**Exhibit 99**

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., a Corporation in the DevelopmentStage)**

**Index to Consolidated Financial Statements**

 

The Consolidated Financial Statements, the Notes to ConsolidatedFinancial Statements, and the Reports of Independent Registered PublicAccounting Firms.

 
| ** **                                                                                                                                                                                                                                                                                                                                                             | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Boise Inc. Consolidated Statements of Income (Loss) for the  year ended December 31, 2008, and the period of February 1  (Inception) through December 31, 2007, and the Predecessor Consolidated  Statements of Income (Loss) for the period of January 1 through  February 21, 2008, and the years ended December 31, 2007 and 2006.    |       | 1        |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Boise Inc. Consolidated Balance Sheets as of  December 31, 2008 and 2007, and the Predecessor Consolidated Balance  Sheet as of December 31, 2007.                                                                                                                                                                                                           |       | 2        |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Boise Inc. Consolidated Statements of Cash Flows for the  year ended December 31, 2008, and for the period of February 1  (Inception) through December 31, 2007, and the Predecessor Consolidated  Statements of Cash Flows for the period of January 1 through  February 21, 2008, and for the years ended December 31, 2007 and  2006. |       | 4        |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Boise Inc. Consolidated Statements of Stockholders’ Equity  for the year ended December 31, 2008, and the period ended  December 31, 2007, and for the years ended December 31, 2007 and  2006.                                                                                                                                                    |       | 5        |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Notes to Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                            |       | 6        |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Report of Independent Registered Public Accounting Firm —  KPMG LLP.                                                                                                                                                                                                                                                                                              |       | 57       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Independent Auditor’s Report — KPMG LLP.                                                                                                                                                                                                                                                                                                                     |       | 59       |
|                                                                                                                                                                                                                                                                                                                                                                   |       |     |
| Report of Independent Registered Public Accounting Firm —  McGladrey & Pullen, LLP.                                                                                                                                                                                                                                                                      |       | 60       |

 

----

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., aCorporation in the Development Stage)**

**Consolidated Statements of Income (Loss)**

(in thousands,except share and per-share data)

 
| ** **                                         | ** ** | **Boise Inc.**                      | ** **  | **Predecessor**                                                    | ** ** |
|----------------------------------------------------|------------|------------------------------------------|-------------|--------------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Year  Ended  December 31,  2008** | ** **  | **February 1  (Inception)  Through  December 31,  2007** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| **Sales**                                          |       |                                     |        |                                                               |       |   |   |   |   |   |   |
| Trade                                              |       | $                                        | 1,990,207   |                                                               | $          | — |   | $ | 258,430 |   | $ | 1,636,605 |   | $ | 1,567,421 |   |
| Related parties                                    |       | 80,425                                   |        | —                                                             |       | 101,490 |   | 695,998 |   | 654,536 |   |
|                                               |       | 2,070,632                                |        | —                                                             |       | 359,920 |   | 2,332,603 |   | 2,221,957 |   |
| **Costs and expenses**                             |       |                                     |        |                                                               |       |   |   |   |   |   |   |
| Materials, labor, and other operating  expenses    |       | 1,756,826                                |        | —                                                             |       | 313,931 |   | 1,948,230 |   | 1,874,344 |   |
| Fiber costs from related parties                   |       | 54,628                                   |        | —                                                             |       | 7,662 |   | 39,352 |   | 30,418 |   |
| Depreciation, amortization, and depletion          |       | 109,988                                  |        | —                                                             |       | 477 |   | 84,649 |   | 116,398 |   |
| Selling and distribution expenses                  |       | 48,278                                   |        | —                                                             |       | 9,097 |   | 59,488 |   | 59,756 |   |
| General and administrative expenses                |       | 34,258                                   |        | 334                                                                |       | 6,606 |   | 44,549 |   | 44,498 |   |
| St. Helens mill restructuring                 |       | 29,780                                   |        | —                                                             |       | — |   | — |   | — |   |
| Other (income) expense, net                        |       | (2,980                                   | )           | —                                                             |       | (989 | ) | (4,142 | ) | 2,724 |   |
|                                               |       | 2,030,778                                |        | 334                                                                |       | 336,784 |   | 2,172,126 |   | 2,128,138 |   |
| **Income (loss) from operations**                  |       | 39,854                                   |        | (334                                                               | )          | 23,136 |   | 160,477 |   | 93,819 |   |
| Foreign exchange gain (loss)                       |       | (4,696                                   | )           | —                                                             |       | 54 |   | 1,184 |   | (86 | ) |
| Change in fair value of interest rate  derivatives |       | (479                                     | )           | —                                                             |       | — |   | — |   | — |   |
| Interest expense                                   |       | (91,220                                  | )           | (6                                                                 | )          | (2 | ) | — |   | — |   |
| Interest income                                    |       | 2,246                                    |        | 10,422                                                             |       | 161 |   | 697 |   | 569 |   |
|                                               |       | (94,149                                  | )           | 10,416                                                             |       | 213 |   | 1,881 |   | 483 |   |
| **Income (loss) before income taxes**              |       | (54,295                                  | )           | 10,082                                                             |       | 23,349 |   | 162,358 |   | 94,302 |   |
| Income tax (provision) benefit                     |       | 8,772                                    |        | (4,590                                                             | )          | (563 | ) | (2,767 | ) | (1,381 | ) |
| **Net income (loss)**                              | ** ** | **$**                                    | **(45,523** | **)**                                                              | **$**      | **5,492** | ** ** | **$** | **22,786** | ** ** | **$** | **159,591** | ** ** | **$** | **92,921** | ** ** |
| **Weighted average common shares outstanding:**    |       |                                     |        |                                                               |       |   |   |   |   |   |   |
| **Basic and diluted**                              | ** ** | **73,635,665**                           | ** **  | **34,272,754**                                                     | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| **Net income (loss) per common share:**            |       |                                     |        |                                                               |       |   |   |   |   |   |   |
| **Basic and diluted**                              | ** ** | **$**                                    | **(0.62**   | **)**                                                              | **$**      | **0.16** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

1

----

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., aCorporation in the Development Stage)**

**Consolidated Balance Sheets**

(in thousands)

 
| ** **                                           | ** ** | **Boise Inc.**         | ** **    | **Predecessor**             | ** ** |
|------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                           | ** ** | **December 31,  2008** | ** **    | **December 31,  2007** | ** ** | **December 31,  2007** | ** ** |
| **ASSETS**                                           |       |                        |          |                        |       |   |   |
| **Current**                                          |       |                        |          |                        |       |   |   |
| Cash and cash equivalents                            |       | $                           | 22,518        |                        | $          | 186 |   | $ | 8 |   |
| Cash held in trust                                   |       | —                      |          | 403,989                     |       | — |   |
| Receivables                                          |       |                        |          |                        |       |   |   |
| Trade, less allowances of $961, $0,  and $1,063 |       | 220,204                     |          | —                      |       | 181,799 |   |
| Related parties                                      |       | 1,796                       |          | —                      |       | 36,452 |   |
| Other                                                |       | 4,937                       |          | —                      |       | 10,224 |   |
| Inventories                                          |       | 335,004                     |          | —                      |       | 324,679 |   |
| Deferred income taxes                                |       | 5,318                       |          | 85                          |       | — |   |
| Prepaid and other                                    |       | 6,289                       |          | 59                          |       | 6,936 |   |
|                                                 |       | 596,066                     |          | 404,319                     |       | 560,098 |   |
| **Property**                                         |       |                        |          |                        |       |   |   |
| Property and equipment, net                          |       | 1,262,810                   |          | —                      |       | 1,192,344 |   |
| Fiber farms and deposits                             |       | 14,651                      |          | —                      |       | 17,843 |   |
|                                                 |       | 1,277,461                   |          | —                      |       | 1,210,187 |   |
| **Deferred financing costs**                         |       | 72,570                      |          | —                      |       | — |   |
| **Goodwill**                                         |       | —                      |          | —                      |       | 42,218 |   |
| **Intangible assets, net**                           |       | 35,075                      |          | —                      |       | 23,967 |   |
| **Other assets**                                     |       | 7,114                       |          | 3,293                       |       | 9,242 |   |
| **Total assets**                                     | ** ** | **$**                       | **1,988,286** | ** **                  | **$**      | **407,612** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

2

----

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., aCorporation in the Development Stage)**

**Consolidated Balance Sheets (continued)**

(in thousands,except share data)

 
| ** **                                                                                                                                                                                                                             | ** ** | **Boise Inc.**         | ** **    | **Predecessor**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **December 31,  2008** | ** **    | **December 31,  2007** | ** ** | **December 31,  2007** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                          |       |                        |          |                        |       |   |   |
| **Current**                                                                                                                                                                                                                            |       |                        |          |                        |       |   |   |
| Current portion of long-term debt                                                                                                                                                                                                      |       | $                           | 25,822        |                        | $          | — |   | $ | — |   |
| Income taxes payable                                                                                                                                                                                                                   |       | 841                         |          | 1,280                       |       | 306 |   |
| Accounts payable                                                                                                                                                                                                                       |       |                        |          |                        |       |   |   |
| Trade                                                                                                                                                                                                                                  |       | 177,157                     |          | —                      |       | 178,686 |   |
| Related parties                                                                                                                                                                                                                        |       | 3,107                       |          | —                      |       | 299 |   |
| Accrued liabilities                                                                                                                                                                                                                    |       |                        |          |                        |       |   |   |
| Compensation and benefits                                                                                                                                                                                                              |       | 44,488                      |          | —                      |       | 53,573 |   |
| Interest payable                                                                                                                                                                                                                       |       | 184                         |          | —                      |       | — |   |
| Deferred underwriting fee                                                                                                                                                                                                              |       | —                      |          | 12,420                      |       | — |   |
| Other                                                                                                                                                                                                                                  |       | 17,402                      |          | 1,015                       |       | 16,716 |   |
|                                                                                                                                                                                                                                   |       | 269,001                     |          | 14,715                      |       | 249,580 |   |
| **Debt**                                                                                                                                                                                                                               |       |                        |          |                        |       |   |   |
| Long-term debt, less current portion                                                                                                                                                                                                   |       | 1,011,628                   |          | —                      |       | — |   |
| Notes payable                                                                                                                                                                                                                          |       | 66,606                      |          | —                      |       | — |   |
|                                                                                                                                                                                                                                   |       | 1,078,234                   |          | —                      |       | — |   |
| **Other**                                                                                                                                                                                                                              |       |                        |          |                        |       |   |   |
| Deferred income taxes                                                                                                                                                                                                                  |       | 8,907                       |          | —                      |       | 896 |   |
| Compensation and benefits                                                                                                                                                                                                              |       | 149,691                     |          | —                      |       | 6,030 |   |
| Other long-term liabilities                                                                                                                                                                                                            |       | 33,007                      |          | —                      |       | 29,427 |   |
|                                                                                                                                                                                                                                   |       | 191,605                     |          | —                      |       | 36,353 |   |
| **Common stock subject to possible conversion**(16,555,860 shares at conversion value at  December 31, 2007)                                                                                                                      |       | —                      |          | 159,760                     |       | — |   |
| **Commitments and contingent liabilities**                                                                                                                                                                                             |       |                        |          |                        |       |   |   |
| **Stockholders’ Equity**                                                                                                                                                                                                          |       |                        |          |                        |       |   |   |
| Business unit equity                                                                                                                                                                                                                   |       | —                      |          | —                      |       | 1,559,779 |   |
| Preferred stock, $.0001 par value per  share: 1,000,000 shares authorized; none issued                                                                                                                                                 |       | —                      |          | —                      |       | — |   |
| Common stock, $.0001 par value per share:  250,000,000 shares authorized; 79,716,130 shares and 51,750,000 shares issued  and outstanding (which included 16,555,860 shares subject to possible  conversion at December 31, 2007) |       | 8                           |          | 5                           |       | — |   |
| Additional paid-in capital                                                                                                                                                                                                             |       | 575,151                     |          | 227,640                     |       | — |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                   |       | (85,682                     | )             | —                      |       | — |   |
| Income accumulated during development stage                                                                                                                                                                                            |       | —                      |          | 5,492                       |       | — |   |
| Accumulated deficit                                                                                                                                                                                                                    |       | (40,031                     | )             | —                      |       | — |   |
| **Total stockholders’ equity**                                                                                                                                                                                                    |       | 449,446                     |          | 233,137                     |       | 1,559,779 |   |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                                    | ** ** | **$**                       | **1,988,286** | ** **                  | **$**      | **407,612** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

3

----

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., aCorporation in the Development Stage)**

**Consolidated Statements of Cash Flows**

(in thousands)

 
| ** **                                                                       | ** ** | **Boise Inc.**                      | ** ** | **Predecessor**                                                    | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Year  Ended  December 31,  2008** | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| **Cash provided by (used for) operations**                                       |       |                                     |       |                                                               |       |   |   |   |   |   |   |
| Net income (loss)                                                                |       | $                                        | (45,523    | )                                                                  | $          | 5,492 |   | $ | 22,786 |   | $ | 159,591 |   | $ | 92,921 |   |
| Items in net income (loss) not using  (providing) cash                           |       |                                     |       |                                                               |       |   |   |   |   |   |   |
| Depreciation, amortization, and depletion  of deferred financing costs and other |       | 119,933                                  |       | —                                                             |       | 477 |   | 84,649 |   | 116,398 |   |
| Share-based compensation expense                                                 |       | 3,096                                    |       | —                                                             |       | — |   | — |   | — |   |
| Related-party interest expense                                                   |       | 2,760                                    |       | —                                                             |       | — |   | — |   | — |   |
| Notes payable interest expense                                                   |       | 5,512                                    |       | —                                                             |       | — |   | — |   | — |   |
| Interest income on cash held in trust                                            |       | —                                   |       | (10,414                                                            | )          | — |   | — |   | — |   |
| Pension and other postretirement benefit  expense                                |       | 8,388                                    |       | —                                                             |       | 1,826 |   | 13,334 |   | 14,971 |   |
| Deferred income taxes                                                            |       | (9,363                                   | )          | —                                                             |       | 11 |   | 253 |   | — |   |
| Change in fair value of energy derivatives                                       |       | 7,445                                    |       | —                                                             |       | (37 | ) | 432 |   | (516 | ) |
| Change in fair value of interest rate  derivatives                               |       | 479                                      |       | —                                                             |       | — |   | — |   | — |   |
| St. Helens mill restructuring                                               |       | 35,998                                   |       | —                                                             |       | — |   | — |   | — |   |
| Gain on changes in retiree healthcare  programs                                  |       | —                                   |       | —                                                             |       | — |   | (4,367 | ) | (3,741 | ) |
| (Gain) loss on sales of assets, net                                              |       | —                                   |       | —                                                             |       | (943 | ) | (112 | ) | 2,213 |   |
| Other                                                                            |       | 4,696                                    |       | —                                                             |       | (54 | ) | (1,184 | ) | 2,598 |   |
| Decrease (increase) in working capital, net  of acquisitions                     |       |                                     |       |                                                               |       |   |   |   |   |   |   |
| Receivables                                                                      |       | 25,296                                   |       | —                                                             |       | (23,522 | ) | (4,357 | ) | (6,443 | ) |
| Inventories                                                                      |       | (28,950                                  | )          | —                                                             |       | 5,343 |   | (4,402 | ) | (45,416 | ) |
| Prepaid expenses                                                                 |       | (1,044                                   | )          | (59                                                                | )          | 875 |   | (833 | ) | 646 |   |
| Accounts payable and accrued liabilities                                         |       | (17,801                                  | )          | 257                                                                |       | (10,718 | ) | 18,414 |   | 14,634 |   |
| Current and deferred income taxes                                                |       | (1,057                                   | )          | 1,284                                                              |       | 335 |   | 509 |   | (1,224 | ) |
| Pension and other postretirement benefit  payments                               |       | (636                                     | )          | —                                                             |       | (1,826 | ) | (13,334 | ) | (14,971 | ) |
| Other                                                                            |       | (1,483                                   | )          | —                                                             |       | 2,326 |   | 178 |   | 828 |   |
| Cash provided by (used for) operations                                           |       | 107,746                                  |       | (3,440                                                             | )          | (3,121 | ) | 248,771 |   | 172,898 |   |
| **Cash provided by (used for) investment**                                       |       |                                     |       |                                                               |       |   |   |   |   |   |   |
| Acquisition of businesses and facilities                                         |       | (1,216,459                               | )          | (2,624                                                             | )          | — |   | — |   | (42,609 | ) |
| Cash released from (held in) trust, net                                          |       | 403,989                                  |       | (393,575                                                           | )          | — |   | — |   | — |   |
| Expenditures for property and equipment                                          |       | (90,597                                  | )          | —                                                             |       | (10,168 | ) | (141,801 | ) | (109,073 | ) |
| Sales of assets                                                                  |       | 394                                      |       | —                                                             |       | 17,662 |   | 14,224 |   | 3,824 |   |
| Additional Consideration Agreement payment                                       |       | —                                   |       | —                                                             |       | — |   | (32,542 | ) | — |   |
| Other                                                                            |       | (5,703                                   | )          | —                                                             |       | 863 |   | 1,769 |   | 1,949 |   |
| Cash provided by (used for) investment                                           |       | (908,376                                 | )          | (396,199                                                           | )          | 8,357 |   | (158,350 | ) | (145,909 | ) |
| **Cash provided by (used for) financing**                                        |       |                                     |       |                                                               |       |   |   |   |   |   |   |
| Issuances of long-term debt                                                      |       | 1,125,700                                |       | —                                                             |       | — |   | — |   | — |   |
| Payments of long-term debt                                                       |       | (88,250                                  | )          | —                                                             |       | — |   | — |   | — |   |
| Issuances of short-term debt                                                     |       | —                                   |       | 137                                                                |       | — |   | — |   | — |   |
| Payments of short-term debt                                                      |       | —                                   |       | (137                                                               | )          | — |   | — |   | — |   |
| Payments to stockholders for exercise of  conversion rights                      |       | (120,170                                 | )          | —                                                             |       | — |   | — |   | — |   |
| Payments of deferred financing fees                                              |       | (81,898                                  | )          | —                                                             |       | — |   | — |   | — |   |
| Payments of deferred underwriters fees                                           |       | (12,420                                  | )          | (16,560                                                            | )          | — |   | — |   | — |   |
| Proceeds from sale of shares of common  stock to initial stockholders            |       | —                                   |       | 25                                                                 |       | — |   | — |   | — |   |
| Proceeds from public offering                                                    |       | —                                   |       | 414,000                                                            |       | — |   | — |   | — |   |
| Proceeds from issuance of insider warrants                                       |       | —                                   |       | 3,000                                                              |       | — |   | — |   | — |   |
| Net equity transactions with related  parties                                    |       | —                                   |       | —                                                             |       | (5,237 | ) | (90,420 | ) | (26,990 | ) |
| Other                                                                            |       | —                                   |       | (640                                                               | )          | — |   | — |   | — |   |
| Cash provided by (used for) financing                                            |       | 822,962                                  |       | 399,825                                                            |       | (5,237 | ) | (90,420 | ) | (26,990 | ) |
| **Increase (decrease) in cash and cash  equivalents**                            |       | 22,332                                   |       | 186                                                                |       | (1 | ) | 1 |   | (1 | ) |
| **Balance at beginning of the period**                                           |       | 186                                      |       | —                                                             |       | 8 |   | 7 |   | 8 |   |
| **Balance at end of the period**                                                 | ** ** | **$**                                    | **22,518** | ** **                                                         | **$**      | **186** | ** ** | **$** | **7** | ** ** | **$** | **8** | ** ** | **$** | **7** | ** ** |

 

See accompanying notes toconsolidated financial statements.

 

4

----

 

**Boise Inc.**

**(Formerly Aldabra 2 Acquisition Corp., aCorporation in the Development Stage)**

**Consolidated Statements of Stockholders’Equity**

(in thousands,except share data)

 
| **Common  Shares  Outstanding** | ** **   | ** **                                                                                                                                                           | ** ** | **Total  Stockholders’  Equity** | ** **    | **Business  Unit  Equity** | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-In  Capital** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Income  Accumulated  During  Development  Stage** | ** **  | **Accumulated  Deficit** | ** ** |
|---------------------------------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|---------------|----------------------------|------------|----------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|-------------|--------------------------|------------|
|                            | *** *** | ***Predecessor***                                                                                                                                                    |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
| —                          |         | Balance at  December 31, 2005                                                                                                                                   |       | $                                     | 1,424,533     |                       | $          | 1,424,677            |       | $                 | —     |                             | $          | —                                               |       | $                                                   | —      |                     | $          | (144 | ) | $ | — |   | $ | — |   |
|                            |         | Comprehensive  income (loss):                                                                                                                                        |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Net income                                                                                                                                                           |       | 92,921                                |          | 92,921                     |       | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
|                            |         | Other  comprehensive loss, net of tax                                                                                                                                |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Cash flow hedges                                                                                                                                                     |       | (9,232                                | )             | —                     |       | —               |       | —            |       | —                           |       | (9,232                                               | )          | —                                              |        | —                   |       |
|                            |         | Comprehensive  income:                                                                                                                                               |       | $                                     | 83,689        |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |   |
| —                          |         | Net equity  transactions with related parties                                                                                                                        |       | (26,990                               | )             | (26,990                    | )          | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
| —                          |         | Balance at  December 31, 2006                                                                                                                                   |       | $                                     | 1,481,232     |                       | $          | 1,490,608            |       | $                 | —     |                             | $          | —                                               |       | $                                                   | —      |                     | $          | (9,376 | ) | $ | — |   | $ | — |   |
|                            |         | Comprehensive  income:                                                                                                                                               |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Net income                                                                                                                                                           |       | 159,591                               |          | 159,591                    |       | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
|                            |         | Other  comprehensive income, net of tax                                                                                                                              |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Cash flow hedges                                                                                                                                                     |       | 9,376                                 |          | —                     |       | —               |       | —            |       | —                           |       | 9,376                                                |       | —                                              |        | —                   |       |
|                            |         | Comprehensive  income:                                                                                                                                               |       | $                                     | 168,967       |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |   |
| —                          |         | Net equity  transactions with related parties                                                                                                                        |       | (90,420                               | )             | (90,420                    | )          | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
| —                          | ** **   | **Balance  at December 31, 2007**                                                                                                                               | ** ** | **$**                                 | **1,559,779** | ** **                 | **$**      | **1,559,779**        | ** ** | **$**             | **—** | ** **                       | **$**      | **—**                                           | ** ** | **$**                                               | **—**  | ** **               | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                            | *** *** | ***Boise Inc.***                                                                                                                                                |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
| —                          |         | Balance at  February 1, 2007 (Inception)                                                                                                                        |       | $                                     | —        |                       | $          | —               |       | $                 | —     |                             | $          | —                                               |       | $                                                   | —      |                     | $          | — |   | $ | — |   | $ | — |   |
|                            |         | Comprehensive  income:                                                                                                                                               |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Net income                                                                                                                                                           |       | 5,492                                 |          | —                     |       | —               |       | —            |       | —                           |       | —                                               |       | 5,492                                               |        | —                   |       |
|                            |         | Comprehensive  income                                                                                                                                                |       | $                                     | 5,492         |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |   |
| 10,350,000                      |         | Issuance of  common stock to initial stockholders on February 1, 2007 (Inception) at  $.002 per share                                                           |       | 25                                    |          | —                     |       | —               |       | 1                 |       | 24                               |       | —                                               |       | —                                              |        | —                   |       |
|                            |         | Proceeds of  issuance of warrants                                                                                                                                    |       | 3,000                                 |          | —                     |       | —               |       | —            |       | 3,000                            |       | —                                               |       | —                                              |        | —                   |       |
| 41,400,000                      |         | Sale of  41,400,000 units through public offering net of underwriter’s discount and  offering expenses (which includes 16,555,860 shares subject to conversion) |       | 384,380                               |          | —                     |       | —               |       | 4                 |       | 384,376                          |       | —                                               |       | —                                              |        | —                   |       |
|                            |         | Less 16,555,860  shares of common stock subject to possible conversion                                                                                               |       | (159,760                              | )             | —                     |       | —               |       | —            |       | (159,760                         | )          | —                                               |       | —                                              |        | —                   |       |
| 51,750,000                      |         | Balance at  December 31, 2007                                                                                                                                   |       | $                                     | 233,137       |                       | $          | —               |       | $                 | —     |                             | $          | 5                                                    |       | $                                                   | 227,640     |                     | $          | — |   | $ | 5,492 |   | $ | — |   |
|                            |         | Comprehensive  loss:                                                                                                                                                 |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Net loss                                                                                                                                                             |       | (45,523                               | )             | —                     |       | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | (45,523                  | )          |
|                            |         | Other  comprehensive loss, net of tax                                                                                                                                |       |                                  |          |                       |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |
|                            |         | Cash flow hedges                                                                                                                                                     |       | (760                                  | )             | —                     |       | —               |       | —            |       | —                           |       | (760                                                 | )          | —                                              |        | —                   |       |
|                            |         | Unfunded  accumulated benefit obligation                                                                                                                             |       | (84,922                               | )             | —                     |       | —               |       | —            |       | —                           |       | (84,922                                              | )          | —                                              |        | —                   |       |
|                            |         | Other  comprehensive loss                                                                                                                                            |       | (85,682                               | )             |                       |       |                 |       |              |       |                             |       | (85,682                                              | )          |                                                |        | (45,523                  | )          |
|                            |         | Comprehensive  loss                                                                                                                                                  |       | $                                     | (131,205      | )                          |       |                 |       |              |       |                             |       |                                                 |       |                                                |        |                     |       |   |
|                            |         | Reclassification  of income accumulated during development stage                                                                                                     |       | —                                |          | —                     |       | —               |       | —            |       | —                           |       | —                                               |       | (5,492                                              | )           | 5,492                    |       |
| 37,857,374                      |         | Issuance of  common stock for acquisition at $9.15 per share (net of a 12% discount for  lack of marketability)                                                      |       | 304,828                               |          | —                     |       | —               |       | 4                 |       | 304,824                          |       | —                                               |       | —                                              |        | —                   |       |
| 2,450,617                       |         | Restricted stock                                                                                                                                                     |       | 3,096                                 |          | —                     |       | —               |       | —            |       | 3,096                            |       | —                                               |       | —                                              |        | —                   |       |
| (24,517                         | )            | Restricted stock  forfeited                                                                                                                                          |       | —                                |          | —                     |       | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
| 30,083                          |         | Restricted stock  vested                                                                                                                                             |       | —                                |          | —                     |       | —               |       | —            |       | —                           |       | —                                               |       | —                                              |        | —                   |       |
|                            |         | Shares of common  stock subject to possible conversion converted to permanent equity                                                                                 |       | 159,760                               |          | —                     |       | —               |       | —            |       | 159,760                          |       | —                                               |       | —                                              |        | —                   |       |
| (12,347,427                     | )            | Reclassify shares  of common stock subject to possible conversion that was not redeemed to  permanent equity                                                         |       | (120,170                              | )             | —                     |       | —               |       | (1                | )          | (120,169                         | )          | —                                               |       | —                                              |        | —                   |       |
| **79,716,130**                  | ** **   | **Balance  at December 31, 2008**                                                                                                                               | ** ** | **$**                                 | **449,446**   | ** **                 | **$**      | **—**           | ** ** | **$**             | **—** | ** **                       | **$**      | **8**                                                | ** ** | **$**                                               | **575,151** | ** **               | **$**      | **(85,682** | **)** | **$** | **—** | ** ** | **$** | **(40,031** | **)** |

 

See accompanying notes toconsolidated financial statements.

 

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***Notes to Consolidated Financial Statements***

 

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

 

Boise Inc.(formerly Aldabra 2 Acquisition Corp.) or “the Company,” “we,” “us,” or “our”was a blank check company created on February 1, 2007 (Inception) andorganized for the purpose of effecting a merger, capital stock exchange, assetacquisition, or other similar business combination with an operating business.On February 22, 2008, Boise Inc. completed the acquisition (theAcquisition) of Boise White Paper, L.L.C., Boise Packaging &Newsprint, L.L.C., Boise Cascade Transportation Holdings Corp.(collectively, the Paper Group), and other assets and liabilities related tothe operation of the paper, packaging and newsprint, and transportationbusinesses of the Paper Group and part of the headquarters operations of BoiseCascade, L.L.C. (Boise Cascade). The business we acquired is referred toin this report on Form 10-K as the “Predecessor.” The Acquisition wasaccomplished through the Company’s acquisition of Boise PaperHoldings, L.L.C. See Note 3, Acquisition of Boise Cascade’s Paper andPackaging Operations, for more information related to the Acquisition.

 

The followingsets forth our corporate structure following the Acquisition:

 

 

Boise Inc.operates its business in three reportable segments, Paper, Packaging, andCorporate and Other (support services) and is headquartered in Boise, Idaho.Boise Inc. manufactures packaging products and papers, includingcorrugated containers, containerboard, label and release and flexible packagingpapers, imaging papers for the office and home, printing and converting papers,newsprint, and market pulp.

 

Theaccompanying Consolidated Statement of Income (Loss) and Consolidated Statementof Cash Flows for the year ended December 31, 2008, include the activitiesof Aldabra 2 Acquisition Corp. prior to the Acquisition and the operations ofthe acquired businesses from February 22, 2008, through December 31,2008. The Consolidated Statements of Income (Loss) and Consolidated Statementsof Cash Flows for the period of January 1 through February 21, 2008,and

 

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for the years ended December 31,2007 and 2006, of the Predecessor are presented for comparative purposes. Theperiod of February 1 (Inception) through December 31, 2007,represents the activities of Aldabra 2 Acquisition Corp.

 

For thePredecessor periods presented, the consolidated financial statements includeaccounts specifically attributed to the Paper Group and a portion of BoiseCascade’s shared corporate general and administrative expenses. These sharedservices include, but are not limited to, finance, accounting, legal, informationtechnology, and human resource functions. Some corporate costs related solelyto the Predecessor and were allocated totally to these operations. Sharedcorporate general and administrative expenses not specifically identifiable tothe Paper Group were allocated primarily based on average sales, assets, andlabor costs. The Predecessor consolidated financial statements do not includean allocation of Boise Cascade’s debt, interest, and deferred financing costs,because none of these items were specifically identified as corporate advancesto, or borrowings by, the Predecessor. Boise Cascade used interest rate swapsto hedge variable interest rate risk. Because debt and interest costs are notallocated to the Predecessor, the effects of the interest rate swaps are notincluded in the consolidated financial statements. During the Predecessorperiods presented, income taxes, where applicable, were calculated as if thePredecessor were a separate taxable entity. For the period of January 1through February 21, 2008, and the years ended December 31, 2007 and2006, the majority of the businesses and assets of the Predecessor were heldand operated by limited liability companies, which are not subject toentity-level federal or state income taxation. In addition to the businessesand assets held and operated by limited liability companies, the Predecessorhad taxable corporations subject to federal, state, and local income taxes forwhich taxes were recorded. Information on the allocations and related-party transactionsis included in Note 5, Transactions With Related Parties.

 

***2.******                                      Summaryof Significant Accounting Policies***

 

*Consolidation and Use of Estimates*

 

Theconsolidated financial statements include the accounts of Boise Inc. andits subsidiaries after elimination of intercompany balances and transactions.The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions about future events. Theseestimates and the underlying assumptions affect the amounts of assets andliabilities reported, disclosures about contingent assets and liabilities, andreported amounts of revenues and expenses. Such estimates include thedetermination and allocation of the fair values of assets acquired andliabilities assumed in an acquisition; the assessment of the recoverability oflong-lived assets; the recognition, measurement, and valuation of current anddeferred income taxes; valuation and recognition of pension expense andliabilities; and valuation of accounts receivable, inventories, and assetretirement obligations, among others. These estimates and assumptions are basedon management’s best estimates and judgment. Management evaluates its estimatesand assumptions on an ongoing basis using historical experience and otherfactors, including the current economic environment, which management believesto be reasonable under the circumstances. We adjust such estimates andassumptions when facts and circumstances dictate. Illiquid credit markets;volatile equity, foreign currency, and energy markets; and declines in consumerspending have combined to increase the uncertainty inherent in such estimatesand assumptions. As future events and their effects cannot be determined withprecision, actual results could differ significantly from these estimates.Changes in these estimates resulting from continuing changes in the economicenvironment will be reflected in the consolidated financial statements infuture periods.

 

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*Revenue Recognition*

 

We recognizerevenue when the following criteria are met: persuasive evidence of anagreement exists, delivery has occurred or services have been rendered, ourprice to the buyer is fixed and determinable, and collectability is reasonablyassured. Delivery is not considered to have occurred until the customer takestitle and assumes the risks and rewards of ownership. The timing of revenuerecognition is dependent on shipping terms. Revenue is recorded at the time ofshipment for terms designated free on board (f.o.b) shipping point. For salestransactions designated f.o.b destination, revenue is recorded when the productis delivered to the customer’s delivery site. Fees for shipping and handlingcharged to customers for sales transactions are included in “Sales.” Costsrelated to shipping and handling are included in “Materials, labor, and otheroperating expenses.”

 

Until late February 2009,we sold all of the newsprint we produced to Abitibi Consolidated SalesCorporation (ACSC), an indirect subsidiary of AbitibiBowater Inc.(AbitibiBowater), at a price equal to the price AbitibiBowater’s mills receivedfrom its customers, less associated expenses and a sales and marketing discount.In accordance with Emerging Issues Task Force (EITF) 01-09, *Accounting for Consideration Given by a Vendor to aCustomer (including a Reseller of the Vendor’s Products)*, thediscount was presumed to be a reduction of the selling price of the product and,therefore, was characterized as a reduction of revenue in our ConsolidatedStatements of Income (Loss).

 

*Equity Compensation*

 

We account forthe restricted stock and restricted stock units (collectively restricted stock)granted under the Boise Inc. Incentive and Performance Plan (the Plan)under Statement of Financial Accounting Standards (SFAS) No. 123(R), *Share-Based Payment*. We accruecompensation expense for the restricted stock based on the fair value on thedate of the grant. Compensation expense is recognized ratably over the vestingperiod for the restricted stock grants that vest over time and ratably over theaward period for the restricted stock grants that vest based on the closingprice of Boise Inc. stock. During the year ended December 31, 2008,we recognized $3.1 million of compensation expense. Most of these costswere recorded in “General and administrative expenses” in our ConsolidatedStatements of Income (Loss). See Note 15, Stockholders’ Equity, for adiscussion of the Plan and the method we use to calculate compensation expense.

 

During thePredecessor periods presented, equity compensation was granted to thePredecessor’s employees under Boise Cascade’s equity compensation plans. Theseequity compensation plans were accounted for under SFAS No. 123(R). Duringthe Predecessor period of January 1 through February 21, 2008, andthe years ended December 31, 2007 and 2006, the Predecessor recognized$0.2 million, $1.7 million, and $1.8 million of compensationexpense, most of which was recorded in “General and administrative expenses” inthe Consolidated Statements of Income (Loss).

 

*Research and Development Costs*

 

We expenseresearch and development costs as incurred. For the year ended December 31,2008, research and development expenses were $1.0 million. For thePredecessor period of January 1 through February 21, 2008, and theyears ended December 31, 2007 and 2006, research and development expenseswere $0.1 million, $0.7 million, and $0.6 million, respectively.

 

*Advertising Costs*

 

We expense thecost of advertising as incurred. For the year ended December 31, 2008,advertising expenses were $2.3 million. For the Predecessor period of January 1through

 

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February 21, 2008, and theyears ended December 31, 2007 and 2006, advertising expenses were$1.0 million, $4.0 million, and $3.9 million, respectively.These expenses are generally recorded in “Selling and distribution expenses.”

 

*Foreign Currency Translation*

 

The functionalcurrency for our operations outside the United States is the U.S. dollar.Nonmonetary assets and liabilities and related depreciation and amortizationfor these foreign operations are remeasured into U.S. dollars using historicalexchange rates. Monetary assets and liabilities are remeasured into U.S.dollars using the exchange rates as of the Consolidated Balance Sheet date.Revenue and expense items are remeasured into U.S. dollars using an averageexchange rate prevailing during the year. The foreign exchange gains (losses)reported in the Consolidated Statements of Income (Loss) resulted from theremeasurements into the U.S. dollar.

 

*Cash and Cash Equivalents*

 

Cashequivalents consist of short-term investments that have a maturity of threemonths or less at the date of purchase. Cash equivalents totaled$15.3 million at December 31, 2008.

 

For all of thePredecessor periods presented, we participated in Boise Cascade’s centralizedcash management system (see Note 5, Transactions With Related Parties).Interest income or expense was not recorded related to these transactions,except for transactions related to the taxable subsidiaries. In all Predecessorperiods presented, the interest income related to these transactions was notsignificant. The net effect of these transactions was included in “Businessunit equity” on the Consolidated Balance Sheets. As such, the amount of cashrecorded on the Predecessor Consolidated Balance Sheet at December 31,2007, does not represent the amount required or generated by the Predecessor.

 

*Trade Accounts Receivable and Allowance for Doubtful Accounts*

 

Trade accountsreceivable are stated at the amount we expect to collect. Trade accountsreceivable do not bear interest. The allowance for doubtful accounts is ourbest estimate of the losses we expect will result from the inability of ourcustomers to make required payments. We generally determine the allowance basedon a combination of actual historical write-off experience and an analysis ofspecific customer accounts. We periodically review our allowance for doubtfulaccounts, and adjustments to the valuation allowance are charged to income.Trade accounts receivable balances that remain outstanding after we have usedreasonable collection efforts are written off through a charge to the valuationallowance and a credit to accounts receivable. We may at times insure orarrange for guarantees on our receivables.

 

*Financial Instruments*

 

Our financialinstruments are cash and cash equivalents, accounts receivable, accountspayable, and long-term debt. The recorded values of cash and cash equivalents,accounts receivable, and accounts payable approximate fair values based ontheir short-term nature. Our long-term debt is recorded at the face value ofthose obligations.

 

We are exposedto market risks, including changes in interest rates, energy prices, andforeign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is aneconomic hedge or we designate the derivative as a cash flow or fair valuehedge. We formally document all relationships between hedging instruments andthe

 

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hedged items, as well as ourrisk management objectives and strategies for undertaking various hedgedtransactions. For those derivatives designated as cash flow or fair valuehedges, we formally assess, both at the derivatives’ inception and on anongoing basis, whether the derivatives that are used in hedging transactionsare highly effective in offsetting changes in the hedged items. The ineffectiveportion of hedging transactions is recognized in income (loss).

 

In accordancewith SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities*, as amended, we recordall derivative instruments as assets or liabilities on our Consolidated BalanceSheets at fair value. The fair value of these instruments is determined bythird parties. Changes in the fair value of derivatives are recorded in either “Netincome (loss)” or “Other comprehensive income (loss)” as appropriate. The gainor loss on derivatives designated as cash flow hedges is included in “Other comprehensiveincome (loss)” in the period in which changes in fair value occur and isreclassified to income (loss) in the period in which the hedged item affectsincome (loss), and any ineffectiveness is recognized currently in ourConsolidated Statements of Income (Loss). The fair value of the hedged exposureis presumed to be the market value of the hedging instrument when criticalterms match. The gain or loss on derivatives designated as fair value hedgesand the offsetting gain or loss on the hedged item attributable to the hedgedrisk are included in income (loss) in the period in which changes in fair valueoccur. The gain or loss on derivatives that have not been designated as hedginginstruments is included in income (loss) in the period in which changes in fairvalue occur.

 

*Customer Rebates and Allowances*

 

We providerebates to our customers based on the volume of their purchases. We provide therebates to increase the sell-through of our products. The rebates provided toour customers are accounted for in accordance with EITF 01-09, *Accounting for Consideration Given by a Vendor to aCustomer*. The rebates are recorded as a decrease in sales.

 

At December 31,2008, we had $0.6 million of rebates payable to our customers recorded in “Accruedliabilities, Other” on our Consolidated Balance Sheet. The Predecessor recorded$0.6 million of rebates payable to customers at December 31, 2007.

 

*Inventory Valuation*

 

Inventoriesare valued at the lower of cost or market. Cost is based on the average orfirst-in, first-out (FIFO) method of inventory valuation. Manufacturedinventories include costs for materials, labor, and factory overhead.

 

Inventoriesinclude the following (in thousands):

 
| ** **                         | ** ** | **Boise Inc.**  | ** **  | **Predecessor**       | ** ** |
|------------------------------------|------------|----------------------|-------------|-----------------------|------------|
| ** **                         | ** ** | **December 31** | ** **  | **December 31,** | ** ** |
| ** **                         | ** ** | **2008**             | ** **  | **2007**              | ** ** | **2007** | ** ** |
| Finished goods and work in process |       | $                    | 210,611     |                  | $          | — |   | $ | 192,161 |   |
| Logs                               |       | 57,881               |        | —                |       | 43,686 |   |
| Other raw materials and supplies   |       | 66,512               |        | —                |       | 88,832 |   |
| ** **                         | ** ** | **$**                | **335,004** | ** **            | $          | — |   | **$** | **324,679** |   |

 

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*Property and Equipment, Net*

 

Property andequipment acquired in the Acquisition were recorded at estimated fair value onthe date of the Acquisition. We have completed our purchase price allocation ofthe fair value of property and equipment or assets acquired and liabilitiesassumed.

 

Property andequipment acquired subsequent to the Acquisition are recorded at cost. Costincludes expenditures for major improvements and replacements and the amount ofinterest cost associated with significant capital additions. For the year endedDecember 31, 2008, we recognized $0.1 million of capitalizedinterest. During the Predecessor periods of January 1 through February 21,2008, and the years ended December 31, 2007 and 2006, the Predecessorrecognized $0.1 million, $1.7 million, and $0.5 million ofcapitalized interest. We expense all repair and maintenance costs as incurredin accordance with Financial Accounting Standards Board (FASB) Staff Position(FSP) No. AUG AIR-1, *Accounting forPlanned Major Maintenance Activities.* When property and equipmentare retired, sold, or otherwise disposed of, the asset’s carrying amount andrelated accumulated depreciation are removed from the accounts and any gain orloss is included in income (loss). In all periods presented, we used the straight-linemethod of depreciation.

 

Property andequipment consisted of the following asset classes and the following generalrange of estimated useful lives (dollars, in thousands):

 
| ** **                    | ** ** | **Boise Inc.**   | ** **    | **General Range of** | ** ** | **Predecessor**              | ** ** |
|-------------------------------|------------|-----------------------|---------------|--------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **December 31,** | ** **    | **Estimated Useful**      | ** ** | **December 31,**        | ** ** |
| ** **                    | ** ** | **2008**              | ** **    | **2007**                       | ** ** | **Lives in Years** | ** ** | **2007** | ** ** |
| Land and land improvements    |       | $                     | 31,875        |                           | $          | —                       |       | 17-20 |   | $ | 31,592 |   |
| Buildings and improvements    |       | 187,892               |          | —                         |       | 9-40                         |       | 185,509 |   |
| Machinery and equipment       |       | 1,113,572             |          | —                         |       | 3-20                         |       | 1,212,425 |   |
| Construction in progress      |       | 29,833                |          | —                         |       | N/A                          |       | 36,535 |   |
|                          |       | 1,363,172             |          | —                         |       |                         |       | 1,466,061 |   |
| Less accumulated depreciation |       | (100,362              | )             | —                         |       | N/A                          |       | (273,717 | ) |
| ** **                    | ** ** | **$**                 | **1,262,810** | ** **                     | **$**      | **—**                   | ** ** |   |   | **$** | **1,192,344** |   |

 

*Fiber Farms and Deposits*

 

Theconsolidated financial statements include the cottonwood fiber farm operationsin our Paper segment. Our cottonwood fiber farm has multiple locations near ourmill in Wallula, Washington. They are short-rotation fiber farms that have agrowing cycle averaging six to eight years.

 

Costs for activitiesrelated to the establishment of a new crop of trees, including planting,thinning, fertilization, pest control, herbicide application, irrigation, andland lease costs, are capitalized, while costs for administration, harvesting,insurance, and property taxes are expensed. The capitalized costs areaccumulated by specifically identifiable farm or irrigation blocks. We chargecapitalized costs, excluding land, to “Depreciation, amortization, anddepletion” in the accompanying Consolidated Statements of Income (Loss) at thetime the fiber is harvested based on actual accumulated costs associated withfiber cut.

 

We are a partyto a number of long-term log and fiber supply agreements. At December 31,2008, our total obligation for log and fiber purchases under contracts withthird parties was approximately $168.7 million. Except for depositsrequired pursuant to wood supply contracts, these obligations are not recordedin our consolidated financial statements until contract payment

 

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terms take effect. Theobligations are subject to change based on, among other things, the effect ofgovernmental laws and regulations, our manufacturing operations not operatingin the normal course of business, log and fiber availability, and the status ofenvironmental appeals.

 

*Long-Lived Asset Impairment*

 

We account forthe impairment of long-lived assets in accordance with SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*. An impairment of long-lived assets exists whenthe carrying value of an asset exceeds its fair value and when the carryingvalue is not recoverable through future undiscounted cash flows fromoperations. We review the carrying value of long-lived assets for impairmentwhen events or changes in circumstances indicate that the carrying amount ofassets may not be recoverable.

 

*Goodwill and Intangible Assets*

 

We account forgoodwill and other intangible assets in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*. Goodwillrepresents the excess of purchase price and related costs over the valueassigned to the net tangible and intangible assets of businesses acquired. Wehave not allocated any amounts related to the Acquisition to goodwill. Ourpolicy is to assess goodwill and intangible assets with indefinite lives in thefourth quarter of each year, and immediately if an indicator of possibleimpairment exists, using a fair-value-based approach. We also evaluate theremaining useful lives of our finite-lived purchased intangible assets todetermine whether any adjustments to the useful lives are necessary.

 

*Deferred Software Costs*

 

We deferinternal-use software costs that benefit future years. These costs areamortized using the straight-line method over the expected life of thesoftware, typically three to five years. “Other assets” in the ConsolidatedBalance Sheets include $3.9 million and $0.7 million of deferredsoftware costs at December 31, 2008 and 2007, respectively. We amortized$0.7 million of deferred software costs for the year ended December 31,2008. For the Predecessor period of January 1 through February 21,2008, and for the years ended December 31, 2007 and 2006, amortization ofdeferred software costs totaled $0.1 million, $0.6 million, and$0.7 million, respectively.

 

*Asset Retirement Obligations*

 

We account forasset retirement obligations in accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations,*and FASB Interpretation (FIN) No. 47*,Accounting for Conditional Asset Retirement Obligations — anInterpretation of FASB Statement No. 143*. This standard affectsprimarily the way we account for landfill closure and closed-site monitoringcosts. We accrue for asset retirement obligations in the period in which theyare incurred if sufficient information is available to reasonably estimate thefair value of the obligation. When we record the liability, we capitalize thecost by increasing the carrying amount of the related long-lived asset. Overtime, the liability is accreted to its settlement value, and the capitalizedcost is depreciated over the useful life of the related asset. Upon settlementof the liability, we will recognize a gain or loss for any difference betweenthe settlement amount and the liability recorded. See Note 11, AssetRetirement Obligations, for additional information.

 

*Taxes Collected*

 

We account fortaxes collected from customers and remitted to governmental authorities inaccordance with EITF 06-3, *How TaxesCollected From Customers and Remitted to Governmental*

 

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*AuthoritiesShould Be Presented in the Income Statement (That Is, Gross Versus NetPresentation)*. We present taxes on a net basis in ourConsolidated Statement of Income (Loss).

 

*Labor Concentration*

 

As of December 31,2008, we had approximately 4,510 employees. Approximately 2,710, or 60%,of these employees work pursuant to collective bargaining agreements. In firstquarter 2009, we will start negotiating labor contracts at our packagingplant in Salem, Oregon (92 employees represented by the Association ofWestern Pulp & Paper Workers), which expired in December 2008,and at our paper mill in Wallula, Washington (332 employees represented bythe AWPPW), which expires mid-March 2009. During labor negotiations withour collective bargaining units, we could experience work interruptions, whichcould significantly increase our labor costs, prevent us from meeting customerdemand, or reduce our sales and profitability.

 

*New and Recently Adopted Accounting Standards*

 

In December 2008,the FASB issued FASB Staff Position (FSP) FAS 132(R)-1, *Employer’s Disclosures About Postretirement BenefitPlan Assets.* This FSP amends SFAS No. 132 (Revised 2003), *Employers’ Disclosures About Pensions and OtherPostretirement Benefits,* to provide guidance on an employer’sdisclosures about plan assets of a defined benefit pension or otherpostretirement plan. The FSP is effective for fiscal years ending after December 15,2009. The adoption will affect our disclosures only and will have no effect onour financial position or results of operations.

 

In October 2008,the FASB issued FSP No. 157-3, *Determiningthe Fair Value of a Financial Asset When the Market for That Asset Is NotActive*, which clarifies the application of SFAS No. 157 in amarket that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. FSP No. 157-3 becameeffective in October 2008, and its adoption did not have a material impacton our financial position or results of operations.

 

In June 2008,the FASB issued FSP No. EITF 03-6-1, *DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities*. FSP No. EITF 03-6-1 states thatunvested share-based payment awards that contain nonforfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per share pursuantto the two-class method. FSP No. EITF 03-6-1 is effective forfinancial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. All prior-periodearnings-per-share data presented shall be adjusted retrospectively (includinginterim financial statements, summaries of earnings, and selected financialdata) to conform with the provisions of this staff position. Early applicationis not permitted. We currently do not have any share-based awards that wouldqualify as participating securities. Therefore, adoption of this FSP did nothave a material impact on our financial position, results of operations, orearnings per share.

 

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. generallyaccepted accounting principles. SFAS No. 162 became effective on November 15,2008. Adoption did not have a material impact on our financial position orresults of operations.

 

In April 2008,the FASB issued FSP No. FAS 142-3, *Determinationof the Useful Life of Intangible Assets.* FSP No. FAS 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible asset

 

13

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under FASB Statement No. 142,*Goodwill and Other Intangible Assets*.This new guidance also provides additional disclosure requirements related torecognized intangible assets. We adopted FSP No. FAS 142-3 in January 2009,and it did not have a material impact on our financial position or results ofoperations.

 

In March 2008,the FASB issued SFAS No. 161, *DisclosuresAbout Derivative Instruments and Hedging Activities*. SFAS No. 161requires enhanced disclosures about derivative instruments and hedging activitiesto enable investors to better understand their effects on financial position,financial performance, and cash flows. These requirements include thedisclosure of the fair values of derivative instruments and their gains andlosses in a tabular format. We adopted SFAS No. 161 in January 2009,and it had no effect on our financial position or results of operations.

 

In January 2008,we adopted SFAS No. 157, *Fair ValueMeasurements*. The adoption did not have a material affect on ourfinancial 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 13, FinancialInstruments, we expanded our disclosures about fair value measurements. Inaccordance with the provisions of FSP No. 157-2, *Effective Date of FASB Statement No. 157*,we have elected to defer implementation of SFAS No. 157 as it relates tononfinancial assets and nonfinancial liabilities that are recognized anddisclosed at fair value in the financial statements on a nonrecurring basisuntil January 1, 2009.

 

In December 2007,the FASB issued SFAS No. 141(R), *BusinessCombinations,* and SFAS No. 160, *Accounting and Reporting of Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of Accounting Research Bulletin No. 51.*These new standards will significantly change the accounting for and reportingof business combination transactions and noncontrolling (minority) interests inconsolidated financial statements. We adopted SFAS Nos. 141(R) and160 on January 1, 2009. The impact of adopting these standards will belimited to business combinations occurring on or after January 1, 2009.

 

*Reclassifications*

 

Certainamounts in prior periods’ consolidated financial statements have beenreclassified to conform with the current period’s presentation.

 

***3.******                                      Acquisitionof Boise Cascade’s Paper and Packaging Operations***

 

On February 22,2008, we acquired the paper, packaging, and most of the corporate and othersegments of Boise Cascade for cash and securities. We have four pulp and papermills, one paper mill, five corrugated container plants, a corrugated sheetfeeder plant, and two paper distribution facilities located in the UnitedStates. Our corporate headquarters office is in Boise, Idaho.

 

TheAcquisition was accounted for in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 141, *Business Combinations*. Upon completion of the transaction,Boise Cascade owned 37.9 million, or 49%, of our outstanding shares.Subsequent to the transaction, Boise Cascade transferred the shares to itsparent company, Boise Cascade Holdings, L.L.C.

 

14

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The purchaseprice was paid with cash, the issuance of shares of our common stock, and anote payable. These costs, including direct transaction costs and purchaseprice adjustments, are summarized as follows:

 
| ** **                                               | ** ** | **February 22,  2008** | ** **    |
|----------------------------------------------------------|------------|-----------------------------|---------------|
| ** **                                               | ** ** | **(thousands)**             | ** **    |
|                                                     |       |                        |          |
| Cash paid to Boise Cascade                               |       | $                           | 1,252,281     |   |
| Cash paid to Boise Cascade for financing  and other fees |       | 24,915                      |          |
| Less: cash contributed by Boise Cascade                  |       | (38,000                     | )             |
| Net cash                                                 |       | 1,239,196                   |          |
| Equity at $9.15 average price per share                  |       | 346,395                     |          |
| Lack of marketability discount                           |       | (41,567                     | )             |
| Total equity                                             |       | 304,828                     |          |
| Note payable to Boise Cascade at closing                 |       | 41,000                      |          |
| Working capital adjustment                               |       | 17,334                      |          |
| Total note payable to Boise Cascade                      |       | 58,334                      |          |
| Fees and expenses                                        |       | 61,785                      |          |
| Total purchase price                                     | ** ** | **$**                       | **1,664,143** | ** ** |

 

*Cash*

 

Upon closing,we paid Boise Cascade $1,252.3 million in cash related to the basepurchase price plus $24.9 million incurred by Boise Cascade fortransaction financing costs and fees. Immediately prior to the Acquisition,Boise Cascade contributed $38.0 million of cash to the acquiredbusinesses.

 

*Equity*

 

The number ofshares issued to Boise Cascade totaled 37,857,374. The equity price per sharewas calculated based on the average per-share closing price of our common stockfor the 20 trading days ending on the third trading day immediately prior tothe consummation of the Acquisition. Since that average price was below the$9.54 floor provided in the purchase agreement, we determined a new measurementdate in accordance with Issue No. 2 of EITF 99-12, *Determination of the Measurement Date for the MarketPrice of Acquirer Securities Issued in a Purchase Business Combination*.We calculated a $9.15 average price per share based on two days before andafter the Acquisition measurement date, which was February 14, 2008. Thevalue of stock consideration paid to Boise Cascade was reduced by a 12%discount for lack of marketability.

 

*Note Payable*

 

In connectionwith the Acquisition, Boise Inc. issued a $41.0 million subordinatedpromissory note to Boise Cascade. After the Acquisition, and pursuant to thepurchase agreement, the note was amended to increase the amount payable to$58.3 million effective February 22, 2008. The increase of the notereflects $17.3 million of postclosing working capital adjustments in Boise

 

15

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Cascade’s favor. After thetransaction, Boise Cascade transferred the note payable to its parent, BoiseCascade Holdings, L.L.C., and on June 10, 2008, Boise CascadeHoldings, L.L.C., sold the note payable to eight individual parties for$53.8 million, including accrued interest but before transaction costs.The full amount of the original note, as amended, together with accrued andunpaid interest from March 31, 2008, is now represented by eight separatenotes payable, each with terms (other than the amount) identical to theoriginal note payable. Because none of the eight holders of the notes arerelated to either Boise Inc. or Boise Cascade, we no longer record thenotes as related-party notes payable on our Consolidated Balance Sheet. SeeNote 5, Transactions With Related Parties, and Note 12, Debt, forfurther information on the notes.

 

Fees andexpenses consist primarily of debt issuance fees and direct costs of thetransaction.

 

The followingtable summarizes the fair value allocation of the assets acquired andliabilities assumed in the Acquisition as of December 31, 2008:

 
| ** **               | ** ** | **February 22,  2008,  Fair Value** | ** **    |
|--------------------------|------------|-----------------------------------------------|---------------|
| ** **               | ** ** | **(thousands)**                               | ** **    |
| ** **               | ** ** | ** **                                    | ** **    |
| Current assets           |       | $                                             | 571,936       |   |
| Property and equipment   |       | 1,306,070                                     |          |
| Fiber farms and deposits |       | 11,006                                        |          |
| Intangible assets:       |       |                                          |          |
| Trademark and trade name |       | 16,800                                        |          |
| Customer list            |       | 13,700                                        |          |
| Technology               |       | 6,860                                         |          |
| Deferred financing costs |       | 81,898                                        |          |
| Other long-term assets   |       | 4,465                                         |          |
| Current liabilities      |       | (246,928                                      | )             |
| Long-term liabilities    |       | (101,664                                      | )             |
| Total purchase price     | ** ** | **$**                                         | **1,664,143** | ** ** |

 

The followingpro forma results are based on the individual historical results ofBoise Inc. and the Predecessor (prior to the Acquisition on February 22,2008) with adjustments to give effect to the combined operations as if theAcquisition had been consummated on January 1, 2007. The pro forma resultsare intended for information purposes only and do not purport to represent whatthe combined companies’ results of operations would actually have been had thetransaction in fact occurred on January 1, 2007.

 
| ** **                                  | ** ** | **Pro Forma**                      | ** ** |
|---------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                  | ** ** | **Year  Ended  December 31**       | ** ** |
| ** **                                  | ** ** | **2008**                                | ** ** | **2007** | ** ** |
|                                        |       | **(thousands,  except per-share data)** |       |
|                                        |       |                                    |       |   |   |
| Sales                                       |       | $                                       | 2,430,552  |   | $ | 2,332,603 |   |
| Net loss                                    |       | (56,516                                 | )          | (1,418 | ) |
| Net loss per share – basic and diluted |       | (0.73                                   | )          | (0.02 | ) |
|                                             |            |                                         |            |  |  |  |  |

 

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***4.******                                      NetIncome (Loss) Per Common Share***

 

For the year ended December 31, 2008, and the period of February 1(Inception) through December 31, 2007, when we had publicly traded sharesoutstanding, net income (loss) per common share is computed by dividing netincome (loss) by the weighted average number of shares of common stockoutstanding during the period. Basic and diluted net income (loss) per share iscalculated as follows:

 
| ** **                                                                       | ** ** | **Boise Inc.**                                   | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Year  Ended  December 31,  2008**              | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** ** |
| ** **                                                                       | ** ** | **(thousands, except per-share data)** | ** ** |
|                                                                             |       |                                                  |       |   |   |
| Net income (loss)                                                                |       | $                                                     | (45,523    | ) | $ | 5,492 |   |
| Weighted average number of common shares  for basic net income (loss) per share  |       | 73,636                                                |       | 34,273 |   |
| Incremental effect of dilutive common stock  equivalents:                        |       |                                                  |       |   |   |
| Common stock warrants (a) (b)                                               |       | —                                                |       | — |   |
| Restricted stock (c)                                                             |       | —                                                |       | — |   |
| Restricted stock units (c)                                                       |       | —                                                |       | — |   |
| Weighted average number of shares for  diluted net income (loss) per share       |       | 73,636                                                |       | 34,273 |   |
| Net income (loss) per share — basic  and diluted (a) (b) (c) | ** ** | **$**                                                 | **(0.62**  | **)** | **$** | **0.16** | ** ** |

 

----

(a)                                  Warrantsto purchase 44.4 million shares of common stock for the year ended December 31,2008, were not included in the computation of diluted net income (loss) pershare because the exercise price exceeded the average market price of ourcommon stock.

 

(b)                                 Warrantsto purchase 44.4 million shares of common stock for the period of February 1(Inception) through December 31, 2007, were not included in thecomputation of diluted net income per share because the warrants werecontingently exercisable.

 

(c)                                  Restrictedstock and restricted stock units for the year ended December 31, 2008,were not included in the computation of diluted net loss per share becauseinclusion of these amounts would be antidilutive.

 

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

 

During thePredecessor periods of January 1 through February 21, 2008, and theyears ended December 31, 2007 and 2006, the Predecessor participated inBoise Cascade’s centralized cash management system. Cash receipts attributableto the Predecessor’s operations were collected by Boise Cascade, and cashdisbursements were funded by Boise Cascade. The net effect of thesetransactions has been reflected as “Net equity transactions with relatedparties” in the Consolidated

 

17

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Statements of Cash Flows andConsolidated Statements of Stockholders’ Equity. The following table includesthe components of these related-party transactions:

 
| ** **                                               | ** ** | **Predecessor**                                      | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| ** **                                               | ** ** | **(thousands)**                                      | ** ** |
|                                                     |       |                                                 |       |   |   |   |   |
| Cash collections                                         |       | $                                                    | (354,222   | ) | $ | (2,343,598 | ) | $ | (2,219,907 | ) |
| Payment of accounts payable                              |       | 336,605                                              |       | 2,094,226 |   | 2,021,972 |   |
| Capital expenditures and acquisitions                    |       | 10,168                                               |       | 141,801 |   | 151,682 |   |
| Income taxes                                             |       | 217                                                  |       | 1,990 |   | 2,604 |   |
| Corporate general and administrative  expense allocation |       | 1,995                                                |       | 15,161 |   | 16,659 |   |
| Net equity transactions with related  parties            | ** ** | **$**                                                | **(5,237** | **)** | **$** | **(90,420** | **)** | **$** | **(26,990** | **)** |

 

*Related-Party Sales*

 

During thePredecessor periods of January 1 through February 21, 2008, and theyears ended December 31, 2007 and 2006, the Predecessor sold paper andpaper products to OfficeMax Incorporated (OfficeMax) at sales prices that weredesigned to approximate market prices. For the Predecessor periods of January 1through February 21, 2008, and the years ended December 31, 2007 and2006, sales to OfficeMax were $90.1 million, $615.7 million, and$575.9 million, respectively. During each of these periods, sales toOfficeMax represented 25%, 26%, and 26% of total sales, respectively. Thesesales are included in “Sales, Related parties” in the Consolidated Statementsof Income (Loss). Subsequent to the Acquisition, OfficeMax is no longer arelated party. During the year ended December 31, 2008, Boise Inc.sales to OfficeMax were $494.6 million, or 24% of total sales.

 

Boise Inc.and the Predecessor provided transportation services to Boise Cascade. For theyear ended December 31, 2008, Boise Inc. recorded $3.4 millionof sales for transportation services. For the period of January 1 through February 21,2008, and the years ended December 31, 2007 and 2006, the Predecessorrecorded $0.6 million, $5.0 million, and $5.6 million,respectively, of sales for transportation services. During these same periods,the Predecessor sold $10.8 million, $75.3 million, and$73.0 million of wood to Boise Cascade. These sales are included in “Sales,Related parties” in the Consolidated Statements of Income (Loss).

 

In connectionwith the Acquisition, we entered into an outsourcing services agreement underwhich we provide a number of corporate staff services to Boise Cascade at ourcost. These services include information technology, accounting, and humanresource services. The initial term of the agreement is for three years. It willautomatically renew for one-year terms unless either party provides notice oftermination to the other party at least 12 months in advance of theapplicable term. For the year ended December 31, 2008, we recognized$12.1 million in “Sales, Related parties” and the same amounts in “Costand expenses” in our Consolidated Statements of Income (Loss) related to thisagreement.

 

Subsequent tothe Acquisition, Louisiana Timber Procurement Company, L.L.C., a fullyconsolidated entity, began selling chips and logs to Boise Cascade. During theyear ended December 31, 2008, we recorded $64.9 million of sales toBoise Cascade in “Sales, Related

 

18

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parties” in the ConsolidatedStatements of Income (Loss) and recorded approximately the same amounts ofexpenses in “Materials, labor, and other operating expenses.”

 

*Related-Party Costs and Expenses*

 

Boise Inc.and the Predecessor purchased fiber from related parties at prices thatapproximated market prices. For the year ended December 31, 2008,Boise Inc. recorded $54.6 million of fiber purchases from relatedparties. During the Predecessor periods of January 1 through February 21,2008, and the years ended December 31, 2007 and 2006, fiber purchases fromrelated parties were $7.7 million, $39.4 million, and$30.4 million, respectively. Most of these purchases related to chip andlog purchases from Boise Cascade’s wood products business. All of the costsassociated with these purchases were recorded as “Fiber costs from relatedparties” in the Consolidated Statements of Income (Loss).

 

During thePredecessor periods, the Predecessor used services and administrative staff ofBoise Cascade. These services included, but were not limited to, finance,accounting, legal, information technology, and human resource functions. Thecosts not specifically identifiable to the Predecessor were allocated basedprimarily on average sales, assets, and labor costs. These costs are includedin “General and administrative expenses” in the Consolidated Statements ofIncome (Loss). The Predecessor believes the allocations are a reasonablereflection of its use of the services. However, had the Predecessor operated ona stand-alone basis, it estimates that its Corporate and Other segment wouldhave reported approximately $2.5 million, $18 million, and$18 million of segment expenses before interest, taxes, depreciation, andamortization for the Predecessor periods of January 1 through February 21,2008, and the years ended December 31, 2007 and 2006, respectively.

 

During thePredecessor periods, some of the Predecessor’s employees participated in BoiseCascade’s noncontributory defined benefit pension and contributory definedcontribution savings plans. The Predecessor treated its participants in thepension plans as participants in multiemployer plans. Accordingly, thePredecessor has not reflected any assets or liabilities related to the plans onthe Consolidated Balance Sheet at December 31, 2007. The Predecessor,however, recorded costs associated with the employees who participated in theseplans in the Consolidated Statements of Income (Loss). For the Predecessorperiods of January 1 through February 21, 2008, and the years ended December 31,2007 and 2006, the Statements of Income (Loss) included $3.9 million,$22.4 million, and $21.9 million, respectively, of expensesattributable to its participation in Boise Cascade’s defined benefit anddefined contribution plans.

 

During thePredecessor periods presented, the Predecessor’s employees and former employeesalso participated in Boise Cascade’s other postretirement healthcare benefitplans. All of the Predecessor’s postretirement healthcare benefit plans wereunfunded (see Note 14, Retirement and Benefit Plans). In addition, some ofthe Predecessor’s employees participated in equity compensation programs.

 

*Note Payable*

 

In connectionwith the Acquisition, we issued a $41.0 million subordinated promissorynote to Boise Cascade. After the Acquisition, and pursuant to the purchaseagreement, the note was amended to increase the amount payable to$58.3 million effective February 22, 2008. The increase of the notereflects $17.3 million of postclosing working capital adjustments in BoiseCascade’s favor. The note bears interest at 15.75% compounded quarterly. To theextent that interest is not paid in cash, interest will be added to theprincipal amount of the note. The note matures on August 21, 2015,provided that if such date is more than 181 days after the scheduledmaturity date of the indebtedness under our credit agreements, then thematurity date shall automatically be

 

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deemed to be 181 daysafter the latest maturity date of any such indebtedness. We may prepay the noteat any time, in whole or in part, subject to restrictions contained in ourcredit agreements.

 

After thetransaction, Boise Cascade transferred the note payable to its parent, BoiseCascade Holdings, L.L.C., and on June 10, 2008, Boise CascadeHoldings, L.L.C., sold the note payable to eight individual parties for$53.8 million, including accrued interest but before transaction costs.The full amount of the original note, as amended, together with accrued andunpaid interest from March 31, 2008, is now represented by eight separatenotes payable, each with terms (other than the amount) identical to theoriginal note payable. Because none of the eight holders of the notes arerelated to either Boise Inc. or Boise Cascade, we no longer record thenotes as related-party notes on our Consolidated Balance Sheet.

 

In 2008, priorto the sale of the note, we recorded $2.8 million of related-partyinterest expense in “Interest expense” in our Consolidated Statements of Income(Loss). At December 31, 2008, we had $66.6 million recorded in “Notespayable” on our Consolidated Balance Sheet.

 

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

 

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

 
| ** **                             | ** ** | **Boise Inc.**                      | ** ** | **Predecessor**                                      | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                             | ** ** | **Year  Ended  December 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| Changes in supplemental pension plans  |       | $                                        | (2,914     | )                                                    | $          | — |   | $ | — |   | $ | — |   |
| Changes in retiree healthcare programs |       | —                                   |       | —                                               |       | (4,367 | ) | (3,741 | ) |
| Sales of assets, net                   |       | —                                   |       | (941                                                 | )          | (231 | ) | 3,019 |   |
| Closure costs                          |       | —                                   |       | —                                               |       | 119 |   | — |   |
| Project costs                          |       | 248                                      |       | —                                               |       | 276 |   | 2,771 |   |
| Other, net                             |       | (314                                     | )          | (48                                                  | )          | 61 |   | 675 |   |
| ** **                             | ** ** | **$**                                    | **(2,980** | **)**                                                | **$**      | **(989** | **)** | **$** | **(4,142** | **)** | **$** | **2,724** |   |

 

During theperiod of February 1 (Inception) through December 31, 2007, “Other(income) expense, net” was zero.

 

***7.******                                      IncomeTaxes***

 

For the yearended December 31, 2008, our effective tax benefit rate was 16.2%. Theprimary reason for the difference from the federal statutory income tax rate of35.0% is due to the valuation allowance we recorded during 2008. The effectivetax rate for the period of February 1 (Inception) through December 31,2007, was 45.5%. The primary reason for the difference from the federalstatutory income tax rate of 34.0% is due to the effect of state and localincome taxes.

 

During thePredecessor periods of January 1 through February 21, 2008, and theyears ended December 31, 2007 and 2006, the majority of the Predecessorbusinesses and assets were held and operated by limited liability companies,which are not subject to entity-level federal or state income taxation. For theseparate Predecessor subsidiaries that are taxed as corporations, the effectivetax rates were 37.6%, 44.1%, and 37.4%, respectively. During these periods, theprimary reason for the difference in tax rates is the effect of state incometaxes.

 

20

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The income taxbenefit or provision differs from the amount computed using the federalstatutory income tax rate as follows:

 
| ** **                                                            | ** ** | **Boise Inc.**                          | ** ** | **Predecessor**                                                    | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Year Ended  December 31,  2008** | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year Ended  December 31,  2007** | ** ** | **Year Ended  December 31,  2006** | ** ** |
| Federal statutory tax rate                                            |       | 35.0                                         | %          | 34.0                                                               | %          | 34.0 | % | 34.0 | % | 34.0 | % |
| State income taxes, net of federal income  tax benefit                |       | 3.4                                          |       | 11.5                                                               |       | 3.6 |   | 6.2 |   | 5.6 |   |
| Nondeductible interest on applicable  high-yield discount obligations |       | (2.1                                         | )          | —                                                             |       | — |   | — |   | — |   |
| Valuation allowance                                                   |       | (20.0                                        | )          | —                                                             |       | — |   | — |   | — |   |
| Other                                                                 |       | (0.1                                         | )          | —                                                             |       | — |   | 3.9 |   | (2.2 | ) |
| ** **                                                            | ** ** | **16.2**                                     | **%**      | **45.5**                                                           | **%**      | **37.6** | **%** | **44.1** | **%** | **37.4** | % |

 

The income tax benefit(provision) shown in the Consolidated Statements of Income (Loss) includes thefollowing:

 
| ** **                                 | ** ** | **Boise Inc.**                          | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                 | ** ** | **Year Ended  December 31,  2008** | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** ** |
| ** **                                 | ** ** | **(thousands)**                              | ** ** |
|                                       |       |                                         |       |   |   |
| Current income tax benefit (provision)     |       |                                         |       |   |   |
| Federal                                    |       | $                                            | (578       | ) | $ | (2,913 | ) |
| State                                      |       | 2                                            |       | (1,762 | ) |
| Foreign                                    |       | (15                                          | )          | — |   |
| Total current                              |       | (591                                         | )          | (4,675 | ) |
| Deferred income tax benefit (provision)    |       |                                         |       |   |   |
| Federal                                    |       | 8,778                                        |       | 85 |   |
| State                                      |       | 585                                          |       | — |   |
| Foreign                                    |       | —                                       |       | — |   |
| Total deferred                             |       | 9,363                                        |       | 85 |   |
| Total benefit (provision) for income taxes | ** ** | **$**                                        | **8,772**  | ** ** | **$** | **(4,590** | **)** |

 

During theyear ended December 31, 2008, cash paid for taxes, net of refundsreceived, was $1.4 million. During the period of February 1(Inception) through December 31, 2007, we made $3.4 million of taxpayments. During the Predecessor period of January 1 through February 21,2008, cash paid for taxes, net of refunds received, was immaterial. Cash paidfor taxes, net of refunds received, was $2.3 million and $2.8 millionduring the Predecessor years ended December 31, 2007 and 2006,respectively.

 

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A reconciliation of the statutory U.S. federal tax benefit (provision)and the reported tax benefit (provision) is as follows:

 
| ** **                                                            | ** ** | **Boise Inc.**                          | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                            | ** ** | **Year Ended  December 31,  2008** | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** ** |
| ** **                                                            | ** ** | **(thousands)**                              | ** ** |
|                                                                  |       |                                         |       |   |   |
| Statutory tax benefit (provision)                                     |       | $                                            | 19,003     |   | $ | (3,428 | ) |
| State taxes                                                           |       | 1,845                                        |       | (1,162 | ) |
| Nondeductible interest on applicable  high-yield discount obligations |       | (1,167                                       | )          | — |   |
| Valuation allowance                                                   |       | (10,884                                      | )          | — |   |
| Other                                                                 |       | (25                                          | )          | — |   |
| Reported tax (provision) benefit                                      | ** ** | **$**                                        | **8,772**  | ** ** | **$** | **(4,590** | **)** |

 

At December 31,2008, we had $0.8 million of alternative minimum tax credits, which may becarried forward indefinitely. At December 31, 2008, we had$34.9 million of federal net operating losses, of which we will carry back$8.6 million to 2007. We will carry forward the remaining loss, whichexpires in 2028. At December 31, 2008, we had a $2.0 million statenet operating loss carryover, which expires between 2013 and 2028. We haveplaced a valuation allowance on a significant portion of the net operating losscarryovers, as the realization of these benefits is not more likely than not.

 

The componentsof the net deferred tax liability/asset in the Consolidated Balance Sheets areas follows:

 
| ** **                                              | ** ** | **Boise Inc.  December 31** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                              | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | **Assets**                            | ** ** | **Liabilities** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|                                                    |       | **(thousands)**                       |       |
|                                                    |       |                                  |       |   |   |   |   |   |   |
| Employee benefits                                       |       | $                                     | 73,241     |   | $ | 31 |   | $ | — |   | $ | — |   |
| Property and equipment                                  |       | —                                |       | 48,989 |   | — |   | — |   |
| Intangible assets and other                             |       | 395                                   |       | 13,576 |   | — |   | — |   |
| Net operating loss                                      |       | 13,523                                |       | — |   | — |   | — |   |
| Alternative minimum tax                                 |       | 843                                   |       | — |   | — |   | — |   |
| Reserves                                                |       | 5,528                                 |       | — |   | — |   | — |   |
| Inventories                                             |       | 7,249                                 |       | — |   | — |   | — |   |
| Interest on applicable high-yield discount  obligations |       | 1,912                                 |       | — |   | — |   | — |   |
| Other                                                   |       | 2,280                                 |       | 1,901 |   | 120 |   | — |   |
| Valuation allowance                                     |       | (44,063                               | )          | — |   | (35 | ) | — |   |
| ** **                                              | ** ** | **$**                                 | **60,908** | ** ** | **$** | **64,497** | ** ** | **$** | **85** | ** ** | **$** | **—** |   |

 

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At December 31,2008 and 2007, we had the following deferred tax balances on the ConsolidatedBalance Sheets:

 
| ** **                                    | ** ** | **Boise Inc.  Years Ended  December 31** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(thousands)**                                         | ** ** |
|                                          |       |                                                    |       |   |   |
| Current deferred tax assets, net              |       | $                                                       | 5,318      |   | $ | 85 |   |
| Noncurrent deferred tax liabilities, net      |       | (8,907                                                  | )          | — |   |
| Total deferred tax assets (liabilities),  net | ** ** | **$**                                                   | **(3,589** | **)** | **$** | **85** | ** ** |

 

Deferred tax assets are reducedby a valuation allowance when it is more likely than not that some portion ofthe deferred tax assets will not be realized. At December 31, 2008, werecorded a $10.9 million valuation allowance, related primarily to federaland state net operating losses, because we believe that it is not more likelythan not that we will be able to use the net operating loss carry forwardsbefore they expire. At December 31, 2008, we also recorded a$32.9 million and a $0.3 million valuation allowance in “Accumulatedother comprehensive income” on our Consolidated Balance Sheet against ourpension liability and cash flow hedges, respectively. At December 31,2007, we recorded a $35,000 valuation allowance against our state and localdeferred tax asset, because we believed it was more likely than not thatsufficient taxable income would not be generated to fully utilize this asset.

 

At December 31,2007, the Predecessor had $661,000 of deferred tax liability related to itsseparate subsidiaries recorded on the Consolidated Balance Sheet. Because ofits pass-through tax structure, the Predecessor recorded tax expense relatedonly to small subsidiaries that are taxed as corporations. At December 31,2007, the Predecessor’s tax basis was $467.6 million lower than thereported amount of net assets recorded on the Consolidated Balance Sheet dueprimarily to accelerated depreciation recorded for tax purposes.

 

Pretax income (loss) from domestic andforeign sources is as follows:

 
| ** **           | ** ** | **Boise Inc.**                          | ** **  |
|----------------------|------------|----------------------------------------------|-------------|
| ** **           | ** ** | **Year Ended  December 31,  2008** | ** **  | **February 1  (Inception)  Through  December 31,  2007** | ** ** |
| ** **           | ** ** | **(thousands)**                              | ** **  |
|                 |       |                                         |        |   |   |
| Domestic             |       | $                                            | (54,306     | ) | $ | 10,082 |   |
| Foreign              |       | 11                                           |        | — |   |
| Pretax income (loss) | ** ** | **$**                                        | **(54,295** | **)** | **$** | **10,082** | ** ** |

 

At December 31,2008, our foreign subsidiaries had no undistributed earnings that had beenindefinitely reinvested.

 

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*FIN No. 48*

 

At our inception, we adopted the provisions of FIN No. 48, *Accounting for Uncertainty in Income Taxes — anInterpretation of FASB Statement No. 109*, and it did not have asignificant impact on our financial position or results of operations. At December 31,2008, we had an insignificant amount of unrecognized tax benefits, none ofwhich would affect our effective tax rate if recognized. We do not anticipatethat the amount of unrecognized tax benefits will significantly increase ordecrease within the next 12 months. Our policy is to recognize interestand penalties on unrecognized tax benefits in “Income tax provision” in theConsolidated Statements of Income (Loss). For the year ended December 31,2008 and the period of February 1 (Inception) through December 31,2007, we recognized an insignificant amount of interest and penalties.

 

In the normal course of business, we are subject to examination bytaxing authorities. Boise Inc.’s open tax years are 2007 and 2008.

 

As part of the purchase price of the Acquisition, Aldabra 2 AcquisitionCorp. purchased the stock of two separate corporate entities. Thesecorporations are wholly owned, consolidated entities of Boise Inc. Thesecorporations, in the normal course of business, are subject to examination bytaxing authorities, and their open tax years are 2005 through current. Thestatute of limitations for 2004 expired this year. Any tax adjustments incurredby an examination are the responsibility of Boise Inc. Boise Inc. iscurrently under audit for one of these corporate entities, Boise CascadeTransportation Holdings Corp., for the 2006 tax year. The audit began at theend of December 2008. We do not expect any material adjustments from thisaudit.

 

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

 

We lease our distribution centers, as well as other property andequipment, under operating leases. During the Predecessor periods presented,the Predecessor leased its distribution centers, as well as other property andequipment, under operating leases. For purposes of determining straight-linerent expense, the lease term is calculated from the date of possession of thefacility, including any periods of free rent and any option periods that arereasonably assured of being exercised. Straight-line rent expense is alsoadjusted to reflect any allowances or reimbursements provided by the lessor.Rental expense and sublease income for operating leases were as follows (inthousands):

 
| ** **             | ** ** | **Boise Inc.**                          | ** ** | ** **                                                         | **Predecessor** | ** ** |
|------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------|-----------------|------------|
| ** **             | ** ** | **Year Ended  December 31,  2008** | ** ** | **February 1  (Inception)  Through  December 31,  2007** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year Ended  December 31,  2007** | ** ** | **Year Ended  December 31,  2006** | ** ** |
| Rental expense         |       | $                                            | 13,523     |                                                               | $               | —     |   |   | $ | 2,044 |   | $ | 13,314 |   | $ | 11,172 |   |
| Sublease rental income |       | —                                       |       | —                                                             |            |       | — |   | 5 |   | — |   |
|                        |            |                                              |            |                                                                    |                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

For noncancelable operating leases with remaining terms of more thanone year, the minimum lease payment requirements are $12.1 million in2009, $11.6 million in 2010, $10.7 million in 2011, $9.9 millionin 2012, $8.1 million in 2013, and $6.8 million in 2014, with totalpayments thereafter of $19.2 million. These future minimum lease paymentrequirements have not been reduced by sublease rentals due in the future undernoncancelable subleases. Minimum sublease rental income received in the futureis not expected to be material.

 

Substantially all lease agreements have fixed payment terms based onthe passage of time. Some lease agreements provide us with the option topurchase the leased property. Additionally,

 

24

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someagreements contain renewal options averaging seven years, with fixed paymentterms similar to those in the original lease agreements.

 

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

 

We have a large, diversified customer base. A large portion of ouruncoated freesheet and office paper sales volume is sold to OfficeMax.Throughout 2008, we (as did the Predecessor) marketed our newsprint throughAbitibi Consolidated Sales Corporation (ACSC), an indirect subsidiary ofAbitibiBowater Inc. We terminated this arrangement with ACSC in late February 2009,and now market newsprint using our own sales personnel. Sales to OfficeMax andACSC have represented, and OfficeMax will continue to represent, concentrationsin the volumes of business transacted and concentrations of credit risk. At December 31,2008, we had $30.3 million and $32.4 million of accounts receivabledue from OfficeMax and ACSC, respectively. The Predecessor had$36.0 million and $27.9 million of accounts receivable due fromOfficeMax and ACSC, respectively, at December 31, 2007.

 

During the Predecessor periods presented, a large portion of thereceivables were used to secure borrowings under Boise Cascade’s accountsreceivable securitization program. The Predecessor consolidated financialstatements do not include an allocation of the secured borrowings or costsunder the program because none of the debt was specifically identified ascorporate advances to or borrowings by the Predecessor.

 

***10.******                               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 account for acquisitions using the purchase method of accounting. Asa result, we allocate the purchase price to the tangible and intangible assetsacquired and liabilities assumed based on their respective fair values as ofthe date of acquisition.

 

We have not allocated any amounts related to the Acquisition togoodwill. Previously recorded goodwill of the Predecessor of approximately$42.2 million at December 31, 2007, was eliminated as part of thepurchase price allocation.

 

Intangible assets represent the values assigned to the trademark andtrade name, customer relationships, and technology in connection with theAcquisition. Customer relationships will be amortized over approximately tenyears, and technology will be amortized over five years. The trademark andtrade name are not amortized. During the year ended December 31, 2008,intangible asset amortization was $2.3 million. During the Predecessorperiods of January 1 through February 21, 2008, and the years ended December 31,2007 and 2006, intangible asset amortization was zero, $3.5 million, and$3.6 million, respectively. Our estimated amortization

 

25

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expense is$2.7 million in 2009, 2010, 2011, and 2012, $1.6 million in 2013, and$1.4 million in 2014.

 
| ** **               | ** ** | **Boise Inc.**                                  | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **Year Ended December 31, 2008** | ** ** |
| ** **               | ** ** | **Gross Carrying  Amount**                      | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **               | ** ** | **(thousands)**                                      | ** ** |
| ** **               | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trademark and trade name |       | $                                                    | 16,800     |   | $ | — |   | $ | 16,800 |   |
| Customer relationships   |       | 13,700                                               |       | (1,142 | ) | 12,558 |   |
| Technology               |       | 6,860                                                |       | (1,143 | ) | 5,717 |   |
| ** **               | ** ** | **$**                                                | **37,360** | ** ** | **$** | **(2,285** | **)** | **$** | **35,075** |   |

 
| ** **                 | ** ** | **Predecessor**                                      | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **Year Ended December 31, 2007** | ** ** |
| ** **                 | ** ** | **Gross Carrying  Amount**                      | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                 | ** ** | **(thousands)**                                      | ** ** |
| ** **                 | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade names and trademarks |       | $                                                    | 15,800     |   | $ | (599 | ) | $ | 15,201 |   |
| Customer relationships     |       | 11,300                                               |       | (4,540 | ) | 6,760 |   |
| Noncompete agreements      |       | 1,200                                                |       | (1,200 | ) | — |   |
| Technology                 |       | 5,043                                                |       | (3,037 | ) | 2,006 |   |
| ** **                 | ** ** | **$**                                                | **33,343** | ** ** | **$** | **(9,376** | **)** | **$** | **23,967** |   |

 

Intangible assets of the Predecessor totaling $24.0 million at December 31,2007, were eliminated as part of the purchase price allocations.

 

Since the Acquisition, the market capitalization of the Company hasdeclined significantly. As of September 30, 2008, this decline wasidentified as a triggering event to assess the long-lived assets for impairmentas outlined in SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*. Accordingly, weperformed an undiscounted cash flow analysis as of September 30, 2008, anddetermined that the value of our long-lived assets was not impaired. In connectionwith this analysis, we also reviewed the carrying value of our trademark andtrade name that have been classified as nonamortizing intangible assets anddetermined that the carrying value of these intangible assets was not impaired.

 

Given the difficult economic conditions that persisted through 2008, weperformed our annual impairment assessment for our indefinite-lived intangibleassets for all of our segments in accordance with the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets.*As the market capitalization of our stock has continued to decline, we haveupdated our annual impairment assessment to December 31, 2008. Based onthe results of our testing, we have concluded that our indefinite-livedintangible assets were not impaired. We have also performed an undiscountedcash flow analysis as of December 31, 2008, and determined that the valueof our long-lived assets was not impaired. We also evaluated the remaininguseful lives of our customer relationships and technology and determined thatno adjustments to the useful lives were necessary.

 

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***11.******                               AssetRetirement Obligations***

 

We account for asset retirement obligations in accordance with SFAS No. 143,*Accounting for Asset Retirement Obligations*,and 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 its settlementvalue, and the capitalized cost is depreciated over the useful life of therelated asset. Upon settlement of the liability, we will recognize a gain orloss for any difference between the settlement amount and the liabilityrecorded.

 

At December 31, 2008, we had $14.3 million of assetretirement obligations recorded on the Consolidated Balance Sheet. At December 31,2007, the Predecessor had $13.3 million of asset retirement obligationsrecorded on the Consolidated Balance Sheet. These liabilities related primarilyto landfill closure and closed-site monitoring costs. These liabilities arebased on the best estimate of current costs and are updated periodically toreflect current technology, laws and regulations, inflation, and other economicfactors. No assets are legally restricted for purposes of settling assetretirement obligations. The table below describes changes to the assetretirement obligations for Boise Inc. for the year ended December 31,2008, and the Predecessor year ended December 31, 2007 (in thousands):

 
| ** **                                                            | ** ** | **Boise Inc.**         | ** ** | **Predecessor**             | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
| Asset retirement obligation at beginning of  period                   |       | $                           | —     |                        | $          | 10,771 |   |
| Asset retirement liability recorded in the  purchase price allocation |       | 13,655                      |       | —                      |       |
| Liabilities incurred                                                  |       | 58                          |       | —                      |       |
| Accretion expense                                                     |       | 921                         |       | 869                         |       |
| Payments                                                              |       | (542                        | )          | (37                         | )          |
| Revisions in estimated cash flows                                     |       | 191                         |       | 1,700                       |       |
| Asset retirement obligation at end of  period                         | ** ** | **$**                       | **14,283** | ** **                  | **$**      | **13,303** | ** ** |

 

We have additional asset retirement obligations with indeterminatesettlement dates. The fair value of these asset retirement obligations cannotbe estimated due to the lack of sufficient information to estimate thesettlement dates of the obligations. These asset retirement obligationsinclude, for example, (i) removal and disposal of potentially hazardousmaterials related to equipment and/or an operating facility if the equipmentand/or facilities were to undergo major maintenance, renovation, or demolition;(ii) wastewater treatment ponds that may be required to be drained and/orcleaned if the related operating facility is closed; and (iii) storagesites or owned facilities for which removal and/or disposal of chemicals andother related materials are required if the operating facility is closed. Wewill recognize a liability in the period in which sufficient informationbecomes available to reasonably estimate the fair value of these obligations.

 

27

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***12.******                               Debt***

 

At December 31, 2008, our long-term debt and the interest rates onthat debt were as follows:

 
| ** **                           | ** ** | **December 31, 2008** | ** **    |
|--------------------------------------|------------|---------------------------------|---------------|
| ** **                           | ** ** | **Amount**                      | ** **    | **Interest Rate** | ** ** |
| ** **                           | ** ** | **(thousands)**                 | ** **    | ** ** | ** ** |
| ** **                           | ** ** | ** **                      | ** **    | ** ** | ** ** |
| Revolving credit facility, due 2013  |       | $                               | 60,000        |   | 4.33 | % |
| Tranche A term loan, due 2013   |       | 245,313                         |          | 4.75 | % |
| Tranche B term loan, due 2014   |       | 471,437                         |          | 5.75 | % |
| Second lien term loan, due 2015      |       | 260,700                         |          | 9.25 | % |
| Current portion of long-term debt    |       | (25,822                         | )             | 5.33 | % |
| Long-term debt, less current portion |       | 1,011,628                       |          | 6.34 | % |
| Current portion of long-term debt    |       | 25,822                          |          | 5.33 | % |
|                                 |       | 1,037,450                       |          | 6.31 | % |
| 15.75% notes payable, due 2015       |       | 66,606                          |          | 15.75 | % |
| ** **                           |       | **$**                           | **1,104,056** |   |   |   |

 

Boise Inc. and the Predecessor had no short- or long-term debtoutstanding at December 31, 2007.

 

*Senior Secured Credit Facilities*

 

Our senior secured credit facilities consist of:

 

·                  A five-year nonamortizing$250.0 million senior secured revolving credit facility with interest ateither the London Interbank Offered Rate (LIBOR) plus 325 basis points or acalculated base rate plus 325 basis points (the Revolving Credit Facility and,collectively with the Tranche A Term Loan Facility and the Tranche BTerm Loan Facility, the First Lien Facilities);

 

·                  A five-yearamortizing $250.0 million senior secured Tranche A term loan facilitywith interest at LIBOR plus 325 basis points or a calculated base rate plus 325basis points (the Tranche A Term Loan Facility);

 

·                  A six-yearamortizing $475.0 million senior secured Tranche B term loan facilitywith interest at LIBOR plus 350 basis points (subject to a floor of 4.00%) or acalculated base rate plus 250 basis points (the Tranche B Term LoanFacility); and

 

·                  A seven-yearnonamortizing $260.7 million second lien term loan facility with interestat LIBOR plus 700 basis points (subject to a floor of 5.50%) or a calculatedbase rate plus 600 basis points (the Second Lien Facility and, together withthe First Lien Facilities, the Credit Facilities).

 

All borrowings under the Credit Facilities bear interest at a rate perannum equal to an applicable margin plus a customary base rate or Eurodollarrate. The base rate means, for any day, a rate per annum equal to the greaterof (i) the Prime Rate in effect on such day and (ii) the FederalFunds Effective Rate in effect on such day plus 0.50%. In addition to payinginterest, the Company pays a commitment fee to the lenders under the RevolvingCredit Facility at a rate of 0.50% per annum (which shall be reduced to 0.375%when the leverage ratio is less than 2.25:1.00) times the daily average undrawnportion of the Revolving Credit Facility (reduced by the amount of letters ofcredit issued and outstanding), which fee will accrue from the Acquisitionclosing date and shall be

 

28

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payablequarterly in arrears. At December 31, 2008, we had $60.0 million ofborrowings outstanding under the Revolving Credit Facility. For the year ended December 31,2008, the average interest rate for our borrowings under our Revolving CreditFacility was 6.0%. The minimum and maximum borrowings under the RevolvingCredit Facility were zero and $80.0 million for the year ended December 31,2008. The weighted average amount of borrowings outstanding under the RevolvingCredit Facility during the year ended December 31, 2008, was$57.6 million. At December 31, 2008, we had availability of$163.6 million, which is net of outstanding letters of credit of$26.4 million, above the amount we had borrowed.

 

The loan documentation for the Credit Facilities contains, among otherterms, representations and warranties, covenants, events of default andindemnification customary for loan agreements for similar leveraged acquisitionfinancings, and other representations and warranties, covenants, and events ofdefault deemed by the administrative agent of the First Lien Facilities or theSecond Lien Facility, as applicable, to be appropriate for the specifictransaction.

 

*Covenants*

 

The First and Second Lien Facilities require BZ IntermediateHoldings LLC (Holdings), a wholly owned consolidated entity ofBoise Inc. and the parent company of Boise Paper Holdings, L.L.C.(the Borrower), and its subsidiaries to maintain financial covenant ratios. At December 31,2008, Holdings is required to maintain a minimum interest coverage ratio of2.375:1.00 and a maximum leverage ratio of 4.50:1.00 under the First LienFacilities. The covenant ratios tighten over time. The interest coverage ratiois defined in our loan agreements at the end of any fiscal quarter as the ratioof (i) consolidated adjusted EBITDA for the four-fiscal-quarter periodthen ended to (ii) consolidated interest expense payable in cash for suchfour-fiscal-quarter period. The leverage ratio is defined in our loanagreements at the end of any fiscal quarter as the ratio of (i) consolidatedtotal debt as of such day to (ii) consolidated adjusted EBITDA for the four-fiscal-quarterperiod ending on such date. Differences between our financial statements andHoldings’ financial statements are related primarily to notes payable held byBoise Inc. and the related interest expense on those notes, interestincome, income taxes, and other miscellaneous expenses.

 

The Credit Facilities also limit the ability of Holdings and itssubsidiaries to make capital expenditures, generally to $150 million peryear.

 

*Guarantees*

 

The Company’s obligations under its Credit Facilities are guaranteed byeach of the Borrower’s existing and subsequently acquired domestic (and, to theextent no material adverse tax consequences to Holdings or Borrower wouldresult therefrom and as reasonably requested by the administrative agent undereach Credit Facility, foreign) subsidiaries and Holdings (collectively, theGuarantors). The First Lien Facilities are secured by a first-priority securityinterest in substantially all of the real, personal, and mixed property ofBorrower and the Guarantors, including a first-priority security interest in100% of the equity interests of Borrower and each domestic subsidiary ofHoldings, 65% of the equity interests of each of Holdings’ foreign subsidiaries(other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does notaccount for more than $2.5 million of consolidated earnings beforeinterest, taxes, depreciation, and amortization (EBITDA) during any fiscal yearof Borrower), and all intercompany debt. The Second Lien Facility is secured bya second-priority security interest in substantially all of the real, personal,and mixed property of Borrower and the Guarantors, including a second-prioritysecurity interest in 100% of the equity interests of Borrower and each domesticsubsidiary of Holdings, 65% of the equity interests of each of Holdings’foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise HongKong Limited does not account for more than $2.5 million of consolidatedEBITDA during any fiscal year of Borrower), and all intercompany debt.

 

29

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*Prepayments*

 

In the event all or any portion of the Tranche B Term LoanFacility is repaid pursuant to any voluntary prepayments or mandatoryprepayments with respect to asset sale proceeds or proceeds received from theissuance of debt prior to the second anniversary of the Acquisition closingdate, such repayments will be made at (a) 102.0% of the amount repaid ifsuch repayment occurs prior to the first anniversary of the Acquisition closingdate and (b) 101.0% of the amount repaid if such repayment occurs on orafter the first anniversary of the Acquisition closing date and prior to thesecond anniversary of the Acquisition closing date.

 

Subject to the provisions of the intercreditor agreement between theFirst Lien Facility and the Second Lien Facility, in the event the Second LienFacility is prepaid as a result of a voluntary or mandatory prepayment (otherthan as a result of a mandatory prepayment with respect to insurance/condemnationproceeds or excess cash flow) at any time prior to the third anniversary of theAcquisition closing date, Borrower shall pay a prepayment premium equal to the “make-wholepremium” described below.

 

At any time after the third anniversary of the Acquisition closing dateand prior to the sixth anniversary of the Acquisition closing date, subject tothe provisions of the First Lien Facilities, the Second Lien Facility may beprepaid in whole or in part subject to the “call premium” described below,provided that loans bearing interest with reference to the reserve-adjustedEurodollar rate will be prepayable only on the last day of the related interestperiod unless Borrower pays any related breakage costs.

 

With respect to a Second Lien Facility loan on any date of prepayment,the “make-whole premium” means the present value of (a) all requiredinterest payments due on such Second Lien Facility loan from the date ofprepayment through and including the make-whole termination date, excludingaccrued interest (assuming that the interest rate applicable to all suchinterest is the LIBOR swap rate at the close of business on the third businessday prior to the date of such prepayment with the termination date nearest tothe make-whole termination date plus 7.00%) plus (b) the prepaymentpremium that would be due if such prepayment were made on the day after themake-whole termination date, in each case discounted to the date of prepaymenton a quarterly basis (assuming a 360-day year and actual days elapsed) at arate equal to the sum of such swap rate plus 0.50%.

 

The “call premium” means that in the event all or any portion of theSecond Lien Facility is repaid as a result of a voluntary prepayment ormandatory prepayment with respect to asset sale proceeds or proceeds receivedfrom the issuance of debt after the third anniversary of the Acquisitionclosing date and prior to the sixth anniversary of the Acquisition closingdate, such repayments will be made at (i) 105.0% of the amount repaid ifsuch repayment occurs on or after the third anniversary of the Acquisitionclosing date and prior to the fourth anniversary of the Acquisition closingdate, (ii) 103.0% of the amount repaid if such repayment occurs on orafter the fourth anniversary of the Acquisition closing date and prior to thefifth anniversary of the Acquisition closing date, and (iii) 101.0% of theamount repaid if such repayment occurs on or after the fifth anniversary of theAcquisition closing date and prior to the sixth anniversary of the Acquisitionclosing date.

 

*Other Provisions*

 

Subject to specified exceptions, the Credit Facilities require that theproceeds from certain asset sales, casualty insurance, certain debt issuances,and 75% (subject to step-downs based on certain leverage ratios) of the excesscash flow for each fiscal year must be used to pay down outstanding borrowings.As of December 31, 2008, required debt principal repayments under theCredit Facilities, including those from excess cash flows, total$25.8 million in 2009. Of this amount,

 

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$15.7 millionis from our scheduled repayments and $10.1 million relates to excess cashflows. Our debt principal repayment requirements are $21.9 million in2010, $43.7 million in 2011, $133.8 million in 2012,$103.8 million in 2013, and $708.5 million thereafter.

 

*Notes Payable*

 

In connection with the Acquisition, Boise Inc. issued a$41.0 million subordinated promissory note to Boise Cascade. After theAcquisition, and pursuant to the purchase agreement, the note was amended toincrease the amount payable to $58.3 million effective February 22,2008. The increase of the note reflects $17.3 million of postclosingworking capital adjustments in Boise Cascade’s favor. With the exception of oursubsidiaries that are party to the Credit and Guaranty Agreement dated as of February 22,2008, each of our current and future domestic subsidiaries are joint andseveral obligors under this note, as reflected by a Subordinated GuarantyAgreement, which guarantees our obligations under the note.

 

After the transaction, Boise Cascade transferred the note payable toits parent, Boise Cascade Holdings, L.L.C., and on June 10, 2008,Boise Cascade Holdings, L.L.C., sold the note payable to eight individualparties for $53.8 million, including accrued interest but beforetransaction costs. The full amount of the original note, as amended, togetherwith accrued and unpaid interest from March 31, 2008, is now representedby eight separate notes payable, each with terms (other than the amount)identical to the original note payable. Because none of the eight holders ofthe notes is related to either Boise Inc. or Boise Cascade, we no longerrecord the notes as related-party notes on our Consolidated Balance Sheet.

 

The notes bear interest at 15.75% per annum (computed on the basis of a360-day year) payable quarterly (each such quarterly payment date, an InterestPayment Date). To the extent interest is not paid in cash, interest will beadded to the principal amount of the notes on each Interest Payment Date. Thenotes mature on August 21, 2015, provided that if such date is more than181 days after the scheduled maturity date of the indebtedness under theCredit Facilities, then the maturity date shall automatically be deemed to be181 days after the latest maturity date of any such indebtedness. Atmaturity, the amount of the notes will be approximately $185.6 million,assuming none of the interest has been paid in cash.

 

We may prepay the notes at any time in whole or in part, withoutpremium or penalty, subject to any restrictions contained in our senior creditfacilities. We must prepay the notes upon the occurrence of the followingevents: (i) a change of control (as defined in the Credit Facilities), (ii) asale or transfer of 50% or more of the company’s assets, and (iii) eventsof default (as provided in the notes). We must use the proceeds from the saleof equity or debt securities or borrowings to repay the notes, subject to anyrestrictions contained in our senior credit facilities.

 

*Other*

 

At December 31, 2008, we had $72.6 million of costs recordedin “Deferred financing costs” on our Consolidated Balance Sheet related to theAcquisition. The amortization of these costs is recorded in interest expenseusing the effective interest method over the life of the loans. We recorded$9.3 million of amortization expense for the year ended December 31,2008, in “Interest expense” in our Consolidated Statements of Income (Loss).

 

In April 2008, we entered into interest rate derivativeinstruments to hedge a portion of our interest rate risk as required under theterms of the First Lien Facilities. At December 31, 2008, we had$1,037.5 million of variable-rate debt outstanding, of which$685.0 million was hedged using interest rate derivatives. At December 31,2008, our average effective interest rate was not affected by our interest ratederivatives, as the effective cap rates were above the interest rates on the

 

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hedged debt.For additional information on our interest rate derivatives, see Note 13,Financial Instruments.

 

For the year ended December 31, 2008, cash payments for interest,net of interest capitalized, were $72.8 million. No payments were madeduring the period of February 1 (inception) through December 31,2007, or the Predecessor period of January 1 through February 21,2008, and the year ended December 31, 2007.

 

***13.******                               FinancialInstruments***

 

We are exposed to market risks, including changes in interest rates, energyprices, and foreign currency exchange rates.

 

*Interest Rate Risk*

 

With the exception of the 15.75% notes payable maturing in August 2015,our debt is variable-rate debt. At December 31, 2008, the estimated valueof the notes payable, based on then-current interest rates for similarobligations with like maturities, was approximately $37.6 million lessthan the amount recorded on our Consolidated Balance Sheet. At December 31,2008, the estimated value of our variable-rate debt, based on then current interestrates for similar obligations with like maturities, was approximately$351.6 million less than the amount recorded on our Consolidated BalanceSheet. The fair value of long-term debt is estimated based on quoted marketprices for the same or similar issues or on the discounted value of the futurecash flows expected to be paid using incremental rates of borrowing for similarliabilities.

 

In April 2008, we entered into interest rate derivativeinstruments to hedge a portion of our interest rate risk as required under theterms of the First Lien Facilities. At December 31, 2008, we had$1,037.5 million of variable-rate debt outstanding, of which$685.0 million was hedged using interest rate derivatives. We purchasedinterest rate caps with a term of three years and a cap rate of 5.50% on anotional amount of $260.0 million to hedge the interest rate on our SecondLien Facility. We also purchased interest rate caps to hedge part of theinterest rate risk on our Tranche B Term Loan Facility with a LIBOR caprate of 5.00% on a notional amount of $425.0 million for the period of April 21,2008, through March 31, 2009; a notional amount of $350.0 million forthe period of March 31, 2009, through March 31, 2010; and a notionalamount of $300.0 million for the period of March 31, 2010, through March 31,2011.

 

*Second Lien Facility.*  We account for the interest rate derivativeswith a notional amount of $260.0 million that hedge our exposure tointerest rate fluctuations on our Second Lien Facility as economic hedges. At December 31,2008, we recorded the fair value of the interest rate derivatives, or$0.1 million, in “Other assets” on our Consolidated Balance Sheet. Duringthe year ended December 31, 2008, we recorded the change in fair value ofthese derivatives, or $0.5 million of expense, in “Change in fair value ofinterest rate derivatives” in our Consolidated Statement of Income (Loss).During the year ended December 31, 2008, we recorded $0.2 million in “Interestexpense” for the amortization of the premiums paid for the interest ratederivatives.

 

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*First Lien Facility.*  We account for the interest rate derivativesthat hedge part of the interest rate risk on our Tranche B Term LoanFacility as cash flow hedges. These derivatives have a cap rate of 5.00% on anotional amount of $425.0 million for the period of April 21, 2008,through March 31, 2009; a notional amount of $350.0 million for theperiod of March 31, 2009, through March 31, 2010; and a notional amountof $300.0 million for the period of March 31, 2010, through March 31,2011. At December 31, 2008, we recorded the fair value of the interestrate derivatives, or $0.2 million, in “Other assets” on our ConsolidatedBalance Sheet. During the year ended December 31, 2008, we recorded thechange in fair value of these derivatives, or a $0.8 million loss, in “Accumulatedother comprehensive income” on our Consolidated Balance Sheet. No amounts werereclassified to interest expense. During the year ended December 31, 2008,we recorded $0.4 million in “Interest expense” for the amortization of thepremiums paid for the interest rate derivatives. At December 31, 2008,there was no ineffectiveness related to these hedges.

 

Effective December 31, 2008, we began utilizing the calculatedbase rate plus 250 basis points on the Tranche B Term Loan Facility ratherthan the LIBOR plus 350 basis points (subject to a floor of 4.00%) used priorto December 31, 2008. As the interest rate on this debt no longer matchesthe rate on the interest rate derivatives used to hedge a portion of that debt,we no longer designate the interest rate derivatives as cash flow hedges andwill account for them as economic hedges. The amounts recorded in “Accumulatedother comprehensive income” on our Consolidated Balance Sheet will be amortizedto interest expense over the remaining life of the interest rate derivatives.Changes in the fair value of these derivatives will be recorded in “Change infair value of interest rate derivatives” in our Consolidated Statements ofIncome (Loss).

 

*Energy Risk*

 

We enter into natural gas swaps, options, or a combination of theseinstruments to hedge the variable cash flow risk of natural gas purchases atindex prices. As of December 31, 2008, we had entered into derivativeinstruments related to approximately 72% of our forecasted natural gaspurchases for the period of January through February 2009,approximately 62% of our forecasted natural gas purchases for March 2009,approximately 60% of our forecasted natural gas purchases from April 2009through October 2009, approximately 18% of our forecasted natural gaspurchases from November 2009 through March 2010, and approximately 8%of our forecasted natural gas purchases from April 2010 through October 2010.These derivatives include three-way collars, call spreads, and swaps.

 

A three-way collar is a combination of options: a written put, apurchased call, and a written call. The purchased call establishes a maximumprice unless the market price exceeds the written call, at which point themaximum price would be New York Mercantile Exchange (NYMEX) price less thedifference between the purchased call and the written call strike price. Thewritten put establishes a minimum price (the floor) for the volumes undercontract. The strategy enables us to decrease the floor and the ceiling priceof the collar beyond the range of a traditional collar while

 

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offsetting the associated costwith the sale of the written call. The following table summarizes our positionrelated to these instruments as of December 31, 2008:

 
| ** **                  | ** ** | **Three-Way Collar**                       | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **January 2009  Through  March 2009** | ** ** | **April 2009  Through  October 2009** | ** ** | **November 2009  Through  March 2010** | ** ** | **April 2010  Through  October 2010** | ** ** |
| **Volume hedged**           | ** ** | **1,000 mmBtu/day**                             | ** ** | **1,000 mmBtu/day** | ** ** | **1,000 mmBtu/day** | ** ** | **7,000 mmBtu/day** | ** ** | **6,000 mmBtu/day** | ** ** | **500 mmBtu/day** | ** ** | **2,500 mmBtu/day** | ** ** |
| ** **                  | ** ** | ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Strike price of call sold   |       | $                                               | 14.00      |   | $ | 14.00 |   | $ | 14.00 |   | $ | 12.00 |   | $ | 12.00 |   | $ | 12.00 |   | $ | 12.00 |   |
| Strike price of call bought |       | 11.00                                           |       | 11.00 |   | 11.00 |   | 9.00 |   | 9.00 |   | 9.00 |   | 9.00 |   |
| Strike price of put sold    |       | 10.05                                           |       | 6.38 |   | 6.50 |   | 6.50 |   | 6.50 |   | 6.00 |   | 6.15 |   |
| Three-way collar premium    |       | —                                          |       | — |   | 0.095 |   | 0.176 |   | 0.166 |   | — |   | — |   |
| Approximate percent hedged  |       | 3                                               | %          | 3 | % | 3 | % | 23 | % | 16 | % | 1 | % | 8 | % |
|                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A call spreadis a combination of a purchased call and a written call. The purchased callestablishes a maximum price unless the market exceeds the written call, at whichpoint the maximum price would be the NYMEX price, less the difference betweenthe purchased call and the written call strike price plus any applicable netpremium associated with the two options. The following table summarizes ourposition related to these instruments as of December 31, 2008:

 
| ** **                  | ** ** | **Call Spreads**                           | ** ** |
|-----------------------------|------------|-------------------------------------------------|------------|
| ** **                  | ** ** | **January 2009  Through  March 2009** | ** ** | **April 2009  Through  October 2009** | ** ** |
| **Volume hedged**      | ** ** | **21,000  mmBtu/day**                           | ** ** | **10,000  mmBtu/day** | ** ** |
| Strike price of call sold   |       | $                                               | 15.00      |   | $ | 15.00 |   |
| Strike price of call bought |       | 10.50                                           |       | 10.50 |   |
| Net cap premium             |       | 1.27                                            |       | 0.84 |   |
| Approximate percent hedged  |       | 57                                              | %          | 33 | % |
|                             |            |                                                 |            |  |  |  |  |

 

A swap fixesthe price of the volumes under contract by paying our counterparty a fixedprice for such volumes and receiving the variable NYMEX price for each month fromour counterparty. The following table summarizes our position related tofixed-price swap instruments as of December 31, 2008:

 
| ** **                 | ** ** | **Swaps**                                          | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|
| ** **                 | ** ** | **January 2009  Through  February 2009** | ** ** |
| **Volume hedged**          | ** ** | **3,500 mmBtu/day**                                | ** ** |
| Fixed price                |       | $                                                  | 7.69       |   |
| Approximate percent hedged |       | 9                                                  | %          |
|                            |            |                                                    |            |  |

 

We haveelected to account for these instruments as economic hedges. At December 31,2008, we recorded the fair value of the derivatives, or $7.3 million, in “Accruedliabilities, Other” on our Consolidated Balance Sheet. During the year ended December 31,2008, we recorded the change

 

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in fair value of theinstruments, or $7.4 million of expense, in “Materials, labor, andoperating expenses” in our Consolidated Statements of Income (Loss).

 

*Foreign Currency Risk*

 

While we areexposed to foreign currency risk in our operations, none of this risk wasmaterial to our financial position or results of operations as of December 31,2008.

 

*Predecessor*

 

During thePredecessor periods presented, Boise Cascade occasionally used interest rateswaps to hedge variable interest rate risk. Because debt and interest costswere not allocated to the Predecessor, the effects of the interest rate swapswere not included in the Predecessor consolidated financial statements.

 

*Fair Value Measurements*

 

In accordancewith the provisions of FSP No. 157-2 (see New and Recently AdoptedAccounting Standards in Note 2, Summary of Significant AccountingPolicies), we have applied the provisions of SFAS No. 157 only to ourfinancial assets and liabilities recorded at fair value, which consist offinancial instruments that are used to hedge exposures to interest rate andenergy risks. For these financial instruments, fair value is determined at eachbalance sheet date based on LIBOR rates and interest rate curves and NYMEXprice quotations, respectively, under the terms of the contracts using currentmarket information as of the reporting date. The following table provides asummary of the inputs used to develop these estimated fair values under thehierarchy defined in SFAS No. 157:

 
| ** **                    | ** ** | **Fair Value Measurements at December 31, 2008,  Using:** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **Total**                                                                               | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| ** **                    | ** ** | **(thousands)**                                                                         |
|                          |       |                                                                                    |       |   |   |   |   |   |   |
| Assets:                       |       |                                                                                    |       |   |   |   |   |   |   |
| Interest rate derivatives (a) |       | $                                                                                       | 341        |   | $ | — |   | $ | 341 |   | $ | — |   |
| ** **                    | ** ** | **$**                                                                                   | **341**    | ** ** | **$** | **—** | ** ** | **$** | **341** | ** ** | **$** | **—** |   |
| Liabilities:                  |       |                                                                                    |       |   |   |   |   |   |   |
| Energy derivatives (b)        |       | $                                                                                       | 7,324      |   | $ | — |   | $ | 7,324 |   | $ | — |   |
| ** **                    | ** ** | **$**                                                                                   | **7,324**  | ** ** | **$** | **—** | ** ** | **$** | **7,324** | ** ** | **$** | **—** |   |

 

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(a)                                  Includes$0.3 million recorded in “Other assets” on our Consolidated Balance Sheet.

 

(b)                                 Includes$7.3 million recorded in “Accrued Liabilities, Other” on our ConsolidatedBalance Sheet.

 

As of December 31,2008, we did not have any fair value measurements using significantunobservable inputs (level 3).

 

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*Tabular Disclosure of the Fair Values ofDerivative Instruments and the Effect of Those Instruments*

 
| **Fair Values of Derivative Instruments**      |
|--------------------------------------------------------------------|
| ** **                                                         | ** ** | **Asset Derivatives** | ** ** | **Liability Derivatives** | ** ** |
| ** **                                                         | ** ** | **December 31, 2008** | ** ** |
| ** **                                                         | ** ** | **Balance  Sheet  Location** | ** ** | **Fair Value** | ** ** | **Balance  Sheet  Location** | ** ** | **Fair Value** | ** ** |
| ** **                                                         | ** ** | **(thousands)** | ** ** |
| Derivatives designated as cash flow hedging  instruments           |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                            |   | Other assets |   | $ | 250 |   | Accrued liabilities |   | $ | — |   |
| **Total derivatives designated as cash flow  hedging instruments** | ** ** | ** ** | ** ** | **$** | **250** |   |   |   | **$** | **—** |   |
| Derivatives designated as economic hedging  instruments (a)   |   |   |   |   |   |   |   |   |   |
| Interest rate contracts                                            |   | Other assets |   | $ | 91 |   | Accrued liabilities |   | $ | — |   |
| Natural gas contracts                                              |   | Other assets |   | — |   | Accrued liabilities |   | 7,324 |   |
| **Total derivatives designated as economic  hedging instruments**  | ** ** | ** ** | ** ** | **$** | **91** |   |   |   | **$** | **7,324** |   |
| **Total Derivatives**                                              | ** ** | ** ** | ** ** | **$** | **341** |   |   |   | **$** | **7,324** |   |

 

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(a)                                  Seediscussion above for additional information on our purpose for entering intoderivatives designated as economic hedges and our overall risk managementstrategies.

 
| **The Effect of Derivative Instruments on the Consolidated Statement of Income (Loss)  for the Year Ended December 31, 2008** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Derivatives  Designated  as Cash Flow  Hedging  Instruments**                                                                                                                                          | ** ** | **Amount of Gain  or (Loss)  Recognized in  OCI on Derivative  (Effective Portion)** | ** ** | **Location of Gain  or (Loss)  Reclassified from  Accumulated OCI  Into Income  (Effective Portion)** | ** ** | **Amount of Gain  or (Loss)  Reclassified from  Accumulated OCI  Into Income  (Effective Portion)** | ** ** | **Derivatives  Designated as  Economic  Hedging  Instruments (a)** | ** ** | **Location of  Gain or (Loss)  Recognized in  Income on  Derivative** | ** ** | **Amount of  Gain or  (Loss)  Recognized in  Income on  Derivative** | ** ** |
| **(thousands)**                                                                                                                                                                                                    | ** ** |
| Interest rate contracts                                                                                                                                                                                            |   | $ | (760 | ) | Interest  income/expense |   | $ | — |   | Interest  rate contracts |   | Change in  fair value of interest rate derivatives |   | $ | (479 | ) |
|                                                                                                                                                                                                               |   |   |   |   |   |   |   | Natural gas  contracts |   | Materials,  labor, and other operating expenses |   | (7,445 | ) |
| ** **                                                                                                                                                                                                         | ** ** | **$** | **(760** | **)** | ** ** | ** ** | **$** | **—** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **(7,924** | **)** |

 

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(a)                                  Seediscussion above for additional information on our purpose for entering intoderivatives designated as economic hedges and our overall risk managementstrategies.

 

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

 

During all ofthe periods presented, some of our employees participated in our retirementplans and some of the Predecessor’s employees participated in Boise Cascade’sretirement plans. These plans consist of noncontributory defined benefitpension plans, contributory defined contribution savings plans, deferredcompensation plans, and postretirement healthcare benefit plans. Compensationexpense was calculated based on costs directly attributable to our employeesand,

 

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in the case of the Predecessoremployees of the Paper Group, an allocation of expense related to corporateemployees that serviced all Boise Cascade business units.

 

Some of ouremployees participate in noncontributory defined benefit pension plans thatwere either transferred from or spun off from Boise Cascade. The salarieddefined benefit pension plan is available only to employees who were formerlyemployed by OfficeMax before November 2003. The pension benefit forsalaried employees is based primarily on the employees’ years of service andhighest five-year average compensation. The benefit for hourly employees isgenerally based on a fixed amount per year of service. The Predecessor treatedparticipants in these plans as participants in multiemployer plans.Accordingly, the Predecessor did not reflect any assets or liabilities relatedto the noncontributory defined benefit pension plans on its ConsolidatedBalance Sheet. The Predecessor did, however, record costs associated with theemployees who participated in these plans in its Consolidated Statements ofIncome (Loss). Expenses attributable to participation in noncontributorydefined benefit plans for the year ended December 31, 2008, and thePredecessor period of January 1 through February 21, 2008, and theyears ended December 31, 2007 and 2006, were $8.3 million,$1.8 million, $13.1 million, and $14.4 million, respectively.

 

Some of ourand the Predecessor’s employees participated in contributory defined contributionsavings plans, which covered most of our salaried and hourly employees.Expenses related to matching contributions attributable to participation incontributory defined contribution savings plans for the year ended December 31,2008, and the Predecessor periods of January 1 through February 21,2008, and the years ended December 31, 2007 and 2006, were$8.4 million, $2.1 million, $9.3 million, and $7.5 million,respectively. Employees that are not eligible to participate in thenoncontributory defined benefit pension plans are eligible for additionaldiscretionary company matching contributions based on a percentage approvedeach plan year.

 

Some of ourand the Predecessor’s employees participated in deferred compensation plans, inwhich key managers and nonaffiliated directors may irrevocably elect to defer aportion of their base salary and bonus or director’s fees until termination ofemployment or beyond. A participant’s account is credited with imputed interestat a rate equal to 130% of Moody’s composite average of yields on corporatebonds. In addition, participants other than directors may elect to receivetheir company matching contributions in the deferred compensation plan in lieuof any matching contribution in the contributory defined contribution savingsplan. The deferred compensation plans are unfunded; therefore, benefits arepaid from general assets of the company. At December 31, 2008, we had$0.6 million of liabilities attributable to participation in our newdeferred compensation plan, which was effective on April 1, 2008, on ourConsolidated Balance Sheet. At December 31, 2007, the Predecessor had$3.8 million of liabilities attributable to participation in Boise Cascade’sdeferred compensation plan recorded on the Predecessor’s Consolidated BalanceSheet. This liability is not an obligation of Boise Inc. and was notrecorded on our Consolidated Balance Sheet at December 31, 2008.

 

Some of ourand the Predecessor’s employees participated in Boise Cascade’s postretirementhealthcare benefit plans. The type of retiree healthcare benefits and theextent of coverage vary based on employee classification, date of retirement,location, and other factors. All of the postretirement healthcare plans areunfunded. In 2007 and 2006, the Predecessor communicated to employees changesto the retiree healthcare programs. The Predecessor discontinued healthcarecoverage for most of the post-65 retirees. In addition, the Predecessoreliminated the company subsidy for some of the pre-65 hourly retirees.This change shifts retiree medical costs to the plan participants. As a resultof this change, the Predecessor recorded a $4.4 million and$3.7 million gain in the Consolidated Statements of Income (Loss) for theyears ended December 31, 2007 and 2006. The postretirement benefit planshave a December 31 measurement date.

 

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In December 2008,we amended our defined benefit pension plan for salaried employees (SalariedPlan). This amendment freezes the accumulation of benefits and years of servicefor participants of the Salaried Plan effective April 15, 2009. Thisamendment also freezes benefits in the Boise Inc. Supplemental Plan (SUPP)and the Boise Inc. Supplemental Early Retirement Plan for Executive Officers(SERP). Because the Salaried Plan has unrecognized losses, the curtailment gainassociated with this amendment was applied to partially offset those losses inaccordance with SFAS 88, *Employers’Accounting for Settlements of Defined Benefit Pension Plans and for TerminationBenefits*. However, we have recognized a $2.9 million gain onour SUPP and SERP plans, because the curtailment gain exceeded our existingunrecognized losses. This gain is recognized in “Other (income) expense, net”in our Consolidated Statements of Income (Loss) for the year ended December 31,2008.

 

*Obligations and Funded Status ofPostretirement Benefits and Pensions*

 

ThePredecessor treated participants in its pension plans as participants inmultiemployer plans; accordingly, the Predecessor has not reflected any assetsor liabilities related to the noncontributory defined benefit pension plans onits Consolidated Balance Sheet at December 31, 2007. In connection withthe Acquisition, we have treated the pension and postretirement benefit plansas company-sponsored plans and have measured the benefit obligation and fundedstatus as of February 22, 2008. The funded status changes from period toperiod based on the investment return from plan assets, contributions, benefitpayments, and the discount rate used to measure the obligation. The fundedstatus of the pension and postretirement plans recorded in connection with theAcquisition is shown in the table below as of February 22, 2008 (inthousands):

 
| ** **                   | ** ** | **Pension Benefits** | ** **  | **Other Benefits** | ** ** |
|------------------------------|------------|---------------------------|-------------|-------------------------|------------|
| Projected benefit obligation |       | $                         | (379,390    | )                       | $          | (2,723 | ) |
| Market value of assets       |       | 323,640                   |        | —                  |       |
| Over (under) funded status   | ** ** | **$**                     | **(55,750** | **)**                   | **$**      | **(2,723** | **)** |

 

Theaccumulated benefit obligation for pension benefits at February 22, 2008,was $339.1 million.

 

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The followingtable, which includes only company-sponsored plans, reconciles the beginningbalance at February 22, 2008, and ending balances at December 31,2008, of our benefit obligation. It also shows the fair value of plan assetsand aggregate funded status of our plans.

 
| ** **                                            | ** ** | **Pension  Benefits** | ** **   | **Other  Benefits** | ** ** |
|-------------------------------------------------------|------------|-----------------------|--------------|---------------------|------------|
| ** **                                            | ** ** | **2008**              | ** **   |
| ** **                                            | ** ** | **(thousands)**       | ** **   |
| Change in benefit obligation                          |       |                  |         |                |       |
| Benefit obligation at February 22,  2008         |       | $                     | 379,390      |                | $          | 2,723 |   |
| Service cost                                          |       | 9,226                 |         | 3                   |       |
| Interest cost                                         |       | 20,881                |         | 98                  |       |
| Amendments                                            |       | 364                   |         | (77                 | )          |
| Actuarial loss                                        |       | 31,715                |         | —              |       |
| Closure and curtailment gain                          |       | (37,473               | )            | —              |       |
| Benefits paid                                         |       | (7,411                | )            | (257                | )          |
| Benefit obligation at December 31,  2008         |       | $                     | 396,692      |                | $          | 2,490 |   |
| Change in plan assets                                 |       |                  |         |                |       |
| Fair value of plan assets at  February 22, 2008  |       | $                     | 323,640      |                | $          | — |   |
| Actual return on plan assets                          |       | (68,210               | )            | —              |       |
| Employer contributions                                |       | 65                    |         | —              |       |
| Benefits paid                                         |       | (7,411                | )            | —              |       |
| Fair value of plan assets at  December 31, 2008  |       | $                     | 248,084      |                | $          | — |   |
| Over (under) funded status                            | ** ** | **$**                 | **(148,608** | **)**               | **$**      | **(2,490** | **)** |
| Amounts recognized on our Consolidated  Balance Sheet |       |                  |         |                |       |
| Noncurrent assets                                     |       | $                     | —       |                | $          | — |   |
| Current liabilities                                   |       | (1,317                | )            | (670                | )          |
| Noncurrent liabilities                                |       | (147,291              | )            | (1,820              | )          |
| Net amount recognized                                 | ** ** | **$**                 | **(148,608** | **)**               | **$**      | **(2,490** | **)** |

 

Amountsrecognized in Accumulated Other Comprehensive (Income) Loss for the year ended December 31,2008, consist of:

 
| ** **            | ** ** | **Pension  Benefits** | ** ** | **Other  Benefits** | ** ** |
|-----------------------|------------|-----------------------|------------|---------------------|------------|
| ** **            | ** ** | **(thousands)**       | ** ** |
| Net (gain) loss       |       | $                     | 84,600     |                | $          | (42 | ) |
| Prior service cost    |       | 364                   |       | —              |       |
| Net amount recognized | ** ** | **$**                 | **84,964** | ** **          | **$**      | **(42** | **)** |

 

The projectedbenefit obligation, accumulated benefit obligation, and fair value of planassets for the pension plans with accumulated benefit obligations in excess ofplan assets were $396.7 million, $393.2 million, and$248.1 million, respectively, as of December 31, 2008.

 

Theaccumulated benefit obligation for all defined benefit pension plans was$393.2 million at December 31, 2008.

 

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*Components of Net Periodic Benefit Cost and Other Comprehensive(Income) Loss*

 

The componentsof net periodic benefit cost and other comprehensive (income) loss are asfollows (in thousands):

 
| ** **                                                                                       | ** ** | **Pension Benefits**                | ** ** | **Other Benefits**                              | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **Boise Inc.**                      | ** ** | **Predecessor**                                      | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** | **Boise Inc.** | ** ** | **Boise Inc.** | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
| ** **                                                                                       | ** ** | **Year  Ended  December 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** | **Year  Ended  December 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| Service cost                                                                                     |       | $                                        | 9,226      |                                                 | $          | 1,566 |   | $ | 12,103 |   | $ | 13,040 |   | $ | 3 |   | $ | — |   | $ | 75 |   | $ | 212 |   |
| Interest cost                                                                                    |       | 20,881                                   |       | 3,458                                                |       | 22,718 |   | 19,098 |   | 98 |   | 18 |   | 230 |   | 368 |   |
| Expected return  on plan assets                                                                  |       | (20,398                                  | )          | (3,452                                               | )          | (23,173 | ) | (19,214 | ) | — |   | — |   | — |   | — |   |
| Amortization of  actuarial (gain) loss                                                           |       | —                                   |       | (21                                                  | )          | 271 |   | 155 |   | — |   | (12 | ) | (34 | ) | — |   |
| Amortization of  prior service costs and other                                                   |       | —                                   |       | 194                                                  |       | 1,190 |   | 490 |   | — |   | — |   | — |   | — |   |
| Plan settlement  curtailment (gain) loss                                                         |       | (1,749                                   | )          | —                                               |       | (46 | ) | 822 |   | — |   | — |   | — |   | — |   |
| Company-sponsored  plans                                                                         |       | 7,960                                    |       | 1,745                                                |       | 13,063 |   | 14,391 |   | 101 |   | 6 |   | 271 |   | 580 |   |
| Multiemployer  plans                                                                             |       | 327                                      |       | 75                                                   |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Net periodic  benefit costs                                                                      | ** ** | **$**                                    | **8,287**  | ** **                                           | **$**      | **1,820** | ** ** | **$** | **13,063** | ** ** | **$** | **14,391** | ** ** | **$** | **101** | ** ** | **$** | **6** | ** ** | **$** | **271** | ** ** | **$** | **580** | ** ** |
| Changes in plan  assets and benefit obligations recognized in other comprehensive (income)  loss |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net (gain) loss                                                                                  |       | $                                        | 84,600     |                                                 | $          | — |   | $ | — |   | $ | — |   | $ | (42 | ) | $ | — |   | $ | — |   | $ | — |   |
| Prior service  cost                                                                              |       | 364                                      |       | —                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Amortization of  actuarial gain (loss)                                                           |       | —                                   |       | —                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Amortization of  prior service cost                                                              |       | —                                   |       | —                                               |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Total recognized  in other comprehensive (income) loss                                           |       | 84,964                                   |       | —                                               |       | — |   | — |   | (42 | ) | — |   | — |   | — |   |
| Total recognized  in net periodic benefit cost and other comprehensive (income) loss             | ** ** | **$**                                    | **93,251** | ** **                                           | **$**      | **1,820** | ** ** | **$** | **13,063** | ** ** | **$** | **14,391** | ** ** | **$** | **59** | ** ** | **$** | **6** | ** ** | **$** | **271** | ** ** | **$** | **580** | ** ** |

 

In 2009, weestimate net periodic pension expense will be $9.6 million. The 2009 netperiodic pension expense will include $0.3 million of net loss that willbe amortized from “Accumulated Other Comprehensive Income (Loss).”

 

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*Assumptions*

 

Theassumptions used in accounting for the plans are estimates of factors that willdetermine, among other things, the amount and timing of future benefitpayments. The following table presents the assumptions used in the measurementof our benefits obligation:

 
| ** **                    | ** ** | **Pension Benefits**   | ** ** | **Other Benefits**     | ** ** |
|-------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **Boise Inc.**         | ** ** | **Boise Inc.**         | ** ** | **Predecessor** | ** ** |
| ** **                    | ** ** | **December 31,  2008** | ** ** | **February 22,  2008** | ** ** | **December 31,  2008** | ** ** | **February 22,  2008** | ** ** | **December 31,  2007** | ** ** |
| Weighted average              |       |                        |       |                        |       |   |   |   |   |   |   |
| Discount rate                 |       | 6.20                        | %          | 6.50                        | %          | 5.70 | % | 5.50 | % | 5.75 | % |
| Rate of compensation increase |       | 4.25                        | %          | 4.25                        | %          | — | % | — | % | — | % |

 

The followingtable presents the assumptions used in the measurement of net periodic benefitcost:

 
| ** **                                                               | ** ** | **Pension Benefits**                | ** ** | **Other Benefits**                              | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                               | ** ** | **Boise Inc.**                      | ** ** | **Predecessor**                                      | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** | **Boise Inc.** | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** | **Predecessor** | ** ** |
| ** **                                                               | ** ** | **Year  Ended  December 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** | **Year  Ended  December 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Year  Ended  December 31,  2007** | ** ** | **Year  Ended  December 31,  2006** | ** ** |
| Weighted average  assumptions as of the last day in the presented period |       |                                     |       |                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Discount rate                                                            |       | 6.50                                     | %          | 6.40                                                 | %          | 5.90 | % | 5.60 | % | 5.70 | % | 5.50 | % | 5.75 | % | 5.40 | % |
| Expected  long-term rate of return on plan assets                        |       | 7.25                                     | %          | 7.25                                                 | %          | 7.25 | % | 7.25 | % | — | % | — | % | — | % | — | % |
| Rate of  compensation Increase                                           |       | 4.25                                     | %          | 4.25                                                 | %          | 4.25 | % | 4.25 | % | — | % | — | % | — | % | — | % |

 

*Discount Rate Assumption.*  In all periods presented, the discount rateassumption was determined using a spot rate yield curve constructed toreplicate Aa-graded corporate bonds. The plan’s projected cash flows wereduration- matched to this yield curve to develop an appropriate discount rate.

 

*Asset Return Assumption.*  The expected long-term rate of return on planassets was based on a weighted average of the expected returns for the majorinvestment asset classes. Expected returns for the asset classes are based onlong-term historical returns, inflation expectations, forecasted gross domesticproduct, earnings growth, and other economic factors. The weights assigned toeach asset class were based on the investment strategy. The weighted averageexpected return on plan assets we will use in our calculation of 2009 netperiodic benefit cost is 7.25%.

 

*Rate of Compensation Increases.*  This assumption reflects the long-term actualexperience, the near-term outlook, and assumed inflation.

 

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The followingtable presents our assumed healthcare cost trend rates at December 31,2008, and the Predecessor’s at December 31, 2007:

 
| ** **                                                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Weighted average assumptions:                                                      |       |     |       |     |       |
| Healthcare cost trend rate assumed for next  year                                  |       | 9.00     | %          | 9.50     | %          |
| Rate to which the cost trend rate is  assumed to decline (the ultimate trend rate) |       | 5.00     | %          | 5.00     | %          |
| Year that the rate reaches the ultimate  trend rate                                |       | 2017     |       | 2017     |       |

 

Assumedhealthcare cost trend rates affect the amounts reported for the healthcareplans. At December 31, 2008, a one-percentage-point change in our assumedhealthcare cost trend rate would not significantly affect our total service orinterest costs or our postretirement benefit obligation.

 

*Plan Assets*

 

Our pensionplan asset allocations by asset category at December 31, 2008, are asfollows:

 
| **Asset Category**         | ** ** | **Plan Assets at  December 31,  2008** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| U.S. equity securities          |       | 44                                                    | %          |
| International equity securities |       | 12                                                    | %          |
| Fixed-income securities         |       | 44                                                    | %          |
| ** **                      |       | **100**                                               | **%**      |

 

Our RetirementFunds Investment Committee is responsible for establishing and overseeing theimplementation of our investment policy. The investment policy is structured tooptimize growth of the pension plan trust assets, while minimizing the risk ofsignificant losses, in order to enable the plans to satisfy their benefitpayment obligations over time. We have retained Russell Investments (Russell)to oversee the management of our pension investments through its manager ofmanagers program in order to achieve broad diversification in a cost-effectivemanner. As of December 31, 2008, our investment policy governing ourrelationship with Russell allocated 45% to long-duration fixed-incomesecurities (three managers), 35% to large-capitalization U.S. equity securities(ten managers utilized in the Russell large-capitalization U.S. equity fund asof December 31, 2008), 12% to international equity securities (ninemanagers), and 8% to small- and mid-capitalization U.S. equity securities (tenmanagers). Our arrangement with Russell calls for monthly rebalancing to thepolicy targets noted above.

 

*Cash Flows*

 

In connectionwith the Acquisition, Boise Cascade transferred sufficient assets to fundBoise Inc.’s accumulated benefit obligation at a 6.5% discount rate, andas a result, we were not required to and did not make contributions to thequalified pension plans during 2008. Pension funding requirements depend inpart on returns on plan assets. As of December 31, 2008, our pensionassets had a market value of $248 million, compared with $324 millionas of February 22, 2008, the date we assumed the obligation for theseplans. Assuming a rate of return on plan assets of 7.25% in 2009 and 2010, weestimate that we would be required to contribute $4.1 million in 2009 andapproximately $38 million in 2010, which includes the impact of thepension plan freeze. The amount of required contributions will depend, amongother things, on actual returns on plan assets, changes in our plan assetreturn assumptions, changes in interest rates which affect our

 

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discount rate assumptions,changes in pension funding requirement laws, and modifications to our plans.Our estimates may change materially depending upon the impact of these andother factors. Recent declines in the global equity markets may require us tomake larger than previously anticipated contributions to our pension plans. Wemay also elect to make additional voluntary contributions in any year, whichcould reduce the amount of required contributions in future years. For the yearended December 31, 2008, we made no cash contributions to our qualifiedpension plans; however, we made cash contributions and certain benefit paymentsto our nonqualified pension plans and other postretirement benefit planstotaling $0.6 million. In 2009, we are required to make a$4.1 million minimum contribution to our pension plans.

 

The followingbenefit payments, which reflect expected future service as appropriate, areexpected to be paid. Qualified pension benefit payments are paid from planassets, while nonqualified pension and other benefit payments are paid by thecompany.

 
| ** **      | ** ** | **Pension Benefits** | ** ** | **Other Benefits** | ** ** |
|-----------------|------------|---------------------------|------------|-------------------------|------------|
| ** **      | ** ** | **(thousands)**           | ** ** |
| 2009            |       | $                         | 13,295     |                    | $          | 672 |   |
| 2010            |       | 14,430                    |       | 430                     |       |
| 2011            |       | 16,582                    |       | 276                     |       |
| 2012            |       | 19,070                    |       | 200                     |       |
| 2013            |       | 21,253                    |       | 163                     |       |
| Years 2014-2018 |       | 133,565                   |       | 414                     |       |
|                 |            |                           |            |                         |            |  |  |

 

***15.******          Stockholders’ Equity***

 

*Preferred Stock*

 

We areauthorized to issue 1,000,000 shares of preferred stock with such designations,voting, and other rights and preferences as may be determined from time to timeby the board of directors. No shares were issued or outstanding at December 31,2008 and 2007.

 

*Common Stock*

 

We areauthorized to issue 250,000,000 shares of common stock, of which 79,716,130shares were issued and outstanding at December 31, 2008. Of these sharesoutstanding, 2,426,100 shares were restricted stock (discussed below). At December 31,2007, we had 51,750,000 shares of common stock issued and outstanding, of which16,555,860 shares were subject to possible conversion.

 

On February 5,2008, stockholders owning 12,543,778 shares exercised their conversion rightsand voted against the Acquisition. Such stockholders were entitled to receivetheir per-share interest in the proceeds from our initial public offering,which had been held in trust. Of these 12,543,778 shares, 12,347,427 shareswere presented for conversion. The remaining shares not presented remainoutstanding. At December 31, 2007, cash held in trust was $403,989,389. Inconnection with the Acquisition, we paid $120,169,890 from our cash held intrust to these stockholders. The remaining cash held in trust was used toeffect the Acquisition.

 

*Warrants*

 

In connectionwith our public offering in June 2007, we issued 41,400,000 units (theUnits). Each Unit consists of one share of our common stock and one RedeemableCommon Stock Purchase Warrant (the Warrants). Each Warrant entitles the holderto purchase one share of common stock at an exercise price of $7.50, commencingon the later of the completion of a

 

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business combination and oneyear from the effective date of the public offering and expiring four yearsfrom the effective date of the public offering. We may redeem the Warrants, ata price of $0.01 per Warrant, upon 30 days’ notice while the Warrants areexercisable, only in the event that the last sale price of the common stock isat least $14.25 per share for any 20 trading days within a 30-trading-dayperiod ending on the third day prior to the date on which notice of redemptionis given. In June 2008, we filed a posteffective amendment on Form S-1to register the shares of our common stock covered by these Warrants.

 

Simultaneouslywith the consummation of the public offering, Aldabra 2 Acquisition Corp.’schairman and chief executive officer privately purchased a total of 3,000,000Warrants (the Insider Warrants) at $1.00 per Warrant (for an aggregate purchaseprice of $3,000,000). The amount paid for the Warrants approximated fair valueon the date of issuance. All of the proceeds received from these purchases wereplaced in cash held in trust. The Insider Warrants purchased were identical tothe Warrants underlying the Units issued in the public offering except that theWarrants may not be called for redemption and the Insider Warrants may beexercisable on a “cashless basis,” at the holder’s option, so long as suchsecurities are held by such purchaser or his affiliates. At December 31,2008, including 3,000,000 Insider Warrants, 44,400,000 Warrants wereoutstanding.

 

*Accumulated Other Comprehensive Income (Loss)*

 

Accumulatedother comprehensive income (loss) includes the following:

 
| ** **                                       | ** ** | **Cash**         | ** ** | **Unfunded Accumulated  Benefit Obligation** | ** ** | **Accumulated  Other**                | ** ** |
|--------------------------------------------------|------------|------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **Flow  Hedges** | ** ** | **Actuarial  Loss (a)**                           | ** ** | **Prior Service  Cost (a)** | ** ** | **Comprehensive  Income (Loss)** | ** ** |
| ** **                                       | ** ** | **(thousands)**  | ** ** |
| Balance at December 31, 2007, net of  taxes |       | $                | —     |                                                   | $          | —                                |       | $ | — |   | $ | — |   |
| Current-period changes, before taxes             |       | (760             | )          | (84,558                                                | )          | (364                                  | )          | (85,682 | ) |
| Reclassifications to earnings, before taxes      |       | —           |       | —                                                 |       | —                                |       | — |   |
| Income taxes                                     |       | —           |       | —                                                 |       | —                                |       | — |   |
| Balance at December 31, 2008, net of  taxes | ** ** | **$**            | **(760**   | **)**                                                  | **$**      | **(84,558**                           | **)**      | **$** | **(364** | **)** | **$** | **(85,682** | **)** |

 

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(a)***          ***The2009 net periodic pension expense will include $0.3 million of net lossthat will be amortized from “Accumulated Other Comprehensive Income (Loss).”

 

*Restricted Stock and Restricted Stock Units*

 

In May 2008,pursuant to the Boise Inc. Incentive and Performance Plan (the Plan), wegranted to directors and members of management 2.5 million shares ofrestricted stock and 0.6 million restricted stock units (collectivelyrestricted stock). The restricted stock grants include both service-conditionvesting and market-condition vesting awards. Of the 3.1 million shares ofrestricted stock granted, 1.2 million were service-condition vestingawards, and 1.9 million were market-condition vesting awards. Theweighted-average grant-date fair values of the restricted stock were $4.16 pershare for the service-condition vesting awards and $1.75 per share for themarket-condition vesting awards. We account for awards granted under the Planin our consolidated financial statements in accordance with SFAS No. 123(R).

 

In accordancewith SFAS No. 123(R), we evaluate share-based compensation on a quarterlybasis based on our estimate of expected restricted stock forfeiture, review ofrecent forfeiture

 

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activity, and expected futureturnover. We recognize the effect of adjusting the forfeiture rate for allexpense amortization in the period that we change the forfeiture estimate. Theeffect of forfeiture adjustments during the year ended December 31, 2008,was zero.

 

*Market-Condition Vesting Awards*

 

Members ofmanagement were granted 1.9 million shares of restricted stock, which aresubject to market-based vesting restrictions, as described below. Of this1.9 million, 0.7 million will vest on February 28, 2011, if theclosing price of Boise Inc. stock has been at least $10 per share for atleast 20 trading days in any period of 30 consecutive trading days between thegrant date and February 28, 2011. The weighted-average grant-date fairvalue of these awards was $2.03 per share. The remaining 1.2 millionshares of the restricted stock grants will vest on February 28, 2011, ifthe closing price of Boise Inc. stock has been at least $12.50 per sharefor at least 20 trading days in any period of 30 consecutive trading daysbetween the grant date and February 28, 2011. The weighted-averagegrant-date fair value of these awards was $1.57 per share. Any shares notvested on February 28, 2011, will be forfeited. Additionally, members ofmanagement must be employed by Boise Inc. on February 28, 2011, toreceive these awards.

 

*Service-Condition Vesting Awards*

 

Directors andmembers of management were granted awards of 0.4 million and0.8 million shares of restricted stock subject to service-conditionvesting. The restricted stock granted to directors vests on February 28,2009, whereas all other grants subject to service-condition vestingrestrictions vest as follows: one-third of the service-condition portion of thegrant shall vest on each of February 28, 2009, February 28, 2010, andFebruary 28, 2011, subject to EBITDA goals. Any shares not vested on orbefore February 28, 2011, will be forfeited.

 

*Compensation Expense*

 

We accruecompensation expense for the restricted stock based on the fair value on thedate of the grant, as described below. Compensation expense is recognizedratably over the vesting period for the restricted stock grants that vest overtime and ratably over the award period for the restricted stock grants thatvest based on the closing price of Boise Inc. stock, as discussed above.During the year ended December 31, 2008, we recognized $3.1 millionof compensation expense. Most of these costs were recorded in “General andadministrative expenses” in our Consolidated Statement of Income (Loss).

 

*Fair Value Measurement*

 

SFAS No. 123(R) requiresdifferent valuation calculations for equity grants that have a servicecondition and equity grants that have a market condition. The fair value ofservice-condition restricted stock is determined based on the number of sharesor units granted and the quoted price of our stock at the date of grant and isexpensed on a straight-line basis over the vesting period. The fair value onthe date of grant of these restricted stock grants was $4.16 per share.Compensation expense is adjusted if the service condition is not met.

 

The equitygrants that vest based on the stock price of Boise Inc. aremarket-condition grants under the requirements of SFAS No. 123(R). Thestandard requires that the valuation of market-condition awards consider thelikelihood that the market condition will be satisfied rather than assumingthat the award is vested on the award date. Because the market-basedrestrictions represent a more difficult threshold to meet before payout, withgreater uncertainty that the market condition will be satisfied, these awardshave a lower fair value than those that vest based solely on the passage oftime. However, compensation expense is required to be recognized under SFAS

 

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No. 123(R) for an awardregardless of when, if ever, the market condition is satisfied. We determinedthe fair value on the date of grant of the market-condition awards that vestbased on the stock price of Boise Inc. at $10 per share and $12.50 pershare to be approximately $2.03 per share and $1.57 per share, respectively.The fair value of market-condition restricted stock or units is estimated atthe grant date using a Monte Carlo simulation. We assumed a risk-free rate of2.59%, an expected stock volatility of 58.60%, and a stock price forBoise Inc.’s common shares of $4.16 per share. The $4.16-per-share valueis based on Boise Inc.’s closing stock price on the date of grant. Expenseis recognized on a straight-line basis over the service period.

 

The followingsummarizes the activity of our outstanding service- and market-conditionrestricted stock and units awarded under the Plan as of December 31, 2008,and changes during the period ended December 31, 2008:

 
| ** **                                         | ** ** | **Service-Condition Vesting Awards** | ** ** | **Market-Condition Vesting Awards**      | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                         | ** ** | **Number of  Shares**                     | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Aggregate  Fair Value** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant-Date  Fair Value** | ** ** | **Aggregate  Fair  Value** | ** ** |
| ** **                                         | ** ** | **(thousands)**                                | ** ** | ** **                                         | ** ** | **(thousands)** | ** ** | **(thousands)** | ** ** | ** ** | ** ** | **(thousands)** | ** ** |
| Outstanding at May 2, 2008 (a)           |       | —                                         |       | $                                                  | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
| Granted                                            |       | 1,185                                          |       | 4.16                                               |       | 4,927 |   | 1,929 |   | 1.75 |   | 3,368 |   |
| Vested                                             |       | (30                                            | )          | 4.16                                               |       | (125 | ) | — |   | — |   | — |   |
| Forfeited                                          |       | (12                                            | )          | 4.16                                               |       | (48 | ) | (13 | ) | 1.75 |   | (23 | ) |
| Outstanding at December 31,  2008 (a)(b) | ** ** | **1,143**                                      | ** ** | **$**                                              | **4.16**   | ** ** | **$** | **4,754** | ** ** | **1,916** | ** ** | **$** | **1.75** | ** ** | **$** | **3,345** | ** ** |

 

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(a)***          ***Outstandingunits are the same as nonvested units.

 

(b)***          ***Theremaining weighted average contractual term is approximately 2.0 years forthe service-condition awards and 2.2 years for the market-conditionawards.

 

At December 31,2008, we had approximately $2.6 million and $2.3 million of totalunrecognized compensation cost related to the nonvested service-condition andmarket-condition restricted stock grants, respectively, under the Plan. Thecost is expected to be recognized generally over a weighted average period of2.4 years and 3.0 years for the service-condition andmarket-condition awards, respectively. In accordance with SFAS No. 123 (R),unrecognized compensation expense is calculated net of estimated forfeitures of$0.1 million. During the year ended December 31, 2008, we recognized$3.1 million of compensation expense, of which $2.2 million relatedto the grant-date fair value of service-condition awards vested through December 31,2008, and $0.9 million related to the market-condition awards thatgenerally vest on February 28, 2011.

 

*Dividends*

 

In June 2007,our board of directors authorized stock dividends of 0.5 shares of common stockand 0.2 shares of common stock for each outstanding share of common stock at June 12,2007, and June 19, 2007, respectively.

 

Our ability topay dividends is restricted by our senior secured credit facilities as well asDelaware law and state regulatory authorities. Under Delaware law, our board ofdirectors may not authorize payment of a dividend unless it is either paid outof our capital surplus, as calculated in accordance with the Delaware GeneralCorporation Law, or, if we do not have a surplus, it is paid out of our netprofits for the fiscal year in which the dividend is declared and/or thepreceding fiscal year. To the extent we do not have adequate surplus or netprofits, we will be prohibited from paying dividends. We have not paid any cashdividends on our common stock to date.

 

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*Predecessor*

 

During thePredecessor periods presented, equity compensation was granted to thePredecessor’s employees under Boise Cascade’s equity compensation plans. Duringthe Predecessor periods of January 1 through February 21, 2008, andthe years ended December 31, 2007 and 2006, the Predecessor recognized$0.2 million, $1.7 million, and $1.8 million of compensationexpense, respectively, most of which was recorded in “General andadministrative expenses” in the Consolidated Statements of Income (Loss).

 

***16.******          St. Helens MillRestructuring***

 

In November 2008,we announced the restructuring of our paper mill in St. Helens, Oregon,permanently halting pulp production at the plant and reducing annual paperproduction capacity by approximately 200,000 tons and market pulp capacity atthe St. Helens and Wallula mills by a total of approximately 138,000 tons.The restructuring was primarily the result of declining product demand coupledwith continuing high costs. The move allows us to better match productionlevels to demand for our products and to discontinue production of our leastprofitable papers. The restructuring was substantially complete in January 2009.We have permanently ceased paper production on machines #1 and #4 at the mill.Paper machine #2 at St. Helens continues to operate, manufacturingprimarily lightweight opaque and flexible packaging papers, as does the#3 machine, which is owned by Cascades Tissue Group. The permanentcapacity reductions resulted in the loss of approximately 300 jobs at theSt. Helens mill and 35 jobs in related sales, marketing, and logisticsfunctions elsewhere in the company. Eligible salaried employees were offeredseverance packages and outplacement assistance. We have concluded closureagreement negotiations for the affected union employees. We will employapproximately 170 employees at the mill after restructuring. At December 31,2008, we had terminated approximately 26 employees.

 

For the yearended December 31, 2008, we recorded a pretax charge of $37.6 millionassociated with the restructuring, of which $28.8 million related tononcash expenses. These costs are recorded in our Paper segment. Of the$37.6 million, $7.8 million related to the write-down of inventoryand was recorded in “Materials, labor, and other operating expenses” in theConsolidated Statement of Income (Loss). We recorded the remaining$29.8 million of restructuring costs in “St. Helens millrestructuring” in the Consolidated Statement of Income (Loss). These costsincluded asset write-downs for plant and equipment at the St. Helens mill,employee-related severance costs, pension curtailment losses, and othermiscellaneous costs related to the restructuring of the mill. The severanceliabilities are included in “Accrued liabilities, Compensation and benefits” onthe Consolidated Balance Sheet. We expect to pay these severance costs in firsthalf of 2009.

 

An analysis ofrestructuring-related expenses in 2008 is as follows:

 
| ** **               | ** ** | **Noncash Expense** | ** ** | **Cash Expense (a)** | ** ** | **Total Expenses** | ** ** |
|--------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **(thousands)**          | ** ** |
| ** **               | ** ** | ** **               | ** ** |
| Inventory write-down     |       | $                        | 7,788      |                           | $          | —                  |       | $ | 7,788 |   |
| Asset write-down         |       | 19,825                   |       | —                         |       | 19,825                  |       |
| Employee related costs   |       | —                   |       | 8,433                          |       | 8,433                   |       |
| Pension curtailment loss |       | 1,165                    |       | —                         |       | 1,165                   |       |
| Other                    |       | —                   |       | 357                            |       | 357                     |       |
| ** **               | ** ** | **$**                    | **28,778** | ** **                     | **$**      | **8,790**               | ** ** | **$** | **37,568** |   |

 

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(a)***          ***Asof December 31, 2008, cash payments totaled $0.4 million. We expectto pay most of the remainder of these expenses in the first half of 2009.

 

47

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

 

We operate ourbusiness in three reportable segments, Paper, Packaging, and Corporate andOther (support services) and are headquartered in Boise, Idaho. These segmentsrepresent distinct businesses that are managed separately because of differingproducts and services. Each of these businesses requires distinct operating andmarketing strategies. Management reviews the performance of the Company basedon these segments.

 

*Paper.* Our Paper segment manufactures and sells uncoated freesheet (includingcommodity and premium cut-size office papers); a range of packaging papers(including corrugating medium, label and release papers, and flexible packagingpapers); commodity and premium printing and converting papers (includingcommercial printing papers, envelope papers, and form-related products); andmarket pulp. Many of these paper products are commodity products, while othershave specialized features that make these products premium and specialtygrades. Our premium grades include 100% recycled and colored cut-size officepapers, and our specialty grades include custom-developed papers for such usesas label and release and flexible food packaging. We ship to customers bothdirectly from our mills and through distribution centers. In 2008,approximately 39% of uncoated freesheet paper sales volume, includingapproximately 70% of the office papers sales volume, was sold to OfficeMaxIncorporated (OfficeMax).

 

*Packaging.* Our Packaging segment manufactures and sells containerboard (linerboard)and newsprint at our mill in DeRidder, Louisiana. In March 2008, wecompleted a $23 million project on our linerboard machine at DeRidder,which reduced our exposure to fossil fuels and increased product capabilities.We also operate five corrugated container plants in the Northwest and a sheetfeeder plant in Texas. Our corrugated containers are used primarily in thepackaging of fresh fruit and vegetables, processed food, and beverages, as wellas industrial and consumer products. Our Waco, Texas, plant, known as CentralTexas Corrugated, or CTC, produces corrugated sheets that are sold to sheetplants in the Southwest, where they are converted into corrugated containersfor a variety of customers. Our containerboard and corrugated products are soldby our own sales personnel and by brokers.

 

Until late February 2009,we marketed our newsprint through Abitibi Consolidated Sales Corporation(ACSC), an indirect subsidiary of AbitibiBowater Inc. (AbitibiBowater)pursuant to an arrangement whereby ACSC purchased all of the newsprint weproduce. ACSC sold our newsprint primarily in regional markets near ourDeRidder, Louisiana, manufacturing facility. In late February 2009, weterminated our arrangement with ACSC and since that time have sold ournewsprint production through our own sales personnel primarily to newspaperpublishers in the Southern U.S.

 

*Corporate and Other.*  Our Corporate and Other segment includesprimarily corporate support services, related assets and liabilities, andforeign exchange gains and losses. During the Predecessor periods presented, theCorporate and Other segment included primarily an allocation of Boise Cascadecorporate support services and related assets and liabilities. These supportservices include but were not limited to finance, accounting, legal,information technology, and human resource functions. This segment alsoincludes transportation assets, such as rail cars and trucks, which we use totransport our products from our manufacturing sites. Rail cars and trucks aregenerally leased. We provide transportation services not only to our ownfacilities but also, on a limited basis, to third parties when geographicproximity and logistics are favorable. During the year ended December 31,2008, segment sales related primarily to our rail and truck business and were$67.7 million. During the Predecessor period of January 1 through February 21,2008, and for the years ended December 31, 2007 and 2006, these sales were$8.5 million, $58.9 million, and $61.4 million, respectively.

 

48

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In connectionwith the Acquisition, we entered into an outsourcing services agreement underwhich we provide a number of corporate staff services to Boise Cascade at ourcost. These services include information technology, accounting, and humanresource services. The initial term of the agreement is for three years. Itwill automatically renew for one-year terms unless either party provides noticeof termination to the other party at least 12 months in advance of theapplicable term. For the year ended December 31, 2008, we recorded$12.1 million in “Sales, Related parties” and the same amount in “Costsand expenses” in our Consolidated Statement of Income (Loss) related to thisagreement.

 

The segments’profits and losses are measured on operating profits before change in fairvalue of interest rate derivatives, interest expense, and interest income.Specified expenses are allocated to the segments. For many of these allocatedexpenses, the related assets and liabilities remain in the Corporate and Othersegment.

 

The segmentsfollow the accounting principles described in Note 2, Summary ofSignificant Accounting Policies.

 

Sales toOfficeMax and ACSC, an indirect subsidiary of AbitibiBowater, have representeda concentration in the volume of business transacted and revenue generated fromthese transactions. Sales to OfficeMax were $494.6 million during the yearended December 31, 2008, representing 24% of total sales. For the periodof January 1 through February 21, 2008, and the years ended December 31,2007 and 2006, the Predecessor’s sales to OfficeMax were $90.1 million,$615.7 million, and $575.9 million, respectively. During thePredecessor periods, sales to OfficeMax represented 25%, 26%, and 26% of sales.Sales to ACSC represented 9% of consolidated trade sales for the year ended December 31,2008, and 9%, 9%, and 11% during the Predecessor period of January 1through February 21, 2008, and the years ended December 31, 2007 and2006, respectively. No other single customer accounted for 10% or more of consolidatedtrade sales or of total sales. Export sales to foreign unaffiliated customerswere $212.8 million in 2008 and $40.8 million, $222.1 million,and $182.4 million during the Predecessor period of January 1 throughFebruary 21, 2008, and the years ended December 31, 2007 and 2006,respectively. In all periods presented, net sales were generated domestically,and long-lived assets were held by domestic operations.

 

49

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Segment salesto external customers by product line are as follows (millions):

 
| ** **                       | ** ** | **Boise Inc.**                | ** **  | **Predecessor**                                              | ** ** |
|----------------------------------|------------|------------------------------------|-------------|--------------------------------------------------------------|------------|
| ** **                       | ** ** | **Year  Ended  December 31,** | ** **  | **February 1  (Inception)  Through  December 31,** | ** ** | **January 1  Through  February 21,** | ** ** | **Year  Ended  December 31** | ** ** |
| ** **                       | ** ** | **2008**                           | ** **  | **2007**                                                     | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Paper                            |       |                               |        |                                                         |       |   |   |   |   |   |   |
| Uncoated freesheet               |       | $                                  | 1,240.9     |                                                         | $          | — |   | $ | 224.2 |   | $ | 1,392.1 |   | $ | 1,319.9 |   |
| Containerboard (medium)          |       | 0.2                                |        | —                                                       |       | 0.1 |   | 1.5 |   | 0.7 |   |
| Market pulp                      |       | 101.9                              |        | —                                                       |       | 20.1 |   | 139.3 |   | 118.7 |   |
|                             |       | 1,343.0                            |        | —                                                       |       | 244.4 |   | 1,532.9 |   | 1,439.3 |   |
| Packaging                        |       |                               |        |                                                         |       |   |   |   |   |   |   |
| Containerboard (linerboard)      |       | 88.6                               |        | —                                                       |       | 16.5 |   | 104.3 |   | 107.4 |   |
| Newsprint                        |       | 203.2                              |        | —                                                       |       | 29.8 |   | 217.1 |   | 230.4 |   |
| Corrugated containers and sheets |       | 324.3                              |        | —                                                       |       | 53.1 |   | 364.5 |   | 342.3 |   |
| Other                            |       | 84.3                               |        | —                                                       |       | 13.7 |   | 94.5 |   | 82.3 |   |
|                             |       | 700.4                              |        | —                                                       |       | 113.1 |   | 780.4 |   | 762.4 |   |
| Corporate and Other              |       | 27.2                               |        | —                                                       |       | 2.4 |   | 19.3 |   | 20.3 |   |
| ** **                       | ** ** | **$**                              | **2,070.6** | ** **                                                   | **$**      | **—** | ** ** | **$** | **359.9** | ** ** | **$** | **2,332.6** | ** ** | **$** | **2,222.0** |   |

 

50

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An analysis ofour operations by segment is as follows:

 

**Boise Inc.**

 
| ** **                                                      | ** ** | **Sales**      | ** **  | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** ** | ** ** | **Capital**       | ** ** | ** **         | ** ** |
|-----------------------------------------------------------------|------------|----------------|-------------|----------------------|------------|----------------------------------------|------------|------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                      | ** ** | **Trade**      | ** **  | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**  | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (g)** | ** ** | **Expendi-  tures** | ** ** | **Assets** | ** ** |
| ** **                                                      | ** ** | **(millions)** | ** **  |
|                                                            |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| **Year  Ended December 31, 2008**                               |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| Paper                                                           |       | $              | 1,343.0     |                 | $          | —                                 |       | $          | 60.7       |              | $          | 1,403.7            |       | $ | 32.7 | (a) | $ | 71.7 |   | $ | 104.3 | (a) | $ | 42.8 |   | $ | 1,310.4 |   |
| Packaging                                                       |       | 635.5          |        | 64.9                 |       | 3.3                                    |       | 703.7      |       | 21.1              | (a)        | 35.1               |       | 56.2 | (a) | 43.5 |   | 558.3 |   |
| Corporate and  Other                                            |       | 11.7           |        | 15.5                 |       | 40.5                                   |       | 67.7       |       | (18.6             | )(a)       | 3.2                |       | (15.4 | )(a) | 4.3 |   | 156.4 |   |
|                                                            |       | 1,990.2        |        | 80.4                 |       | 104.5                                  |       | 2,175.1    |       | 35.2              |       | 110.0              |       | 145.1 |   | 90.6 |   | 2,025.1 |   |
| Intersegment  eliminations                                      |       | —         |        | —               |       | (104.5                                 | )          | (104.5     | )          | —            |       | —             |       | — |   | — |   | (36.8 | ) |
| Change in fair  value of interest rate derivatives              |       | —         |        | —               |       | —                                 |       |       |       | (0.5              | )          | —             |       | — |   | — |   | — |   |
| Interest expense                                                |       | —         |        | —               |       | —                                 |       |       |       | (91.2             | )          | —             |       | — |   | — |   | — |   |
| Interest income                                                 |       | —         |        | —               |       | —                                 |       |       |       | 2.2               |       | —             |       | — |   | — |   | — |   |
| ** **                                                      | ** ** | **$**          | **1,990.2** | ** **           | **$**      | **80.4**                               | ** ** | **$**      | **—** | ** **        | **$**      | **2,070.6**        | ** ** | **$** | **(54.3** | **)** | **$** | **110.0** | ** ** | **$** | **145.1** | ** ** | **$** | **90.6** | ** ** | **$** | **1,988.3** |   |
| **February 1  (Inception) Through December 31, 2007** |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| Paper                                                           |       | $              | —      |                 | $          | —                                 |       | $          | —     |              | $          | —             |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Packaging                                                       |       | —         |        | —               |       | —                                 |       | —     |       | —            |       | —             |       | — |   | — |   | — |   |
| Corporate and  Other                                            |       | —         |        | —               |       | —                                 |       | —     |       | (0.3              | )          | —             |       | (0.3 | ) | — |   | 407.6 |   |
|                                                            |       | —         |        | —               |       | —                                 |       | —     |       | (0.3              | )          | —             |       | (0.3 | ) | — |   | 407.6 |   |
| Intersegment  eliminations                                      |       | —         |        | —               |       | —                                 |       | —     |       | —            |       | —             |       | — |   | — |   | — |   |
| Interest income                                                 |       | —         |        | —               |       | —                                 |       | —     |       | 10.4              |       | —             |       | — |   | — |   | — |   |
| ** **                                                      | ** ** | **$**          | **—**  | ** **           | **$**      | **—**                             | ** ** | **$**      | **—** | ** **        | **$**      | **—**         | ** ** | **$** | **10.1** | ** ** | **$** | **—** | ** ** | **$** | **(0.3** | **)** | **$** | **—** | ** ** | **$** | **407.6** |   |

 

51

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**Predecessor**

 
| ** **                                         |       | **Sales**      | ** **  | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** ** | ** ** | **Capital**       | ** ** | ** **         | ** ** |
|----------------------------------------------------|------------|----------------|-------------|----------------------|------------|----------------------------------------|------------|------------|------------|-------------------|------------|--------------------|------------|
| ** **                                         |       | **Trade**      | ** **  | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**  | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (g)** | ** ** | **Expendi-  tures** | ** ** | **Assets** | ** ** |
| ** **                                         |       | **(millions)** |        |
| ** **                                         |       | ** **     |        |
| **January 1  Through February 21, 2008** |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| Paper                                              |       | $              | 154.4       |                 | $          | 90.0                                   |       | $          | 9.1        |              | $          | 253.5              |       | $ | 20.7 |   | $ | 0.3 |   | $ | 21.1 |   | $ | 5.0 |   |   |   |
| Packaging                                          |       | 102.2          |        | 10.9                 |       | 0.4                                    |       | 113.5      |       | 5.7               |       | 0.1                |       | 5.7 |   | 5.2 |   |   |   |
| Corporate and  Other                               |       | 1.8            |        | 0.6                  |       | 6.1                                    |       | 8.5        |       | (3.2              | )          | 0.1                |       | (3.1 | ) | — |   |   |   |
|                                               |       | 258.4          |        | 101.5                |       | 15.6                                   |       | 375.5      |       | 23.2              |       | 0.5                |       | 23.7 |   | 10.2 |   |   |   |
| Intersegment  eliminations                         |       | —         |        | —               |       | (15.6                                  | )          | (15.6      | )          | —            |       | —             |       | — |   | — |   |   |   |
| Interest income                                    |       |           |        | —               |       | —                                 |       | —     |       | 0.2               |       | —             |       | — |   | — |   |   |   |
|                                               | ** ** | **$**          | **258.4**   | ** **           | **$**      | **101.5**                              | ** ** | **$**      | **—** | ** **        | **$**      | **359.9**          | ** ** | **$** | **23.4** | ** ** | **$** | **0.5** | ** ** | **$** | **23.7** | ** ** | **$** | **10.2** |   |   |   |
| **Year  Ended December 31, 2007**             |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| Paper                                              |       | $              | 917.2       |                 | $          | 615.7                                  |       | $          | 63.3       |              | $          | 1,596.2            |       | $ | 133.5 | (c) | $ | 45.0 | (b) | $ | 178.5 | (c) | $ | 103.4 |   | $ | 1,265.6 |   |
| Packaging                                          |       | 705.1          |        | 75.3                 |       | 2.7                                    |       | 783.1      | (d)        | 40.1              | (c)        | 37.7               | (b)        | 77.8 | (c) | 38.2 |   | 579.1 |   |
| Corporate and  Other                               |       | 14.3           |        | 5.0                  |       | 39.6                                   |       | 58.9       |       | (11.9             | )(c)       | 1.9                | (b)        | (10.0 | )(c) | 0.2 |   | 12.4 |   |
|                                               |       | 1,636.6        |        | 696.0                |       | 105.6                                  |       | 2,438.2    |       | 161.7             |       | 84.6               |       | 246.3 |   | 141.8 |   | 1,857.1 |   |
| Intersegment  eliminations                         |       | —         |        | —               |       | (105.6                                 | )          | (105.6     | )          | —            |       | —             |       | — |   | — |   | (11.4 | ) |
| Interest income                                    |       | —         |        | —               |       | —                                 |       | —     |       | 0.7               |       | —             |       | — |   | — |   | — |   |
|                                               | ** ** | **$**          | **1,636.6** | ** **           | **$**      | **696.0**                              | ** ** | **$**      | **—** | ** **        | **$**      | **2,332.6**        | ** ** | **$** | **162.4** | ** ** | **$** | **84.6** | ** ** | **$** | **246.3** | ** ** | **$** | **141.8** | ** ** | **$** | **1,845.7** | ** ** |
| **Year  Ended December 31, 2006**             |       |           |        |                 |       |                                   |       |       |       |              |       |               |       |   |   |   |   |   |   |
| Paper                                              |       | $              | 863.7       |                 | $          | 575.6                                  |       | $          | 55.4       |              | $          | 1,494.7            |       | $ | 63.3 | (e) | $ | 62.3 |   | $ | 125.6 | (e) | $ | 85.5 |   | $ | 1,188.0 |   |
| Packaging                                          |       | 689.0          |        | 73.4                 |       | 4.1                                    |       | 766.5      | (d)        | 45.3              | (e)        | 50.8               |       | 96.1 | (e) | 66.1 | (f) | 565.1 |   |
| Corporate and  Other                               |       | 14.7           |        | 5.6                  |       | 41.1                                   |       | 61.4       |       | (14.9             | )(e)       | 3.3                |       | (11.6 | )(e) | 0.1 |   | 15.7 |   |
|                                               |       | 1,567.4        |        | 654.6                |       | 100.6                                  |       | 2,322.6    |       | 93.7              |       | 116.4              |       | 210.1 |   | 151.7 |   | 1,768.8 |   |
| Intersegment  eliminations                         |       | —         |        | —               |       | (100.6                                 | )          | (100.6     | )          | —            |       | —             |       | — |   | — |   | (10.0 | ) |
| Interest income                                    |       | —         |        | —               |       | —                                 |       | —     |       | 0.6               |       | —             |       | — |   | — |   | — |   |
|                                               | ** ** | **$**          | **1,567.4** | ** **           | **$**      | **654.6**                              | ** ** | **$**      | **—** | ** **        | **$**      | **2,222.0**        | ** ** | **$** | **94.3** | ** ** | **$** | **116.4** | ** ** | **$** | **210.1** | ** ** | **$** | **151.7** | ** ** | **$** | **1,758.8** | ** ** |

 

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(a)           Included $37.6 million of expenserecorded in the Paper segment associated with the restructuring of theSt. Helens mill.

 

Included$7.4 million of expense related to the impact of energy hedges, of which$6.1 million was recorded in the Paper segment and $1.3 million wasrecorded in the Packaging segment.

 

Included$5.5 million of expense recorded in the Packaging segment related to lostproduction and costs incurred as a result of Hurricanes Gustav and Ike.

 

Included$10.2 million related to inventory purchase accounting adjustments, ofwhich $7.4 million was recorded in the Paper segment and $2.8 millionwas recorded in the Packaging segment.

 

Included$19.8 million of expense recorded in the Packaging segment related to theoutage at the DeRidder, Louisiana, mill.

 

Included a$2.9 million gain on changes in supplemental pension plans recorded in theCorporate and Other segment.

 

52

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(b)           Included approximately$21.7 million, $19.1 million, and $1.0 million of lowerdepreciation and amortization expense in the Paper, Packaging, and Corporateand Other segments as a result of discontinuing depreciation and amortizationon the assets recorded as held for sale.

 

(c)           Included a$4.4 million gain for changes in retiree healthcare programs recorded inthe Corporate and Other segment.

 

Included$8.7 million of expense related to the impact of energy hedges. Of the$8.7 million, $7.3 million was recorded in the Paper segment and $1.4 millionwas recorded in the Packaging segment.

 

Included$4.0 million of expense recorded in the Paper segment related to thestart-up of the reconfigured paper machine at the Wallula, Washington, mill.

 

(d)           Included the impact ofadopting EITF 04-13 effective January 1, 2006, which required us toreport our inventory buy/sell transactions with the same counterparty on a netbasis.

 

(e)           Included a$3.7 million gain for changes in retiree healthcare programs recorded inthe Corporate and Other segment.

 

Included$18.1 million of expense related to the impact of energy hedges. Of the$18.1 million, $15.0 million was recorded in the Paper segment and$3.1 million was recorded in the Packaging segment.

 

Included$2.8 million of expense recorded in the Corporate and Other segment forspecial project costs.

 

Included$2.4 million of expense recorded in the Paper segment related towrite-downs associated with the sale of the Vancouver, Washington, mill.

 

(f)            Included$42.6 million of cash paid for the purchase of CTC’s assets in Waco,Texas, recorded in the Packaging segment.

 

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

 

53

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The followingis a reconciliation of net income to EBITDA (millions):

 
| ** **                                         | ** ** | **Boise Inc.**                | ** ** | ** **                                                   | **Predecessor** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|--------------------------------------------------------------|-----------------|------------|
| ** **                                         | ** ** | **Year  Ended  December 31,** | ** ** | **February 1  (Inception)  Through  December 31,** | ** **      | ** ** | **January 1  Through  February 21,** | ** ** | **Year Ended  December 31** | ** ** |
| ** **                                         | ** ** | **2008**                           | ** ** | **2007**                                                     | ** **      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income (loss)                                  |       | $                                  | (45.5      | )                                                            | $               | 5.5        |   |   | $ | 22.8 |   | $ | 159.6 |   | $ | 92.9 |   |
| Change in fair value of interest rate  derivatives |       | 0.5                                |       | —                                                       |            |       | — |   | — |   | — |   |
| Interest expense                                   |       | 91.2                               |       | —                                                       |            |       | — |   | — |   | — |   |
| Interest income                                    |       | (2.2                               | )          | (10.4                                                        | )               |       | (0.2 | ) | (0.7 | ) | (0.6 | ) |
| Income tax provision (benefit)                     |       | (8.8                               | )          | 4.6                                                          |            |       | 0.6 |   | 2.8 |   | 1.4 |   |
| Depreciation, amortization, and depletion          |       | 110.0                              |       | —                                                       |            |       | 0.5 |   | 84.6 |   | 116.4 |   |
| EBITDA                                             | ** ** | **$**                              | **145.1**  | ** **                                                   | **$**           | **(0.3**   | **)** | ** ** | **$** | **23.7** | ** ** | **$** | **246.3** | ** ** | **$** | **210.1** | ** ** |

 

***18.***          ***Commitments and Guarantees***

 

*Commitments*

 

We havecommitments for fiber, leases, and utilities. Our lease commitments arediscussed further in Note 8, Leases. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business.

 

We are a partyto a number of long-term log and fiber supply agreements. At December 31,2008, our total obligation for log and fiber purchases under contracts withthird parties was approximately $168.7 million. Under most of the log andfiber supply agreements, we have the right to cancel or reduce our commitmentsin the event of a mill curtailment or shutdown. The prices under most of theseagreements are set quarterly or semiannually based on regional market prices,and the estimate is based on contract terms or current-quarter pricing. Our logand fiber obligations are subject to change based on, among other things, theeffect of governmental laws and regulations, our manufacturing operations notoperating in the normal course of business, log and fiber availability, and thestatus of environmental appeals. Except for deposits required pursuant to woodsupply contracts, these obligations are not recorded in our consolidatedfinancial statements until contract payment terms take effect.

 

We enter intoutility contracts for the purchase of electricity and natural gas. We alsopurchase these services under utility tariffs. The contractual and tariffarrangements include multiple-year commitments and minimum annual purchaserequirements. At December 31, 2008, we had approximately$24.0 million of utility purchase commitments. These payment obligationswere valued at prices in effect on December 31, 2008, or determinedpursuant to contractual terms, if available. Because we consume the energy inthe manufacture of our products, these obligations represent the face value ofthe contracts, not resale value.

 

*Guarantees*

* *

We provideguarantees, indemnifications, and assurances to others, which constituteguarantees as defined under FIN No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees*, *Including Indirect Guarantees of Indebtedness ofOthers*. See Note 12, Debt for a description of the guarantees,including the approximate terms of the guarantees, how the guarantees arose,the events or circumstances that would require us to perform under theguarantees, and the maximum potential undiscounted amounts of future paymentswe could be required to make.

 

***19.***          ***Legal Proceedings and Contingencies***

 

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

 

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***20.******          Quarterly Results ofOperations (unaudited)***

 
| ** **                         | ** ** | **Predecessor**                                                                            | ** ** | ** **                  | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **January 1**                                                                         | ** ** | **Boise Inc.**         | ** ** |
| ** **                         | ** ** | **Through**                                                                                | ** ** | **2008**                    | ** ** |
| ** **                         | ** ** | **February 21,  2008**                                                                | ** ** | **First  Quarter (a)** | ** ** | **Second  Quarter (b)** | ** ** | **Third  Quarter (c)** | ** ** | **Fourth  Quarter (d)** | ** ** |
| ** **                         | ** ** | **(millions, except per-share and stock price information)** | ** ** |
|                               |       |                                                                                       |       |                        |       |   |   |   |   |   |   |
| Net sales                          |       | $                                                                                          | 359.9      |                        | $          | 228.0 |   | $ | 618.4 |   | $ | 633.1 |   | $ | 591.1 |   |
| Income (loss) from operations      |       | 23.1                                                                                       |       | (9.3                        | )          | 7.6 |   | 30.1 |   | 11.4 |   |
| Net income (loss)                  |       | 22.8                                                                                       |       | (16.4                       | )     | (18.1 | ) | 4.4 |   | (15.5 | ) |
| Net income (loss) per common share |       |                                                                                       |       |                        |       |   |   |   |   |   |   |
| Basic                              |       | —                                                                                     |       | (0.26                       | )          | (0.23 | ) | 0.06 |   | (0.20 | ) |
| Diluted                            |       | —                                                                                     |       | (0.26                       | )          | (0.23 | ) | 0.06 |   | (0.20 | ) |
| Common stock dividends per share   |       | —                                                                                     |       | —                      |       | — |   | — |   | — |   |
| Common stock prices (h)       |       |                                                                                       |       |                        |       |   |   |   |   |   |   |
| High                               |       | —                                                                                     |       | 9.70                        |       | 6.73 |   | 4.20 |   | 1.45 |   |
| Low                                |       | —                                                                                     |       | 6.19                        |       | 3.58 |   | 1.56 |   | 0.29 |   |
|                                    |            |                                                                                            |            |                             |            |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                       | ** ** | **Boise Inc.**                                                                        | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2007**                                                                                   | ** ** |
| ** **                       | ** ** | **February 1  (Inception)  Through  March 31,  2007**                            | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
| ** **                       | ** ** | **(millions, except per-share and stock price information)** | ** ** |
|                             |       |                                                                                       |       |   |   |   |   |   |   |
| Net sales                        |       | $                                                                                          | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Loss from operations             |       | —                                                                                     |       | — |   | (0.1 | ) | (0.2 | ) |
| Net income                       |       | —                                                                                     |       | 0.3 |   | 2.8 |   | 2.4 |   |
| Net income per common share      |       |                                                                                       |       |   |   |   |   |   |   |
| Basic                            |       | —                                                                                     |       | 0.02 |   | 0.05 |   | 0.05 |   |
| Diluted                          |       | —                                                                                     |       | 0.02 |   | 0.05 |   | 0.05 |   |
| Common stock dividends per share |       | —                                                                                     |       | — |   | — |   | — |   |
| Common stock prices (h)     |       |                                                                                       |       |   |   |   |   |   |   |
| High                             |       | —                                                                                     |       | 9.15 |   | 9.30 |   | 9.87 |   |
| Low                              |       | —                                                                                     |       | 9.15 |   | 8.98 |   | 9.21 |   |
|                                  |            |                                                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                         | ** ** | **Predecessor**                                                                            | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2007**                                                                                   | ** ** |
| ** **                         | ** ** | **First  Quarter (e)**                                                                | ** ** | **Second  Quarter (f)** | ** ** | **Third  Quarter (g)** | ** ** | **Fourth  Quarter (g)** | ** ** |
| ** **                         | ** ** | **(millions, except per-share and stock price information)** | ** ** |
|                               |       |                                                                                       |       |   |   |   |   |   |   |
| Net sales                          |       | $                                                                                          | 578.7      |   | $ | 582.6 |   | $ | 583.7 |   | $ | 587.6 |   |
| Income from operations             |       | 22.8                                                                                       |       | 16.6 |   | 50.7 |   | 70.4 |   |
| Net income                         |       | 22.0                                                                                       |       | 16.5 |   | 50.2 |   | 70.8 |   |
| Net income (loss) per common share |       |                                                                                       |       |   |   |   |   |   |   |
| Basic                              |       | —                                                                                     |       | — |   | — |   | — |   |
| Diluted                            |       | —                                                                                     |       | — |   | — |   | — |   |
| Common stock dividends per share   |       | —                                                                                     |       | — |   | — |   | — |   |
| Common stock prices (h)       |       |                                                                                       |       |   |   |   |   |   |   |
| High                               |       | —                                                                                     |       | — |   | — |   | — |   |
| Low                                |       | —                                                                                     |       | — |   | — |   | — |   |
|                                    |            |                                                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

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(a)***          ***Firstquarter 2008 included $19.8 million of expense related to the outage atthe DeRidder, Louisiana, mill.

 

First quarter2008 included $6.5 million of expense related to inventory purchaseaccounting adjustments.

 

(b)***          ***Secondquarter 2008 included $3.7 million of expense related to inventorypurchase accounting adjustments.

 

Second quarter2008 included $3.7 million recorded as a reduction in “Materials, labor,and other operating expense” for energy hedges.

 

(c)***          ***Thirdquarter 2008 included $11.3 million of expense for energy hedges.

 

Third quarter2008 included $5.5 million of expense related to lost production and costsincurred as a result of Hurricanes Gustav and Ike.

 

(d)***          ***Fourthquarter 2008 included $37.6 million of expenses related to therestructuring of our pulp and paper mill in St. Helens, Oregon, which weannounced in November 2008.

 

Fourth quarter2008 included a $2.9 million gain for changes in supplemental pensionplans.

 

(e)***          ***Firstquarter 2007 included $8.7 million of expense related to the impact ofenergy hedges.

 

(f)***           ***Secondquarter 2007 included a $4.4 million gain for changes in retireehealthcare programs.

 

Second quarter2007 included $4.0 million of expense related to the start-up of thereconfigured paper machine at the Wallula, Washington, mill.

 

(g)***          ***Inthird quarter 2007 and fourth quarter 2007, the Predecessor had approximately$10.2 million and $31.6 million of lower depreciation andamortization expense as a result of discontinuing depreciation and amortizationon the assets Boise Cascade recorded as held for sale.

 

(h)***          ***Ourcommon stock began trading on February 22, 2008, on the New York StockExchange (NYSE) under the symbol BZ and, as of December 31, 2008, tradedunder the symbol BZBC.From June 29, 2007, through February 21, 2008, Aldabra 2 AcquisitionCorp.’s common stock was traded on the American Stock Exchange (AMEX) under theSymbol AII. In connection with the Acquisition on February 22, 2008,Aldabra 2 Acquisition Corp. changed its name to Boise Inc. and relisted onthe NYSE under the symbol BZ. The Predecessor had no common stock and was nottraded on an exchange. Common stock prices are based on daily closing prices.

 

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***Report ofIndependent Registered Public Accounting Firm***

 

The Board of Directors andStockholders

Boise, Inc.:

 

We have auditedthe accompanying consolidated balance sheet of Boise Inc. (formerlyAldabra 2 Acquisition Corp.) and subsidiaries as of December 31, 2008, andthe related consolidated statements of loss, stockholders’ equity, and cashflows for the year ended December 31, 2008. We also have auditedBoise Inc.’s. internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). Boise Inc.’smanagement is responsible for these consolidated financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying Management’s Report on Internal Control OverFinancial Reporting. Our responsibility is to express an opinion on theseconsolidated financial statements and an opinion on the Company’s internalcontrol over financial reporting based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement and whether effective internalcontrol over financial reporting was maintained in all material respects. Ouraudit of the consolidated financial statements included examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk. Our audit also included performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions or that the degree of compliance with thepolicies or procedures may deteriorate.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Boise Inc. andsubsidiaries as of December 31, 2008, and the results of their operationsand their cash flows for the year ended December 31, 2008, in conformitywith U.S. generally accepted accounting principles. Also in our opinion,Boise Inc.

 

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maintained, in all materialrespects, effective internal control over financial reporting as of December 31,2008, based on criteria established in *InternalControl — Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP

 

Boise, Idaho

February 23, 2009

 

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***Independent Auditor’sReport***

 

The Board of Directors ofBoise Inc.:

 

We haveaudited the accompanying consolidated balance sheet of Boise Paper Products andsubsidiaries as of December 31, 2007, and the related consolidatedstatements of income, capital, and cash flows for the period from January 1,2008, through February 21, 2008, and for each of the years in the two-yearperiod ended December 31, 2007. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America. Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Boise PaperProducts and subsidiaries as of December 31, 2007, and the results oftheir operations and their cash flows for the period from January 1, 2008,through February 21, 2008, and for each of the years in the two-yearperiod ended December 31, 2007, in conformity with U.S. generally acceptedaccounting principles.

 

/s/ KPMG LLP

 

Boise, Idaho

February 23, 2009

 

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***Report ofIndependent Registered Public Accounting Firm***

 

To the Board of Directors andStockholders

Aldabra 2 Acquisition Corp.:

 

We haveaudited the accompanying consolidated balance sheet of Aldabra 2 AcquisitionCorp. (a corporation in the development stage) and subsidiary (the “Company”)as of December 31, 2007, and the related consolidated statements ofincome, stockholders’ equity and cash flows for the period from February 1,2007 (inception) to December 31, 2007. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audit.

 

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Aldabra 2Acquisition Corp. and subsidiary as of December 31, 2007, and the resultsof their operations and their cash flows for the period from February 1,2007 (date of inception) to December 31, 2007, in conformity with UnitedStates generally accepted accounting principles.

 

/s/ McGladrey &Pullen, LLP

 

New York, New York

February 21, 2008

 

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