risk management objectives and strategiesfor undertaking various hedged transactions. For those derivatives designatedas cash flow or fair value hedges, we formally assess, both at the derivatives’inception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in the hedgeditems. The ineffective portion of hedging transactions is recognized in income(loss).

 

In accordance with Statement of Financial AccountingStandards (SFAS) No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, werecord all derivative instruments as assets or liabilities on our ConsolidatedBalance Sheets at fair value. Changes in the fair value of derivatives arerecorded in either “Net income (loss)” or “Other comprehensive income (loss),”as appropriate. The gain or loss on derivatives designated as cash flow hedgesis included in “Other comprehensive income (loss)” in the period in which changesin fair value occur and is reclassified to income (loss) in the period in whichthe hedged item affects income (loss), and any ineffectiveness is recognizedcurrently in our Consolidated Statements of Income (Loss). The gain or loss onderivatives designated as fair value hedges and the offsetting gain or loss onthe hedged item attributable to the hedged risk are included in income (loss)in the period in which changes in fair value occur. The gain or loss onderivatives that have not been designated as hedging instruments is included inincome (loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

After the Sale, our debtis predominantly fixed-rate. At September 30, 2008, the estimated currentmarket value of our fixed-rate debt, based on then-current interest rates forsimilar obligations with like maturities, was approximately $79.1 millionless than the amount reported on our Consolidated Balance Sheet.

 

With the proceeds from the Sale, wesignificantly decreased our variable-rate debt. As a result, we terminated allof our interest rate swap agreements for approximately $11.9 million in February 2008.The interest rateswaps were considered economic hedges.During the ninemonths ended September 30, 2008 and 2007, we recorded the fair value ofthe interest rate swaps, or $6.3 million of expense and $5.4 millionof income, in “Change in fair value of interest rate swaps” in our ConsolidatedStatements of Income (Loss).

 

*Energy Risk*

 

Occasionally,we enter into natural gas swaps, options, or a combination of these instrumentsto hedge the variable cash flow risk of natural gas purchases at index prices.As of September 30, 2008, we had no material derivative instrumentsrelated to our forecasted natural gas purchases.

 

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*Contingent Value Rights*

 

As part of the Sale, Terrapin Partners VenturePartnership and Boise Cascade, L.L.C. (collectively the Grantors) issued21.2 million contingent value rights (CVRs) to holders of Boise Inc.’sstock. The CVRs are governed by a Contingent Value Rights Agreement (the CVRAgreement). The term of the CVR Agreement is from February 5, 2008,through February 5, 2009, and allows investors to receive payments incash, shares of common stock, or a combination of cash and shares, as electedby us, based upon the performance of Boise Inc.’s stock. If at any time duringthe year, Boise Inc.’s stock price is at least $10.50 for (1) any 20 daysof any period of 30 consecutive days or (2) any 10 consecutivetrading days, then the CVRs have no value. If neither of the precedingconditions is met over the one-year period, the holder receives a value equalto the lesser of $1.00 or the amount by which the $10.50 exceeds the averagestock price for the 30-day period ending February 5, 2009 (the AnniversaryPrice). If we elect to settle our obligation under the CVR Agreement usingBoise Inc. shares, the CVR Agreement provides that our shares will be valued atthe greater of the Anniversary Price or $9.00 per share. As a result, themaximum number of Boise Inc. shares we would be required to deliver to therights holders would be 2.4 million, assuming Terrapin Partners VenturePartnership failed to perform its obligations.

 

We recorded the fair value of the liability on the grant date based on asimulation analysis that considered the likelihood of Boise Inc. investorsreceiving payment under the Agreement. We update the simulation model eachquarter and revalue the liability based on its results. The Grantors arejointly and severally liable to the investors for the CVR payment, but betweenthe Grantors, each Grantor is individually liable for 50% of the CVR payment.Because we are jointly and severally liable to investors, at September 30,2008, we recorded a liability for 100% of the fair value of the CVRs, or$3.6 million, in “Accrued liabilities, Other” on our Consolidated BalanceSheet. We also recorded $2.2 million of income and $1.8 million ofexpense in “Change in fair value of contingent value rights” in ourConsolidated Statements of Loss for the three and nine months ended September 30,2008, and a $1.8 million receivable in “Receivables, Other” on ourConsolidated Balance Sheet at September 30, 2008.

 

*Financial Instrument Fair Value Reconciliation*

 

The following table reconciles the beginning andending balances of the instruments for which we measured the fair value usingunobservable inputs (Level 3 in the fair value hierarchy) as of September 30,2008:

 
| ** **                                                                                                                                      | ** ** | **Contingent  Value  Rights** | ** ** | **Interest  Rate  Swaps** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|---------------------------|------------|------------|------------|
| ** **                                                                                                                                      | ** ** | **(millions)**                | ** ** |
|                                                                                                                                            |       |                          |       |                      |       |       |       |
| Beginning  balance at December 31, 2007                                                                                                    |       | $                             | —     |                      | $          | 5.6        |       | $ | 5.6 |   |
|                                                                                                                                            |       |                          |       |                      |       |       |       |
| Losses included  in earnings                                                                                                                    |       | 1.8                           |       | 6.3                       |       | 8.1        |       |
| Receivable from  Terrapin Partners                                                                                                              |       | 1.8                           |       | —                    |       | 1.8        |       |
| Termination of  interest rate swaps                                                                                                             |       | —                        |       | (11.9                     | )          | (11.9      | )          |
| Ending balance  at September 30, 2008                                                                                                      | ** ** | **$**                         | **3.6**    | ** **                | **$**      | **—** | ** ** | **$** | **3.6** | ** ** |
|                                                                                                                                            |       |                          |       |                      |       |       |       |
| Total losses  included in earnings attributable to the change in unrealized gains or losses  relating to assets held at September 30, 2008 | ** ** | **$**                         | **1.8**    | ** **                | **$**      | **—** | ** ** | **$** | **1.8** | ** ** |

 

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

 

Attached as exhibits to this Form 10-Q are certifications ofour chief executive officer and chief financial officer. Rule 13a-14 ofthe Securities Exchange Act of 1934, as amended, requires that we include thesecertifications with this report. This Controls and Procedures section includesinformation concerning the disclosure controls and procedures referred to inthe certifications. You should read this section in conjunction with thecertifications.

 

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*Evaluationof Disclosure Controls and Procedures*

 

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

 

We evaluate the effectiveness of our disclosure controls andprocedures on at least a quarterly basis. A number of key components in ourinternal control system assist us in these evaluations. Since the company’sinception, we have had a disclosure committee. The committee meets regularlyand includes input from our senior management, general counsel, internal auditstaff, and independent accountants. This committee is charged with consideringand evaluating the materiality of information and reviewing the company’sdisclosure obligations on a timely basis. Our internal audit department alsoevaluates components of our internal controls on an ongoing basis. To assist inits evaluations, the internal audit staff identifies, documents, and tests ourcontrols and procedures. Our intent is to maintain disclosure controls andprocedures as dynamic processes that change as our business and workingenvironments change.

 

During the three months ended September 30, 2008, there wereno material changes in our internal controls over financial reporting. Inconjunction with the February 22, 2008, sale of our Paper and Packaging &Newsprint assets, we entered into anOutsourcing Services Agreement under which Boise Inc. provides a number of corporatestaff services to us at cost. These services include information technology,accounting, and human resource services. Our management,with the participation of our CEO and CFO, has evaluated the effectiveness ofthe design and operation of our disclosure controls and procedures, includingthe effectiveness of the services provided to us under the Outsourcing ServicesAgreement, as of the end of the quarter covered by the quarterly report on thisForm 10-Q. Based on that evaluation, the CEO and CFO have concluded that,as of such date, our disclosure controls and procedures were effective inmeeting the objectives for which they were designed and were operating at areasonable assurance level.

 

*Limitationson the Effectiveness of Controls and Procedures*

 

In designing and evaluating our disclosure controls andprocedures, we recognized that disclosure controls and procedures, no matterhow well-conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the disclosure controls and procedures aremet. Additionally, in designing disclosure controls and procedures, ourmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Wehave also designed our disclosure controls and procedures based in part uponassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

 

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**PART II—OTHER INFORMATION**

 

***ITEM 1.              LEGALPROCEEDINGS***

 

We are a party to routine legal proceedings that arisein the ordinary course of our business. We are not currently a party to anylegal proceedings or environmental claims that we believe would have a materialadverse effect on our financial position, results of operations, or cash flows.

 

***ITEM 1A.           RISKFACTORS***

 

This QuarterlyReport on Form 10-Q contains forward-looking statements. Statements thatare not historical or current facts, including statements about ourexpectations, anticipated financial results, projected capital expenditures,and future business prospects, are forward-looking statements. You can identifythese statements by our use of words such as “may,” “will,” “expect,” “believe,”“should,” “plan,” “anticipate,” and other similar expressions. You can findexamples of these statements throughout this report, including the “RecentTrends and Operational Outlook” section of “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” We cannot guaranteethat our actual results will be consistent with the forward-looking statementswe make in this report, and we do not assume an obligation to update anyforward-looking statements.

 

Ourforward-looking statements are affected by a variety of risk factors, includingthe risk factors listed in “Item 1A. Risk Factors” of our Quarterly Reporton Form 10-Q for the quarter ended March 31, 2008, as well as thosefactors listed in other documents we file with the Securities and ExchangeCommission (SEC). Except for the update provided below, there have been nomaterial changes to our risk factors during the three months ended September 30,2008, from those listed in our Quarterly Report on Form 10-Q for thequarter ended March 31, 2008.

 

·                  ***The state of the creditmarkets could adversely affect our costs of doing business, demand for ourproducts, and our financial performance.*******Recent turmoil in the credit markets has increased ourexposure to several risk factors, including the impact on building productprices, margins, and sales volumes resulting from lack of financing for housingand commercial construction. It has also affected our customers, whose sales,cash flows, and financing are dependent upon their access to credit markets,and the access of their customer base to credit markets to finance buildingprojects. Significant financial failures in our customer base will cause us tosuffer increased bad debt losses and reduced credit availability under our$350 million senior secured asset-based revolving credit facility. Inaddition, some of our fixed-income investments in our pension plans have beenadversely affected by the turmoil in the credit markets. We are unable topredict the timing of any recovery in the credit markets or whether marketswill continue to deteriorate over the remainder of the year.

 

·      ***Thestate of the housing, construction, and home improvement markets couldadversely affect demand for our products.*** In recent months, thehousing, residential construction, and home improvement markets havedeteriorated dramatically. Other factors, including rising interest rates onvariable-rate mortgages, increasing mortgage delinquency and foreclosure rates,reduction in the availability of mortgage financing and consumer credit, lowerhousing turnover, and home price depreciation, could limit consumers’discretionary spending and affect their confidence level. This could lead tofurther reduced spending on new single-family home construction as well as homeimprovement projects, which in turn would result in decreased demand for ourproducts.

 

·                  ***We may be unable to findshort-term investments that meet our investment safety criteria.*****Returns on the short-term investments recorded in “Cashand cash equivalents” on our balance sheet have been and may continue to beadversely affected by difficult markets. Until normal conditions in short-termcredit markets are restored, it will continue to be more difficult to findshort-term investment opportunities that meet our investment safety criteria.For more information, see the discussion in “Liquidity and Capital Resources”in “Item 2. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” of this Quarterly Report on Form 10-Q.

 

·                  ***The value of ourinvestment in Boise Inc. is and may continue to be impaired.*******Recent adverse events in equity markets and thefinancial performance of Boise Inc. have significantly reduced the valueof our investment in that company and have caused us to reduce the carryingvalue of that investment on our financial statements. For additionalinformation see “Our Operating Results” in “Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis Quarterly Report on Form 10-Q.

 

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·                  ***Labor disruptions orincreased labor costs could adversely affect our business.***The pending labor union negotiationsdescribed in “Item 1A. Risk Factors in our Quarterly Report onForm 10-Q for the quarter ended March 31, 2008, have beensuccessfully completed. Labor contracts covering approximately700 employees with the Carpenters Industrial Council expire onJuly 15, 2009, at our Florien and Oakdale, Louisiana, plywood plants. Wedo not anticipate that we will start bargaining these contracts until latesecond quarter of 2009. We do not expect material work interruptions orincreases in our costs during the course of the negotiations with ourcollective bargaining units. Nevertheless, if our expectations are notaccurate, we could experience a material labor disruption or significantlyincreased labor costs at one or more of our facilities, any of which couldprevent us from meeting customer demand or reduce our sales and profitability.

 

***ITEM 2.              UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS***

 

None.

 

***ITEM 3.              DEFAULTSUPON SENIOR SECURITIES***

 

None.

 

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

 

Not applicable.

 

***ITEM 5.              OTHERINFORMATION***

 

None.

 

***ITEM 6.              EXHIBITS***

 

Required exhibits arelisted in the Index to Exhibits and are incorporated by reference.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   |   | BOISE  CASCADE HOLDINGS, L.L.C.        |
|--------|--------|----------------------------------------|
|   |   |                                   |
|   |   |                                   |
|   |   | /s/ Bernadette M.  Madarieta           |
|   |   | Bernadette M. Madarieta                |
|   |   | Vice President and  Controller         |
|   |   | (As Duly Authorized  Officer and Chief |
|   |   | Accounting Officer)                    |

 

Date:  November 6, 2008

 

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

 

**INDEX TO EXHIBITS**

 

Filed With theQuarterly Report on Form 10-Q for the Quarter Ended September 30,2008

 
| **Number** | ** ** | **Description**                                                                                                         |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                    |
| 10 (a)     |       | Stock Purchase  Agreement dated July 1, 2008, between BC Brazil Investment Corporation  and Aracruz Celulose, S.A. |
|       |       |                                                                                                                    |
| 31.1       |       | CEO Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                       |
|       |       |                                                                                                                    |
| 31.2       |       | CFO Certification  Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                       |

 

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(a)               Incorporated by reference toCurrent Report on Form 8-K filed July 2, 2008.

 

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