**Tableof Contents**

** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

 
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                   | ** ** | ** **                                                                                              |
| **For the quarterly period ended March 31, 2009** |
|                                                   | ** ** | ** **                                                                                              |
| OR                                                     |
|                                                   | ** ** | ** **                                                                                              |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from ____________ to ____________**

 

**CommissionFile Number: 001-33541**

 

**Boise Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                    | ** ** | **20-8356960**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |

 

**1111West Jefferson Street, Suite 200Boise, Idaho 83702-5388**(Address of principal executive offices) (Zip Code)

 

**(208)384-7000**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporatewebsite, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).      Yes o     No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

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

 

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

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                       | ** ** | **Shares  Outstanding as of April 30, 2009** |
|---------------------------------|------------|---------------------------------------------------|
| Common Stock,  $.0001 Par Value |       | 84,481,557                                        |

 

 

 

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Table of Contents

 

**Table ofContents**

 
| ** **    | ** **   |                                                                                        |                                                                | **PART I—FINANCIAL  INFORMATION**                         |   |   |
|---------------|--------------|---------------------------------------------------------------------------------------------|---------------------------------------------------------------------|---------------------------------------------------------------------|--------|--------|
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 1.       |         | Financial Statements                                                                        |                                                                | 3                                                                   |
|          |         |                                                                                        | Notes to Unaudited Quarterly Consolidated Financial  Statements     |                                                                | 7      |
|          |         |                                                                                        |  1.                                                            | Nature of  Operations and Basis of Presentation                     |   | 7      |
|          |         |                                                                                        |  2.                                                            | Acquisition  of Boise Cascade’s Paper and Packaging Operations |   | 8      |
|          |         |                                                                                        |  3.                                                            | Net Income  (Loss) Per Common Share                                 |   | 9      |
|          |         |                                                                                        |  4.                                                            | Transactions  With Related Parties                                  |   | 9      |
|          |         |                                                                                        |  5.                                                            | Other (Income)  Expense, Net                                        |   | 11     |
|          |         |                                                                                        |  6.                                                            | Income Taxes                                                        |   | 11     |
|          |         |                                                                                        |  7.                                                            | Leases                                                              |   | 12     |
|          |         |                                                                                        |  8.                                                            | Receivables                                                         |   | 12     |
|          |         |                                                                                        |  9.                                                            | Inventories                                                         |   | 13     |
|          |         |                                                                                        | 10.                                                                 | Property and  Equipment, Net                                        |   | 13     |
|          |         |                                                                                        | 11.                                                                 | Intangible Assets                                                   |   | 13     |
|          |         |                                                                                        | 12.                                                                 | Asset  Retirement Obligations                                       |   | 14     |
|          |         |                                                                                        | 13.                                                                 | Debt                                                                |   | 15     |
|          |         |                                                                                        | 14.                                                                 | Financial  Instruments                                              |   | 18     |
|          |         |                                                                                        | 15.                                                                 | New and  Recently Adopted Accounting Standards                      |   | 23     |
|          |         |                                                                                        | 16.                                                                 | Retirement and  Benefit Plans                                       |   | 23     |
|          |         |                                                                                        | 17.                                                                 | Stockholders’ Equity                                           |   | 24     |
|          |         |                                                                                        | 18.                                                                 | Comprehensive  Income (Loss)                                        |   | 27     |
|          |         |                                                                                        | 19.                                                                 | St. Helens  Mill Restructuring                                      |   | 27     |
|          |         |                                                                                        | 20.                                                                 | Segment Information                                                 |   | 28     |
|          |         |                                                                                        | 21.                                                                 | Commitments and  Guarantees                                         |   | 30     |
|          |         |                                                                                        | 22.                                                                 | Legal Proceedings  and Contingencies                                |   | 31     |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 2.  |         | Management’s Discussion and Analysis  of Financial Condition and Results of Operations |                                                                | 31                                                                  |
|          |         |                                                                                        | Understanding Our Financial Information                             |                                                                | 31     |
|          |         |                                                                                        | Background                                                          |                                                                | 31     |
|          |         |                                                                                        | Acquisition of Boise Cascade’s Paper and Packaging  Operations |                                                                | 32     |
|          |         |                                                                                        | St. Helens Mill Restructuring                                       |                                                                | 33     |
|          |         |                                                                                        | Our  Segments                                                       |                                                                | 34     |
|          |         |                                                                                        | Recent Trends and Operational Outlook                               |                                                                | 35     |
|          |         |                                                                                        | Factors That Affect Our Operating Results                           |                                                                | 36     |
|          |         |                                                                                        | Our  Operating Results                                              |                                                                | 41     |
|          |         |                                                                                        | Industry  Activities                                                |                                                                | 46     |
|          |         |                                                                                        | Liquidity and Capital Resources                                     |                                                                | 46     |
|          |         |                                                                                        | Contractual  Obligations                                            |                                                                | 53     |
|          |         |                                                                                        | Off-Balance-Sheet Activities                                        |                                                                | 54     |
|          |         |                                                                                        | Guarantees                                                          |                                                                | 54     |
|          |         |                                                                                        | Inflationary and Seasonal Influences                                |                                                                | 54     |
|          |         |                                                                                        | Working  Capital                                                    |                                                                | 54     |
|          |         |                                                                                        | Environmental                                                       |                                                                | 54     |
|          |         |                                                                                        | Critical Accounting Estimates                                       |                                                                | 55     |
|          |         |                                                                                        | New and Recently Adopted Accounting Standards                       |                                                                | 55     |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 3.  |         | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                                | 56                                                                  |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 4.  |         | Controls and  Procedures                                                                    |                                                                | 56                                                                  |
|          |         |                                                                                        |                                                                |                                                                |   |   |
|          |         |                                                                                        |                                                                | **PART II—OTHER  INFORMATION**                            |   |   |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 1.  |         | Legal Proceedings                                                                           |                                                                | 58                                                                  |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 1A. | Risk Factors |                                                                                        | 58                                                                  |
|          |         |                                                                                        |                                                                |                                                                |   |   |
| Item 2.       |         | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                                | 59                                                                  |

 

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| Item 3.      | Defaults  Upon Senior Securities                    | 59     |
|--------------|-----------------------------------------------------|--------|
|         |                                                |   |   |   |
| Item 4.      | Submission  of Matters to a Vote of Securityholders | 59     |
|         |                                                |   |   |   |
| Item 5.      | Other Information                                   | 59     |
|         |                                                |   |   |   |
| Item 6. | Exhibits                                            | 59     |

 

All reports we file with the Securities and ExchangeCommission (SEC) are available free of charge via the Interactive DataElectronic Applications (IDEA) System through the SEC website at www.sec.gov.We also provide copies of our SEC filings at no charge upon request and makeelectronic copies of our reports available through our website atwww.boiseinc.com as soon as reasonably practicable after filing such materialwith the SEC.

 

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**PART I—FINANCIAL INFORMATION**

 

***ITEM 1.              FINANCIALSTATEMENTS***

 

**Boise Inc.**

**Consolidated Statements of Income (Loss)**

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

 
| ** **                                         | ** ** | **Boise Inc.**                            | ** ** | ** **                                     | **Predecessor** | ** **  |
|----------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|-----------------|-------------|
| ** **                                         | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** **      | ** **  | **January 1  Through  February 21,  2008** | ** ** |
|                                               |       |                                           |       |                                           |            |        |   |   |
| **Sales**                                          |       |                                           |       |                                           |            |        |   |   |
| Trade                                              |       | $                                              | 484,868    |                                           | $               | 226,044     |   |   | $ | 258,430 |   |
| Related parties                                    |       | 15,417                                         |       | 1,944                                          |            |        | 101,490 |   |
|                                               |       | 500,285                                        |       | 227,988                                        |            |        | 359,920 |   |
|                                               |       |                                           |       |                                           |            |        |   |   |
| **Costs  and expenses**                            |       |                                           |       |                                           |            |        |   |   |
| Materials,  labor, and other operating expenses    |       | 413,139                                        |       | 195,429                                        |            |        | 313,931 |   |
| Fiber costs from  related parties                  |       | 5,703                                          |       | 18,629                                         |            |        | 7,662 |   |
| Depreciation,  amortization, and depletion         |       | 31,972                                         |       | 12,747                                         |            |        | 477 |   |
| Selling and  distribution expenses                 |       | 13,782                                         |       | 5,943                                          |            |        | 9,097 |   |
| General and  administrative expenses               |       | 10,373                                         |       | 4,549                                          |            |        | 6,606 |   |
| St. Helens mill  restructuring                     |       | 3,648                                          |       | —                                         |            |        | — |   |
| Other (income)  expense, net                       |       | 239                                            |       | (28                                            | )               |        | (989 | ) |
|                                               |       | 478,856                                        |       | 237,269                                        |            |        | 336,784 |   |
|                                               |       |                                           |       |                                           |            |        |   |   |
| **Income  (loss) from operations**                 |       | 21,429                                         |       | (9,281                                         | )               |        | 23,136 |   |
|                                               |       |                                           |       |                                           |            |        |   |   |
| Foreign exchange  gain (loss)                      |       | (678                                           | )          | (853                                           | )               |        | 54 |   |
| Change in fair  value of interest rate derivatives |       | (132                                           | )          | —                                         |            |        | — |   |
| Interest expense                                   |       | (22,154                                        | )          | (11,435                                        | )               |        | (2 | ) |
| Interest income                                    |       | 54                                             |       | 1,821                                          |            |        | 161 |   |
|                                               |       | (22,910                                        | )          | (10,467                                        | )               |        | 213 |   |
|                                               |       |                                           |       |                                           |            |        |   |   |
| **Income  (loss) before income taxes**             |       | (1,481                                         | )          | (19,748                                        | )               |        | 23,349 |   |
| Income tax  (provision) benefit                    |       | 565                                            |       | 3,377                                          |            |        | (563 | ) |
| **Net  income (loss)**                             | ** ** | **$**                                          | **(916**   | **)**                                          | **$**           | **(16,371** | **)** | ** ** | **$** | **22,786** | ** ** |
| ** **                                         | ** ** | ** **                                     | ** ** | ** **                                     | ** **      | ** **  | ** ** | ** ** |
| **Weighted  average common shares outstanding:**   | ** ** | ** **                                     | ** ** | ** **                                     | ** **      | ** **  | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **77,491,233**                                 | ** ** | **62,682,834**                                 | ** **      | ** **  | **—** | ** ** |
| ** **                                         | ** ** | ** **                                     | ** ** | ** **                                     | ** **      | ** **  | ** ** | ** ** |
| **Net  income (loss) per common share:**           | ** ** | ** **                                     | ** ** | ** **                                     | ** **      | ** **  | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **$**                                          | **(0.01**  | **)**                                          | **$**           | **(0.26**   | **)** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

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**Boise Inc.Consolidated Balance Sheets**(unaudited, inthousands)

 
| ** **                               | ** ** | **Boise Inc.**      | ** **    |
|------------------------------------------|------------|--------------------------|---------------|
| ** **                               | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
|                                     |       |                     |          |   |   |
| **ASSETS**                               |       |                     |          |   |   |
|                                     |       |                     |          |   |   |
| **Current**                              |       |                     |          |   |   |
| Cash and cash  equivalents               |       | $                        | 27,510        |   | $ | 22,518 |   |
| Receivables                              |       |                     |          |   |   |
| Trade, less  allowances of $979 and $961 |       | 183,606                  |          | 220,204 |   |
| Related parties                          |       | 2,532                    |          | 1,796 |   |
| Other                                    |       | 5,805                    |          | 4,937 |   |
| Inventories                              |       | 309,952                  |          | 335,004 |   |
| Deferred income  taxes                   |       | 8,791                    |          | 5,318 |   |
| Prepaid and  other                       |       | 7,638                    |          | 6,289 |   |
|                                     |       | 545,834                  |          | 596,066 |   |
|                                     |       |                     |          |   |   |
| **Property**                             |       |                     |          |   |   |
| Property and  equipment, net             |       | 1,250,219                |          | 1,262,810 |   |
| Fiber farms and  deposits                |       | 14,496                   |          | 14,651 |   |
|                                     |       | 1,264,715                |          | 1,277,461 |   |
|                                     |       |                     |          |   |   |
| **Deferred  financing costs**            |       | 69,718                   |          | 72,570 |   |
| **Intangible  assets, net**              |       | 34,425                   |          | 35,075 |   |
| **Other  assets**                        |       | 6,454                    |          | 7,114 |   |
| **Total  assets**                        | ** ** | **$**                    | **1,921,146** | ** ** | **$** | **1,988,286** | ** ** |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

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**Boise Inc.Consolidated Balance Sheets (continued)**(unaudited, inthousands, except share data)

 
| ** **                                                                                                                                | ** ** | **Boise Inc.**      | ** **    |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|
| ** **                                                                                                                                | ** ** | **March 31,  2009** | ** **    | **December 31,  2008** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                              | ** ** | ** **               | ** **    | ** ** | ** ** |
|                                                                                                                                      |       |                     |          |   |   |
| **Current**                                                                                                                               |       |                     |          |   |   |
| Current portion  of long-term debt                                                                                                        |       | $                        | 7,479         |   | $ | 25,822 |   |
| Income taxes  payable                                                                                                                     |       | 804                      |          | 841 |   |
| Accounts payable                                                                                                                          |       |                     |          |   |   |
| Trade                                                                                                                                     |       | 157,871                  |          | 177,157 |   |
| Related parties                                                                                                                           |       | 1,492                    |          | 3,107 |   |
| Accrued  liabilities                                                                                                                      |       |                     |          |   |   |
| Compensation and  benefits                                                                                                                |       | 45,248                   |          | 44,488 |   |
| Interest payable                                                                                                                          |       | 168                      |          | 184 |   |
| Other                                                                                                                                     |       | 21,167                   |          | 17,402 |   |
|                                                                                                                                      |       | 234,229                  |          | 269,001 |   |
|                                                                                                                                      |       |                     |          |   |   |
| **Debt**                                                                                                                                  |       |                     |          |   |   |
| Long-term debt,  less current portion                                                                                                     |       | 967,340                  |          | 1,011,628 |   |
| Notes payable                                                                                                                             |       | 69,229                   |          | 66,606 |   |
|                                                                                                                                      |       | 1,036,569                |          | 1,078,234 |   |
|                                                                                                                                      |       |                     |          |   |   |
| **Other**                                                                                                                                 |       |                     |          |   |   |
| Deferred income  taxes                                                                                                                    |       | 15,208                   |          | 8,907 |   |
| Compensation and  benefits                                                                                                                |       | 152,177                  |          | 149,691 |   |
| Other long-term  liabilities                                                                                                              |       | 33,583                   |          | 33,007 |   |
|                                                                                                                                      |       | 200,968                  |          | 191,605 |   |
|                                                                                                                                      |       |                     |          |   |   |
| **Commitments  and contingent liabilities**                                                                                               |       |                     |          |   |   |
|                                                                                                                                      |       |                     |          |   |   |
| **Stockholders’  Equity**                                                                                                            |       |                     |          |   |   |
| Preferred stock,  $.0001 par value per share: 1,000,000 shares authorized; none issued                                                    |       | —                   |          | — |   |
| Common stock,  $.0001 par value per share: 250,000,000 shares authorized; 79,879,372 shares and 79,716,130 shares issued  and outstanding |       | 8                        |          | 8 |   |
| Additional  paid-in capital                                                                                                               |       | 576,008                  |          | 575,151 |   |
| Accumulated  other comprehensive loss                                                                                                     |       | (85,689                  | )             | (85,682 | ) |
| Accumulated  deficit                                                                                                                      |       | (40,947                  | )             | (40,031 | ) |
| **Total  stockholders’ equity**                                                                                                      |       | 449,380                  |          | 449,446 |   |
|                                                                                                                                      |       |                     |          |   |   |
| **Total  liabilities and stockholders’ equity**                                                                                      | ** ** | **$**                    | **1,921,146** | ** ** | **$** | **1,988,286** | ** ** |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

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**Boise Inc.Consolidated Statements of Cash Flows**(unaudited, in thousands)

 
| ** **                                                                       | ** ** | **Boise Inc.**                            | ** ** | ** **                                     | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|-----------------|------------|
| ** **                                                                       | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** |
| **Cash  provided by (used for) operations**                                      |       |                                           |       |                                           |            |       |   |   |
| Net income  (loss)                                                               |       | $                                              | (916       | )                                              | $               | (16,371    | ) |   | $ | 22,786 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                           |       |                                           |            |       |   |   |
| Depreciation,  depletion, and amortization of deferred financing costs and other |       | 35,030                                         |       | 13,554                                         |            |       | 477 |   |
| Share-based  compensation expense                                                |       | 857                                            |       | —                                         |            |       | — |   |
| Related-party  interest expense                                                  |       | —                                         |       | 986                                            |            |       | — |   |
| Notes payable  interest expense                                                  |       | 2,623                                          |       | —                                         |            |       | — |   |
| Pension and  other postretirement benefit expense                                |       | 2,450                                          |       | 1,237                                          |            |       | 1,826 |   |
| Deferred income  taxes                                                           |       | (844                                           | )          | (3,377                                         | )               |       | 11 |   |
| Change in fair  value of energy derivatives                                      |       | 2,191                                          |       | (204                                           | )               |       | (37 | ) |
| Change in fair  value of interest rate derivatives                               |       | 132                                            |       | —                                         |            |       | — |   |
| (Gain) loss on  sales of assets, net                                             |       | (20                                            | )          | (3                                             | )               |       | (943 | ) |
| Other                                                                            |       | 678                                            |       | 853                                            |            |       | (54 | ) |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                           |       |                                           |            |       |   |   |
| Receivables                                                                      |       | 38,800                                         |       | 23,485                                         |            |       | (23,522 | ) |
| Inventories                                                                      |       | 25,258                                         |       | (5,158                                         | )               |       | 5,343 |   |
| Prepaid expenses                                                                 |       | 256                                            |       | (7,451                                         | )               |       | 875 |   |
| Accounts payable  and accrued liabilities                                        |       | (19,577                                        | )          | 23,654                                         |            |       | (10,718 | ) |
| Current and  deferred income taxes                                               |       | (39                                            | )          | 1,806                                          |            |       | 335 |   |
| Pension and  other postretirement benefit payments                               |       | (1,319                                         | )          | (47                                            | )               |       | (1,826 | ) |
| Other                                                                            |       | 128                                            |       | (1,155                                         | )               |       | 2,326 |   |
| Cash provided by  (used for) operations                                          |       | 85,688                                         |       | 31,809                                         |            |       | (3,121 | ) |
|                                                                             |       |                                           |       |                                           |            |       |   |   |
| **Cash  provided by (used for) investment**                                      |       |                                           |       |                                           |            |       |   |   |
| Acquisition of  businesses and facilities                                        |       | (543                                           | )          | (1,219,421                                     | )               |       | — |   |
| Cash released  from (held in) trust, net                                         |       | —                                         |       | 403,989                                        |            |       | — |   |
| Expenditures for  property and equipment                                         |       | (17,171                                        | )          | (10,224                                        | )               |       | (10,168 | ) |
| Sales of assets                                                                  |       | 61                                             |       | —                                         |            |       | 17,662 |   |
| Other                                                                            |       | (412                                           | )          | 2,410                                          |            |       | 863 |   |
| Cash provided by  (used for) investment                                          |       | (18,065                                        | )          | (823,246                                       | )               |       | 8,357 |   |
|                                                                             |       |                                           |       |                                           |            |       |   |   |
| **Cash  provided by (used for) financing**                                       |       |                                           |       |                                           |            |       |   |   |
| Issuances of  long-term debt                                                     |       | 10,000                                         |       | 1,065,700                                      |            |       | — |   |
| Payments of  long-term debt                                                      |       | (72,631                                        | )          | (35,000                                        | )               |       | — |   |
| Payments to  stockholders for exercise of conversion rights                      |       | —                                         |       | (120,170                                       | )               |       | — |   |
| Payments of  deferred financing fees                                             |       | —                                         |       | (81,898                                        | )               |       | — |   |
| Payments of  deferred underwriters fees                                          |       | —                                         |       | (12,420                                        | )               |       | — |   |
| Net equity  transactions with related parties                                    |       | —                                         |       | —                                         |            |       | (5,237 | ) |
| Cash provided by  (used for) financing                                           |       | (62,631                                        | )          | 816,212                                        |            |       | (5,237 | ) |
|                                                                             |       |                                           |       |                                           |            |       |   |   |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 4,992                                          |       | 24,775                                         |            |       | (1 | ) |
|                                                                             |       |                                           |       |                                           |            |       |   |   |
| **Balance  at beginning of the period**                                          |       | 22,518                                         |       | 186                                            |            |       | 8 |   |
| ** **                                                                       | ** ** | ** **                                     | ** ** | ** **                                     | ** **      | ** ** | ** ** | ** ** |
| **Balance  at end of the period**                                                | ** ** | **$**                                          | **27,510** | ** **                                     | **$**           | **24,961** | ** ** | ** ** | **$** | **7** | ** ** |

 

See accompanying notes to unaudited quarterly consolidated financialstatements.

 

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

 

***1.            Nature of Operationsand Basis of Presentation***

 

On February 22,2008, Boise Inc. or “the Company,” “we,” “us,” or “our” completed theacquisition (the Acquisition) 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 to the operation ofthe paper, packaging and newsprint, and transportation businesses of the PaperGroup and part of the headquarters operations of Boise Cascade, L.L.C. (BoiseCascade). The business we acquired is referred to in this report on Form 10-Qas the “Predecessor.” The Acquisition was accomplished through the Company’sacquisition of Boise Paper Holdings, L.L.C. See Note 2, Acquisition ofBoise Cascade’s Paper and Packaging Operations, for more information related tothe Acquisition.

 

The following sets forthour corporate structure following the Acquisition:

 

 

Boise Inc. operates itsbusiness in three reportable segments, Paper, Packaging, and Corporate andOther (support services) and is headquartered in Boise, Idaho. Boise Inc.manufactures packaging products and papers, including corrugated containers,containerboard, label and release and flexible packaging papers, imaging papersfor the office and home, printing and converting papers, newsprint, and marketpulp.

 

The accompanyingConsolidated Statement of Income (Loss) and Consolidated Statement of CashFlows for the three months ended March 31, 2008, include our activitiesprior to the Acquisition and the operations of the acquired businesses from February 22,2008, through March 31, 2008. The Consolidated Statement of Income (Loss)and Consolidated Statement of Cash Flows for the period of January 1through February 21, 2008, of the Predecessor are presented forcomparative purposes.

 

The quarterly consolidatedfinancial statements presented have not been audited by an independentregistered public accounting firm but, in the opinion of management, includeall adjustments, consisting of normal, recurring adjustments, necessary topresent fairly the results for the periods presented. The preparation of theconsolidated financial statements involves the use of estimates and accruals.Actual results may vary from those estimates. Quarterly results are notnecessarily indicative of results that may be expected for the full year. Thesecondensed notes to unaudited consolidated financial statements should be readin conjunction with our Quarterly Reports on Form 10-Q, our 2008 AnnualReport on Form 10-K, and the other reports we file with the Securities andExchange Commission (SEC).

 

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For the Predecessorperiod presented, the consolidated financial statements include accountsspecifically attributed to the Paper Group and a portion of Boise Cascade’sshared corporate general and administrative expenses. These shared servicesinclude, 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 Predecessorperiod presented, income taxes, where applicable, were calculated as if thePredecessor were a separate taxable entity. For the period of January 1through February 21, 2008, the majority of the businesses and assets ofthe Predecessor were held and operated by limited liability companies, whichare not subject to entity-level federal or state income taxation. In additionto the businesses and assets held and operated by limited liability companies,the Predecessor had taxable corporations subject to federal, state, and localincome taxes for which taxes were recorded. Information on the allocations andrelated-party transactions is included in Note 4, Transactions WithRelated Parties.

 

*Reclassifications*

 

Certain amounts in priorperiods’ consolidated financial statements have been reclassified to conformwith the current period’s presentation.

 

***2.******            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. The Acquisition wasaccounted for in accordance with the provisions of Statement of FinancialAccounting Standards (SFAS) No. 141, *Business Combinations*.Upon completion of the transaction, Boise Cascade owned 37.9 million, or49%, of our outstanding shares, and they continue to hold a significantfinancial interest in us.

 

The purchase price waspaid with cash, the issuance of shares of our common stock, and a note payable.These costs, including direct transaction costs and purchase price 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** | ** ** |

 

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The following tablesummarizes the final fair value allocation of the assets acquired andliabilities assumed in the Acquisition as of March 31, 2009:

 
| ** **                | ** ** | **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** | ** ** |

 

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

 

For the three months ended March 31, 2009 and2008, net income (loss) per common share is computed by dividing net income(loss) by the weighted average number of shares of common stock outstandingduring the period. Basic and diluted net income (loss) per share is calculatedas follows:

 
| ** **                                                                      | ** ** | **Boise Inc.**                                   | ** ** |
|---------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **Three  Months  Ended  March 31**               | ** ** |
| ** **                                                                      | ** ** | **2009**                                              | ** ** | **2008** | ** ** |
| ** **                                                                      | ** ** | **(thousands, except per-share data)** | ** ** |
|                                                                            |       |                                                  |       |   |   |
| Net income  (loss)                                                              |       | $                                                     | (916       | ) | $ | (16,371 | ) |
|                                                                            |       |                                                  |       |   |   |
| Weighted average  number of common shares for basic net income (loss) per share |       | 77,491                                                |       | 62,683 |   |
| Incremental  effect of dilutive common stock equivalents:                       |       |                                                  |       |   |   |
| Common stock  warrants (a)                                                      |       | —                                                |       | — |   |
| Restricted stock  (b)                                                           |       | —                                                |       | — |   |
| Restricted stock  units (b)                                                     |       | —                                                |       | — |   |
| Weighted average  number of shares for diluted net income (loss) per share      |       | 77,491                                                |       | 62,683 |   |
|                                                                            |       |                                                  |       |   |   |
| Net income  (loss) per share—basic and diluted (a) (b)                | ** ** | **$**                                                 | **(0.01**  | **)** | **$** | **(0.26** | **)** |

 

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(a)                                For the three months ended March 31, 2009and 2008, warrants to purchase 44.4 million shares of common stock werenot included in the computation of diluted net income (loss) per share, becausethe exercise price exceeded the average market price of our common stock.

 

(b)                               For the three months ended March 31,2009, unvested restricted stock and restricted stock units were not included inthe computation of diluted net loss per share, because inclusion of theseamounts would be antidilutive.

 

***4.******                                      TransactionsWith Related Parties***

 

During the Predecessor period of January 1through February 21, 2008, the Predecessor participated in Boise Cascade’scentralized cash management system. Cash receipts attributable to thePredecessor’s operations were collected by Boise Cascade, and cashdisbursements were funded by

 

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Boise Cascade. The net effect of these transactionshas been reflected as “Net equity transactions with related parties” in theConsolidated Statement of Cash Flows. The following table includes thecomponents of these related-party transactions:

 
| ** **                                               | ** ** | **Predecessor**                                      | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **January 1  Through  February 21,  2008** | ** ** |
| ** **                                               | ** ** | **(thousands)**                                      | ** ** |
|                                                     |       |                                                 |       |
| Cash collections                                         |       | $                                                    | (354,222   | ) |
| Payment of  accounts payable                             |       | 336,605                                              |       |
| Capital  expenditures and acquisitions                   |       | 10,168                                               |       |
| Income taxes                                             |       | 217                                                  |       |
| Corporate  general and administrative expense allocation |       | 1,995                                                |       |
| Net equity  transactions with related parties            | ** ** | **$**                                                | **(5,237** | **)** |

 

*Related-Party Sales*

 

During the Predecessorperiod of January 1 through February 21, 2008, the Predecessor soldpaper and paper products to OfficeMax Incorporated (OfficeMax) at sales pricesthat were designed to approximate market prices. For the Predecessor period of January 1through February 21, 2008, sales to OfficeMax were $90.1 million andrepresented 25% of total sales. These sales are included in “Sales, Relatedparties” in the Consolidated Statement of Income (Loss). Subsequent to theAcquisition, OfficeMax is no longer a related party.

 

Boise Inc. and thePredecessor provided transportation services to Boise Cascade. For the threemonths ended March 31, 2009 and 2008, and the Predecessor period of January 1through February 21, 2008, Boise Inc. and the Predecessor recorded$0.6 million, $0.4 million, and $0.6 million of sales fortransportation services, respectively.

 

The Predecessor sold$10.8 million of wood to Boise Cascade’s wood products business during theperiod of January 1 through February 21, 2008. These sales areincluded in “Sales, Related parties” in the Consolidated Statements of Income(Loss). Subsequent to the Acquisition, Louisiana Timber Procurement Company,L.L.C., a fully consolidated entity, began selling wood to Boise Cascade.During the three months ended March 31, 2009, we recorded$11.2 million of sales to Boise Cascade in “Sales, Related parties” in theConsolidated Statement of Income (Loss) and recorded approximately the sameamount of expenses in “Materials, labor, and other operating expenses.”

 

In connection with theAcquisition, we entered into an outsourcing services agreement under which weprovide a number of corporate staff services to Boise Cascade at our cost.These services include information technology, accounting, and human resourceservices. 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 three months ended March 31, 2009 and 2008, werecognized $3.6 million and $1.5 million, respectively, in “Sales,Related parties” and the same amounts in “Costs and expenses” in ourConsolidated Statements of Income (Loss) related to this agreement.

 

*Related-Party Costs and Expenses*

 

BoiseInc. and the Predecessor purchased fiber from related parties at prices thatapproximated market prices. During the three months ended March 31, 2009and 2008, and the Predecessor period of January 1 through February 21,2008, fiber purchases from related parties were $5.7 million,$18.6 million, and $7.7 million, respectively. Most of thesepurchases related to chip and log purchases from Boise Cascade’s wood productsbusiness. All of the costs associated with these purchases were recorded as “Fibercosts from related parties” in the Consolidated Statements of Income (Loss).

 

During thePredecessor period presented, the Predecessor used services and administrativestaff of Boise Cascade. These services included, but were not limited to,finance, accounting, legal, information technology, and human resourcefunctions. The costs not specifically identifiable to the

 

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Predecessor were allocated based primarily on averagesales, assets, and labor costs. These costs are included in “General andadministrative expenses” in the Consolidated Statement of Income (Loss). ThePredecessor believes the allocations are a reasonable reflection of its use ofthe services. However, had the Predecessor operated on a stand-alone basis, itestimates that its Corporate and Other segment would have reportedapproximately $2.5 million of segment expenses before interest, taxes,depreciation, and amortization for the Predecessor period of January 1through February 21, 2008.

 

During the Predecessor period presented, some of thePredecessor’s employees participated in Boise Cascade’s noncontributory definedbenefit pension and contributory defined contribution savings plans. For thePredecessor period of January 1 through February 21, 2008, theStatement of Income (Loss) included $3.9 million of expenses attributableto its participation in Boise Cascade’s defined benefit and definedcontribution plans.

 

During the three monthsended March 31, 2008, we recorded $1.0 million of related-partyinterest expense in “Interest expense” in our Consolidated Statement of Income(Loss). This expense is related to the subordinated promissory note we issuedto Boise Cascade in connection with the Acquisition. After the Acquisition, thenote was transferred to parties unrelated to Boise Cascade or to us.Accordingly, we no longer record the note as a related-party note on ourConsolidated Balance Sheet. At March 31, 2009, and December 31, 2008,we had $69.2 million and $66.6 million, respectively, recorded in “Notespayable” on our Consolidated Balance Sheets.

 

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

 

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

 
| ** **            | ** ** | **Boise Inc.**                            | ** ** | ** **                                           | **Predecessor** | ** ** |
|-----------------------|------------|------------------------------------------------|------------|------------------------------------------------------|-----------------|------------|
| ** **            | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,   2008** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** |
|                  |       |                                           |       |                                                 |            |       |   |   |
| Sales of assets,  net |       | $                                              | (20        | )                                                    | $               | (3         | ) |   | $ | (941 | ) |
| Other, net            |       | 259                                            |       | (25                                                  | )               |       | (48 | ) |
| ** **            | ** ** | **$**                                          | **239**    | ** **                                           | **$**           | **(28**    | **)** | ** ** | **$** | **(989** | **)** |

 

***6.           Income Taxes***

 

For the three months ended March 31, 2009 and2008, our effective tax benefit rate was 38.1% and 17.1%, respectively. During2009, the primary reason for the difference from the federal statutory incometax rate of 35.0% was the effect of establishing valuation allowances on lossesincurred during the quarter, which was substantially offset by the effect ofvarious discrete tax items. In 2008, the primary reason for the difference wasthe effect of valuation allowances.

 

During the Predecessor period of January 1through February 21, 2008, the majority of the Predecessor businesses andassets were held and operated by limited liability companies, which are notsubject to entity-level federal or state income taxation. For the separatePredecessor subsidiaries that are taxed as corporations, the effective tax ratewas 37.6%. During this period, the primary reason for the difference from thefederal statutory income tax rate of 34.0% was the effect of state incometaxes.

 

For the three months ended March 31, 2009, werecorded $0.6 million of income tax benefits. We have not recognized anadditional $0.9 million of tax benefits related to losses incurred duringthe quarter, because the realization of these benefits is not considered morelikely than not.

 

For the three months ended March 31,2008, we recorded $3.4 million of income tax benefits related to lossesincurred during the quarter. At March 31, 2008, we had notrecognized $4.1 million of tax benefits from the losses resulting from ourfirst-quarter operations, because the realization of these benefits was notconsidered more likely than not. Because of its pass-through tax structure,the Predecessor recorded tax expense related only to small subsidiaries thatare taxed as corporations.

 

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Income tax expense during the Predecessor period of January 1through February 21, 2008, was $0.6 million, consisting of federaland state income taxes.

 

During the three monthsended March 31, 2009 and 2008, cash paid for taxes, net of refundsreceived, was $0.3 million and $1.5 million. During the Predecessorperiod of January 1 through February 21, 2008, cash paid for taxes,net of refunds received, was not material.

 

Aspart of the Acquisition, we acquired two corporate entities, both of which aresubject to examination by taxing authorities in their normal course ofbusiness. These entities are subject to audit by taxing authorities for theyear 2005 and the years that follow. We are responsible for any tax adjustmentsresulting from such audits. One of these entities, Boise Cascade TransportationHoldings Corp., is currently undergoing examination for the 2006 tax year;however, we do not expect any material adjustments from this audit.

 

***7.           Leases***

 

We lease ourdistribution centers, as well as other property and equipment, under operatingleases. During the Predecessor period presented, the Predecessor leased itsdistribution centers, as well as other property and equipment, under operatingleases. For purposes of determining straight-line rent expense, the lease termis calculated from the date of possession of the facility, including anyperiods of free rent and any renewal option periods that are reasonably assuredof being exercised. Straight-line rent expense is also adjusted to reflect anyallowances or reimbursements provided by the lessor. Rental expense foroperating leases and sublease rental income received were as follows (inthousands):

 
| ** **              | ** ** | **Boise Inc.**                            | ** ** | ** **                                           | **Predecessor** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|-----------------|------------|
| ** **              | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,   2008** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** |
|                    |       |                                           |       |                                                 |            |       |   |   |
| Rental expense          |       | $                                              | 3,919      |                                                 | $               | 1,395      |   |   | $ | 2,044 |   |
| Sublease rental  income |       | —                                         |       | —                                               |            |       | — |   |
|                         |            |                                                |            |                                                      |                 |            |  |  |  |  |  |

 

For noncancelableoperating leases with remaining terms of more than one year, the minimum leasepayment requirements are $9.4 million for the remainder of 2009,$12.0 million in 2010, $11.0 million in 2011, $10.2 million in2012, $8.2 million in 2013, and $6.9 million in 2014, with total paymentsthereafter of $19.3 million. Minimum sublease income received in thefuture is not expected to be material, and future minimum sublease paymentshave not been reduced by any sublease income.

 

Substantially alllease agreements have fixed payment terms based on the passage of time. Somelease agreements provide us with the option to purchase the leased property.Additionally, some agreements contain renewal options averagingseven years, with fixed payment terms similar to those in the originallease agreements.

 

***8.           Receivables***

 

We have a large,diversified customer base; however, we sell a large portion of our paper salesvolume to OfficeMax. Sales to OfficeMax represent a concentration in the volumeof business transacted and a concentration of credit risk. During the threemonths ended March 31, 2009 and 2008, sales to OfficeMax were$141.9 million and $153.3 million, respectively, and representedapproximately 28% and 26% of our total sales for these periods. At March 31,2009, and December 31, 2008, we had $39.2 million and$30.3 million, respectively, of accounts receivable due from OfficeMax.

 

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Until recently, wemarketed our newsprint exclusively through Abitibi Consolidated SalesCorporation (ACSC), an indirect subsidiary of AbitibiBowater Inc. We terminatedthis agreement in early 2009, and we now market newsprint directly to customersusing our own sales personnel. At March 31, 2009, and December 31,2008, we had $8.6 million and $32.4 million, respectively, ofreceivables due from ACSC. Recently, AbitibiBowater announced that certain ofits U.S. and Canadian subsidiaries have filed voluntary petitions in the UnitedStates under Chapter 11 of the United States Bankruptcy Code.  In addition, AbitibiBowater and its Canadiansubsidiaries have obtained an Order from the Quebec Superior Court in Canadafor creditor protection pursuant to the Companies’ Creditors Arrangement Act.The Fort Francis, Ontario, pulp mill, which is owned by AbitibiBowater, is amajor supplier of purchased pulp to our International Falls, Minnesota, mill.The impact of the bankruptcy proceedings on the operations of the Fort Francispulp mill is uncertain; however, due to the availability of alternative sourcesof pulp fiber, we do not anticipate a significant impact on the mill operationsat International Falls at this time. The amount ACSC owes us is less than theamount we owe ACSC and other affiliates of AbitibiBowater. It is uncertain whateffect the reorganization will have on our ability to collect all or some ofthe receivables owed to us by ACSC.

 

***9.           Inventories***

 

Inventoriesinclude the following:

 
| ** **                        | ** ** | **Boise Inc.** | ** **  |
|-----------------------------------|------------|---------------------|-------------|
| ** **                        | ** ** | **March 31,**  | ** **  | **December 31,** | ** ** |
| ** **                        | ** ** | **2009**            | ** **  | **2008** | ** ** |
| ** **                        | ** ** | **(thousands)**     | ** **  |
|                              |       |                |        |   |   |
| Finished goods                    |       | $                   | 155,994     |   | $ | 173,029 |   |
| Work in process                   |       | 30,611              |        | 37,582 |   |
| Fiber                             |       | 42,106              |        | 41,241 |   |
| Other raw materials  and supplies |       | 81,241              |        | 83,152 |   |
| ** **                        | ** ** | **$**               | **309,952** |   | **$** | **335,004** |   |

 

***10.******                               Propertyand Equipment, Net***

 

Property and equipmentconsisted of the following asset classes:

 
| ** **                     | ** ** | **Boise Inc.** | ** **    |
|--------------------------------|------------|---------------------|---------------|
| ** **                     | ** ** | **March 31,**  | ** **    | **December 31,** | ** ** |
| ** **                     | ** ** | **2009**            | ** **    | **2008** | ** ** |
| ** **                     | ** ** | **(thousands)**     | ** **    |
|                           |       |                |          |   |   |
| Land and land  improvements    |       | $                   | 31,875        |   | $ | 31,875 |   |
| Buildings and  improvements    |       | 193,723             |          | 187,892 |   |
| Machinery and  equipment       |       | 1,126,253           |          | 1,113,572 |   |
| Construction in  progress      |       | 27,926              |          | 29,833 |   |
|                           |       | 1,379,777           |          | 1,363,172 |   |
| Less accumulated  depreciation |       | (129,558            | )             | (100,362 | ) |
| ** **                     | ** ** | **$**               | **1,250,219** |   | **$** | **1,262,810** |   |

 

***11.          Intangible Assets***

 

Intangible assetsrepresent primarily the values assigned to the trademark and trade name,customer relationships, and technology in connection with the Acquisition.Customer relationships are amortized over approximately ten years andtechnology is amortized over approximately five years. Trademarks and tradenames are not amortized. During the three months ended March 31, 2009 and2008, intangible asset amortization was $0.7 million and$0.4 million. During the Predecessor period of January 1 through February 21,2008, intangible asset amortization was zero. Our estimated amortizationexpense is $2.1 million for the remainder of 2009, $2.8 million ineach of 2010 and 2011, $2.7 million in 2012, $1.6 million in 2013,and $1.4 million in 2014.

 

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| ** **                  | ** ** | **Boise Inc.**                                            | ** ** |
|-----------------------------|------------|----------------------------------------------------------------|------------|
| ** **                  | ** ** | **Three Months Ended March 31, 2009** | ** ** |
| ** **                  | ** ** | **Gross Carrying  Amount**                                | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | ** **                                                     | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                        |       |                                                           |       |   |   |   |   |
| Trademarks and  trade names |       | $                                                              | 16,800     |   | $ | — |   | $ | 16,800 |   |
| Customer  relationships     |       | 13,700                                                         |       | (1,484 | ) | 12,216 |   |
| Technology and  other       |       | 6,895                                                          |       | (1,486 | ) | 5,409 |   |
| ** **                  | ** ** | **$**                                                          | **37,395** | ** ** | **$** | **(2,970** | **)** | **$** | **34,425** |   |

 
| ** **                  | ** ** | **Boise Inc.**                                  | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **Year Ended December 31, 2008** | ** ** |
| ** **                  | ** ** | **Gross Carrying  Amount**                      | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | ** **                                           | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                        |       |                                                 |       |   |   |   |   |
| Trademarks and  trade names |       | $                                                    | 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** |   |

 

We have not allocated any amounts related to theAcquisition to goodwill.

 

***12.***           ***Asset Retirement Obligations***

 

We account for asset retirementobligations in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations*, and Financial Accounting StandardsBoard (FASB) Interpretation (FIN) No. 47, *Accountingfor Conditional Asset Retirement Obligations — an Interpretation of FASBStatement No. 143*. We accrue for asset retirement obligationsin the period in which they are incurred if sufficient information is availableto reasonably estimate the fair value of the obligation. When we record theliability, we capitalize the cost by increasing the carrying amount of therelated long-lived asset. Over time, the liability is accreted to 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 March 31, 2009, and December 31,2008, we had $14.6 million and $14.3 million of asset retirementobligations recorded on the Consolidated Balance Sheets. These liabilitiesrelated primarily to landfill closure and closed-site monitoring costs. Theseliabilities are based on the best estimate of current costs and are updatedperiodically to reflect current technology, laws and regulations, inflation,and other economic factors. No assets are legally restricted for purposes ofsettling asset retirement obligations. The table below describes changes to theasset retirement obligations for Boise Inc. for the three months ended March 31,2009, and for the year ended December 31, 2008:

 
| ** **                                                            | ** ** | **Boise Inc.**      | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                            | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| ** **                                                            | ** ** | **(thousands)**          | ** ** |
|                                                                  |       |                     |       |   |   |
| Asset retirement  obligation at beginning of period                   |       | $                        | 14,283     |   | $ | — |   |
| Asset retirement  liability recorded in the purchase price allocation |       | —                   |       | 13,655 |   |
| Liabilities  incurred                                                 |       | —                   |       | 58 |   |
| Accretion  expense                                                    |       | 292                      |       | 921 |   |
| Payments                                                              |       | (7                       | )          | (542 | ) |
| Revisions in  estimated cash flows                                    |       | —                   |       | 191 |   |
| Asset retirement  obligation at end of period                         | ** ** | **$**                    | **14,568** | ** ** | **$** | **14,283** | ** ** |

 

We have additional asset retirementobligations with indeterminate settlement dates. The fair value of these assetretirement obligations cannot be estimated due to the lack of sufficientinformation to estimate the settlement dates of the obligations. These assetretirement obligations include, for example,

 

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(i) removal and disposal of potentially hazardous materials related toequipment and/or an operating facility if the equipment and/or facilities wereto undergo major maintenance, renovation, or demolition; (ii) wastewatertreatment ponds that may be required to be drained and/or cleaned if therelated operating facility is closed; and (iii) storage sites or ownedfacilities for which removal and/or disposal of chemicals and other relatedmaterials are required if the operating facility is closed. We will recognize aliability in the period in which sufficient information becomes available toreasonably estimate the fair value of these obligations.

 

***13.***           ***Debt***

 

At March 31, 2009,and December 31, 2008, our long-term debt and the interest rates on thatdebt were as follows:

 
| ** **                            | ** ** | **March 31, 2009** | ** **    | **December 31, 2008** | ** ** |
|---------------------------------------|------------|------------------------------|---------------|---------------------------------|------------|
| ** **                            | ** ** | **Amount**                   | ** **    | **Interest Rate**          | ** ** | **Amount** | ** ** | **Interest Rate** | ** ** |
| ** **                            | ** ** | **(thousands)**              | ** **    | ** **                      | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                                  |       |                         |          |                            |       |   |   |   |   |
| Revolving credit  facility, due 2013  |       | $                            | 20,000        |                            | 3.81       | % | $ | 60,000 |   | 4.33 | % |
| Tranche A term  loan, due 2013        |       | 237,567                      |          | 3.81                            | %          | 245,313 |   | 4.75 | % |
| Tranche B term  loan, due 2014        |       | 456,552                      |          | 5.75                            | %          | 471,437 |   | 5.75 | % |
| Second lien term  loan, due 2015      |       | 260,700                      |          | 9.25                            | %          | 260,700 |   | 9.25 | % |
| Current portion  of long-term debt    |       | (7,479                       | )             | 4.11                            | %          | (25,822 | ) | 5.33 | % |
| Long-term debt,  less current portion |       | 967,340                      |          | 6.19                            | %          | 1,011,628 |   | 6.34 | % |
| Current portion  of long-term debt    |       | 7,479                        |          | 4.11                            | %          | 25,822 |   | 5.33 | % |
|                                  |       | 974,819                      |          | 6.17                            | %          | 1,037,450 |   | 6.31 | % |
|                                  |       |                         |          |                            |       |   |   |   |   |
| 15.75% notes  payable, due 2015       |       | 69,229                       |          | 15.75                           | %          | 66,606 |   | 15.75 | % |
|                                  | ** ** | **$**                        | **1,044,048** |                            |       | ** ** | **$** | **1,104,056** |   |   |   |

 

*Senior Secured Credit Facilities*

 

Our senior secured credit facilities consist of:

 

·      A five-year nonamortizing $250.0million senior secured revolving credit facility with interest at either theLondon Interbank Offered Rate (LIBOR) plus 325 basis points or a calculatedbase rate plus 325 basis points (the Revolving Credit Facility and, collectivelywith the Tranche A Term Loan Facility and the Tranche B Term Loan Facility, theFirst Lien Facilities);

 

·      A five-year amortizing $250.0 millionsenior secured Tranche A term loan facility with interest at LIBOR plus 325basis points or a calculated base rate plus 325 basis points (the Tranche ATerm Loan Facility);

 

·      A six-year amortizing $475.0 millionsenior secured Tranche B term loan facility with interest at LIBOR (subject toa floor of 4.00%) plus 350 basis points or a calculated base rate plus 250basis points (the Tranche B Term Loan Facility); and

 

·      A seven-year nonamortizing $260.7million second lien term loan facility with interest at LIBOR (subject to afloor of 5.50%) plus 700 basis points or a calculated base rate plus 600 basispoints (the Second Lien Facility and, together with the First Lien Facilities,the Credit Facilities).

 

All borrowings under the Credit Facilities bear interest at arate per annum equal to an applicable margin plus a customary base rate orEurodollar rate. The base rate means, for any day, a rate per annum equal tothe greater of (i) the Prime Rate in effect on such day and (ii) theFederal Funds Effective Rate in effect on such day plus 0.50%. In addition topaying interest, the Company pays a commitment fee to the lenders under theRevolving Credit Facility at a rate of 0.50% per annum (which shall be reducedto 0.375% when the leverage ratio is less than 2.25:1.00) times the dailyaverage undrawn portion of the Revolving Credit Facility (reduced by the amountof letters of credit issued and outstanding), which fee is payable quarterly inarrears. At March 31, 2009, and December 31, 2008, we had$20.0 million and $60.0 million of borrowings outstanding under theRevolving Credit Facility. For the three months ended March 31, 2009, andthe year ended December 31, 2008, the average interest rate for ourborrowings under our Revolving Credit Facility was 3.7% and 6.0%. The minimumand maximum borrowings under the Revolving Credit Facility were$10.0 million and $60.0 million for the three months

 

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endedMarch 31, 2009, and 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 three months ended March 31, 2009 and 2008, was$28.1 million and $73.7 million. At March 31, 2009, we hadavailability of $205.5 million, which is net of outstanding letters ofcredit of $24.5 million. At December 31, 2008, we had availability of$163.6 million, which was net of outstanding letters of credit of$26.4 million.

 

The loan documentation for the Credit Facilities contains, amongother terms, 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 agents 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 of Boise Inc. andthe parent company of Boise Paper Holdings, L.L.C. (the Borrower), and itssubsidiaries to maintain financial covenant ratios. At March 31, 2009,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. Under the Second Lien Facility, Holdings is required to maintain amaximum leverage ratio of 4.75:1.00 at March 31, 2009. The covenant ratiostighten over time. At December 31,2009, the minimum interest coverage ratio requirement increases to 2.50:1.00under the First Lien Facilities, and the maximum leverage ratio decreases to3.75:1.00 and 4.00:1.00 under the First and Second Lien Facilities,respectively. The minimum interest coverage ratio requirement remains 2.50:1.00throughout the term of the loan, whereas the maximum leverage ratio decreasesto a low of 3.00:1.00 and 3.25:1.00 under the First and Second Lien Facilities,respectively, in first quarter 2011.

 

The interest coverage ratio isdefined in our loan agreements at the end of any fiscal quarter as the ratio of(i) consolidated adjusted earnings before interest, taxes, depreciation,and amortization (EBITDA) for the four-fiscal-quarter period then ended to (ii) consolidatedinterest expense payable in cash for such four-fiscal-quarter period. Theleverage ratio is defined in our loan agreements at the end of any fiscalquarter as the ratio of (i) consolidated total debt as of such day to (ii) consolidatedadjusted EBITDA for the four-fiscal-quarter period ending on such date. Differencesbetween our financial statements and Holdings’ financial statements are relatedprimarily to notes payable held by Boise Inc. and the related interest expenseon those notes, income taxes, and other miscellaneous expenses.

 

The Credit Facilitiesalso limit the ability of Holdings and its subsidiaries to make capitalexpenditures, generally to $150 million per year. However, this amount mayincrease up to an additional $75 million a year if we had less than $150million of capital expenditures in the previous fiscal year. We may also spend$125 million a year, up to an aggregate of $200 million, for permittedacquisitions under the terms of our Credit Facilities.

 

*Guarantees*

 

The Company’s obligations under its Credit Facilities areguaranteed by each of the Borrower’s existing and subsequently acquireddomestic (and, to the extent no material adverse tax consequences to Holdingsor Borrower would result therefrom and as reasonably requested by theadministrative agent under each Credit Facility, foreign) subsidiaries andHoldings (collectively, the Guarantors). The First Lien Facilities are securedby a first-priority security interest in substantially all of the real, personal,and mixed property of Borrower and the Guarantors, including a first-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. TheSecond Lien Facility is secured by a second-priority security interest insubstantially all of the real, personal, and mixed property of Borrower and theGuarantors, including a second-priority security interest in 100% of the equityinterests of Borrower and each domestic subsidiary of Holdings, 65% of theequity interests of each of Holdings’ foreign subsidiaries (other than BoiseHong Kong Limited so long as Boise Hong Kong Limited does not account for morethan $2.5 million of consolidated EBITDA during any fiscal year ofBorrower), and all intercompany debt.

 

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*Prepayments*

 

In the event all or any portion ofthe Tranche B Term Loan Facility is repaid pursuant to any voluntaryprepayments or mandatory prepayments with respect to asset sale proceeds orproceeds received from the issuance of debt prior to the second anniversary ofthe Acquisition closing date, such repayments will be made at 101.0% of theamount repaid if such repayment occurs after the first anniversary of theAcquisition closing date and prior to the second anniversary of the Acquisitionclosing date.

 

Subject to the provisions of the intercreditor agreementbetween the First Lien Facilities and the Second Lien Facility, in the eventthe Second Lien Facility is prepaid as a result of a voluntary or mandatoryprepayment (other than as a result of a mandatory prepayment with respect toinsurance/condemnation proceeds or excess cash flow) at any time prior to thethird anniversary of the Acquisition closing date, Borrower shall pay aprepayment premium equal to the “make-whole premium” described below.

 

The “make-whole premium” means the present value of (a) allrequired interest payments due on such Second Lien Facility loan from the dateof prepayment 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%.

 

At any time after the third anniversary of the Acquisitionclosing date and prior to the sixth anniversary of the Acquisition closingdate, subject to the provisions of the First Lien Facilities, the Second LienFacility may be prepaid in whole or in part subject to the “call premium”described below, provided that loans bearing interest with reference to thereserve-adjusted Eurodollar rate will be prepayable only on the last day of therelated interest period unless Borrower pays any related breakage costs.

 

The “call premium” means that in the event all or any portionof the Second 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 Facilitiesrequire that the proceeds from certain asset sales, casualty insurance, certaindebt issuances, and 75% (subject to step-downs based on certain leverageratios) of the excess cash flow for each fiscal year must be used to pay downoutstanding borrowings. As of March 31,2009, required debt principal repayments under the Credit Facilities total$3.2 million during the remainder of 2009, $26.5 million in 2010,$48.4 million in 2011, $134.3 million in 2012, $63.7 million in2013, $438.0 million in 2014, and $260.7 million thereafter.

 

*Notes Payable*

 

In connection with theAcquisition, we issued a $58.3 million subordinated promissory note. Theoriginal note is now represented by eight separate notes payable, each withterms (other than the amount) identical to the original note. With the exceptionof our subsidiaries that are party to the Credit and Guaranty Agreement datedas of February 22, 2008, each of our current and future domesticsubsidiaries are joint and several obligors under this note, as reflected by aSubordinated Guaranty Agreement, which guarantees our obligations under thenote.

 

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The notes bear interestat 15.75% per annum (computed on the basis of a 360-day year) payable quarterly(each such quarterly payment date, an Interest Payment Date). To the extentinterest is not paid in cash, interest will be added to the principal amount ofthe notes on each Interest Payment Date. The notes mature on August 21,2015, provided that if such date is more than 181 days after the scheduledmaturity date of the indebtedness under the Credit Facilities, then thematurity date shall automatically be deemed to be 181 days after the latestmaturity date of any such indebtedness. At maturity, the amount of the noteswill be approximately $185.9 million, assuming none of the interest hasbeen paid in cash.

 

We may prepay the notesat any time in whole or in part, without premium or penalty, subject to anyrestrictions contained in our senior credit facilities. We must prepay thenotes upon the occurrence of the following events: (i) a change of control(as defined in the Credit Facilities), (ii) a sale or transfer of 50% ormore of the company’s assets, and (iii) events of default (as provided inthe notes). We must use the proceeds from the sale of equity or debt securitiesor borrowings to repay the notes, subject to any restrictions contained in oursenior credit facilities.

 

*Other*

 

At March 31, 2009, and December 31, 2008, we had $69.7 million and $72.6 million ofcosts recorded in “Deferred financing costs” on our Consolidated Balance Sheetrelated to the Acquisition. The amortization of these costs is recorded ininterest expense using the effective interest method over the life of theloans. We recorded $2.9 million and $0.8 million of amortizationexpense for the three months ended March 31, 2009 and 2008, in “Interestexpense” in our Consolidated Statements of Income (Loss).

 

In April 2008, weentered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. AtMarch 31, 2009, we had $974.8 million of variable-rate debtoutstanding, of which $610.0 million was hedged using interest ratederivatives. At March 31, 2009, our average effective interest rate wasnot affected by our interest rate derivatives, as the effective cap rates wereabove the interest rates on the hedged debt. For additional information on ourinterest rate derivatives, see Note 14, Financial Instruments.

 

For the three months ended March 31,2009 and 2008, cash payments for interest, net of interest capitalized, were$16.5 million and $8.5 million. No payments were made during thePredecessor period of January 1 through February 21, 2008.

 

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

 

We are exposed to market risks, including changes ininterest rates, energy prices, and foreign currency exchange rates.

 

*Interest Rate Risk*

 

With the exception of the15.75% notes payable maturing in August 2015, our debt is variable-ratedebt. At March 31, 2009, the estimated value of the notes payable, basedon then-current interest rates for similar obligations with like maturities,was approximately $64.7 million less than the amount recorded on ourConsolidated Balance Sheet. At March 31, 2009, the estimated value of ourvariable-rate debt, based on then-current interest rates for similarobligations with like maturities, was approximately $334.0 million lessthan the amount recorded on our Consolidated Balance Sheet. The fair value oflong-term debt is estimated based on quoted market prices for the same orsimilar issues or on the discounted value of the future cash flows expected tobe paid using incremental rates of borrowing for similar liabilities.

 

In April 2008, weentered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. AtMarch 31, 2009, we had $974.8 million of variable-rate debtoutstanding, $610.0 million of which was hedged using interest ratederivatives. We purchased interest rate caps with a term of three years and acap rate of 5.50% on a notional amount of $260.0 million to hedge theinterest rate on our Second Lien Facility. We also purchased interest rate capsto hedge part of the interest rate risk on our Tranche B Term Loan Facilitywith a LIBOR cap rate of 5.00% on a notional amount of $425.0 million forthe period of April 21, 2008, through March 31, 2009; a notional amountof $350.0 million for the period of March 31, 2009, through March 31,2010; and a notional amount of $300.0 million for the period of March 31,2010, through March 31, 2011.

 

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*FirstLien Facilities.*Weaccount for the interest rate derivatives that hedge part of the interest raterisk on our Tranche B Term Loan Facility as economic hedges. These derivativeshave a cap rate of 5.00% on a notional amount of $425.0 million for theperiod of April 21, 2008, through March 31, 2009; a notional amountof $350.0 million for the period of March 31, 2009, through March 31,2010; and a notional amount of $300.0 million for the period of March 31,2010, through March 31, 2011. At March 31,2009, we recorded the fair value of the interest rate derivatives, or$57,000, in “Other assets” on our Consolidated Balance Sheet. During the threemonths ended March 31, 2009, we recorded the change in fair value of thesederivatives, or $135,000 of expense, in “Change in fair value of interest ratederivatives” in our Consolidated Statement of Income (Loss). During the threemonths ended March 31, 2009, we recorded $143,000 in “Interest expense”for the amortization of the premiums paid for the interest rate derivatives.

 

Effective December 31, 2008, webegan utilizing the calculated base rate plus 250 basis points on the Tranche BTerm Loan Facility rather than the LIBOR plus 350 basis points (subject to afloor of 4.00%) used prior to December 31, 2008. As the interest rate onthis debt no longer matched the rate on the interest rate derivatives used tohedge a portion of that debt, we no longer designated the interest ratederivatives as cash flow hedges and account for them as economic hedges. Theamounts recorded in “Accumulated other comprehensive loss” on our ConsolidatedBalance Sheet are being amortized to interest expense over the remaining lifeof the interest rate derivatives. During the three months ended March 31,2009, we amortized $84,000 of the amounts recorded in “Accumulated othercomprehensive loss” on our Consolidated Balance Sheet to “Interest expense” inour Consolidated Statement of Income (Loss). Changes in the fair value of thesederivatives are recorded in “Change in fair value of interest rate derivatives”in our Consolidated Statements of Income (Loss).

 

*Second Lien Facility.*We account for the interest ratederivatives with a notional amount of $260.0 million that hedge our exposure tointerest rate fluctuations on our Second Lien Facility as economic hedges. At March 31, 2009, werecorded the fairvalue of the interest rate derivatives, or $32,000, in “Other assets” on ourConsolidated Balance Sheet. During the three months ended March 31, 2009,we recorded the change in fair value of these derivatives, or $3,000 of income,in “Change in fair value of interest rate derivatives” in our ConsolidatedStatement of Income (Loss). During the three months ended March 31, 2009,we recorded $62,000 in “Interest expense” for the amortization of the premiumspaid for the interest rate derivatives.

 

*Energy Risk*

 

Weenter into transactions to hedge the variable cash flow risk of natural gaspurchases. As of March 31, 2009, we had entered into derivativeinstruments related to approximately 85% of our forecasted natural gaspurchases for April 2009 through October 2009, approximately 45% ofour forecasted natural gas purchases for November 2009 through March 2010,approximately 42% of our forecasted natural gas purchases for April 2010through October 2010, and approximately 5% of our forecasted natural gaspurchases for November 2010 through March 2011. At March 31,2009, these derivatives included three-way collars and call spreads.

 

A three-way collar is acombination of options: a written put, a purchased call, and a written call.The purchased call establishes a maximum price unless the market price exceedsthe written call, at which point the maximum price would be New York MercantileExchange (NYMEX) price less the difference between the purchased call and thewritten call strike price. The written put establishes a minimum price (thefloor) for the volumes under contract. The strategy enables us to decrease thefloor and the ceiling price of the collar beyond the range of a traditionalcollar while offsetting the associated cost with the sale of the written call.The following table summarizes our position related to these instruments as of March 31,2009:

 

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| ** **                   | ** ** | **Three-Way Collars**                      | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **April 2009  Through  October 2009** | ** ** | **November 2009  Through  March 2010** | ** ** |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Volume hedged                |       | 1,000 mmBtu/day                                 |       | 7,000 mmBtu/day |   | 6,000 mmBtu/day |   | 6,000 mmBtu/day |   | 8,500 mmBtu/day |   |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Strike price of  call sold   |       | $                                               | 14.00      |   | $ | 12.00 |   | $ | 9.25 |   | $ | 12.00 |   | $ | 12.00 |   |
| Strike price of  call bought |       | 11.00                                           |       | 9.00 |   | 6.25 |   | 9.00 |   | 9.00 |   |
| Strike price of  put sold    |       | 6.50                                            |       | 6.50 |   | 3.94 |   | 6.50 |   | 5.35 |   |
| Three-way collar  premium    |       | 0.10                                            |       | 0.18 |   | — |   | 0.17 |   | — |   |
|                         |       |                                            |       |   |   |   |   |   |   |   |   |
| Approximate  percent hedged  |       | 3                                               | %          | 23 | % | 20 | % | 16 | % | 23 | % |
|                              |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                   | ** ** | ** **                                       | ** ** | ** **                                      | ** ** | ** **                                       | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **November 2009  Through  March 2010** | ** ** | **April 2010  Through  October 2010** | ** ** | **November 2010  Through  March 2011** | ** ** |
|                         |       |                                             |       |                                            |       |                                             |       |   |   |   |   |
| Volume hedged                |       | 2,000 mmBtu/day                                  |       | 5,500 mmBtu/day                                 |       |                                             |       | 7,000 mmBtu/day |   | 2,000 mmBtu/day |   |
|                         |       |                                             |       |                                            |       |                                             |       |   |   |   |   |
| Strike price of  call sold   |       | $                                                | 11.00      |                                            | $          | 12.00                                            |       |   |   | $ | 11.00 |   | $ | 11.00 |   |
| Strike price of  call bought |       | 8.00                                             |       | 9.00                                            |       |                                             |       | 8.00 |   | 8.00 |   |
| Strike price of  put sold    |       | 4.60                                             |       | 5.90                                            |       |                                             |       | 5.12 |   | 5.63 |   |
| Three-way collar  premium    |       | —                                           |       | —                                          |       |                                             |       | — |   | — |   |
|                         |       |                                             |       |                                            |       |                                             |       |   |   |   |   |
| Approximate  percent hedged  |       | 5                                                | %          | 18                                              | %          |                                             |       | 23 | % | 5 | % |
|                              |            |                                                  |            |                                                 |            |                                                  |            |  |  |  |  |  |  |  |  |

 

A call spread is acombination of a purchased call and a written call. The purchased callestablishes a maximum price unless the market exceeds the written call, atwhich point the maximum price would be the NYMEX price, less the differencebetween the purchased call and the written call strike price, plus any applicablenet premium associated with the two options. The following table summarizes ourposition related to these instruments as of March 31, 2009:

 
| ** **                   | ** ** | **Call Spreads**                           | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **April 2009  Through  October 2009** | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                         |       |                                            |       |            |       |       |       |       |       |   |   |
| Volume hedged                |       | 10,000 mmBtu/day                                |       | 1,500 mmBtu/day |       |       |       |       |       |   |   |
|                         |       |                                            |       |            |       |       |       |       |       |   |   |
| Strike price of  call sold   |       | $                                               | 15.00      |            | $          | 9.00       |       |       |       |   |   |   |   |
| Strike price of  call bought |       | 10.50                                           |       | 6.25            |       |       |       |       |       |   |   |
| Net cap premium              |       | 0.84                                            |       | 0.20            |       |       |       |       |       |   |   |
|                         |       |                                            |       |            |       |       |       |       |       |   |   |
| Approximate  percent hedged  |       | 33                                              | %          | 5               | %          |       |       |       |       |   |   |
|                              |            |                                                 |            |                 |            |            |            |            |            |  |  |  |  |

 

We have elected toaccount for these instruments as economic hedges. At March 31,2009, we recorded the fair value of the derivatives, or$9.5 million, in “Accrued liabilities, Other” on our Consolidated BalanceSheet. During the three months ended March 31, 2009, we recorded thechange in

 

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fair value of theinstruments, or $2.2 million of expense, in “Materials, labor, andoperating expenses” in our Consolidated Statement of Income (Loss).

 

*Foreign Currency Risk*

 

Whilewe are exposed to foreign currency risk in our operations, none of this riskwas material to our financial position or results of operations as of March 31, 2009.

 

*Fair Value Measurements*

 

In accordance with the provisions of FASB StaffPosition (FSP) No. 157-2 (see Note 15, New and Recently AdoptedAccounting Standards), we have applied the provisions of SFAS No. 157 onlyto our financial assets and liabilities recorded at fair value, which consistof financial 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 March 31, 2009, 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) |       | $                                                                                        | 89         |   | $ | — |   | $ | 89 |   | $ | — |   |
|                           | ** ** | **$**                                                                                    | **89**     | ** ** | **$** | **—** | ** ** | **$** | **89** | ** ** | **$** | **—** | ** ** |
|                           |       |                                                                                     |       |   |   |   |   |   |   |
| Liabilities:                   |       |                                                                                     |       |   |   |   |   |   |   |
| Energy  derivatives (b)        |       | $                                                                                        | 9,515      |   | $ | — |   | $ | 9,515 |   | $ | — |   |
|                           | ** ** | **$**                                                                                    | **9,515**  | ** ** | **$** | **—** | ** ** | **$** | **9,515** | ** ** | **$** | **—** | ** ** |

 

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(a)           Recordedin “Other assets” on our Consolidated Balance Sheet.

 

(b)           Recordedin “Accrued Liabilities, Other” on our Consolidated Balance Sheet.

 

Asof March 31, 2009,we did not have any fair value measurements using significant unobservableinputs (level 3).

 

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*Tabular Disclosure of the FairValues of Derivative Instruments and the Effect of Those Instruments*

 
| ** **                                                         | ** ** | **Fair Values of Derivative Instruments** | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Asset Derivatives**                                    | ** ** | **Liability Derivatives** | ** ** |
| ** **                                                         | ** ** | **March 31, 2009**                                  | ** ** |
| ** **                                                         | ** ** | **Balance  Sheet  Location**                                  | ** ** | **Fair Value** | ** ** | **Balance  Sheet  Location** | ** ** | **Fair Value** | ** ** |
| ** **                                                         | ** ** | **(thousands)**                                               | ** ** |
|                                                               |       |                                                          |       |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedging instruments (a)       |       |                                                          |       |   |   |   |   |   |   |
| Interest rate  contracts                                           |       | Other assets                                                  |       | $ | — |   | Accrued liabilities |   | $ | — |   |
| **Total  derivatives designated as cash flow hedging instruments** | ** ** | ** **                                                    | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **—** | ** ** |
|                                                               |       |                                                          |       |   |   |   |   |   |   |
| Derivatives  designated as economic hedging instruments (b)        |       |                                                          |       |   |   |   |   |   |   |
| Interest rate  contracts                                           |       | Other assets                                                  |       | $ | 89 |   | Accrued liabilities |   | $ | — |   |
| Natural gas  contracts                                             |       | Other assets                                                  |       | — |   | Accrued liabilities |   | 9,515 |   |
| **Total  derivatives designated as economic hedging instruments**  | ** ** | ** **                                                    | ** ** | **$** | **89** | ** ** | ** ** | ** ** | **$** | **9,515** | ** ** |
|                                                               |       |                                                          |       |   |   |   |   |   |   |
| **Total  Derivatives**                                             | ** ** | ** **                                                    | ** ** | **$** | **89** | ** ** | ** ** | ** ** | **$** | **9,515** | ** ** |

 
| **The Effect of Derivative Instruments on the Consolidated Statement of Income (Loss) for the Three Months Ended March 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Derivatives  Designated  as Cash Flow  Hedging  Instruments (a)**                                                                                                                                               | ** ** | **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 (b)** | ** ** | **Location of Gain  or (Loss)  Recognized in  Income on  Derivative** | ** ** | **Amount of Gain  or (Loss)  Recognized in  Income on  Derivative** | ** ** |
| **(thousands)**                                                                                                                                                                                                                  | ** ** |
|                                                                                                                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate  contracts                                                                                                                                                                                                         |       | $ | — |   | Interest income/ expense |   | $ | (84 | ) | Interest rate  contracts |   | Change in fair value  of interest rate derivatives |   | $ | (132 | ) |
|                                                                                                                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                             |       |   |   |   |   |   |   | Natural gas  contracts |   | Materials,  labor, and other operating expenses |   | (2,191 | ) |
| ** **                                                                                                                                                                                                                       | ** ** | **$** | **—** | ** ** | ** ** | ** ** | **$** | **(84** | **)** | ** ** | ** ** | ** ** | ** ** | **$** | **(2,323** | **)** |

 

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(a)                                 As of March 31,2009, we no longer have interest rate derivatives designated as cash flowhedges. The amounts recorded in “Accumulated other comprehensive loss” on ourConsolidated Balance Sheet are being amortized to interest over the remaininglife of the interest rate derivatives. During the three months ended March 31,2009, these derivatives were accounted for as economic hedges.

 

(b)                                See discussionabove for additional information on our purpose for entering into derivativesdesignated as economic hedges and our overall risk management strategies.

 

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***15.***                               ***New and Recently AdoptedAccounting Standards***

 

In April 2009, theFASB issued FSP No. 107-1, *InterimDisclosures about Fair Value of Financial Instruments* (FSP 107-1),which increases the frequency of fair value disclosures from an annual to aquarterly basis. The guidance relates to fair value disclosures for anyfinancial instruments that are not currently reflected on the balance sheet atfair value. The FSP is effective for interim and annual periods ending after June 15,2009, but entities may choose to adopt it for the interim and annual periodsending after March 15, 2009. We will adopt this FSP in second quarter2009. The adoption will affect our disclosures only and will have no effect onour financial position or results of operations.

 

In December 2008,the FASB issued FSP FAS 132(R)-1, *Employer’sDisclosures About Postretirement Benefit Plan Assets.* This FSPamends SFAS No. 132 (Revised 2003), *Employers’Disclosures About Pensions and Other Postretirement Benefits,*toprovide guidance on an employer’s disclosures about plan assets of a definedbenefit pension or other postretirement plan. The FSP is effective for fiscalyears ending after December 15, 2009. The adoption will affect ourdisclosures only and will have no effect on our financial position or resultsof operations.

 

In April 2008, the FASB issued FSP No. FAS142-3, *Determination of the Useful Life ofIntangible Assets.*FSP No. FAS 142-3 amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, *Goodwill and Other IntangibleAssets*. This new guidance also provides additional disclosurerequirements related to recognized intangible assets. We adopted FSP No. FAS142-3 in January 2009, and it did not have a material impact on ourfinancial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures About Derivative Instruments and HedgingActivities*. SFAS No. 161 requires enhanced disclosures aboutderivative instruments and hedging activities to enable investors to betterunderstand their effects on financial position, financial performance, and cashflows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. Weadopted SFAS No. 161 in January 2009. As a result of the adoption ofSFAS No. 161, we have expanded our disclosures regarding derivativeinstruments and hedging activities within Note 14, Financial Instruments.

 

In January 2008, we adopted SFAS No. 157,*Fair Value Measurements*. The adoption didnot have a material impact on our financial position or results of operations.The statement established a framework for measuring fair value, and it enhancedthe disclosures for fair value measurements. The statement applies when otheraccounting pronouncements require or permit fair value measurements, but itdoes not require new fair value measurements. In accordance with the standard,in Note 14, Financial Instruments, we expanded our disclosures about fairvalue measurements. In February 2008, the FASB issued a one-year deferralfor nonfinancial assets and liabilities to comply with SFAS No. 157. Weadopted SFAS No. 157 for nonfinancial assets and liabilities in firstquarter 2009. We had no required fair value measurements for nonfinancialassets and liabilities in first quarter 2009 and no required additionaldisclosures upon adoption. There were no material effects on our financialstatements upon adoption of this new accounting pronouncement; however, thispronouncement could have an impact in future periods. In addition, we may haveadditional disclosure requirements in the event we complete an acquisition orincur impairment of our assets in future periods.

 

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

 

***16.*****                              *****Retirement and BenefitPlans***

 

During all of the periodspresented, some of our employees participated in our retirement plans, and someof the Predecessor’s employees participated in Boise Cascade’s retirementplans. These plans consist of noncontributory defined benefit pension plans,contributory defined contribution savings plans, deferred compensation plans,and postretirement healthcare benefit plans. Compensation expense wascalculated based on costs directly attributable to our employees and, in thecase of the Predecessor employees of the Paper Group, an allocation of expenserelated to corporate employees that serviced all Boise Cascade business units.

 

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In December 2008, we amended our defined benefitpension plan for salaried employees (Salaried Plan). This amendment freezes theaccumulation of benefits and years of service for participants of the SalariedPlan effective April 15, 2009. This amendment also freezes benefits in theBoise Inc. Supplemental Pension Plan (SUPP) and the Boise Inc. SupplementalEarly Retirement Plan (SERP) for executive officers. Because the Salaried Planhas unrecognized losses, the curtailment gain associated with this amendmentwas applied to partially offset those losses in accordance with SFAS No. 88,*Employers’ Accounting for Settlements of DefinedBenefit Pension Plans and for Termination Benefits*. However, we haverecognized a $2.9 million gain on our SUPP and SERP plans, because thecurtailment gain exceeded our existing unrecognized losses. This gain wasrecognized in December 2008.

 

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

 

The components of netperiodic benefit cost and other comprehensive (income) loss are as follows (inthousands):

 
| ** **                                     | ** ** | **Pension Benefits**                      | ** ** | **Other Benefits**                        | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                     | ** ** | **Boise Inc.**                            | ** ** | **Boise Inc.**                            | ** ** | **Predecessor** | ** ** | **Boise Inc.** | ** ** | **Boise Inc.** | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** |
|                                           |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                              | 1,916      |                                           | $          | 1,134 |   | $ | 1,566 |   | $ | 1 |   | $ | — |   | $ | — |   |
| Interest cost                                  |       | 6,041                                          |       | 2,572                                          |       | 3,458 |   | 31 |   | 5 |   | 18 |   |
| Expected return  on plan assets                |       | (5,734                                         | )          | (2,517                                         | )          | (3,452 | ) | — |   | — |   | — |   |
| Amortization of  actuarial (gain) loss         |       | 83                                             |       | —                                         |       | (21 | ) | — |   | — |   | (12 | ) |
| Amortization of  prior service costs and other |       | 9                                              |       | —                                         |       | 194 |   | — |   | — |   | — |   |
| Plan settlement  curtailment (gain) loss       |       | —                                         |       | —                                         |       | — |   | — |   | — |   | — |   |
| Company-sponsored  plans                       |       | 2,315                                          |       | 1,189                                          |       | 1,745 |   | 32 |   | 5 |   | 6 |   |
| Multiemployer  plans                           |       | 103                                            |       | 43                                             |       | 75 |   | — |   | — |   | — |   |
| Net periodic  benefit costs                    | ** ** | **$**                                          | **2,418**  | ** **                                     | **$**      | **1,232** | ** ** | **$** | **1,820** | ** ** | **$** | **32** | ** ** | **$** | **5** | ** ** | **$** | **6** | ** ** |

 

During the three months ended March 31, 2009, netperiodic pension expense included $0.1 million of net loss that wasamortized from “Accumulated other comprehensive income (loss).” 

 

We made nocontributions to our qualified pension plans during the three months ended March 31,2009; however, on April 15, 2009, we made a $5.5 million contributionto our qualified pension plans. We are not required to make furthercontributions to our plans in 2009, but may choose to make further voluntarycontributions during the year.

 

***17.******                              ******Stockholders’ Equity***

 

*Preferred Stock*

 

We are authorized toissue 1,000,000 shares of preferred stock with such designations, voting, andother rights and preferences as may be determined from time to time by the boardof directors. No shares were issued or outstanding at March 31, 2009, and December 31,2008.

 

*Common Stock*

 

We are authorized toissue 250,000,000 shares of common stock, of which 79,879,372 shares wereissued and outstanding at March 31, 2009. Of these shares outstanding,1,985,733 shares were restricted stock (discussed below).

 

*Warrants*

 

In connection with ourpublic offering in June 2007, we issued 41,400,000 units (the Units). EachUnit consists of one share of our common stock and one Redeemable Common StockPurchase Warrant (the Warrants). Each Warrant entitles the holder to purchaseone share of common stock at an exercise price of $7.50, commencing on thelater of the completion of a business combination and one year from theeffective date of the public offering and expiring four years from theeffective date of the public 

 

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offering. We may redeem the Warrants, at a price of $0.01 per Warrant,upon 30 days’ notice while the Warrants are exercisable, only in the event thatthe last sale price of the common stock is at least $14.25 per share for any 20trading days within a 30-trading-day period ending on the third day prior tothe date on which notice of redemption is given. In June 2008, we filed aposteffective amendment on Form S-1 to register the shares of our commonstock covered by these Warrants.

 

Simultaneously with theconsummation of the public offering, Aldabra 2 Acquisition Corp.’s chairman andchief executive officer privately purchased a total of 3,000,000 Warrants (theInsider Warrants) at $1.00 per Warrant (for an aggregate purchase price of$3,000,000). The amount paid for the Warrants approximated fair value on thedate of issuance. All of the proceeds received from these purchases were placedin cash held in trust. The Insider Warrants purchased were identical to theWarrants 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 March 31,2009, and December 31, 2008, including 3,000,000 Insider Warrants,44,400,000 Warrants were outstanding.

 

*Restricted Stock and RestrictedStock Units*

 

We account for awards granted under the Boise Inc. Incentive andPerformance Plan (the Plan) in our consolidated financial statements in accordancewith SFAS No. 123(R). In accordance with SFAS No. 123(R), we evaluateshare-based compensation on a quarterly basis based on our estimate of expectedrestricted stock forfeiture, review of recent forfeiture activity, and expectedfuture turnover. We recognize the effect of adjusting the forfeiture rate forall expense amortization in the period that we change the forfeiture estimate.The effect of forfeiture adjustments during the three months ended March 31,2009, was zero.

 

*Market-Condition Vesting Awards*

 

In May 2008, members of management were granted1.9 million shares of restricted stock, which are subject to market-basedvesting restrictions. Of this 1.9 million, 0.7 million will vest on February 28,2011, if the closing price of Boise Inc. stock has been at least $10 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 $2.03 per share. The remaining1.2 million shares of the restricted stock grants will vest on February 28,2011, if the closing price of Boise Inc. stock has been at least $12.50 pershare for 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.

 

*Service-Condition Vesting Awards*

 

In March 2009,pursuant to the Plan, we granted to directors and members of management4.6 million shares of restricted stock and 1.2 million restrictedstock units (collectively restricted stock) subject to stockholder approval ofthe Plan Amendment described below. The2.0 million shares of restricted stock granted to the directors vest on apro-rata basis through March 15, 2010. The grants to members of managementvest as follows: one-fifth on March 15, 2010, one-fifth on March 15,2011, and three-fifths on March 15, 2012, subject to EBITDA goals. Anyshares not vested on or before March 15, 2012, will be forfeited.On April 23, 2009, our shareholders approved a Plan Amendment thatincreased the number of shares available for issuance under the Plan from5,175,000 to 17,175,000.

 

In May 2008, directors and members of managementwere granted awards of 0.4 million and 0.8 million shares,respectively, of restricted stock subject to service-condition vesting. The restricted stock granted to directors vested on March 2,2009. Additionally, one-third of the management grants subject toservice-condition vesting restrictions also vested on March 2, 2009. Theremaining grants subject to service-condition vesting restrictions vest equallyon February 28, 2010, and February 28, 2011, subject to EBITDA goals.Any shares not vested on or before February 28, 2011, will be forfeited.

 

*Compensation Expense*

 

We recognize compensation expense for the restricted stock based on thefair value on the date of the grant, as described below. Compensation expenseis recognized ratably over the vesting period for the restricted stock grantsthat vest over time and ratably over the award period for the restricted stockgrants that vest based on the closing price of Boise Inc. stock, as discussedabove. During the three 

 

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months ended March 31, 2009, werecognized $0.9 million of compensation expense. Most of these costs wererecorded in “General and administrative expenses” in our Consolidated Statementof Income (Loss).

 

*Fair Value Measurement*

 

SFAS No. 123(R) requires different valuation calculations forequity grants that have a service condition and equity grants that have amarket condition. Thefair value of service-condition restricted stock is determined based on thenumber of shares or units granted and the quoted price of our stock at the dateof grant and is expensed on a straight-line basis over the vesting period. The fair value on the date of grant was $0.43 pershare for the 2009 restricted stock grants and $4.16 per share for the2008 grants. Compensation expense is adjusted if the service condition is notmet.

 

The equity grants that vest based on the stock price of Boise Inc. aremarket-condition grants under the requirements of SFAS No. 123(R). The standard requires that thevaluation of market-condition awards consider the likelihood that the marketcondition will be satisfied rather than assuming that the award is vested onthe award date. Because the market-based restrictions represent a more difficult threshold to meet before payout, with greateruncertainty that the market condition will be satisfied, these awards have alower fair value than those that vest based solely on the passage of time.However, compensation expense is required to be recognized under SFAS No. 123(R) foran award regardless of when, if ever, the market condition is satisfied. Wedetermined the fair value on the date of grant of the market-condition awardsthat vest based on the stock price of Boise Inc. at $10 per share and $12.50per share to be approximately $2.03 per share and $1.57 per share,respectively. Thefair value of market-condition restricted stock or units is estimated at thegrant 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 for Boise Inc.’scommon shares of $4.16 per share. The $4.16-per-share value is based on BoiseInc.’s closing stock price on the date of grant. Expense is recognized on astraight-line basis over the service period.

 

The following summarizes the activity of our outstanding service- andmarket-condition restricted stock and units awarded under the Plan as of March 31,2009, and changes during the period ended March 31, 2009:

 
| ** **                                      | ** ** | **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 January 1, 2008             |       | —                                         |       | $                                                  | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
|                                            |       |                                           |       |                                               |       |   |   |   |   |   |   |   |   |
| Granted                                         |       | 1,185                                          |       | 4.16                                               |       | 4,927 |   | 1,929 |   | 1.75 |   | 3,368 |   |
| Vested (a)                                      |       | (30                                            | )          | 4.16                                               |       | (125 | ) | — |   | — |   | — |   |
| Forfeited                                       |       | (12                                            | )          | 4.16                                               |       | (48 | ) | (13 | ) | 1.75 |   | (23 | ) |
| Outstanding at  December 31, 2008 (b) |       | 1,143                                          |       | 4.16                                               |       | 4,754 |   | 1,916 |   | 1.75 |   | 3,345 |   |
|                                            |       |                                           |       |                                               |       |   |   |   |   |   |   |   |   |
| Granted                                         |       | 5,841                                          |       | 0.43                                               |       | 2,512 |   | — |   | — |   | — |   |
| Vested (a)                                      |       | (604                                           | )          | 4.16                                               |       | (2,511 | ) | — |   | — |   | — |   |
| Forfeited                                       |       | (6                                             | )          | 4.16                                               |       | (23 | ) | (13 | ) | 1.75 |   | (22 | ) |
| Outstanding at  March 31, 2009 (b)(c) | ** ** | **6,374**                                      | ** ** | **0.74**                                           | ** ** | **$** | **4,732** | ** ** | **1,903** | ** ** | **1.75** | ** ** | **$** | **3,323** | ** ** |
|                                                 |            |                                                |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a)                                 We repurchase for cash any fractionalshares as they vest. During the year ended December 31, 2008, and thethree months ended March 31, 2009, we repurchased no shares and 24.33shares, respectively.

 

(b)                                Outstanding awards include all nonvestedand nonforfeited awards. 

 

(c)                                 The remaining weighted average contractualterm is approximately 2.1 years for the service-condition awards and 1.9 yearsfor the market-condition awards.

 

At March 31, 2009, we had approximately $4.5 million and$2.1 million of total unrecognized compensation cost related to thenonvested service-condition and market-condition restricted stock grants,respectively, under the Plan. The cost is expected to be recognized generallyover a weighted average period of 2.3 years and 3.0 years for theservice-condition and market-condition awards, respectively. In accordance withSFAS No. 123 (R), unrecognized compensation expense is calculated net ofestimated forfeitures of $0.1 million. During the three months ended March 31,2009, we 

 

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recognized $0.9 million ofcompensation expense, $0.6 million of which related to the grant-date fairvalue of service-condition awards, and $0.3 million of which related tothe market-condition awards.

 

*Dividends*

 

Our ability to pay dividends is restricted by oursenior secured credit facilities as well as Delaware law and state regulatoryauthorities. Under Delaware law, our board of directors may not authorizepayment of a dividend unless it is either paid out of our capital surplus, ascalculated in accordance with the Delaware General Corporation Law, or if we donot have a surplus, it is paid out of our net profits for the fiscal year inwhich the dividend is declared and/or the preceding fiscal year. To the extentwe do not have adequate surplus or net profits, we will be prohibited frompaying dividends. We have not paidany cash dividends on our common stock to date.

 

***18.******                              ******Comprehensive Income(Loss)***

 

Comprehensiveincome (loss) includes the following (in thousands):

 
| ** **                                     | ** ** | **Boise Inc.**                            | ** ** | ** **                                     | **Predecessor** | ** **  |
|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|-----------------|-------------|
| ** **                                     | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** **      | ** **  | **January 1  Through  February 21,  2008** | ** ** |
|                                           |       |                                           |       |                                           |            |        |   |   |
| Net income  (loss)                             |       | $                                              | (916       | )                                              | $               | (16,371     | ) |   | $ | 22,786 |   |
| Other  comprehensive income (loss), net of tax |       |                                           |       |                                           |            |        |   |   |
| Cash flow hedges                               |       | 84                                             |       | —                                         |            |        | — |   |
| Unfunded  accumulated benefit obligation       |       | (92                                            | )          | —                                         |            |        | — |   |
| Comprehensive  income (loss)                   | ** ** | **$**                                          | **(924**   | **)**                                          | **$**           | **(16,371** | **)** | ** ** | **$** | **22,786** | ** ** |

 

***19.******                              ******St. Helens MillRestructuring***

 

In November 2008, we announced the restructuringof our paper mill in St. Helens, Oregon, permanently halting pulp production atthe plant and reducing annual paper production capacity by approximately200,000 tons and market pulp capacity at the St. Helens and Wallula,Washington, mills by a total of approximately 138,000 tons. Therestructuring was primarily the result of declining product demand coupled withcontinuing high costs. 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, manufacturing primarilylightweight opaque and flexible packaging papers. The #3 machine, which isowned by Cascades Tissue Group, also continues to operate. The permanentcapacity reductions resulted in the loss of approximately 335 jobs at the St.Helens mill and 35 jobs in related sales, marketing, and logistics functionselsewhere in the Company. Some of these employees have been relocated to fillother positions within the Company. Eligible salaried employees were offeredseverance packages and outplacement assistance. We have concluded closureagreement negotiations for the affected union employees. We expect to employapproximately 140 employees at the mill after restructuring. At March 31,2009, we had terminated approximately 320 employees.

 

During the three months ended March 31, 2009, werecorded a pretax charge of $3.6 million associated with the restructuringin “St. Helens mill restructuring” in the Consolidated Statement of Income(Loss). These costs are recorded in our Paper segment. These charges includeddecommissioning costs and other miscellaneous costs related to therestructuring of the mill. At December 31, 2008, and March 31, 2009,we had $8.4 million and $3.2 million of severance liabilitiesrecorded in “Accrued liabilities, Compensation and benefits” on theConsolidated Balance Sheets. We expect to pay the remainder of these severancecosts in second quarter 2009.

 

Ananalysis of total restructuring-related activity as of March 31, 2009, isas follows:

 

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| ** **                                    | ** ** | **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                     |       |
| December 31,  2008                       |       | 28,778                   |       | 8,790                          |       | 37,568                  |       |
|                                          |       |                     |       |                           |       |                    |       |
| Decommissioning  costs                        |       | —                   |       | 3,246                          |       | 3,246                   |       |
| Other                                         |       | —                   |       | 402                            |       | 402                     |       |
| March 31,  2009                          |       | —                   |       | 3,648                          |       | 3,648                   |       |
|                                          |       |                     |       |                           |       |                    |       |
| **Total  activity as of March 31, 2009** | ** ** | **$**                    | **28,778** | ** **                     | **$**      | **12,438**              | ** ** | **$** | **41,216** | ** ** |

 

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(a)                                 As of March 31,2009, cash payments totaled $9.3 million, of which $0.4 million waspaid in 2008.

 

We expect to spendapproximately $6.3 million during 2009, $1.6 million in 2010, and$1.0 million in 2011 in decommissioning and other costs. As of March 31,2009, we have spent $3.6 million for these costs, which are recorded in “St.Helens mill restructuring” in our Consolidated Statement of Income (Loss).These expenses are recorded when the liability is incurred in accordance withSFAS No. 146, *Accounting for CostsAssociated With Exit or Disposal Activities*.

 

***20.******                              ******Segment Information***

 

There are nodifferences in our basis of segmentation or in our basis of measurement ofsegment profit or loss from those disclosed in Note 17, SegmentInformation, of the Notes to Consolidated Financial Statements in “Item 8.  Financial Statements and Supplementary Data”in our 2008 Annual Report on Form 10-K.

 

An analysis ofoperations by segment is as follows:

 
|                                               |       |           |       |        |       |              |       |       |       |       |       |              |       |       |       |   |   |     |       |   |     |       |
|----------------------------------------------------|------------|----------------|------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|--------|--------|----------|------------|--------|----------|------------|
| **Boise  Inc.**                                    | ** ** |
| ** **                                         | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Sales**      | ** ** | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| **Three  Months Ended**                            | ** ** | ** **     | ** ** | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| **March  31, 2009**                                | ** ** | **Trade**      | ** ** | **Parties** | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(c)**    | ** ** |
| ** **                                         | ** ** | **(millions)** | ** ** |
| ** **                                         | ** ** | ** **     | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **        | ** ** | ** ** | ** ** |
| Paper                                              |       | $              | 337.0      |        | $          | —            |       | $          | 15.0       |       | $          | 352.0             |       | $          | 24.8       | (a)    | $      | 21.3     |       | $      | 46.1     | (a)        |
| Packaging                                          |       | 145.3          |       | 11.2        |       | 0.6               |       | 157.1      |       | 1.1        | (a)        | 9.7               |       | 10.8       | (a)        |
| Corporate and  Other                               |       | 2.6            |       | 4.2         |       | 8.5               |       | 15.3       |       | (5.1       | )          | 1.0               |       | (4.2       | )          |
|                                               |       | 484.9          |       | 15.4        |       | 24.1              |       | 524.4      |       | 20.8       |       | 32.0              |       | 52.7       |       |
| Intersegment  eliminations                         |       | —         |       | —      |       | (24.1             | )          | (24.1      | )          | —     |       | —            |       | —     |       |
| Change in fair  value of interest rate derivatives |       | —         |       | —      |       | —            |       | —     |       | (0.1       | )          | —            |       | —     |       |
| Interest expense                                   |       | —         |       | —      |       | —            |       | —     |       | (22.2      | )          | —            |       | —     |       |
| Interest income                                    |       | —         |       | —      |       | —            |       | —     |       | 0.1        |       | —            |       | —     |       |
| ** **                                         | ** ** | **$**          | **484.9**  | ** **  | **$**      | **15.4**          | ** ** | **$**      | **—** | ** ** | **$**      | **500.3**         | ** ** | **$**      | **(1.5**   | **)**  | **$**  | **32.0** | ** ** | **$**  | **52.7** | ** ** |

 

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|                       |       |                             |       |        |       |              |       |       |       |       |       |          |       |       |       |            |   |     |       |   |    |            |
|----------------------------|------------|----------------------------------|------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|---------------|------------|------------|------------|-----------------|--------|----------|------------|--------|---------|-----------------|
| **Boise Inc.**             | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | **Income**  | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Sales**                        | ** ** | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| **Three Months Ended**     | ** ** | ** **                       | ** ** | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**       | ** ** | **EBITDA** | ** ** |
| **March 31, 2008**         | ** ** | **Trade**                        | ** ** | **Parties** | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion** | ** ** | **(c)**    | ** ** |
| ** **                 | ** ** | **(millions)   ** | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** **    | ** ** | ** ** |       |
| Paper                      |       | $                                | 165.1      |        | $          | —            |       | $          | 7.1        |       | $          | 172.2         |       | $          | 11.8       |   (b) | $      | 7.1      |       | $      | 19.0    |   (b) |
| Packaging                  |       | 59.5                             |       | —      |       | 0.4               |       | 59.9       |       | (19.8      | )(b)       | 5.2           |       | (14.5      | )(b)       |
| Corporate and  Other       |       | 1.5                              |       | 1.9         |       | 4.7               |       | 8.1        |       | (2.1       | )          | 0.4           |       | (1.9       | )          |
|                       |       | 226.1                            |       | 1.9         |       | 12.2              |       | 240.2      |       | (10.1      | )          | 12.7          |       | 2.6        |       |
| Intersegment  eliminations |       | —                           |       | —      |       | (12.2             | )          | (12.2      | )          | —     |       | —        |       | —     |       |
| Interest expense           |       | —                           |       | —      |       | —            |       | —     |       | (11.4      | )          | —        |       | —     |       |
| Interest income            |       | —                           |       | —      |       | —            |       | —     |       | 1.8        |       | —        |       | —     |       |
| ** **                 | ** ** | **$**                            | **226.1**  | ** **  | **$**      | **1.9**           | ** ** | **$**      | **—** | ** ** | **$**      | **228.0**     | ** ** | **$**      | **(19.7**  | **)**           | **$**  | **12.7** | ** ** | **$**  | **2.6** | ** **      |

 
|                       |       |                             |       |        |       |              |       |       |       |       |       |              |       |       |       |       |   |    |       |   |     |       |
|----------------------------|------------|----------------------------------|------------|-------------|------------|-------------------|------------|------------|------------|------------|------------|-------------------|------------|------------|------------|------------|--------|---------|------------|--------|----------|------------|
| **Predecessor**            | ** ** |
| ** **                 | ** ** | ** **                       | ** ** | ** **  | ** ** | ** **        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depreciation,** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Sales**                        | ** ** | **(Loss)**  | ** ** | **Amortization,** | ** ** | ** ** | ** ** |
| **January 1 Through**      | ** ** | ** **                       | ** ** | **Related** | ** ** | **Inter-**        | ** ** | ** ** | ** ** | **Before** | ** ** | **and**           | ** ** | **EBITDA** | ** ** |
| **February 21, 2008**      | ** ** | **Trade**                        | ** ** | **Parties** | ** ** | **segment**       | ** ** | **Total**  | ** ** | **Taxes**  | ** ** | **Depletion**     | ** ** | **(c)**    | ** ** |
|                       |       | **(millions)   ** |       |
|                       |       |                             |       |        |       |              |       |       |       |       |       |              |       |       |       |
| Paper                      |       | $                                | 154.4      |        | $          | 90.0              |       | $          | 9.1        |       | $          | 253.5             |       | $          | 20.7       |       | $      | 0.3     |       | $      | 21.1     |       |
| Packaging                  |       | 102.2                            |       | 10.9        |       | 0.4               |       | 113.5      |       | 5.7        |       | 0.1               |       | 5.7        |       |
| 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       |       |
| Intersegment  eliminations |       | —                           |       | —      |       | (15.6             | )          | (15.6      | )          | —     |       | —            |       | —     |       |
| Interest expense           |       | —                           |       | —      |       | —            |       | —     |       | —     |       | —            |       | —     |       |
| Interest income            |       | —                           |       | —      |       | —            |       | —     |       | 0.2        |       | —            |       | —     |       |
| ** **                 | ** ** | **$**                            | **258.4**  | ** **  | **$**      | **101.5**         | ** ** | **$**      | **—** | ** ** | **$**      | **359.9**         | ** ** | **$**      | **23.4**   | ** ** | **$**  | **0.5** | ** ** | **$**  | **23.7** | ** ** |

 

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(a)                                  Included$3.6 million of expense recorded in the Paper segment associated with therestructuring of the St. Helens mill.

 

Included $2.2 million of expense related to the impact of energyhedges, $1.8 million of which was recorded in the Paper segment and$0.4 million in the Packaging segment.

 

(b)                                 Included$6.5 million of expense related to inventory purchase accountingadjustments, $6.3 million of which was recorded in the Paper segment and$0.2 million in the Packaging segment.

 

Included $19.8 million of expense recorded in the Packaging segmentrelated to the outage at the DeRidder, Louisiana, mill.

 

(c)                                  EBITDArepresents income (loss) before interest (interest expense, interest income,and change in fair value of interest rate derivatives) and income tax provision(benefit), and depreciation, amortization, and depletion. EBITDA is the primarymeasure used by our chief operating decision makers to evaluate segmentoperating performance and to decide how to allocate resources to segments. Webelieve EBITDA is useful to investors because it provides a means to evaluatethe operating performance of our segments and our company on an ongoing basisusing criteria 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

 

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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.

 

The following is a reconciliationof net income (loss) to EBITDA (in millions):

 
| ** **                                         | ** ** | **Boise Inc.**                            | ** ** | ** **                                     | **Predecessor** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|-----------------|------------|
| ** **                                         | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** |
|                                               |       |                                           |       |                                           |            |       |   |   |
| Net income  (loss)                                 |       | $                                              | (0.9       | )                                              | $               | (16.4      | ) |   | $ | 22.8 |   |
| Change in fair  value of interest rate derivatives |       | 0.1                                            |       | —                                         |            |       | — |   |
| Interest expense                                   |       | 22.2                                           |       | 11.4                                           |            |       | — |   |
| Interest income                                    |       | (0.1                                           | )          | (1.8                                           | )               |       | (0.2 | ) |
| Income tax  provision (benefit)                    |       | (0.6                                           | )          | (3.4                                           | )               |       | 0.6 |   |
| Depreciation,  amortization, and depletion         |       | 32.0                                           |       | 12.7                                           |            |       | 0.5 |   |
| EBITDA                                             | ** ** | **$**                                          | **52.7**   | ** **                                     | **$**           | **2.6**    | ** ** | ** ** | **$** | **23.7** | ** ** |

 

***21.          Commitments and Guarantees***

 

*Commitments*

 

We have commitments for fiber, leases, and utilities.Our lease commitments are discussed further in Note 7, Leases. Inaddition, we have purchase obligations for goods and services, capitalexpenditures, and raw materials entered into in the normal course of business.

 

We are a party to a number of long-term log and fibersupply agreements. At March 31, 2009, our total obligation for log andfiber purchases under contracts with third parties was approximately$151.1 million. Under most of the log and fiber supply agreements, we havethe right to cancel or reduce our commitments in the event of a millcurtailment or shutdown. The prices under most of these agreements are setquarterly or semiannually based on regional market prices, and the estimate isbased on contract terms or current-quarter pricing. Our log and fiberobligations 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. Except for deposits required pursuant to wood supplycontracts, these obligations are not recorded in our consolidated financialstatements until contract payment terms take effect.

 

We enter into utility contracts for the purchase ofelectricity and natural gas. We also purchase these services under utilitytariffs. The contractual and tariff arrangements include multiple-yearcommitments and minimum annual purchase requirements. At March 31, 2009,we had approximately $21.9 million of utility purchase commitments. Thesepayment obligations were valued at prices in effect on December 31, 2008,or determined pursuant to contractual terms, if available. Because we consumethe energy in the manufacture of our products, these obligations represent theface value of the contracts, not resale value.

 

*Guarantees*

 

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under FIN No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees*, *IncludingIndirect Guarantees of Indebtedness of Others*. See Note 13, Debt,for a description of the guarantees, including the approximate terms of theguarantees, how the guarantees arose, the events or circumstances that wouldrequire us to perform under the guarantees, and the maximum potentialundiscounted amounts of future payments we could be required to make.

 

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***22.        Legal Proceedings andContingencies***

 

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

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

 

***Understanding Our FinancialInformation***

 

The following discussion and analysis provides information managementbelieves to be relevant to understanding our financial condition and results ofoperations. We beginthis discussion and analysis with some general background related to ourcompany followed by an overview of the effects of the “Acquisition of BoiseCascade’s Paper and Packaging Operations” and the “St. Helens MillRestructuring,” as well as a discussion of our operating segments. “RecentTrends and Operational Outlook” and “Factors That Affect Operating Results” areintended to give the reader an overview of goals and challenges, the directionof our business, and changes affecting our products. The analysis then reviews “OurOperating Results” followed by a discussion of relevant activity in ourindustry in “Industry Activities.” We then discuss our balance sheet and cashflows and our financial commitments in the section entitled “Liquidity andCapital Resources.”

 

This discussion and analysis includes statements regarding our expectationswith respect to our future performance, liquidity, and capital resources. Suchstatements, along with any other nonhistorical statements in the discussion,are forward-looking. These forward-looking statements are subject to numerousrisks and uncertainties, including, but not limited to, the risks anduncertainties described in “Item 1A. Risk Factors” in this form 10-Q and in our 2008 Annual Report on Form 10-K,as well as those factors listed in other documents we file with the Securitiesand Exchange Commission (SEC).

 

We do not assume an obligation to update any forward-looking statement. Ouractual results may differ materially from those contained in or implied by anyof the forward-looking statements in this Form 10-Q.

 

***Background***

 

On February 22, 2008, Boise Inc. or “the Company,”“we,” “us,” or “our” completed the acquisition (the Acquisition) of Boise WhitePaper, L.L.C., Boise Packaging & Newsprint, L.L.C., Boise CascadeTransportation Holdings Corp. (collectively, the Paper Group), and other assetsand liabilities related to the operation of the paper, packaging and newsprint,and transportation businesses of the Paper Group and part of the headquartersoperations of Boise Cascade, L.L.C. (Boise Cascade). The business we acquiredis referred to in this report on Form 10-Q as the “Predecessor.” TheAcquisition was accomplished through the Company’s acquisition of Boise PaperHoldings, L.L.C. See “Acquisition of Boise Cascade’s Paper and PackagingOperations” below for more information related to the Acquisition.

 

The accompanyingConsolidated Statement of Income (Loss) and Consolidated Statement of CashFlows for the three months ended March 31, 2008, include the activities ofAldabra 2 Acquisition Corp. prior to the Acquisition and the operations of theacquired businesses from February 22, 2008, through March 31, 2008.The Predecessor Consolidated Statement of Income (Loss) and ConsolidatedStatement of Cash Flows for the period of January 1 through February 21,2008, are presented for comparative purposes.

 

This “Management’s Discussion and Analysisof Financial Condition and Results of Operations” at times refers to thecombined activities of Boise Inc. and the Predecessor for each periodspecifically indicated, which we believe is****the most useful comparison betweenperiods. The Acquisition was accounted for in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 141, *BusinessCombinations,*resulting in a new basis of accounting from thosepreviously reported by the Predecessor. However, sales and most operating costitems are substantially consistent with those reported by the Predecessor.Finished goods inventories were revalued to estimated selling prices less costsof disposal and a reasonable profit on the disposal. Depreciation changed as aresult of adjustments to the fair values of property and equipment due to ourpurchase price allocation. These 

 

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items, along with changes in interest expense and income taxes, areexplained independently where appropriate.

 

***Acquisition of Boise Cascade’s Paper and PackagingOperations***

 

On February 22,2008, we acquired the paper, packaging, and most of the corporate and othersegments of Boise Cascade for cash and securities.

 

The Acquisition wasaccounted for in accordance with the provisions of SFAS No. 141, *Business Combinations*. Upon completion of the transaction,Boise Cascade owned 37.9 million, or 49%, of our outstanding shares, and theycontinue to hold a significant financial interest in us.

 

The purchase price waspaid with cash, the issuance of shares of our common stock, and a note payable.These costs, including direct transaction costs and purchase price adjustments,are summarized as follows:

 
| ** **                                               | ** ** | **February 22,  2008** | ** **  |
|----------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                               | ** ** | **(millions)**              | ** **  |
|                                                     |       |                        |        |
| Cash paid to  Boise Cascade                              |       | $                           | 1,252.3     |   |
| Cash paid to  Boise Cascade for financing and other fees |       | 24.9                        |        |
| Less: cash  contributed by Boise Cascade                 |       | (38.0                       | )           |
| Net cash                                                 |       | 1,239.2                     |        |
|                                                     |       |                        |        |
| Equity at $9.15  average price per share                 |       | 346.4                       |        |
| Lack of  marketability discount                          |       | (41.6                       | )           |
| Total equity                                             |       | 304.8                       |        |
|                                                     |       |                        |        |
| Note payable to  Boise Cascade at closing                |       | 41.0                        |        |
| Working capital  adjustment                              |       | 17.3                        |        |
| Total note  payable to Boise Cascade                     |       | 58.3                        |        |
|                                                     |       |                        |        |
| Fees and  expenses                                       |       | 61.8                        |        |
|                                                     |       |                        |        |
| Total purchase  price                                    | ** ** | **$**                       | **1,664.1** | ** ** |

 

The following tablesummarizes the final fair value allocation of the assets acquired andliabilities assumed in the Acquisition as of March 31, 2009:

 

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| ** **                | ** ** | **February 22,  2008,  Fair Value** | ** **  |
|---------------------------|------------|-----------------------------------------------|-------------|
| ** **                | ** ** | **(millions)**                                | ** **  |
|                      |       |                                          |        |
| Current assets            |       | $                                             | 571.9       |   |
| Property and  equipment   |       | 1,306.0                                       |        |
| Fiber farms and  deposits |       | 11.0                                          |        |
| Intangible  assets:       |       |                                          |        |
| Trademark and  trade name |       | 16.8                                          |        |
| Customer list             |       | 13.7                                          |        |
| Technology                |       | 6.9                                           |        |
| Deferred financing  costs |       | 81.9                                          |        |
| Other long-term  assets   |       | 4.5                                           |        |
| Current  liabilities      |       | (246.9                                        | )           |
| Long-term  liabilities    |       | (101.7                                        | )           |
| Total purchase  price     | ** ** | **$**                                         | **1,664.1** | ** ** |

 

***St. Helens Mill Restructuring***

 

In November 2008, we announced the restructuringof our paper mill in St. Helens, Oregon, permanently halting pulp production atthe plant and reducing annual paper production capacity by approximately200,000 tons and market pulp capacity at the St. Helens and Wallula,Washington, mills by a total of approximately 138,000 tons. The restructuringwas primarily the result of declining product demand coupled with continuinghigh costs. 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, manufacturing primarilylightweight opaque and flexible packaging papers. The #3 machine, which is owned by Cascades Tissue Group, alsocontinues to operate. The permanent capacity reductions resulted in theloss of approximately 335 jobsat the St. Helens mill and 35 jobs in related sales, marketing, and logisticsfunctions elsewhere in the Company. Some of these employees have been relocatedto fill other positions within the Company. Eligible salaried employees wereoffered severance packages and outplacement assistance. We have concluded closure agreementnegotiations for the affected union employees. We expect to employapproximately 140 employees at the mill after restructuring. At March 31,2009, we had terminated approximately 320 employees.

 

During the three months ended March 31, 2009, werecorded a pretax charge of $3.6 million associated with the restructuringin “St. Helens mill restructuring” in the Consolidated Statement of Income(Loss). These costs are recorded in our Paper segment. These charges includeddecommissioning costs and other miscellaneous costs related to therestructuring of the mill. At December 31, 2008, and March 31, 2009,we had $8.4 million and $3.2 million of severance liabilitiesrecorded in “Accrued liabilities, Compensation and benefits” on theConsolidated Balance Sheets. We expect to pay the remainder of these severancecosts in second quarter 2009.

 

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Ananalysis of total restructuring-related activity as of March 31, 2009, isas follows:

 
| ** **                                    | ** ** | **Noncash Expense** | ** ** | **Cash Expense (a)** | ** ** | **Total Expenses** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **(millions)**           | ** ** |
|                                          |       |                     |       |                           |       |                    |       |
| Inventory write-down                          |       | $                        | 7.8        |                           | $          | —                  |       | $ | 7.8 |   |
| Asset write-down                              |       | 19.8                     |       | —                         |       | 19.8                    |       |
| Employee-related  costs                       |       | —                   |       | 8.4                            |       | 8.4                     |       |
| Pension  curtailment loss                     |       | 1.2                      |       | —                         |       | 1.2                     |       |
| Other                                         |       | —                   |       | 0.4                            |       | 0.4                     |       |
| December 31,  2008                       |       | 28.8                     |       | 8.8                            |       | 37.6                    |       |
|                                          |       |                     |       |                           |       |                    |       |
| Decommissioning  costs                        |       | —                   |       | 3.2                            |       | 3.2                     |       |
| Other                                         |       | —                   |       | 0.4                            |       | 0.4                     |       |
| March 31,  2009                          |       | —                   |       | 3.6                            |       | 3.6                     |       |
|                                          |       |                     |       |                           |       |                    |       |
| **Total  activity as of March 31, 2009** | ** ** | **$**                    | **28.8**   | ** **                     | **$**      | **12.4**                | ** ** | **$** | **41.2** | ** ** |

 

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(a)                                  As of March 31,2009, cash payments totaled $9.3 million, of which $0.4 million waspaid in 2008.

 

We expect to spendapproximately $6.3 million during 2009, $1.6 million in 2010, and$1.0 million in 2011 in decommissioning and other costs. As of March 31,2009, we have spent $3.6 million for these costs, which are recorded in “St.Helens mill restructuring” in our Consolidated Statement of Income (Loss).These expenses are recorded when the liability is incurred in accordance withSFAS No. 146, *Accounting for CostsAssociated With Exit or Disposal Activities*.

 

***Our Segments***

 

We operate ourbusiness in three reportable segments, Paper, Packaging, and Corporate andOther (support services). These segments represent distinct businesses that aremanaged separately because of differing products and services. Each of thesebusinesses requires distinct operating and marketing strategies. Managementreviews the performance of the Company based on these segments.

 

*Paper.*Our Paper segment manufactures and sellsuncoated freesheet (including commodity and premium cut-size office papers); arange of packaging papers (including corrugating medium, label and releasepapers, and flexible packaging papers); commodity and premium printing andconverting papers (including commercial printing papers, envelope papers, andform-related products); and market pulp. Many of these paper products arecommodity products, while others have specialized features that make theseproducts premium and specialty grades. Our premium grades include 100% recycledand colored cut-size office papers, and our specialty grades includecustom-developed papers for such uses as label and release and flexible foodpackaging. We ship to customers both directly from our mills and throughdistribution centers. During the three months ended March 31, 2009,approximately 43% of uncoated freesheet paper sales volume, includingapproximately 66% 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 six 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 early 2009, we marketed our newsprint throughAbitibi Consolidated Sales Corporation (ACSC), an indirect subsidiary ofAbitibiBowater Inc. (AbitibiBowater) pursuant to an arrangement whereby ACSCpurchased all of the newsprint we produce. ACSC sold our newsprint primarily inregional markets near our DeRidder, Louisiana, manufacturing facility. In late February 2009,we terminated our arrangement with ACSC and since that time have sold ournewsprint production through our own sales personnel, primarily to newspaperpublishers in the southern and southwestern U.S.

 

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*Corporateand Other*. OurCorporate and Other segment includes primarily corporate support services,related assets and liabilities, and foreign exchange gains and losses. Duringthe Predecessor period presented, the Corporate and Other segment includedprimarily an allocation of Boise Cascade corporate support services and relatedassets and liabilities. These support services include but were not limited tofinance, accounting, legal, information technology, and human resourcesfunctions. This segment also includes transportation assets, such as rail carsand trucks, which we use to transport our products from our manufacturingsites. Rail cars and trucks are generally leased. We provide transportationservices not only to our own facilities but also, on a limited basis, to thirdparties when geographic proximity and logistics are favorable. During the threemonths ended March 31, 2009, segment sales primarily related to our railand truck business were $15.3 million.

 

In connection with theAcquisition, we entered into an outsourcing services agreement under which weprovide a number of corporate staff services to Boise Cascade at our cost.These services include information technology, accounting, and human resourceservices. 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 three months ended March 31, 2009, we recorded$3.6 million in “Sales, Related parties” and the same amount in “Costs andexpenses” in our Consolidated Statement of Income (Loss) related to thisagreement.

 

***Recent Trends and Operational Outlook***

 

The U.S. and the globaleconomy remained weak in early 2009. Concerns over declining consumer andbusiness confidence, the availability and cost of credit, reduced consumerspending and business investment, the volatility and strength of the capitaland credit markets, and inflation all affect the business and economicenvironment and, ultimately, the profitability of our business. Economicdownturns characterized by higher unemployment, lower family income, lowercorporate earnings, lower business investment, and lower consumer spendingtypically result in decreased demand for our products. These conditions arebeyond our control and may have a significant impact on our business, resultsof operations, cash flows, ability to meet our debt service obligations, andfinancial position.

 

Linerboard pricingweakened in first quarter 2009, as overall demand continued to slow. Packagingdemand in agriculture, food, and beverage markets, which constitute over halfof our packaging product end-use markets, has historically been less correlatedto broad economic activity and remained relatively stable through first quarter2009. Demand in industrial markets, which is more closely aligned with generaleconomic activity, was negatively affected due to the slowdown. Export marketswere also negatively affected in first quarter 2009, as the global slowdownreduced demand from those markets. We curtailed production in late 2008 andthrough first quarter 2009 in response to the slowdown in demand. In March, wecompleted a scheduled annual maintenance shutdown at our DeRidder mill.

 

Prices for some grades ofuncoated freesheet papers, primarily printing and converting grades, includingform bond and envelope papers, began to decline during late fourth quarter 2008in conjunction with slowing demand. Pricing for other grades, such as cut-sizeoffice papers, experienced only modest declines. Since a large portion of ourcut-size office paper is sold to OfficeMax under a contract whereby the priceOfficeMax pays is determined by a published index, changes in price for thisproduct sold to OfficeMax tend to lag behind the general market by approximately60 days. Pricing for our packaging-driven grades, including label and releaseand flexible packaging papers, improved through first quarter 2009.

 

U.S. demand for uncoatedfreesheet declined in first quarter 2009. According to the American Forest andPaper Association (AF&PA), uncoated freesheet shipments declined 16% duringthe first three months of 2009, compared with 2008. Demand for commoditycommunication papers continued to decline, as communication paper products werenegatively affected by weak macroeconomic conditions and by the continuingshift to electronic media for communications. Compounding this, demand forprinting and converting products, including envelopes and offset printingpapers, has softened as direct-mail advertising has slowed.

 

Although demand hasdeclined, North American uncoated freesheet inventories declined to 1.1 milliontons in first quarter 2009, the lowest level recorded in recent years,according to the AF&PA. On November 17, 2008, we announced thepermanent restructuring of our mill in St. Helens, Oregon, permanently closingthe pulp mill and two of our three paper machines at that facility. This hasreduced annual paper production capacity at the St. Helens mill byapproximately 200,000 tons and market pulp capacity at the St. Helens andWallula mills by a total of approximately 138,000 tons. We have also 

 

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curtailed shifts and slowed production on other uncoated freesheetmachines to balance production with demand. We may elect to take additionaldowntime if market conditions warrant.

 

In February 2009, weterminated our long-time arrangement with ACSC, an indirect subsidiary of AbitibiBowater,to market our production of newsprint. We now sell our newsprint through ourown sales personnel primarily to newspaper publishers in the southern andsouthwestern U.S. and do so in the face of a continuing decline in the demandfor newsprint in North America. U.S. newsprint prices have fallen from therecord levels achieved in 2008 and market conditions are weak. We havesignificantly curtailed our newsprint machines in order to balance supply withthe demand for our products, as we have transitioned to selling directly tonewspaper publishers.

 

On April 27, 2009,we announced that we had indefinitely idled our D-2 newsprint machine at ourmill in DeRidder, Louisiana. The D-2 machine has been idled since February 9,2009, due to lack of orders. We will continue to operate the D-3 newsprintmachine and the D-1 linerboard machine at the DeRidder mill. The idled machinehas an annual capacity of 186,000 tons of newsprint. By idling the machine, wecan reduce operating and capital costs during this period of decliningnewsprint demand, while preserving the asset for potential future use. The D-2machine is being preserved, enabling us to restart it within a short period oftime should the need arise. We may also pursue options to convert the machineto packaging products at a later date.

 

The weak U.S. economyresulted in reduced demand and lowered prices for many of our manufacturinginputs, including fiber and energy, during first quarter 2009. Reducedconsumption of manufacturing inputs due to lower production also contributed tolower overall costs. Partially offsetting this were increased prices for anumber of our high volume chemicals due to contractual price caps that expiredat the end of 2008.

 

Prevailing interestrates, including both the London Interbank Offered Rate (LIBOR) and the primelending rate, were low by historical standards during first quarter 2009,resulting in reduced interest expense on our secured debt obligations.

 

Approximately 65% of the energy we use in ourmanufacturing process is derived from renewable biomass, including wastebyproducts from our production process. Substantially all of our biomass fiberis sourced under the rigorous procurement standards and requirements of theSustainable Forestry Initiative (SFI). The U.S. Internal Revenue Code allows anexcise tax credit for taxpayers who use alternative fuels in the taxpayer’strade or business. Each year, under normal operating conditions, we produce anduse approximately 500 million gallons of black liquor, a fuel produced frombiomass, to provide energy to four of our five paper mills. This reduces ouruse of traditional fossil fuel sources, such as natural gas and electricity.The credit, equal to $0.50 per gallon of the alternative fuel mixture, isrefundable to the taxpayer. In first quarter 2009, we filed to be registered asan alternative fuel mixer and, in late April, received notification that theregistration was approved.  We becameeligible to claim credits for black liquor produced at our four pulp and papermills beginning at various dates from late January to late March 2009.  Through April 30, 2009, we have filed forclaims totaling approximately $37 million, before the effects of any incometaxes related to these credits.  Thecredit is scheduled to expire on December 31, 2009. The amount of credits weultimately file for, receive, and recognize in income is dependent on, amongother things, our future production levels, tax legislation and regulation, andincome recognition criteria under generally accepted accountingprinciples.  

 

***Factors That Affect OurOperating Results***

 

Our results ofoperations and financial performance are influenced by a variety of factors,including the following:

 

·                 General economic conditions, including but not limitedto durable and nondurable goods production, white-collar employment, electronicsubstitution, and relative currency values;

 

·                 The ability of our lenders, customers, and suppliersto continue to conduct their businesses;

 

·                 Competing technologies that affect the demand for ourproducts;

 

·                 Pension funding requirements;

 

·                 The commodity nature of our products and their pricemovements, which are driven largely by supply and demand;

 

·                 Availability and affordability of raw materials, woodfiber, energy, and chemicals;

 

·                 Legislative or regulatory environments, requirements,or changes affecting the businesses in which we are engaged;

 

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·                 Labor and personnel relations;

 

·                 Credit or currency risks affecting our revenue andprofitability;

 

·                 Major equipment failure;

 

·                 Severe weather phenomena such as drought, hurricanesand significant rainfall, tornadoes, and fire;

 

·                 Our customer concentration and the ability of ourcustomers to pay; and

 

·                 The other factors described in “Part II,Item 1A.  Risk Factors” in thisQuarterly Report on Form 10-Q and “Part I, Item 1A.  Risk Factors” in our 2008 Annual Report on Form 10-K.

 

*Demand*

 

The overall level ofdemand for the products we make and distribute is affected by, among otherthings, electronic media substitution, manufacturing activity, employment,consumer spending, and currency exchange rates. Accordingly, we believe thatour financial results depend in large part on general macroeconomic conditionsin North America, as well as on regional economic conditions in the geographicmarkets in which we operate. The global financial and credit crisis led to asevere recession in the U.S. economy and significant deterioration in themacroeconomic outlook. While an extended economic downturn could negativelyaffect overall demand, no single product line drives our overall financialperformance and individual product lines are influenced by conditions in theirrespective industries. For example:

 

·                 Historically, demand for uncoatedfreesheet correlated positively with general economic activity. However, demand for communication papergrades, such as uncoated freesheet printing and forms paper, which we produce,has decreased as the use of electronic transmission and document storagealternatives has become more widespread and more efficient.

 

·                 Demand for recycled-content papers islinked to an increased public awareness of environmental and sustainabilityissues and is less sensitive to general economic activity. We produce gradesthat contain from 10% to 100% recycled content.

 

·                 Demand for our packaging products,including corrugated containers and sheets, containerboard, label and release,and flexible packaging papers, is driven by packaging demand. This demand isaffected by macroeconomic conditions and is less susceptible to electronicmedia substitution.

 

·                 A large share of the demand for corrugated containers and, therefore,containerboard is driven by unprocessed and processed food production andmanufacturing, specifically the manufacture of nondurable goods. In addition,inventory stocking or liquidation of these goods has an impact, as do currencyexchange rates that affect the cost-competitiveness of foreign manufacturers.

 

·                 Demand for newsprint depends uponprevailing levels of newspaper advertising, circulation, and basis weights.Demand for newsprint in North America declined approximately 31% over the pastfive years, according to Resource Information Systems Inc. (RISI), due in part tothe growth of online media and erosion of the newspaper publishing business. Inlate 2008 and early 2009, the rate of decline accelerated over previous levels.According to RISI, through first quarter 2009, shipments were down 33%,compared with the same period in 2008.

** **

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*Supply*

 

Industrysupply of paper is affected by the number of operational or idled facilities,the building of new capacity, and the shutting down of existing capacity.Capacity also tends to increase gradually over time without significant capitalexpenditures as manufacturers improve production efficiencies. Generally, morecapacity is added or employed when supply is tight and margins are relativelyhigh, and capacity is idled or eliminated when capacity significantly exceedsdemand and margins are poor.

 

Overthe last five years, North American uncoated freesheet, containerboard, andnewsprint capacities declined approximately 16%, 1%, and 26%, respectively, accordingto RISI. In fourth quarter 2008 and into first quarter 2009, temporary andpermanent curtailments accelerated and significantly reduced capacity acrossmany grades. New capacity additions are constrained by the high capitalinvestment and long lead times required to plan, obtain regulatory approvalsfor, and build a new mill.

 

Industrysupply of paper is also influenced by the level of imports and overseasproduction capacity, which has grown over the past decade. In recent months,imports have declined in response to weakened domestic demand and the economicslowdown.

 

*OperatingCosts*

 

Themajor costs of production are fiber, energy, chemicals, and labor. The relativesize of these costs varies by segment. Given the significance of raw materialand energy costs to total operating expenses and the limited ability to controlthese costs, compared with other operating costs, volatility in these costs canmaterially affect operating margins. In addition, the timing and degree ofprice cycles of raw materials and energy differ with respect to each type ofraw material and energy used.

 

*Fiber.* Theprimary raw material is wood fiber, accounting for the following percentages ofmaterials, labor, and other operating expenses, including fiber costs, forBoise Inc. and the Predecessor for each of the periods listed below:

 
| ** ** | ** ** | **Boise Inc.**                            | ** ** | **Boise Inc.**                            | ** ** | **Predecessor**                                      | ** ** | **Combined**                                   | ** ** |
|------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** |
|       |       |                                           |       |                                           |       |                                                 |       |                                           |       |
| Paper      |       | 27                                             | %          | 30                                             | %          | 26                                                   | %          | 27                                             | %          |
| Packaging  |       | 15                                             | %          | 11                                             | %          | 17                                                   | %          | 15                                             | %          |

 

Theprimary sources of logs and wood fiber are timber and byproducts of timber,such as wood chips, wood shavings, and sawdust. Substantially all fiber isacquired from outside sources. We convert logs and wood chips into pulp, whichwe use at our paper mills to produce paper. On an aggregate basis, and undernormal operating conditions, we are a net consumer of pulp, producing andselling less pulp volume on the open market than we consume. Fiber****costs have eased in the Pacific Northwest in 2009 and areapproaching historical averages.

 

Logs and wood fiber arecommodities, and prices for logs and wood fiber have historically been cyclicaldue to changing levels of supply and demand. Log and fiber supply may belimited by public policy or government regulation as well as fire, insectinfestation, disease, ice storms, windstorms, hurricanes, flooding, otherweather conditions, and other natural and man-made causes. Residual fiber supplymay be limited due to a reduction in primary manufacturing at sawmills andplywood plants. Declines in log and fiber supply, driven primarily by changesin public policy and government regulation, have been severe enough to causethe closure of numerous facilities in some of the regions in which we operate.Any sustained undersupply and resulting increase in wood fiber prices coulddecrease our production volumes and/or increase our operating costs. Prices forour products might not reflect increases or decreases in log and wood fiberprices, and as a result, our operating margins could fluctuate. Delivered-fibercosts in all of our operating regions include the cost of diesel, which hasdeclined in first quarter 2009. Lower diesel costs decrease the cost to harvestand transport wood to the mills, favorably affecting fiber costs in all of ourregions.

 

InMinnesota, overall fiber costs decreased in first quarter 2009, compared withfirst quarter 2008, driven by lower consumption and prices of purchased pulp,as we selectively curtailed shifts and slowed 

 

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production to balance production with demand. Wood fiber prices in theregion declined from first quarter and fourth quarter 2008 as a result ofreduced fiber consumption from pulp and paper manufacturers and continuedcurtailment of oriented strand board (OSB) production in the region.

 

In thePacific Northwest, fiber costs decreased in first quarter 2009, compared withfirst quarter 2008 and fourth quarter 2008, due primarily to reducedconsumption as a result of the St. Helens mill downsizing, market curtailments,and lower residual chip and recycled fiber prices. Residual fiber costs in thePacific Northwest declined during first quarter 2009, compared with fourthquarter 2008, reflecting higher pulpwood and chip inventories in the region andreduced fiber demand. Because residual fiber for our paper mills in theNorthwest comes predominantly from sawmills and plywood plants, continuedcurtailments at these mills, as a result of decreased demand for these productsrelated to the housing slowdown, could negatively affect the availability andprice of residual fiber for our Pacific Northwest pulp and paper operations.The downsizing of the St. Helens mill will reduce our ongoing consumption ofresidual fiber in the region.

 

In theSouth, during first quarter 2009, fiber costs at our DeRidder mill decreasedoverall, compared with first quarter 2008, due mainly to reduced fiberconsumption, as we curtailed production to balance production with demand, anddecreased wood and recycled fiber prices. In our Alabama operating region,fiber costs decreased in first quarter 2009, compared with first quarter 2008,driven by lower fiber consumption, as we slowed production to balanceproduction with demand. Prices for wood, pulp, and wastepaper declined in firstquarter 2009, compared with fourth quarter 2008, due primarily to reducedoverall demand for fiber.

 

*Other RawMaterials and Energy Purchasing and Pricing.*We purchaseother raw materials and energy used to manufacture our products in both theopen market and through long-term contracts. These contracts are generally withregional suppliers who agree to supply all of our needs for a certain rawmaterial or energy at a single facility. These contracts normally containminimum purchase requirements and are for terms of various lengths. They alsocontain price adjustment mechanisms that take into account changes in marketprices. Therefore, although our long-term contracts provide us with supplies ofraw materials and energy that are more stable than open-market purchases, theymay not, in many cases, alleviate fluctuations in market prices.

 

Our costs for raw materials are influencedby increases in energy costs. Specifically, some of our key chemicals,including pulping and bleaching chemicals consumed in our paper and packagingmills, are heavily influenced by energy costs. A number of our major suppliershave increased prices over the past year. The relationship between industrysupply and demand, rather than changes in the cost of raw materials, determinesour ability to increase prices. Consequently, we may be unable to passincreases in our operating costs to our customers in the short term.

 

*Energy.*Energyprices, particularly for electricity, natural gas, and fuel oil, have beenvolatile in recent years. Currently, energy prices are favorable, compared withhistorical averages. In first quarter 2009, energy costs were lower, comparedwith first quarter 2008 energy costs, due mainly to lower prices for naturalgas and fuel and to reduced consumption as a result of lower production duringthe quarter. In first quarter 2009, natural gas prices declined, compared withfourth quarter 2008 levels. Under normal operations, including the indefiniteidling of our D-2 newsprint machine, we expect to consume approximately 12million mmBtu of natural gas annually. Energy costs represent the followingpercentages of materials, labor, and other operating expenses, including fibercosts, for Boise Inc. and the Predecessor in each of the periods listed below:

 
| ** ** | ** ** | **Boise Inc.**                            | ** ** | **Boise Inc.**                            | ** ** | **Predecessor**                                      | ** ** | **Combined**                                   | ** ** |
|------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** |
|       |       |                                           |       |                                           |       |                                                 |       |                                           |       |
| Paper      |       | 16                                             | %          | 17                                             | %          | 15                                                   | %          | 16                                             | %          |
| Packaging  |       | 14                                             | %          | 14                                             | %          | 14                                                   | %          | 14                                             | %          |

 

Weenter into transactions to hedge the variable cash flow risk of natural gaspurchases. As of March 31, 2009, we had entered into derivativeinstruments related to approximately 85% of our forecasted natural gaspurchases for April 2009 through October 2009, approximately 45% ofour forecasted natural gas purchases for November 2009 through March 2010,approximately 42% of our 

 

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forecasted natural gas purchases for April 2010 through October 2010,and approximately 5% of our forecasted natural gas purchases for November 2010through March 2011. At March 31, 2009, these derivatives includedthree-way collars and call spreads.

 

Wehave elected to account for these instruments as economic hedges. At March 31,2009,we recorded the fair value of the derivatives, or $9.5 million, in “Accruedliabilities, Other” on our Consolidated Balance Sheet. During the three monthsended March 31, 2009, we recorded the change in fair value of theinstruments, or $2.2 million of expense, in “Materials, labor, and otheroperating expenses” in our Consolidated Statement of Income (Loss). We continueto enter into additional derivative instruments to hedge the variable cash flowrisk of natural gas purchases.

 

*Chemicals.*Important chemicals we use in the production of our productsinclude starch, sodium chlorate, caustic, precipitated calcium carbonate, anddyestuffs and optical brighteners. Purchases of chemicals represent thefollowing percentages of materials, labor, and other operating expenses,including fiber costs, for Boise Inc. and the Predecessor for each of theperiods listed below:

 
| ** ** | ** ** | **Boise Inc.**                            | ** ** | **Boise Inc.**                            | ** ** | **Predecessor**                                      | ** ** | **Combined**                                   | ** ** |
|------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  March 31,  2009** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** |
|       |       |                                           |       |                                           |       |                                                 |       |                                           |       |
| Paper      |       | 14                                             | %          | 15                                             | %          | 13                                                   | %          | 14                                             | %          |
| Packaging  |       | 6                                              | %          | 5                                              | %          | 6                                                    | %          | 6                                              | %          |

 

We have seen significantly higher chemicalprices on some key commodity chemicals, compared with historical standards,although the total cost impact has been mitigated by lower overall usage due toreduced production. Many of our chemicals are purchased under long-termcontracts, which provide more stability than open-market purchases. Many ofthese contracts are renegotiated annually.

 

*Labor.* Laborcosts tend to increase steadily due to inflation in healthcare and wage costs.Labor costs are not as volatile as energy and wood fiber costs. As of April 30,2009, we had approximately 4,120 employees. Approximately 2,430, or 59%, ofthese employees work pursuant to collective bargaining agreements. On April 6,2009, we started negotiating the labor contract at our packaging plant inSalem, Oregon (92 employees represented by the Association of Western Pulp &Paper Workers), which expired in December 2008. On April 13, 2009, we started negotiating the laborcontract at our paper mill in Wallula, Washington (332 employees represented bythe AWPPW), which expired in mid-March 2009. The parties have agreed tooperate under the existing bargaining agreements during the labor negotiations.During labor negotiations with our collective bargaining units, we couldexperience work interruptions, which could significantly increase our laborcosts, prevent us from meeting customer demand, or reduce our sales andprofitability.

 

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***Our******Operating Results***

 

Thefollowing table sets forth operating results in dollars and as a percentage ofsales for the three months ended March 31, 2009 and 2008, and thePredecessor period of January 1 through February 21, 2008 (inmillions, except percent-of-sales data):

                
| ** **                                      | ** ** | **Boise Inc.**                                  | ** ** | ** **                                           | ** ** | **Predecessor** | ** **                                           |
|-------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------|------------------------------------------------------|
| ** **                                      | ** ** | **Three  Months  Ended   March 31,  2009** | ** ** | **Three  Months  Ended   March 31,  2008** | ** ** | ** **      | **January 1  Through  February 21,  2008** | ** ** |
| **Sales**                                       |       |                                                 |       |                                                 |       |            |                                                 |   |
| Trade                                           |       | $                                                    | 484.9      |                                                 | $          | 226.1           |                                                 |   | $ | 258.4 |   |
| Related parties                                 |       | 15.4                                                 |       | 1.9                                                  |       |            | 101.5                                                |   |
|                                            |       | 500.3                                                |       | 228.0                                                |       |            | 359.9                                                |   |
| ** **                                      | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** **      | ** **                                           | ** ** |
| **Costs  and expenses**                         |       |                                                 |       |                                                 |       |            |                                                 |   |
| Materials,  labor, and other operating expenses |       | 413.2                                                |       | 195.4                                                |       |            | 313.9                                                |   |
| Fiber costs from  related parties               |       | 5.7                                                  |       | 18.6                                                 |       |            | 7.7                                                  |   |
| Depreciation,  amortization, and depletion      |       | 32.0                                                 |       | 12.7                                                 |       |            | 0.5                                                  |   |
| Selling and  distribution expenses              |       | 13.8                                                 |       | 6.0                                                  |       |            | 9.1                                                  |   |
| General and  administrative expenses            |       | 10.4                                                 |       | 4.6                                                  |       |            | 6.6                                                  |   |
| St. Helens mill  restructuring                  |       | 3.6                                                  |       | —                                               |       |            | —                                               |   |
| Other (income)  expense, net                    |       | 0.2                                                  |       | —                                               |       |            | (1.0                                                 | ) |
|                                            |       | 478.9                                                |       | 237.3                                                |       |            | 336.8                                                |   |
|                                            |       |                                                 |       |                                                 |       |            |                                                 |   |
| **Income  (loss) from operations**              | ** ** | **$**                                                | **21.4**   | ** **                                           | **$**      | **(9.3**        | **)**                                                | ** ** | **$** | **23.1** | ** ** |
| ** **                                      | ** ** | ** **                                           | ** ** | ** **                                           | ** ** | ** **      | ** **                                           | ** ** |
| **Sales**                                       |       |                                                 |       |                                                 |       |            |                                                 |   |
| Trade                                           |       | 96.9                                                 | %          | 99.1                                                 | %          |            | 71.8                                                 | % |
| Related parties                                 |       | 3.1                                                  |       | 0.9                                                  |       |            | 28.2                                                 |   |
|                                            |       | 100.0                                                | %          | 100.0                                                | %          |            | 100.0                                                | % |
|                                            |       |                                                 |       |                                                 |       |            |                                                 |   |
| **Costs  and expenses**                         |       |                                                 |       |                                                 |       |            |                                                 |   |
| Materials,  labor, and other operating expenses |       | 82.6                                                 | %          | 85.7                                                 | %          |            | 87.2                                                 | % |
| Fiber costs from  related parties               |       | 1.1                                                  |       | 8.2                                                  |       |            | 2.2                                                  |   |
| Depreciation,  amortization, and depletion      |       | 6.4                                                  |       | 5.6                                                  |       |            | 0.1                                                  |   |
| Selling and  distribution expenses              |       | 2.8                                                  |       | 2.6                                                  |       |            | 2.5                                                  |   |
| General and  administrative expenses            |       | 2.1                                                  |       | 2.0                                                  |       |            | 1.9                                                  |   |
| St. Helens mill  restructuring                  |       | 0.7                                                  |       | —                                               |       |            | —                                               |   |
| Other (income)  expense, net                    |       | —                                               |       | —                                               |       |            | (0.3                                                 | ) |
|                                            |       | 95.7                                                 | %          | 104.1                                                | %          |            | 93.6                                                 | % |
|                                            |       |                                                 |       |                                                 |       |            |                                                 |   |
| **Income  (loss) from operations**              | ** ** | **4.3**                                              | **%**      | **(4.1**                                             | **)%**     | ** **      | **6.4**                                              | **%** |

 

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***Sales Volumes and Prices***

 

Set forth below are our segment salesvolumes and average net selling prices for our principal products for the threemonths ended March 31, 2009 and 2008, the Predecessor period of January 1through February 21, 2008, and the combined three months ended March 31,2008:

 
| ** **                                | ** ** | **Boise Inc.**                                                                                            | ** ** | **Predecessor**                                | ** ** | **Combined**                                         | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                | ** ** | **Three  Months  Ended  March 31,  2009**                                                                 | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  March 31,  2008** | ** ** |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| ** **                                | ** ** | **(thousands of short tons, except corrugated containers and sheets)** | ** ** |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| **Paper**                                 |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| Uncoated  freesheet                       |       | 303                                                                                                            |       | 154                                            |       | 236                                                  |       | 390 | (a) |
| Containerboard  (medium)                  |       | 30                                                                                                             |       | 15                                             |       | 19                                                   |       | 34 |   |
| Market pulp                               |       | 7                                                                                                              |       | 13                                             |       | 20                                                   |       | 33 | (a) |
|                                      |       | 340                                                                                                            |       | 182                                            |       | 275                                                  |       | 457 |   |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| **Packaging**                             |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| Containerboard  (linerboard)              |       | 38                                                                                                             |       | 12                                             |       | 36                                                   |       | 48 |   |
| Newsprint                                 |       | 60                                                                                                             |       | 29                                             |       | 56                                                   |       | 85 |   |
| Corrugated  containers and sheets (mmsf)  |       | 1,418                                                                                                          |       | 640                                            |       | 914                                                  |       | 1,554 |   |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| ** **                                | ** ** | **(dollars per short ton, except corrugated containers and sheets)**   | ** ** |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| **Paper**                                 |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| Uncoated  freesheet                       |       | $                                                                                                              | 981        |                                           | $          | 890                                                  |       | $ | 868 |   | $ | 877 |   |
| Containerboard  (medium)                  |       | 469                                                                                                            |       | 454                                            |       | 454                                                  |       | 454 |   |
| Market pulp                               |       | 383                                                                                                            |       | 568                                            |       | 535                                                  |       | 548 |   |
|                                      |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| **Packaging**                             |       |                                                                                                           |       |                                           |       |                                                 |       |   |   |
| Containerboard  (linerboard)              |       | $                                                                                                              | 352        |                                           | $          | 386                                                  |       | $ | 399 |   | $ | 396 |   |
| Newsprint                                 |       | 588                                                                                                            |       | 512                                            |       | 494                                                  |       | 500 |   |
| Corrugated  containers and sheets ($/msf) |       | 60                                                                                                             |       | 56                                             |       | 55                                                   |       | 55 |   |

 

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(a)                                 The combined three months ended March 31, 2008,includes 52,000 short tons of uncoated freesheet and 8,000 short tons of marketpulp from machines at the St. Helens paper mill that have been shut down.

 

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***Operating Results***

 

Thefollowing presents a discussion of sales and costs for the three months ended March 31,2009, compared with the combined three months ended March 31, 2008. Thecombined three months ended March 31, 2008, represent the results of BoiseInc. for the three months ended March 31, 2008, and the results of thePredecessor for the period from January 1 through February 21, 2008.See “Background” and “Acquisition of Boise Cascade’s Paper and PackagingOperations” in this Management’s Discussion and Analysis for more informationrelated to the Acquisition.

 

Managementbelieves this combined presentation of the Boise Inc. and Predecessor statementof operations is the most useful comparison between periods. The Acquisition wasaccounted for in accordance with SFAS No. 141, *BusinessCombinations*,**resulting in anew basis of accounting from that previously reported by the Predecessor.However, sales and most operating cost items are substantially consistent withthose reflected by the Predecessor. Some inventories were revalued inaccordance with purchase accounting rules. Depreciation changed as a result ofadjustments to the fair values of property and equipment due to our purchaseprice allocation. These items, along with changes in interest expense andincome taxes, are explained independently where appropriate.

 

***Sales and Costs for the Three Months Ended March 31, 2009,Compared With the Combined Three Months Ended March 31, 2008***

 

# *Sales*

# * *

Forthe three months ended March 31, 2009, total sales decreased $87.6** **million, or 15%, to $500.3 million from $587.9 millionduring the combined three months ended March 31, 2008. The decrease wasdriven primarily by a 17% decrease in Paper segment sales and a 9% decline inPackaging segment sales due to lower sales volumes, partially offset by highersales prices.

 

*Paper.*Sales decreased $73.7 million, or 17%, to $352.0 million from$425.7 million during the combined three months ended March 31, 2008. The decrease was driven by a 22%decline in uncoated freesheet sales volumes due primarily to declining demandand lower production capacity as a result of the St. Helens mill restructuring.Market downtime was taken to balance production with demand. Sales volumes forboth commodity and premium and specialty uncoated freesheet were down 22%,compared with first quarter 2008, driven primarily by sharp reductions inprinting and converting sales volumes. Sales volumes in our label and release,flexible packaging, and premium office grades grew 1%, compared with firstquarter 2008, as we continued to convert commodity production to label andrelease at our Wallula mill. Reduced volumes were partially offset by higherprices. Overall uncoated freesheet net sales prices increased 12%, comparedwith first quarter 2008, as both commodity and premium and specialty uncoatedfreesheet net sales prices increased.

 

*Packaging.*Sales decreased****$16.3 million,or 9%, to $157.1 million from $173.4 million during the combined threemonths ended March 31, 2008. Thedecrease was driven mainly by a 30% reduction in newsprint sales volumes, a 21%reduction in segment linerboard sales volumes, and a 9% decline in corrugatedcontainer and sheet sales volumes, compared with first quarter 2008. Demand wasweak for both newsprint and linerboard in first quarter 2009, resulting insignificant market downtime during the quarter to match production with demand.Newsprint volumes were also negatively affected, as we transitioned fromselling all of our output to AbitibiBowater to marketing directly to customersbeginning March 1, 2009. Newsprint net sales prices increased 18% in firstquarter 2009, compared with first quarter 2008, but decreased 9%, compared withfourth quarter 2008. Corrugated containers and sheet net sales prices improved9% in first quarter 2009, compared with first quarter 2008. Segment linerboardprices decreased 11% during the same time period, as demand in export marketsdeteriorated markedly in first quarter 2009.

 

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

##### *** ***

Materials,labor, and other operating expenses, including the cost of fiber from relatedparties, decreased $116.7 million, or 22%, to $418.9 million for thethree months ended March 31, 2009, from $535.6 million during thecombined three months ended March 31, 2008. The decrease was driven primarily by lower input costs andreduced fixed costs. Fixed-cost reductions were driven primarily by the St.Helens mill restructuring, decreased maintenance costs at our DeRidder mill,and other fixed cost reductions as we worked to control costs in weak markets.In first quarter 2009, DeRidder held an annual 

 

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maintenance outage, which incurred lower maintenance costs, comparedwith the extended DeRidder outage in first quarter 2008.

 

Fiber, energy, andchemical costs were $94.1 million, $60.8 million, and $50.8 million,respectively, for the three months ended March 31, 2009, and $127.3million, $82.8 million, and $62.0 million, respectively, for the combined threemonths ended March 31, 2008. Combined, this represents a cost decrease of$66.4 million for the three months ended March 31, 2009, comparedwith the combined three months ended March 31, 2008. This decrease wasdriven primarily by lower fiber and energy prices and by lower consumption dueto lower production volumes.

 

Fiber costsdecreased $27.1 million in our Paper segment,****comparedwith first quarter 2008, due primarily to lower purchased pulp and recycled andwood fiber prices and to reduced consumption of wood and recycled fiber as aresult of lower production. In Packaging, fiber costs decreased $6.0 milliondue to lower wood and recycled fiber prices and reduced fiber consumption.

 

Compared with thecombined three months ended March 31, 2008, energy costs decreased $14.8million in our Paper segment driven by lower prices and reduced consumption ofnatural gas, partially offset by higher purchased electricity prices. Energycosts****decreased $7.3 million in ourPackaging segment driven by lower fuel prices and reduced consumption of fueland electricity.

 

Chemical costsdecreased $10.2 million in our Paper segment and $1.0 million in our Packagingsegment due primarily to reduced consumption of chemical inputs partiallyoffset by higher prices.

 

Under purchaseaccounting rules, in connection with the Acquisition, we revalued our inventoryto estimated selling prices less costs of disposal and a reasonable profitallowance for the selling effort. As a result of these purchase accountingadjustments, our materials, labor, and other operating expenses included$6.5 million of expense due to revaluing our inventory during the threemonths ended March 31, 2008.

 

Depreciation,amortization, and depletion for the three months ended March 31, 2009, was$32.0 million, compared with $12.7 million during the three monthsended March 31, 2008. The three months ended March 31, 2008, includesdepreciation, amortization, and depletion for the period from February 22,2008, through March 31, 2008. For the Predecessor period of**January 1 through February 21, 2008,depreciation, amortization, and depletion was $0.5 million due to thesuspension of depreciation for the assets being held for sale as a result of theAcquisition.

 

Selling anddistribution expenses decreased $1.3 million, or 8%, to $13.8 million for thethree months ended March 31, 2009, compared with $15.1 million forthe combined three months ended March 31, 2008. As a percentage of sales,selling and distribution expenses increased to 2.8% for the three months ended March 31,2009, compared with 2.6% for the combined three months ended March 31,2008.

 

General andadministrative expenses decreased $0.8 million, or 7%, to $10.4 million for thethree months ended March 31, 2009, compared with $11.2 million for the combined three months ended March 31,2008. As a percentage of sales, general and administrative expenses increasedto 2.1% for the three months ended March 31, 2009, compared with 1.9% in thecombined three months ended March 31, 2008.

 

*St. Helens Mill Restructuring*. The threemonths ended March 31, 2009, includes $3.6 million of costsassociated with the restructuring of our St. Helens paper mill. These costs arerecorded in our Paper segment and in “St. Helens mill restructuring” in theConsolidated Statement of Income (Loss). These costs included decommissioningcosts and other costs related to the restructuring of the mill. For moreinformation, see “St. Helens Mill Restructuring” in this Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

*Other(income) expense, net.* “Other (income) expense, net” includesmiscellaneous income and expense items. During the three months ended March 31,2009, we had $0.2 million of other expense, and during the three monthsended March 31, 2008, we had $28,000 of other income. During both periods,these amounts represented primarily miscellaneous income and expense items. Thecomponents of “Other (income) expense, net” include income of $1.0 million froma net gain on sales of assets for the Predecessor period of January 1through February 21, 2008.

 

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*Income (loss) fromoperations.* Income fromoperations for the three months ended March 31, 2009, increased $7.6million, or 54.7%, to $21.4 million, compared with $13.8 million for the combined three months ended March 31,2008. This increase was driven primarily by reducedinput costs and higher product prices, partially offset by lower sales volumesdue to reduced demand. Income for the combined three months ended March 31,2008, was negatively affected by approximately $20.5 million of expense due tothe DeRidder outage and by $6.5 million of expense from inventory purchaseaccounting adjustments.

 

*Paper*. Segmentincome decreased $7.8 million, or 24%, to $24.8 million for the three monthsended March 31, 2009, compared with $32.6 million for the combined three months ended March 31,2008. This decline was due primarily to lower demandand costs associated with the St. Helens mill downsizing, partiallyoffset by increased sales prices and lower input costs. First quarter 2009operating results were also negatively affected by$3.6 million in expenses due to the St. Helens mill restructuring and by$1.8 million from noncash mark-to-market energy hedge expenses. The Predecessor suspended depreciation from September 2007through February 2008 for the assets being held for sale as a result ofthe Acquisition, which reduced depreciation and amortization by $9.4million during the period of January 1through February 21, 2008, increasing segment incomefor first quarter 2008, compared with 2009.****The combined threemonths ended March 31, 2008, included $6.3 millionof expense from inventory purchase accounting adjustments.

 

*Packaging*. Segmentincome increased $15.2 million to $1.1 million of income for the three monthsended March 31, 2009, compared with a loss of $14.1 million for the combined three months ended March 31,2008. This increase is the result of higher selling prices, lower input costs,and approximately $20.5 million in costsassociated with the DeRidder outage in first quarter 2008. This was partially offset by lower newsprint, linerboard, andcorrugated container and sheet sales volumes. The Predecessor suspendeddepreciation from September 2007 through February 2008 for the assetsbeing held for sale as a result of the Acquisition, which reduced depreciationand amortization by $6.9 million during theperiod of January 1 through February 21, 2008, increasing segment income for first quarter 2008, compared withfirst quarter 2009.

 

*Other*

 

*ForeignExchange Gain (Loss).*For the three months ended March 31,2009, foreign exchange loss was $0.7 million, compared with a loss of$0.9 million for thecombined three months ended March 31, 2008.

 

*Interest expense.*For thethree months ended March 31, 2009, interest expense was $22.2 million,of which $16.5 million consisted of cash interest payments related to debtunder our senior secured credit facilities. The remaining amount of interestexpense consisted primarily of noncash items, including the following:$2.6 million related to the subordinated promissory notes and$2.9 million for amortization of deferred financing fees. For the threemonths ended March 31, 2008, interest expense was $11.4 million, of which$8.5 million consisted of cash interest payments related to debt under oursenior secured credit facilities. The remaining amount of interest expenseconsisted primarily of noncash items, including the following:$1.0 million related to the subordinated promissory notes and$0.8 million for amortization of deferred financing fees. For additionalinformation, refer to our discussion of debt under “Liquidity and CapitalResources” in this “Management’s Discussion and Analysis of Financial Conditionand Results of Operations.” The debt of Boise Cascade was not allocated to thePredecessor in the financial statements included in this Form 10-Q.

 

*Interest income.*For thethree months ended March 31, 2009, interest income was $0.1 million,compared with $2.0 million for the combined three months ended March 31,2008.Interest income for the period prior to February 22, 2008, is attributableto income from interest earned on our trust assets held prior to theAcquisition.

 

*I**ncomeTaxes*. For the three months ended March 31, 2009, we recorded $0.6million of income tax benefits. We have not recognized an additional$0.9 million of tax benefits related to losses incurred during thequarter, because the realization of these benefits is not considered morelikely than not. For the three months ended March 31, 2008, we recorded$3.4 million of income tax benefits related to losses incurred during thequarter. At March 31, 2008, we had not recognized $4.1 millionof tax benefits from the losses resulting from our first-quarter operations,because the realization of these benefits was not considered more likely thannot. Because of its pass-through tax structure, the Predecessor recorded taxexpense related only to small subsidiaries that are taxed as corporations. Incometax expense during the

 

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Predecessor period of January 1 through February 21, 2008,was $0.6 million, consisting of federal and state income taxes.

 

***Industry Activities***

 

In April 2009,AbitibiBowater, North America’s largest producer of newsprint, announced thatcertain of its U.S. and Canadian subsidiaries have filed voluntary petitions inthe United States under Chapter 11 of the United States Bankruptcy Code. Inaddition, AbitibiBowater and its Canadian subsidiaries have obtained an Orderfrom the Quebec Superior Court in Canada for creditor protection pursuant tothe Companies’ Creditors Arrangement Act. The Fort Francis, Ontario, pulp mill,which is owned by AbitibiBowater, is a major supplier of purchased pulp to ourInternational Falls, Minnesota, mill. The impact of the bankruptcy proceedingsto the operations of the Fort Francis pulp mill is uncertain; however, due tothe availability of alternative sources of pulp fiber, we do not anticipate asignificant impact to the mill operations at International Falls at this time.It is uncertain what the overall long-term impact will be on our Packagingsegment.

 

In January 2009, Smurfit-Stone Container Corp.(Smurfit-Stone), North America’s second-largest maker of corrugated packaging,also filed for reorganization under Chapter 11 of the United States BankruptcyCode. We have linerboard trading arrangements with Smurfit-Stone. We expect noimmediate impact on these arrangements as a result of this filing; however, thelonger-term outlook for these arrangements is uncertain. It is also uncertainwhat the overall long-term impact will be on our Packaging segment.

 

***Liquidity and Capital Resources***

 

Against the backdrop of aweak economy, a global financial crisis, and a credit market contraction, aswell as declining demand for our products, there is uncertainty regarding theamount of cash flows we will generate during the next 12 months. However, webelieve that our cash flows from operations, as well as our available borrowingcapacity under our $250.0 million revolving credit facility, will beadequate to fund debt service requirements and provide cash required to supportour ongoing operations, capital expenditures, and working capital needs for thenext 12 months.

 

If a contractuallycommitted lender fails to honor its commitment under the $250.0 millionrevolving credit facility, the other lenders would remain committed for theirportion of the total facility. A total of 11 lenders participated in therevolving credit facility at March 31, 2009, and the largest singlecommitment under the revolving credit facility was $100.0 million. At March 31,2009, we had $20.0 million of borrowings outstanding under the revolvingcredit facility and our aggregate liquidity from unused borrowing capacityunder the revolving credit facility totaled $205.5 million, net ofoutstanding letters of credit of $24.5 million.

 

Our ability to continueto fund our cash requirements may be affected by general economic, financial,competitive, legislative, and regulatory factors. A continuing deterioration inthe U.S. economy could have a significant impact on our business. Significantdeclines in the demand for or pricing of our products or increases in the costof raw materials could have a significant, negative effect on our ability tomaintain compliance with our financial loan covenants and/or meet our debtservice obligations. We cannot assure that our business will generatesufficient cash flow from operations or that future borrowings will beavailable for use under our revolving credit facility in an amount sufficientto enable us to pay our indebtedness according to its terms or to fund ourother liquidity needs.

 

Unless otherwise noted,this discussion of liquidity and capital resources with respect to 2008 refersto the combined activities of Boise Inc. and the Predecessor for the threemonths ended March 31, 2008.

 

***Sourcesand Uses of Cash***

 

Wegenerate cash from sales of our products and from short-term and long-termborrowings, as well as from cash proceeds from the sale of nonstrategic assets.In addition to paying for ongoing operating costs, we use cash to invest in ourbusiness, repay long-term debt and credit facilities, and meet our contractualobligations and commercial commitments. Below is a discussion of our sourcesand uses of cash through operating activities (including a sensitivity analysisrelated to our sources and uses of cash from/for operating activities),investing activities, and financing activities.

 

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***OperatingActivities***

 

We operate in a cyclical industry, and ouroperating cash flows vary accordingly. Our principal operating cashexpenditures are for fiber, labor, energy, chemicals, and interest. During thethree months ended March 31, 2009, our operating activities provided$85.7 million of cash, compared with $28.7 million in the same periodof 2008. Relative to first quarter 2008, cash provided by operations waspositively affected by favorable changes in working capital items, which wasthe primary reason for the increase in cash provided by operations.

 

*2009*

 

In first quarter 2009, favorable changesin working capital provided $44.7 million of cash from operations,compared with $6.5 million of cash in first quarter 2008. Working capitalis subject to cyclical operating needs, the timing of the collection ofreceivables, the payment of payables and expenses, and to a lesser extent,seasonal fluctuations in our operations.

 

The $44.7 million of cashprovided by operations related to favorable changes in working capital items isattributable primarily to decreases in receivables and inventories, partiallyoffset by decreases in accounts payable and accrued liabilities. Decreases inreceivable levels provided $38.8 million of cash from operations, which isattributable primarily to lower sales levels. Decreases in inventory levelsprovided $25.3 million of cash from operations. Inventory volumes andlevels were down due primarily to lower production levels. Lower levels ofaccounts payable and accrued liabilities used $19.6 million of cash fromoperations, attributable to decreased levels of trade payables across all ofour segments. These decreases are primarily a result of lower raw material andsupply purchases due to reduced production.

 

*2008*

 

In first quarter 2008,changes in working capital primarily reflect an increase in accounts payable andaccrued expenses, the net effect of which was partially offset by an increasein prepaid corporate expenses. The higher levels of accounts payable andaccrued expenses reflect higher trade accounts payable in the Packagingsegment, due in large part to increased costs associated with the DeRidderoutage. In addition, the Packaging segment had a significant increase inaccounts payable to related parties for fiber purchases, which havehistorically been sourced internally. Accounts receivable for the Packagingsegment decreased, which reflects a lower level of sales for March 2008,compared with December 2007, as March sales were affected by lostproduction during the DeRidder outage. To a lesser extent, an increase in tradepayables for the Paper segment, which reflected an increase in fiber costs,also contributed to the favorable change in working capital.

 

In addition to theincrease in prepaid corporate expenses, these favorable changes in workingcapital were also partially offset by lower levels of accrued compensation,which reflect bonus payouts by the Predecessor across all segments in firstquarter 2008. Accounts receivable increased for the Paper segment and theCorporate and Other segment. Increased receivables in the Paper segment reflecta higher level of sales for March 2008, compared with December 2007.The increase in accounts receivable for the Corporate and Other segmentreflects related-party receivables for the trucking business.

 

*SensitivityAnalysis Related to Sources and Uses of Cash From/For Our Operating Activities*

 

*Sourcesof cash flows from operating activities*

 

Our primary source ofcash is revenue generated by the sale of our packaging and paper products,including uncoated freesheet, linerboard, corrugated containers and sheets, andnewsprint. Declines in working capital also provide cash for operations,including declines in receivables from sales of our products, reductions ininventory levels, reductions in prepaid expenses, and increases in accountspayable and other accrued liabilities.

 

During first quarter2009, we sold 303,000 tons of uncoated freesheet, 38,000 tons of linerboard tothird parties, 1.4 billion square feet of corrugated products, and 60,000tons of newsprint. A $10-per-short-ton price change in uncoated freesheet wouldhave affected our revenue by approximately $12 million annually. A$10-per-short-ton price change in linerboard sold to third parties would haveaffected revenue by approximately $2 million annually, and a$10-per-short-ton price change in newsprint 

 

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would haveaffected our revenue by approximately $4 million annually. For corrugatedsheets and containers, a change in pricing of $1.00 per thousand square feet(msf) affects sales revenue by approximately $6 million annually.

 

Sellingprices for uncoated freesheet, newsprint, and corrugated containers and sheetsimproved in first quarter 2009, compared with the same period last year,despite recent declines in product demand, as a result of significant priceincreases in 2008 and widespread market curtailments and capacity reductionsacross the industry. Average net selling prices for uncoated freesheet papersimproved $104 per ton, or 12%, to $981 per ton in first quarter 2009, comparedwith $877 per ton in first quarter 2008. During first quarter 2009, we took30,000 tons of market-related downtime in uncoated freesheet production,compared with no market-related downtime in first quarter 2008. Newsprint prices increased $88 perton, or 18%, to $588 per ton during first quarter 2009, compared with $500 perton during the same period in 2008. Relative to first quarter 2008, corrugatedcontainer and sheet prices improved $5 per msf, or 9%, to $60 per msf, comparedwith $55 per msf during first quarter 2008. Linerboard net selling prices tothird parties declined $44 per ton, or 11%, to $352 per ton in first quarter2009, compared with $396 per ton in first quarter 2008, primarily as a resultof weak market conditions. In first quarter 2009, we took 31,000 tons ofmarket-related downtime in linerboard production and 52,000 tons ofmarket-rated downtime in newsprint production, compared with no market-related downtimein linerboard production and 12,000 tons of market-related downtime innewsprint in first quarter 2008.

 

TheU.S. and the global economy remained weak in early 2009. Economic downturnscharacterized by higher unemployment, lower family income, lower corporateearnings, lower business investment, and lower consumer spending typicallyresult in decreased demand for our products, which we expect will have anegative effect on pricing for our products throughout the remainder of 2009.

 

*Uses ofcash flows for operating activities*

 

Our primary uses of cashare for expenses related to the manufacture of packaging and paper products,including fiber, energy, chemicals, and labor. Other significant uses of cashare for interest expenses, pension contributions, taxes, and increases inworking capital, including increases in receivables from sales of our products,increases in inventory, increases in prepaid expenses, reductions in accountspayable and other accrued liabilities.

 

Fiber costs in firstquarter 2009 were $94.1 million, a decrease of $33.2 million, or 26%,from costs of $127.3 million in first quarter 2008, due primarily to loweroverall wood prices and reduced consumption of wood and recycled fiber andpurchased pulp as a result of lower production. A 1% change in fiber costsaffects our financial results by approximately $5 million annually.

 

Energy costs in firstquarter 2009 were $60.8 million, a decrease of $22.0 million, or 27%,from costs of $82.8 million in first quarter 2008, due primarily to loweroverall energy consumption and lower prices for natural gas and fuel, partiallyoffset by higher electricity prices. Natural gas is a significant component ofour energy costs. Including the indefinite idling of our D-2 newsprint machine,a $1/mmBtu change in our natural gas prices affects our financial results byapproximately $13 million annually.

 

Chemical costs in firstquarter 2009 were $50.8 million, a decrease of $11.2 million, or 18%,from costs of $62.0 million in first quarter 2008, driven by reducedconsumption, partially offset by higher prices. A 1% change in chemical pricesaffects our financial results by approximately $2 million annually.

 

Laborcosts related to the production of our products, recorded in “Materials, labor,and other operating expenses,” were $69.4 million in first quarter 2009, adecrease****of $9.4 million, or 12%, fromcosts of $78.8 million in first quarter 2008. The change was due primarilyto a reduction in the number of people employed at our mills, mainly at St. Helens,partially offset by increases in healthcare and wage costs. Labor costs are notas volatile as energy and wood fiber costs; however, they make up a significantcomponent of our operating costs and tend to increase over time. While webelieve we have good labor relations and have established staggered laborcontracts for each of our five paper mills to minimize potential disruptions inthe event of a labor dispute, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, eitherin the course of negotiations of a labor agreement or otherwise.

 

Thecontinuing macroeconomic downturn, significant decline in global equitymarkets, and turmoil in the credit markets have caused our pension investmentportfolio to suffer significant losses at the end of first quarter 2009. As of March 31,2009, our pension assets had decreased to a market value of 

 

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$226 million, compared with $248 million as of December 31,2008. While the Worker, Retiree, and Employee Recovery Act (WRERA) of 2008provides some relief as to the timing of our required future cash contributions,we expect to make material contributions to our pension plans for the nextseveral years, barring a dramatic recovery in equity and debt market securityvaluations or a sizable increase in the discount rate used to measure ourliabilities. On April 15, 2009, we made a $5.5 million contribution to ourqualified pension plans. Assuming a rate of return on plan assets of 7.25% in2009 and 2010, and including the $5.5 million contribution made on April 15,2009, and WRERA relief provisions, we estimate that we would not be required tomake further contributions in 2009 and would be required to contributeapproximately $23** **million in2010. The amount of required contributions will depend, among other things, onactual returns on plan assets, yield curve election choice, changes in interestrates that affect our discount rate assumptions, changes in pension fundingrequirement laws, and modifications to our plans. Recently, the InternalRevenue Service provided new yield curve election options for the 2009 plan year,which could lower our estimated 2010 required contribution amount. Ourestimates may change materially depending upon the impact of these and otherfactors. In December 2008, we amended our defined benefit pension plan forsalaried employees (Salaried Plan). This amendment freezes the accumulation ofbenefits and years of service for participants in the Salaried Plan effective April 15,2009. This amendment also freezes benefits in the Boise Inc. SupplementalPension Plan (SUPP) and the Boise Inc. Supplemental Early Retirement Plan(SERP) for executive officers. Our estimated 2010 contribution includes theimpact of this amendment. We may also elect to make additional voluntarycontributions in any year, which could reduce the amount of required contributionsin future years. For the three months ended March 31, 2009, we made nocash contributions to our qualified pension plans. We made a $5.5 millioncontribution to our qualified pension plans on April 15, 2009.

 

***InvestmentActivities***

 

Cash investing activitiesused $18.1 million for thethree months ended March 31, 2009, compared with $814.9 million during thesame period in 2008. For the three months ended March 31, 2008, investingactivities included $1.2 billion in cash spent for the Acquisition, excludingdeferred financing fees.

 

Cash capital expendituresfor property, plant, and equipment for the threemonths ended March 31, 2009, were $17.2 million. Cash capitalexpenditures for property, plant, and equipment for the combined three monthsended March 31, 2008, were $20.4 million. This amount includes$10.2 million spent by the Predecessor for the period from January 1,2008, through February 21, 2008, and $10.2 million spent by us from February 22,2008, through March 31, 2008. Of these amounts, $7.1 million relatesto the installation of a shoe press in our DeRidder, Louisiana, mill to reducethe use of energy in producing linerboard.

 

We expect capitalinvestments in 2009 to total approximately $75 million to$85 million, excluding acquisitions. This level of capital expenditurescould increase or decrease as a result of a number of factors, including ourfinancial results and future economic conditions. Our capital spending in 2009will be primarily for business improvement and quality/efficiency projects,replacement projects, and ongoing environmental compliance. Our efficiencyprojects are focused on opportunities to improve our energy efficiency. Weexpect to spend approximately $3 million in 2009 on environmentalcompliance.

 

***FinancingActivities***

 

Cash used forfinancing activities was $62.6 million for the three months ended March 31,2009, compared with $811.0 million of cash provided by financingactivities for the same period in 2008. Financing activities for the threemonths ended March 31, 2009, reflect $72.6 million of debtrepayments. Under our $250 million revolving credit facility,$205.5 million was available at March 31, 2009. Cash provided byfinancing activities for the three months ended March 31, 2008, reflectsapproximately $1.1 billion of debt financing obtained in conjunction with theAcquisition, partially offset by $120.2 million paid to stockholders whoexercised their conversion rights, $94.3 million of deferred financingcosts and underwriting fees, and $35.0 million of debt repayments. Priorto the Acquisition, financing activities have historically consisted primarilyof intercompany loans obtained by the Predecessor.

 

Our expected debtservice obligation, assuming interest rates remain at March 31,2009, levels, is estimated to be approximately $50.4 million for theremainder of 2009 and $88.9 million for 2010, consisting of cash paymentsfor principal, interest, and fees. These amounts remain subject to change, andsuch changes may be material. For example, a 1% increase in interest rateswould increase interest 

 

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expense byapproximately $8.7 million per year (based on debt levels and interestrates as of March 31, 2009).

 

Welease our distribution centers, as well as other property and equipment, underoperating leases. These operating leases are not included in debt; however,they represent a commitment. Obligations under operating leases are shown inthe “Contractual Obligations” section of “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in our 2008 AnnualReport on Form 10-K.

 

The followingdiscussion describes our debt structure in more detail.

 

At March 31,2009, and December 31, 2008, our long-term debt and the interest rates onthat debt were as follows:

 
| ** **                            | ** ** | **March 31, 2009** | ** **  | **December 31, 2008** | ** ** |
|---------------------------------------|------------|------------------------------|-------------|---------------------------------|------------|
| ** **                            | ** ** | **Amount**                   | ** **  | **Interest Rate**          | ** ** | **Amount** | ** ** | **Interest Rate** | ** ** |
| ** **                            | ** ** | **(millions)**               | ** **  | ** **                      | ** ** | **(millions)** | ** ** | ** ** | ** ** |
|                                  |       |                         |        |                            |       |   |   |   |   |
| Revolving credit  facility, due 2013  |       | $                            | 20.0        |                            | 3.81       | % | $ | 60.0 |   | 4.33 | % |
| Tranche A term  loan, due 2013        |       | 237.6                        |        | 3.81                            | %          | 245.3 |   | 4.75 | % |
| Tranche B term  loan, due 2014        |       | 456.6                        |        | 5.75                            | %          | 471.4 |   | 5.75 | % |
| Second lien term  loan, due 2015      |       | 260.7                        |        | 9.25                            | %          | 260.7 |   | 9.25 | % |
| Current portion  of long-term debt    |       | (7.5                         | )           | 4.11                            | %          | (25.8 | ) | 5.33 | % |
| Long-term debt,  less current portion |       | 967.3                        |        | 6.19                            | %          | 1,011.6 |   | 6.34 | % |
| Current portion  of long-term debt    |       | 7.5                          |        | 4.11                            | %          | 25.8 |   | 5.33 | % |
|                                  |       | 974.8                        |        | 6.17                            | %          | 1,037.5 |   | 6.31 | % |
|                                  |       |                         |        |                            |       |   |   |   |   |
| 15.75% notes  payable, due 2015       |       | 69.2                         |        | 15.75                           | %          | 66.6 |   | 15.75 | % |
| ** **                            | ** ** | **$**                        | **1,044.0** | ** **                      | ** ** |   | **$** | **1,104.1** |   |   |   |

 

*Senior Secured Credit Facilities*

 

Our seniorsecured credit facilities consist of:

 

·                 Afive-year nonamortizing $250.0 million senior secured revolving credit facilitywith interest at either the LIBOR plus 325 basis points or a calculated baserate plus 325 basis points (the Revolving Credit Facility and, collectivelywith the Tranche A Term Loan Facility and the Tranche B Term Loan Facility, theFirst Lien Facilities);

 

·                 Afive-year amortizing $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 facility withinterest at LIBOR (subject to a floor of 4.00%) plus 350 basis points or acalculated base rate plus 250 basis points (the Tranche B Term Loan Facility);and

 

·                 Aseven-year nonamortizing $260.7 million second lien term loan facility withinterest at LIBOR (subject to a floor of 5.50%) plus 700 basis points or acalculated base rate plus 600 basis points (the Second Lien Facility and,together with the First Lien Facilities, the Credit Facilities).

 

All borrowings under the CreditFacilities bear interest at a rate per annum equal to an applicable margin plusa customary base rate or Eurodollar rate. The base rate means, for any day, arate per annum equal to the greater of (i) the Prime Rate in effect onsuch day and (ii) the Federal Funds Effective Rate in effect on such dayplus 0.50%. In addition to paying interest, the Company pays a commitment feeto the lenders under the Revolving Credit Facility at a rate of 0.50% per annum(which shall be reduced to 0.375% when the leverage ratio is less than2.25:1.00) times the daily average undrawn portion of the Revolving CreditFacility (reduced by the amount of letters of credit issued and outstanding),which fee is payable quarterly in arrears. At March 31, 2009, and December 31,2008, we had $20.0 million and $60.0 million of borrowingsoutstanding under the Revolving Credit Facility. For the three months ended March 31,2009, and the year ended December 31, 2008, the average interest rates forour borrowings under our Revolving Credit Facility were 3.7% and 6.0%,respectively. The minimum and maximum borrowings under the Revolving CreditFacility were $10.0 million and $60.0 million for the three monthsended March 31, 2009, and were zero and $80.0 million for the yearended December 31, 2008.

 

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The weighted average amount ofborrowings outstanding under the Revolving Credit Facility during the threemonths ended March 31, 2009 and 2008, were $28.1 million and$73.7 million, respectively. At March 31, 2009, we had availabilityof $205.5 million, which is net of outstanding letters of credit of$24.5 million. At December 31, 2008, we had availability of$163.6 million, which was net of outstanding letters of credit of$26.4 million.

 

The loan documentation for the CreditFacilities contains, among other terms, representations and warranties,covenants, events of default and indemnification customary for loan agreementsfor similar leveraged acquisition financings, and other representations andwarranties, covenants, and events of default deemed by the administrativeagents of the First Lien Facilities or the Second Lien Facility, as applicable,to be appropriate for the specific transaction.

 

*Covenants*

 

TheFirst and Second Lien Facilities require BZ Intermediate Holdings LLC(Holdings), a wholly owned consolidated entity of Boise Inc. and the parentcompany of Boise Paper Holdings, L.L.C. (the Borrower), and its subsidiaries tomaintain financial covenant ratios. At March 31, 2009, Holdings isrequired to maintain a minimum interest coverage ratio of 2.375:1.00 and amaximum leverage ratio of 4.50:1.00 under the First Lien Facilities. Under theSecond Lien Facility, Holdings is required to maintain a maximum leverage ratioof 4.75:1.00 at March 31, 2009. The covenant ratios tighten over time. At December 31,2009, the minimum interest coverage ratio requirement increases to 2.50:1.00under the First Lien Facilities, and the maximum leverage ratio decreases to3.75:1.00 and 4.00:1.00 under the First and Second Lien Facilities,respectively. The minimum interest coverage ratio requirement remains 2.50:1.00throughout the term of the loan, whereas the maximum leverage ratio decreasesto a low of 3.00:1.00 and 3.25:1.00 under the First and Second Lien Facilities,respectively, in first quarter 2011.

 

The interest coverage ratio is definedin our loan agreements at the end of any fiscal quarter as the ratio of (i) consolidatedadjusted earnings before interest, taxes, depreciation, and amortization(EBITDA) for the four-fiscal-quarter period then ended to (ii) consolidatedinterest expense payable in cash for such four-fiscal-quarter period. Theleverage ratio is defined in our loan agreements at the end of any fiscalquarter as the ratio of (i) consolidated total debt as of such day to (ii) consolidatedadjusted EBITDA for the four-fiscal-quarter period ending on such date.Differences between our financial statements and Holdings’ financial statementsare related primarily to notes payable held by Boise Inc. and the relatedinterest expense on those notes, income taxes, and other miscellaneousexpenses.

 

TheCredit Facilities also limit the ability of Holdings and its subsidiaries tomake capital expenditures, generally to $150 million per year. However, thisamount may increase up to an additional $75 million a year if we had less than$150 million of capital expenditures in the previous fiscal year. We may alsospend $125 million a year, up to an aggregate of $200 million, for permittedacquisitions under the terms of our Credit Facilities.

 

AtMarch 31, 2009, we were in compliance with the financial covenants under ourCredit Facilities.  Continued declines inthe demand for or pricing of our products, increases in the cost of rawmaterials, unexpected operational issues, or changes in tax legislation andregulation related to alternative fuel mixture credits could have a negativeeffect on our ability to maintain compliance with these financial loancovenants.  If we were unable to maintaincompliance we would seek amendments or waivers to these covenants.  There is no assurance that we would be ableto obtain such amendments or waivers, in which case our debt would be due.

 

*Guarantees*

 

The Company’sobligations under its Credit Facilities are guaranteed by each of the Borrower’sexisting and subsequently acquired domestic (and, to the extent no materialadverse tax consequences to Holdings or Borrower would result therefrom and asreasonably requested by the administrative agent under each Credit Facility,foreign) subsidiaries and Holdings (collectively, the Guarantors). The FirstLien Facilities are secured by a first-priority security interest insubstantially all of the real, personal, and mixed property of Borrower and theGuarantors, including a first-priority security interest in 100% of the equityinterests of Borrower and each domestic subsidiary of Holdings, 65% of theequity interests of each of Holdings’ foreign subsidiaries (other than BoiseHong Kong Limited so long as Boise Hong Kong Limited does not account for morethan $2.5 million of consolidated EBITDA during any fiscal year ofBorrower), and all intercompany debt. The Second Lien Facility is secured by asecond-priority security interest in substantially all of the real, personal,and mixed property of Borrower and the Guarantors, including a 

 

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second-priority security interest in 100% of the equityinterests of Borrower and each domestic subsidiary of Holdings, 65% of theequity interests of each of Holdings’ foreign subsidiaries (other than BoiseHong Kong Limited so long as Boise Hong Kong Limited does not account for morethan $2.5 million of consolidated EBITDA during any fiscal year of Borrower),and all intercompany debt.

 

*Prepayments*

 

In theevent all or any portion of the Tranche B Term Loan Facility is repaid pursuantto any voluntary prepayments or mandatory prepayments with respect to assetsale proceeds or proceeds received from the issuance of debt prior to thesecond anniversary of the Acquisition closing date, such repayments will bemade at 101.0% of the amount repaid if such repayment occurs after the firstanniversary of the Acquisition closing date and prior to the second anniversaryof the Acquisition closing date.

 

Subject tothe provisions of the intercreditor agreement between the First Lien Facilityand the Second Lien Facility, in the event the Second Lien Facility is prepaidas a result of a voluntary or mandatory prepayment (other than as a result of amandatory prepayment with respect to insurance/condemnation proceeds or excesscash flow) at any time prior to the third anniversary of the Acquisitionclosing date, Borrower shall pay a prepayment premium equal to the “make-wholepremium” described below.

 

The “make-wholepremium” means the present value of (a) all required interest payments dueon such Second Lien Facility loan from the date of prepayment through andincluding the make-whole termination date, excluding accrued interest (assumingthat the interest rate applicable to all such interest is the LIBOR swap rateat the close of business on the third business day prior to the date of suchprepayment with the termination date nearest to the make-whole termination dateplus 7.00%) plus (b) the prepayment premium that would be due if suchprepayment were made on the day after the make-whole termination date, in eachcase discounted to the date of prepayment on a quarterly basis (assuming a360-day year and actual days elapsed) at a rate equal to the sum of such swaprate plus 0.50%.

 

At any timeafter the third anniversary of the Acquisition closing date and prior to thesixth anniversary of the Acquisition closing date, subject to the provisions ofthe First Lien Facilities, the Second Lien Facility may be prepaid in whole orin part subject to the “call premium” described below, provided that loansbearing interest with reference to the reserve-adjusted Eurodollar rate will beprepayable only on the last day of the related interest period unless Borrowerpays any related breakage costs.

 

The “callpremium” means that in the event all or any portion of the Second Lien Facilityis repaid as a result of a voluntary prepayment or mandatory prepayment withrespect to asset sale proceeds or proceeds received from the issuance of debtafter the third anniversary of the Acquisition closing date and prior to thesixth anniversary of the Acquisition closing date, such repayments will be madeat (i) 105.0% of the amount repaid if such repayment occurs on or afterthe third anniversary of the Acquisition closing date and prior to the fourthanniversary of the Acquisition closing date, (ii) 103.0% of the amountrepaid if such repayment occurs on or after the fourth anniversary of the Acquisitionclosing date and prior to the fifth anniversary of the Acquisition closingdate, and (iii) 101.0% of the amount repaid if such repayment occurs on orafter the fifth anniversary of the Acquisition closing date and prior to thesixth anniversary of the Acquisition closing date.

 

*Other Provisions*

 

Subject tospecified exceptions, the Credit Facilities require that the proceeds fromcertain asset sales, casualty insurance, certain debt issuances, and 75%(subject to step-downs based on certain leverage ratios) of the excess cashflow for each fiscal year must be used to pay down outstanding borrowings. Asof March 31, 2009, required debt principal repayments under the CreditFacilities total $3.2 million during the remainder of 2009,$26.5 million in 2010, $48.4 million in 2011, $134.3 million in2012, $63.7 million in 2013, $438.0 million in 2014, and$260.7 million thereafter.

 

*Notes Payable*

 

Inconnection with the Acquisition, we issued a $58.3 million subordinatedpromissory note. The original note is now represented by eight separate notespayable, each with terms (other than the 

 

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amount) identical to the original note. 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.

 

Thenotes bear interest at 15.75% per annum (computed on the basis of a 360-dayyear) payable quarterly (each such quarterly payment date, an Interest PaymentDate). To the extent interest is not paid in cash, interest will be added tothe principal amount of the notes on each Interest Payment Date. The notesmature on August 21, 2015, provided that if such date is more than 181days after the scheduled maturity date of the indebtedness under the CreditFacilities, then the maturity date shall automatically be deemed to be 181 daysafter the latest maturity date of any such indebtedness. At maturity, theamount of the notes will be approximately $185.9 million, assuming none ofthe interest has been paid in cash.

 

We mayprepay the notes at any time in whole or in part, without premium or penalty,subject to any restrictions contained in our senior credit facilities. We mustprepay the notes upon the occurrence of the following events: (i) a changeof control (as defined in the Credit Facilities), (ii) a sale or transferof 50% or more of the company’s assets, and (iii) events of default (asprovided in the notes). We must use the proceeds from the sale of equity ordebt securities or borrowings to repay the notes, subject to any restrictionscontained in our senior credit facilities.

 

*Other*

 

At March 31,2009, and December 31, 2008, we had $69.7 million and$72.6 million of costs recorded in “Deferred financing costs” on our ConsolidatedBalance Sheet related to the Acquisition. The amortization of these costs isrecorded in interest expense using the effective interest method over the lifeof the loans. We recorded $2.9 million and $0.8 million,respectively, of amortization expense for the three months ended March 31,2009 and 2008, in “Interest expense” in our Consolidated Statements of Income(Loss).

 

In April 2008,we entered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. AtMarch 31, 2009, we had $974.8 million of variable-rate debtoutstanding, of which $610.0 million was hedged using interest ratederivatives. At March 31, 2009, our average effective interest rate wasnot affected by our interest rate derivatives, as the effective cap rates wereabove the interest rates on the hedged debt. For additional information on ourinterest rate derivatives, see Note 14, Financial Instruments, of the Notes toUnaudited Quarterly Consolidated Financial Statements in “Part I, Item 1.Financial Statements” of this Form 10-Q.

 

For the three months ended March 31,2009 and 2008, cash payments for interest, net of interest capitalized, were$16.5 million and $8.5 million, respectively. No payments were madeduring the Predecessor period of January 1 through February 21, 2008.

 

***Contractual Obligations***

 

For information oncontractual obligations, see the discussion under the heading “ContractualObligations” in “Part II, Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in our 2008 Annual Report on Form 10-K.As of March 31, 2009, there have been no material changes to ourcontractual obligations from those disclosed in our 2008 Annual Report on Form 10-K.

 

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

 

At March 31,2009, we had no off-balance-sheet arrangements with unconsolidated entities.

 

***Guarantees***

 

Note 21,Commitments and Guarantees, and Note 13, Debt, of the Notes to UnauditedQuarterly Consolidated Financial Statements in “Part I, Item 1.  Financial Statements” of this Form 10-Qdescribe the nature of our guarantees, including the approximate terms of theguarantees, how the guarantees arose, the events or circumstances that wouldrequire us to perform under the guarantees, and the maximum potentialundiscounted amounts of future payments we could be required to make.

 

***Inflationary and SeasonalInfluences***

 

Our major costs of production are labor,wood fiber, energy, and chemicals. Energy costs, particularly for electricity,natural gas, and fuel oil, have been volatile in recent years. We have seensignificantly higher chemical prices for some key commodity chemicals, comparedwith historical standards, although the total cost impact has been mitigated bylower overall usage due to reduced production. Fiber, energy, andchemical costs were $94.1 million, $60.8 million, and $50.8 million,respectively, for the three months ended March 31, 2009, compared with$127.3 million, $82.8 million, and $62.0 million, respectively,for the combined three months ended March 31, 2008. Combined, thisrepresents a cost decrease of $66.4 million in 2009, compared with 2008.

 

Our businesses experience someseasonality, based primarily on buying patterns associated with particularproducts. For example, the demand for our corrugated containers is influencedby the agricultural seasons in the Pacific Northwest. In addition, seasonallycold weather increases costs, especially energy consumption, at all of ourmanufacturing facilities. Seasonality also affects working capital levels asdescribed below.

 

***Working Capital***

 

Workingcapital levels fluctuate throughout the year and are affected by seasonality,maintenance shutdowns, and changing sales patterns. Typically, we build workingcapital in our Paper segment at the end of the fourth quarter as we buildfinished goods inventory in preparation for first-quarter sales. Finished goodsinventories are also increased prior to scheduled annual maintenance shutdownsto maintain sales volumes while production is stopped. Inventories for some rawmaterials, such as fiber, exhibit seasonal swings as we increase log and chipinventories to ensure ample supply of fiber to our mills throughout the winter.In our Packaging segment, agricultural demand influences working capital asfinished good inventory levels are increased in preparation for the harvestseason in third and fourth quarters. Changes in sales volumes can affectaccounts receivable levels in both our Paper and Packaging segments,influencing overall working capital levels. We believe our management practiceswith respect to working capital conform to common business practices in theUnited States.

 

***Environmental***

 

Forinformation on environmental issues, see the discussion under the heading “Environmental”in “Part II, Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in our 2008 Annual Report on Form 10-K.As of March 31, 2009, there have been no material changes to ourenvironmental information from that disclosed in our 2008 Annual Report on Form 10-K.

 

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***Critical Accounting Estimates***

 

Criticalaccounting estimates are those that are most important to the portrayal of ourfinancial condition and results. These estimates require management’s mostdifficult, subjective, or complex judgments, often as a result of the need toestimate matters that are inherently uncertain. We review the development,selection, and disclosure of our critical accounting estimates with the AuditCommittee of our board of directors. For information about critical accountingestimates, see the discussion under the heading “Critical Accounting Estimates”in “Part II, Item 7. Management’s Discussion and Analysis of FinancialConditions and Results of Operations” in our 2008 Annual Report on Form 10-K.As of March 31, 2009, there have been no material changes to our criticalaccounting estimates from those disclosed in our 2008 Annual Report on Form 10-K.

 

***New and Recently Adopted Accounting Standards***

 

In April 2009,the Financial Accounting Standards Board (FASB) issued FASB StaffPosition (FSP) No. 107-1, *InterimDisclosures about Fair Value of Financial Instruments* (FSP 107-1),which increases the frequency of fair value disclosures from an annual to aquarterly basis. The guidance relates to fair value disclosures for anyfinancial instruments that are not currently reflected on the balance sheet atfair value. The FSP is effective for interim and annual periods ending after June 15,2009, but entities may choose to adopt it for the interim and annual periodsending after March 15, 2009. We will adopt this FSP in second quarter2009. The adoption will affect our disclosures only and will have no effect onour financial position or results of operations.

 

In December 2008,the FASB issued FSP FAS 132(R)-1, *Employer’sDisclosures About Postretirement Benefit Plan Assets.* This FSPamends SFAS No. 132 (Revised 2003), *Employers’Disclosures About Pensions and Other Postretirement Benefits,*toprovide guidance on an employer’s disclosures about plan assets of a definedbenefit pension or other postretirement plan. The FSP is effective for fiscalyears ending after December 15, 2009. The adoption will affect ourdisclosures only and will have no effect on our financial position or resultsof operations.

 

In April 2008, theFASB 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 assetunder FASB Statement No. 142, *Goodwilland Other Intangible Assets*. This new guidance also providesadditional disclosure requirements related to recognized intangible assets. Weadopted FSP No. FAS 142-3 in January 2009, and it did not have amaterial impact on our financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures About Derivative Instruments andHedging Activities*. SFAS No. 161 requires enhanced disclosuresabout derivative instruments and hedging activities to enable investors tobetter understand their effects on financial position, financial performance,and cash flows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. Weadopted SFAS No. 161 in January 2009. As a result of the adoption ofSFAS No. 161, we have expanded our disclosures regarding derivativeinstruments and hedging activities within Note 14, Financial Instruments.

 

In January 2008, weadopted SFAS No. 157,*Fair ValueMeasurements*. The adoption did not have a material impact 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 14, FinancialInstruments, we expanded our disclosures about fair value measurements. In February 2008,the FASB issued a one-year deferral for nonfinancial assets and liabilities tocomply with SFAS No. 157. We adopted SFAS No. 157 for nonfinancialassets and liabilities in first quarter 2009. We had no required fair valuemeasurements for nonfinancial assets and liabilities in first quarter 2009 andno required additional disclosures upon adoption. There were no materialeffects on our financial statements upon adoption of this new accountingpronouncement; however, this pronouncement could have an impact in futureperiods. In addition, we may have additional disclosure requirements in theevent we complete an acquisition or incur impairment of our assets in futureperiods.

 

In December 2007, the FASB issuedSFAS No. 141(R), *Business Combinations,*and SFAS No. 160, *Accountingand Reporting of Noncontrolling Interests in Consolidated Financial Statements,an Amendment of Accounting Research Bulletin No. 51.* These newstandards will significantly change the accounting for and reporting ofbusiness combination transactions and noncontrolling (minority) interests inconsolidated financial statements. We adopted SFAS Nos. 141(R) and 160on January 1, 2009. The

 

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impact of adopting these standards will belimited to business combinations occurring on or after January 1, 2009.

 

***ITEM3.              QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK***

 

Information relating to quantitative and qualitativedisclosures about market risk can be found in “Part II, Item 7A.Quantitative and Qualitative Disclosures About Market Risk” and under thecaption “Disclosures of Financial Market Risks” in “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour 2008 Annual Report on Form 10-K. Except as disclosed in Note 14,Financial Instruments, in the Notes to Unaudited Quarterly Consolidated FinancialStatements in “Part I, Item 1. Financial Statements” of this Form 10-Q,as of March 31, 2009, there have been no material changes in our exposureto market risk from those disclosed in our 2008 Annual Report on Form 10-K.

 

***ITEM4.              CONTROLS AND PROCEDURES***

 

Attached as exhibits to this Form 10-Qare certifications of our chief executive officer and chief financial officer. Rule 13a-14of the Securities Exchange Act of 1934, as amended, requires that we includethese certifications with this report. This Controls and Procedures sectionincludes information concerning the disclosure controls and procedures referredto in the certifications. You should read this section in conjunction with thecertifications.

 

*Evaluation of Disclosure Controls and Procedures*

 

We maintain “disclosure controls andprocedures” as Rule 13a-15(e) under the Securities Exchange Act of1934, as amended, defines such term. We have designed these controls andprocedures to reasonably assure that information required to be disclosed in ourreports filed under the Exchange Act, such as this Form 10-Q, is recorded,processed, summarized, and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms. We have alsodesigned our disclosure controls to provide reasonable assurance that suchinformation is accumulated and communicated to our senior management, includingour chief executive officer (CEO) and chief financial officer (CFO), asappropriate, to allow them to make timely decisions regarding our requireddisclosures.

 

We evaluate the effectiveness of ourdisclosure controls and procedures on at least a quarterly basis. A number ofkey components in our internal control system assist us in these evaluations.Since the Acquisition, we have had a disclosure committee. The committee meetsregularly and receives input from our senior management, general counsel,internal audit staff, and independent accountants. This committee is chargedwith considering and evaluating the materiality of information and reviewingthe company’s disclosure obligations on a timely basis. Our internal auditdepartment also evaluates components of our internal controls on an ongoingbasis. To assist in its evaluations, the internal audit staff identifies,documents, and tests our disclosure controls and procedures. Our intent is tomaintain disclosure controls and procedures as dynamic processes that change asour business and working environments change.

 

Our management, with the participation ofour CEO and CFO, has evaluated the effectiveness of the design and operation ofour disclosure controls and procedures as of the end of the quarter covered bythis Quarterly Report on Form 10-Q. Based on that evaluation, our CEO andCFO have concluded that, as of such date, our disclosure controls andprocedures were effective in meeting the objectives for which they weredesigned and were operating at a reasonable assurance level.

 

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*Limitations on the Effectiveness of Controls andProcedures*

 

In designing and evaluating our disclosurecontrols and procedures, we recognize that disclosure controls and procedures,no matter how well-conceived and well-operated, can provide only reasonable,not absolute, assurance that the objectives of the disclosure controls andprocedures are met. Additionally, in designing disclosure controls andprocedures, our management necessarily was required to apply its judgment inevaluating the cost-benefit relationship of possible disclosure controls andprocedures. We have also designed our disclosure controls and procedures basedin part upon assumptions about the likelihood of future events, and there canbe no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions.

 

*Changes in Internal Control Over FinancialReporting*

 

Our management identified no changesduring first quarter 2009 that materially affected, or would be reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II—OTHERINFORMATION**

 

***ITEM1.              LEGAL PROCEEDINGS***

 

We are a party to routinelegal proceedings that arise in the ordinary course of our business. We are notcurrently a party to any legal proceedings or environmental claims that webelieve would have a material adverse effect on our business, financialposition, or results of operations.

 

***ITEM1A.           RISK FACTORS***

 

ThisQuarterly Report on Form 10-Q contains forward-looking statements.Statements that are not historical or current facts, including statements aboutour expectations, anticipated financial results, projected capitalexpenditures, and future business prospects, are forward-looking statements.You can identify these statements by our use of words such as “may,” “will,” “expect,”“believe,” “should,” “plan,” “anticipate,” and other similar expressions. Youcan find examples of these statements throughout this report, including the “RecentTrends and Operational Outlook” section of “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” We cannot guaranteethat our actual results will be consistent with the forward-looking statementswe make in this report. You should review carefully the risk factors listed in “Item1A. Risk Factors” of our Annual Report on Form 10-K and our QuarterlyReports on Form 10-Q, as well as those factors listed in other documentswe file with the SEC. We do not assume an obligation to update anyforward-looking statements. Except as noted below, there have been no materialchanges to our risk factors as of March 31, 2009, from those disclosedpreviously in our 2008 Annual Report on Form 10-K.

 

***Sincethe Acquisition, the market price of our common stock has declinedsignificantly, and we face possible delisting from the NYSE.***

 

Shares of our common stock arecurrently listed on the NYSE. The market price of our common stock has declinedsignificantly since the Acquisition. On the date of the Acquisition, February 22,2008, the closing price of our common stock was $8.50 per share. As of April 30,2009, the closing price of our common stock was $0.86 per share and our marketcapitalization was approximately $72.7 million.

 

The NYSE’s quantitative listingstandards require NYSE-listed companies to have an average marketcapitalization of at least $75.0 million over any consecutive thirtytrading-day period. In addition, the average closing price of any listedsecurity must not fall below $1.00 per share for any consecutive 30-trading-dayperiod. On November 5, 2008, we received written notice from the NYSE thatwe do not currently comply with these two continued listing standards.

 

As required by the NYSE, we submitteda business plan to demonstrate our ability to achieve compliance with themarket capitalization requirement within 18 months from the receipt of thenotice. The NYSE has notified us that it has accepted our plan to regaincompliance. We must cure the market capitalization deficiency by May 2010.In early 2009, the NYSE temporarily suspended the share price requirement.  This suspension extends our timeframe to curethe share price deficiency until early September 2009. If we are notcompliant within the timeframes required by the NYSE, our common stock willalso be subject to suspension and delisting. Although we intend to cure thedeficiencies and to return to compliance with the NYSE continued listingrequirements, there can be no assurance that we will be able to do so. If ourcommon stock is delisted, or if it becomes apparent to us that we will beunable to meet the NYSE’s continued listing standards in the near future, weintend to seek to have our common stock listed or quoted on another nationalsecurities exchange or quotation system. However, we may be unable to list orquote our common stock on another national securities exchange or quotationsystem. Even if our common stock is listed or quoted on such other exchange orsystem, a delisting by the NYSE could hurt our investors by reducing theliquidity and market price of our common stock. Additionally, a delisting couldnegatively affect us by reducing the number of investors willing to hold oracquire our common stock, which could negatively affect our ability to accesspublic capital markets.

 

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***ITEM2.              UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS***

 

None.

 

***ITEM3.              DEFAULTS UPON SENIORSECURITIES***

 

None.

 

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

 

(a)                                   The annual shareholders’ meeting of Boise Inc. was held on April 23,2009.

 

(b)                                  Shareholders elected three Class I directors at the annual meeting:Carl A. Albert, Thomas S. Souleles, and Jason G. Weiss. Other directors whoseterms of office continued after the annual shareholders’ meeting are JonathanW. Berger, Jack Goldman, Nathan D. Leight, Matthew W. Norton, W. ThomasStephens, and Alexander Toeldte.

 

(c) (i)                     The votes for or withheld with respect to each director nominee were:

 
| **Nominee**         | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|---------------------|------------|------------|------------|--------------|------------|
| Carl A. Albert      |       | 74,169,824 |       | 756,898      |       |
| Thomas S.  Souleles |       | 74,183,386 |       | 743,336      |       |
| Jason G. Weiss      |       | 74,252,545 |       | 674,177      |       |

 

(c) (ii)                 Shareholders approvedan amendment to the Boise Inc. Incentive and Performance Plan to increase thenumber of shares authorized for issuance under the plan from 5,175,000 sharesto 17,175,000 shares. The votes were as follows:

 

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Nonvote** | ** ** |
|------------|------------|-------------|------------|-------------|------------|-------------------------|------------|
| 54,692,431 |       | 1,377,503   |       | 42,732      |       | 18,814,056              |       |

 

***ITEM5.              OTHER INFORMATION***

 

None.

 

***ITEM6.              EXHIBITS***

 

Required exhibits are listed in the Index to Exhibitsand are incorporated by reference.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |   | BOISE INC.                                                 |
|--------|--------|------------------------------------------------------------|
|   |   |                                                       |
|   |   |                                                       |
|   |   | /s/ Samuel K.  Cotterell                                   |
|   |   | Samuel K.  Cotterell  Vice President and Controller        |
|   |   | (As Duly  Authorized Officer and Chief Accounting Officer) |

 

Date: May 5, 2009

 

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**BOISE INC.**

 

**INDEX TO EXHIBITS**

 

Filed With the Quarterly Report on Form 10-Q for the Quarter EndedMarch 31, 2009

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1*      |       | Boise Inc.  Incentive and Performance Plan, Effective February 22, 2008 (Amended as  of April 23, 2009)                                                                                              |
|       |       |                                                                                                                                                                                                           |
| 10.2*      |       | Form of  2009 Restricted Stock Award Agreement (Officers)                                                                                                                                                 |
|       |       |                                                                                                                                                                                                           |
| 10.3*      |       | Form of  2009 Restricted Stock Unit Award Agreement (Officers)                                                                                                                                            |
|       |       |                                                                                                                                                                                                           |
| 10.4       |       | Form of  2009 Restricted Stock Award Agreement (Nonemployee Directors)                                                                                                                                    |
|       |       |                                                                                                                                                                                                           |
| 10.5       |       | Form of  2009 Restricted Stock Unit Award Agreement (Nonemployee Directors)                                                                                                                               |
|       |       |                                                                                                                                                                                                           |
| 11         |       | See Footnote 3,  Net Income (Loss) Per Common Share, of the Notes to Unaudited Quarterly  Consolidated Financial Statements in “Part I, Item 1. Financial  Statements,” of this Form 10-Q. |
|       |       |                                                                                                                                                                                                           |
| 31.1       |       | CEO  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                              |
|       |       |                                                                                                                                                                                                           |
| 31.2       |       | CFO  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                              |
|       |       |                                                                                                                                                                                                           |
| 32         |       | Section 906  Certifications of Chief Executive Officer and Chief Financial Officer of  Boise Inc.                                                                                                         |

 

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|   |  * | Filed as  Exhibits 99.1, 99.2, and 99.3, respectively, to Current Report on  Form 8-K filed April 24, 2009, and incorporated by reference. |
|--------|---------|------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

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