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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549**

** **

**FORM 10-Q**

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

 

**For the quarterly period ended June 30,2008**

 

**Or**

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

 

**For the transition period from                       to                       **

 

**Commission File Number: 001-33541**

 

**Boise Inc.**(Exact name of registrant 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 principalexecutive 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 forthe past 90 days.     Yes x     No o

 

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

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

 

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

 

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 July 31, 2008** |
|---------------------------------|------------|--------------------------------------------------------------------------|
| Common Stock, $.0001  Par Value |       | 79,722,147                                                               |

 

 

 

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**Table of Contents**

 
| **PART I—FINANCIAL  INFORMATION**                         |                                                                                        |
|---------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|                                                                |                                                                                        |
| Item 1.                                                             | Consolidated Financial  Statements                                                          | 1 |
| Notes to  Unaudited Quarterly Consolidated Financial Statements     | 6                                                                                           |
|                                                                | 1.                                                                                          | Nature of  Operations and Basis of Presentation | 6 |
|                                                                | 2.                                                                                          | Acquisition  of Boise Cascade’s Paper and Packaging Operations | 7 |
|                                                                | 3.                                                                                          | Net Income  (Loss) Per Common Share | 9 |
|                                                                | 4.                                                                                          | Transactions  With Related Parties | 10 |
|                                                                | 5.                                                                                          | Other (Income)  Expense, Net | 12 |
|                                                                | 6.                                                                                          | Income Taxes | 13 |
|                                                                | 7.                                                                                          | Leases | 13 |
|                                                                | 8.                                                                                          | Receivables | 14 |
|                                                                | 9.                                                                                          | Inventories | 14 |
|                                                                | 10.                                                                                         | Property and  Equipment, Net | 14 |
|                                                                | 11.                                                                                         | Goodwill and  Intangible Assets | 15 |
|                                                                | 12.                                                                                         | Asset  Retirement Obligations | 15 |
|                                                                | 13.                                                                                         | Debt | 16 |
|                                                                | 14.                                                                                         | Financial  Instruments | 19 |
|                                                                | 15.                                                                                         | New and  Recently Adopted Accounting Standards | 23 |
|                                                                | 16.                                                                                         | Retirement and  Benefit Plans | 23 |
|                                                                | 17.                                                                                         | Stockholders’ Equity | 24 |
|                                                                | 18.                                                                                         | Comprehensive  Income (Loss) | 28 |
|                                                                | 19.                                                                                         | Segment Information | 28 |
|                                                                | 20.                                                                                         | Commitments and  Guarantees | 31 |
|                                                                | 21.                                                                                         | Legal  Proceedings and Contingencies | 32 |
|                                                                |                                                                                        |
| Item 2.                                                        | Management’s Discussion and Analysis  of Financial Condition and Results of Operations | 32 |
| Understanding  Our Financial Information                            | 32                                                                                          |
| Background and  Executive Overview                                  | 32                                                                                          |
| Acquisition  of Boise Cascade’s Paper and Packaging Operations | 33                                                                                          |
| Our Segments                                                        | 35                                                                                          |
| Recent  Trends and Operational Outlook                              | 36                                                                                          |
| Factors  That Affect Operating Results                              | 38                                                                                          |
| Operating Results                                                   | 44                                                                                          |
| Industry  Mergers and Acquisitions                                  | 51                                                                                          |
| Liquidity and  Capital Resources                                    | 51                                                                                          |
| Contractual  Obligations                                            | 56                                                                                          |
| Off-Balance-Sheet  Activities                                       | 56                                                                                          |
| Guarantees                                                          | 56                                                                                          |
| Environmental                                                       | 56                                                                                          |
| Critical  Accounting Estimates                                      | 56                                                                                          |
| New and  Recently Adopted Accounting Standards                      | 56                                                                                          |
|                                                                |                                                                                        |
| Item 3.                                                        | Quantitative  and Qualitative Disclosures About Market Risk                                 | 57 |
|                                                                |                                                                                        |   |
| Item 4T.                                                       | Controls and  Procedures                                                                    | 59 |
|                                                                |                                                                                        |   |
| **PART II—OTHER  INFORMATION**                            | ** **                                                                                  |
| Item 1.                                                        | Legal Proceedings                                                                           | 61 |
|                                                                |                                                                                        |   |
| Item 1A.                                                       | Risk Factors                                                                                | 61 |
|                                                                |                                                                                        |   |
| Item 2.                                                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 61 |
|                                                                |                                                                                        |   |
| Item 3.                                                             | Defaults  Upon Senior Securities                                                            | 61 |
|                                                                |                                                                                        |   |
| Item 4.                                                             | Submission  of Matters to a Vote of Securityholders                                         | 61 |
|                                                                     |                                                                                             |  |  |  |  |

 

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| Item 5.      | Other Information | 61     |
|--------------|-------------------|--------|
|         |              |   |
| Item 6. | Exhibits          | 62     |

 

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

 

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**PART 1—FINANCIAL INFORMATION**

 

***ITEM 1.              CONSOLIDATEDFINANCIAL STATEMENTS***

 

**Boise Inc.**

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

**Consolidated Statements of Income (Loss)**

(unaudited, in thousands, except for share data)

 
| ** **                                         | ** ** | **Boise Inc.**                           | ** **  | ** **                                    | **Predecessor** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|-----------------|------------|
| ** **                                         | ** ** | **Three  Months  Ended  June 30,  2008** | ** **  | **Three  Months  Ended  June 30,  2007** | ** **      | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** |
| ** **                                         | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Sales**                                          | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| Trade                                              |       | $                                             | 586,583     |                                          | $               | —     |   |   | $ | 403,472 |   |
| Related parties                                    |       | 31,824                                        |        | —                                        |            |       | 179,150 |   |
|                                               |       | 618,407                                       |        | —                                        |            |       | 582,622 |   |
|                                               |       |                                          |        |                                          |            |       |   |   |
| **Costs  and expenses**                            | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses    |       | 544,090                                       |        | —                                        |            |       | 503,465 |   |
| Fiber costs from  related parties                  |       | 7,015                                         |        | —                                        |            |       | 10,280 |   |
| Depreciation,  amortization, and depletion         |       | 32,689                                        |        | —                                        |            |       | 30,796 |   |
| Selling and  distribution expenses                 | * *   | 14,817                                        |        | —                                        |            |       | 14,545 | * * |
| General and  administrative expenses               |       | 12,262                                        |        | 18                                            |            |       | 10,277 |   |
| Other (income)  expense, net                       |       | (96                                           | )           | —                                        |            |       | (3,292 | ) |
|                                               |       | 610,777                                       |        | 18                                            |            |       | 566,071 |   |
| ** **                                         | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Income  (loss) from operations**                 |       | 7,630                                         |        | (18                                           | )               |       | 16,551 |   |
|                                               |       |                                          |        |                                          |            |       |   |   |
| Foreign exchange  gain (loss)                      |       | (209                                          | )           | —                                        |            |       | 530 |   |
| Change in fair  value of interest rate derivatives |       | 510                                           |        | —                                        |            |       | — |   |
| Interest expense                                   |       | (26,145                                       | )           | —                                        |            |       | — |   |
| Interest income                                    |       | 178                                           |        | 511                                           |            |       | 157 |   |
|                                               |       | (25,666                                       | )      | 511                                           |            |       | 687 |   |
|                                               |       |                                          |        |                                          |            |       |   |   |
| **Income  (loss) before income taxes**             |       | (18,036                                       | )           | 493                                           |            |       | 17,238 |   |
| Income tax  (provision) benefit                    |       | (14                                           | )           | (224                                          | )               |       | (703 | ) |
| **Net  income (loss)**                             | ** ** | **$**                                         | **(18,050** | **)**                                         | **$**           | **269**    | ** ** | ** ** | **$** | **16,535** | ** ** |
| ** **                                         | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Weighted  average common shares outstanding:**   | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **77,259,947**                                | ** **  | **14,444,506**                                |            |       | — |   |
| ** **                                         | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Net  loss per common share:**                    | ** ** | ** **                                    | ** **  | ** **                                    | ** **      | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **$**                                         | **(0.23**   | **)**                                         | **$**           | **0.02**   | ** ** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Inc.**

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

**Consolidated Statements of Income (Loss)**

(unaudited, in thousands, except share data)

 
| ** **                                         | ** ** | **Boise Inc.**                         | ** **  | **Predecessor**                                                | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|-------------|----------------------------------------------------------------|------------|
| ** **                                         | ** ** | **Six  Months  Ended  June 30,  2008** | ** **  | **February 1  (Inception)  Through  June 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales**                                          | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                              |       | $                                           | 812,627     |                                                           | $          | — |   |   | $ | 258,430 |   | $ | 806,384 |   |
| Related parties                                    |       | 33,768                                      |        | —                                                         |       |   | 101,490 |   | 354,939 |   |
|                                               |       | 846,395                                     |        | —                                                         |       |   | 359,920 |   | 1,161,323 |   |
|                                               |       |                                        |        |                                                           |       |   |   |   |   |   |
| **Costs  and expenses**                            | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses    |       | 739,519                                     |        | —                                                         |       |   | 313,931 |   | 991,419 |   |
| Fiber costs from  related parties                  |       | 25,644                                      |        | —                                                         |       |   | 7,662 |   | 21,307 |   |
| Depreciation,  amortization, and depletion         |       | 45,436                                      |        | —                                                         |       |   | 477 |   | 61,567 |   |
| Selling and  distribution expenses                 | * *   | 20,760                                      |        | —                                                         |       |   | 9,097 |   | 28,867 | * * |
| General and  administrative expenses               |       | 16,811                                      |        | 19                                                             |       |   | 6,606 |   | 19,727 |   |
| Other (income)  expense, net                       |       | (124                                        | )           | —                                                         |       |   | (989 | ) | (884 | ) |
|                                               |       | 848,046                                     |        | 19                                                             |       |   | 336,784 |   | 1,122,003 |   |
| ** **                                         | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  (loss) from operations**                 |       | (1,651                                      | )           | (19                                                            | )          |   | 23,136 |   | 39,320 |   |
|                                               |       |                                        |        |                                                           |       |   |   |   |   |   |
| Foreign exchange  gain (loss)                      |       | (1,062                                      | )           | —                                                         |       |   | 54 |   | 602 |   |
| Change in fair  value of interest rate derivatives |       | 510                                         |        | —                                                         |       |   | — |   | — |   |
| Interest expense                                   |       | (37,580                                     | )           | —                                                         |       |   | (2 | ) | — |   |
| Interest income                                    |       | 1,999                                       |        | 511                                                            |       |   | 161 |   | 285 |   |
|                                               |       | (36,133                                     | )      | 511                                                            |       |   | 213 |   | 887 |   |
|                                               |       |                                        |        |                                                           |       |   |   |   |   |   |
| **Income  (loss) before income taxes**             |       | (37,784                                     | )           | 492                                                            |       |   | 23,349 |   | 40,207 |   |
| Income tax  (provision) benefit                    |       | 3,363                                       |        | (224                                                           | )          |   | (563 | ) | (1,681 | ) |
| **Net  income (loss)**                             | ** ** | **$**                                       | **(34,421** | **)**                                                          | **$**      | **268** | ** ** | ** ** | **$** | **22,786** | ** ** | **$** | **38,526** | ** ** |
| ** **                                         | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted  average common shares outstanding:**   | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **69,971,391**                              | ** **  | **12,834,000**                                                 |       |   | **—** |   | **—** |   |
| ** **                                         | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  loss per common share:**                    | ** ** | ** **                                  | ** **  | ** **                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **$**                                       | **(0.49**   | **)**                                                          | **$**      | **0.02** | ** ** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
|                                                    |            |                                             |             |                                                                |            |  |  |  |  |  |  |  |  |  |  |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Inc.**

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

**Consolidated Balance Sheets**

(unaudited, in thousands)

 
| ** **                                           | ** ** | **Boise Inc.**     | ** **    | **Predecessor**             | ** ** |
|------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                                           | ** ** | **June 30,  2008** | ** **    | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
|                                                 |       |                    |          |                        |       |   |   |   |
| **ASSETS**                                           |       |                    |          |                        |       |   |   |   |
|                                                 |       |                    |          |                        |       |   |   |   |
| **Current**                                          |       |                    |          |                        |       |   |   |   |
| Cash and cash  equivalents                           |       | $                       | 21,125        |                        | $          | 186 |   |   | $ | 8 |   |
| Cash held in  trust                                  |       | —                  |          | 403,989                     |       |   | — |   |
| Receivables                                          |       |                    |          |                        |       |   |   |   |
| Trade, less  allowances of $831, $0, and $1,063 |       | 233,786                 |          | —                      |       |   | 181,799 |   |
| Related parties                                      |       | 3,940                   |          | —                      |       |   | 36,452 |   |
| Other                                                |       | 8,213                   |          | —                      |       |   | 10,224 |   |
| Inventories                                          |       | 340,702                 |          | —                      |       |   | 324,679 |   |
| Other                                                |       | 14,862                  |          | 144                         |       |   | 6,936 |   |
|                                                 |       | 622,628                 |          | 404,319                     |       |   | 560,098 |   |
|                                                 |       |                    |          |                        |       |   |   |   |
| **Property**                                         |       |                    |          |                        |       |   |   |   |
| Property and  equipment, net                         |       | 1,284,229               |          | —                      |       |   | 1,192,344 |   |
| Fiber farms and  deposits                            |       | 13,022                  |          | —                      |       |   | 17,843 |   |
|                                                 |       | 1,297,251               |          | —                      |       |   | 1,210,187 |   |
|                                                 |       |                    |          |                        |       |   |   |   |
| **Deferred  financing costs**                        |       | 78,881                  |          | —                      |       |   | — |   |
| **Goodwill**                                         |       | —                  |          | —                      |       |   | 42,218 |   |
| **Intangible  assets, net**                          |       | 22,524                  |          | —                      |       |   | 23,967 |   |
| **Other  assets**                                    |       | 11,162                  |          | 3,293                       |       |   | 9,242 |   |
| **Total  assets**                                    | ** ** | **$**                   | **2,032,446** | ** **                  | **$**      | **407,612** | ** ** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Inc.**

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

**Consolidated Balance Sheets (continued)**

(unaudited, in thousands, except share data)

 
| ** **                                                                                                                                                                                                                             | ** ** | **Boise Inc.**     | ** **    | **Predecessor**             | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                             | ** ** | **June 30,  2008** | ** **    | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                         |       |                    |          |                        |       |   |   |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Current**                                                                                                                                                                                                                            |       |                    |          |                        |       |   |   |   |
| Current portion  of long-term debt                                                                                                                                                                                                     |       | $                       | 12,563        |                        | $          | — |   |   | $ | — |   |
| Income taxes  payable                                                                                                                                                                                                                  |       | 6                       |          | 1,280                       |       |   | 306 |   |
| Accounts payable                                                                                                                                                                                                                       |       |                    |          |                        |       |   |   |   |
| Trade                                                                                                                                                                                                                                  |       | 222,312                 |          | —                      |       |   | 178,686 |   |
| Related parties                                                                                                                                                                                                                        |       | 6,080                   |          | —                      |       |   | 299 |   |
| Accrued  liabilities                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| Compensation and  benefits                                                                                                                                                                                                             |       | 41,542                  |          | —                      |       |   | 53,573 |   |
| Interest payable                                                                                                                                                                                                                       |       | 617                     |          | —                      |       |   | — |   |
| Deferred  underwriting fee                                                                                                                                                                                                             |       | —                  |          | 12,420                      |       |   | — |   |
| Other                                                                                                                                                                                                                                  |       | 14,603                  |          | 1,015                       |       |   | 16,716 |   |
|                                                                                                                                                                                                                                   |       | 297,723                 |          | 14,715                      |       |   | 249,580 |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Debt**                                                                                                                                                                                                                               |       |                    |          |                        |       |   |   |   |
| Long-term debt,  less current portion                                                                                                                                                                                                  |       | 1,035,388               |          | —                      |       |   | — |   |
| Notes payable                                                                                                                                                                                                                          |       | 61,655                  |          | —                      |       |   | — |   |
|                                                                                                                                                                                                                                   |       | 1,097,043               |          | —                      |       |   | — |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Other**                                                                                                                                                                                                                              |       |                    |          |                        |       |   |   |   |
| Deferred income  taxes                                                                                                                                                                                                                 |       | 322                     |          | —                      |       |   | 896 |   |
| Compensation and  benefits                                                                                                                                                                                                             |       | 61,965                  |          | —                      |       |   | 6,030 |   |
| Other long-term  liabilities                                                                                                                                                                                                           |       | 30,975                  |          | —                      |       |   | 29,427 |   |
|                                                                                                                                                                                                                                   |       | 93,262                  |          | —                      |       |   | 36,353 |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Common  stock subject to possible conversion**                                                                                                                                                                                       |       | —                  |          | 159,760                     |       |   | — |   |
| (16,555,860  shares at conversion value at December 31, 2007)                                                                                                                                                                     |       |                    |          |                        |       |   |   |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Commitments  and contingent liabilities**                                                                                                                                                                                            |       |                    |          |                        |       |   |   |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Stockholders’  Equity**                                                                                                                                                                                                         |       |                    |          |                        |       |   |   |   |
| Business unit  equity                                                                                                                                                                                                                  |       | —                  |          | —                      |       |   | 1,559,779 |   |
| Preferred stock,  $.0001 par value per share: 1,000,000 shares authorized;  none issued                                                                                                                                                |       | —                  |          | —                      |       |   | — |   |
| Common stock,  $.0001 par value per share: 250,000,000 shares authorized; 79,722,147 shares  and 51,750,000 shares issued and outstanding (which included 16,555,860  shares subject to possible conversion at December 31, 2007) |       | 8                       |          | 5                           |       |   | — |   |
| Additional  paid-in capital                                                                                                                                                                                                            |       | 572,829                 |          | 227,640                     |       |   | — |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                |       | 510                     |          | —                      |       |   | — |   |
| Income  accumulated during development stage                                                                                                                                                                                           |       | —                  |          | 5,492                       |       |   | — |   |
| Accumulated  deficit                                                                                                                                                                                                                   |       | (28,929                 | )             | —                      |       |   | — |   |
| **Total  stockholders’ equity**                                                                                                                                                                                                   |       | 544,418                 |          | 233,137                     |       |   | 1,559,779 |   |
|                                                                                                                                                                                                                                   |       |                    |          |                        |       |   |   |   |
| **Total  liabilities and stockholders’ equity**                                                                                                                                                                                   | ** ** | **$**                   | **2,032,446** | ** **                  | **$**      | **407,612** | ** ** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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**Boise Inc.**

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

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                       | ** ** | **Boise Inc.**                         | ** ** | **Predecessor**                                                | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **February 1  (Inception)  Through  June 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                                                             |       |                                        |       |                                                           |       |   |   |   |   |   |
| **Cash  provided by (used for) operations**                                      |       |                                        |       |                                                           |       |   |   |   |   |   |
| Net income  (loss)                                                               |       | $                                           | (34,421    | )                                                              | $          | 268 |   |   | $ | 22,786 |   | $ | 38,526 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                        |       |                                                           |       |   |   |   |   |   |
| Depreciation,  amortization, and depletion of deferred financing costs and other |       | 48,453                                      |       | —                                                         |       |   | 477 |   | 61,567 |   |
| Share-based  compensation expense                                                |       | 775                                         |       | —                                                         |       |   | — |   | — |   |
| Related-party  interest expense                                                  |       | 2,760                                       |       | —                                                         |       |   | — |   | — |   |
| Notes payable  interest expense                                                  |       | 561                                         |       | —                                                         |       |   | — |   | — |   |
| Interest income  on cash held in trust                                           |       | —                                      |       | (510                                                           | )          |   | — |   | — |   |
| Pension and  other postretirement benefit expense                                |       | 4,180                                       |       | —                                                         |       |   | 1,826 |   | 6,581 |   |
| Deferred income  taxes                                                           |       | (3,276                                      | )          | —                                                         |       |   | 11 |   | 59 |   |
| Change of fair  value of interest rate derivatives                               |       | (510                                        | )          | —                                                         |       |   | — |   | — |   |
| Gain on changes  in retiree healthcare programs                                  |       | —                                      |       | —                                                         |       |   | — |   | (4,367 | ) |
| (Gain) loss on  sales of assets, net                                             |       | (20                                         | )          | —                                                         |       |   | (943 | ) | 1,342 |   |
| Other                                                                            |       | (2,808                                      | )          | —                                                         |       |   | (91 | ) | (27 | ) |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                        |       |                                                           |       |   |   |   |   |   |
| Receivables                                                                      |       | 10,278                                      |       | —                                                         |       |   | (23,522 | ) | (12,584 | ) |
| Inventories                                                                      |       | (7,457                                      | )          | —                                                         |       |   | 5,343 |   | 4,695 |   |
| Prepaid expenses                                                                 |       | (6,654                                      | )          | (62                                                            | )          |   | 875 |   | (2,537 | ) |
| Accounts payable  and accrued liabilities                                        |       | 26,033                                      |       | 12                                                             |       |   | (10,718 | ) | (1,155 | ) |
| Current and  deferred income taxes                                               |       | (976                                        | )          | 224                                                            |       |   | 335 |   | 393 |   |
| Pension and  other postretirement benefit payments                               |       | (171                                        | )          | —                                                         |       |   | (1,826 | ) | (6,581 | ) |
| Other                                                                            |       | (902                                        | )          | —                                                         |       |   | 2,326 |   | 3,371 |   |
| Cash provided by  (used for) operations                                          |       | 35,845                                      |       | (68                                                            | )          |   | (3,121 | ) | 89,283 |   |
|                                                                             |       |                                        |       |                                                           |       |   |   |   |   |   |
| **Cash  provided by (used for) investment**                                      |       |                                        |       |                                                           |       |   |   |   |   |   |
| Acquisition of  businesses and facilities                                        |       | (1,215,601                                  | )          | —                                                         |       |   | — |   | — |   |
| Cash released  from (held in) trust                                              |       | 403,989                                     |       | (399,500                                                       | )          |   | — |   | — |   |
| Expenditures for  property and equipment                                         |       | (35,853                                     | )          | —                                                         |       |   | (10,168 | ) | (68,699 | ) |
| Sales of assets                                                                  |       | 37                                          |       | —                                                         |       |   | 17,662 |   | 3,996 |   |
| Other                                                                            |       | (941                                        | )          | —                                                         |       |   | 863 |   | 1,776 |   |
| Cash provided by  (used for) investment                                          |       | (848,369                                    | )          | (399,500                                                       | )          |   | 8,357 |   | (62,927 | ) |
|                                                                             |       |                                        |       |                                                           |       |   |   |   |   |   |
| **Cash  provided by (used for) financing**                                       |       |                                        |       |                                                           |       |   |   |   |   |   |
| Issuances of  long-term debt                                                     |       | 1,085,700                                   |       | —                                                         |       |   | — |   | — |   |
| Payments of  long-term debt                                                      |       | (37,749                                     | )          | —                                                         |       |   | — |   | — |   |
| Issuances of  short-term debt                                                    |       | —                                      |       | 137                                                            |       |   | — |   | — |   |
| Payments of  short-term debt                                                     |       | —                                      |       | (137                                                           | )          |   | — |   | — |   |
| Payments to  stockholders for exercise of conversion rights                      |       | (120,170                                    | )          | —                                                         |       |   | — |   | — |   |
| Payments of  deferred financing fees                                             |       | (81,898                                     | )          | —                                                         |       |   | — |   | — |   |
| Payments of  deferred underwriters fees                                          |       | (12,420                                     | )          | (16,560                                                        | )          |   | — |   | — |   |
| Proceeds from  sale of shares of common stock to initial stockholders            |       | —                                      |       | 25                                                             |       |   | — |   | — |   |
| Proceeds from  public offering                                                   |       | —                                      |       | 414,000                                                        |       |   | — |   | — |   |
| Proceeds from  issuance of insider warrants                                      |       | —                                      |       | 3,000                                                          |       |   | — |   | — |   |
| Net equity  transactions with related parties                                    |       | —                                      |       | —                                                         |       |   | (5,237 | ) | (26,356 | ) |
| Other                                                                            |       | —                                      |       | (607                                                           | )          |   | — |   | — |   |
| Cash provided by  (used for) financing                                           |       | 833,463                                     |       | 399,858                                                        |       |   | (5,237 | ) | (26,356 | ) |
|                                                                             |       |                                        |       |                                                           |       |   |   |   |   |   |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 20,939                                      |       | 290                                                            |       |   | (1 | ) | — |   |
|                                                                             |       |                                        |       |                                                           |       |   |   |   |   |   |
| **Balance  at beginning of the period**                                          |       | 186                                         |       | —                                                         |       |   | 8 |   | 7 |   |
| **Balance  at end of the period**                                                | ** ** | **$**                                       | **21,125** | ** **                                                     | **$**      | **290** | ** ** | ** ** | **$** | **7** | ** ** | **$** | **7** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

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

 

 

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

 

Boise Inc. (formerlyAldabra 2 Acquisition Corp.) or “the Company,” “we,” “us,” or “our” was a blankcheck company created on February 1, 2007 (inception) and organized forthe purpose of effecting a merger, capital stock exchange, asset acquisition,or other similar business combination with an operating business. On February 22,2008, Boise Inc. 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 Note 2, Acquisition of Boise Cascade’s Paper and PackagingOperations, for more information related to the 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 statements of income (loss) for the three and****sixmonths ended June 30, 2008, and cash flows for the six months ended June 30,2008, include the activities of Aldabra 2 Acquisition Corp. prior to theAcquisition and the operations of the acquired businesses from February 22,2008, through June 30, 2008. The consolidated statements of income (loss)for the period of January 1 through February 21, 2008, and for thethree and six months ended June 30, 2007, and the consolidated statementsof cash flows for the period of January 1 through February 21, 2008,and the six months ended June 30, 2007, of the Predecessor are presentedfor comparative purposes. The three months ended June 30, 2007, and theperiod of February 1 (inception) through June 30, 2007, representsthe activities of Aldabra 2 Acquisition Corp.

 

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The quarterlyconsolidated financial statements presented have not been audited by anindependent registered public accounting firm but, in the opinion ofmanagement, include all adjustments, consisting of normal, recurringadjustments, necessary to present fairly the results for the periods presented.The preparation of the consolidated financial statements involves the use ofestimates and accruals. Actual results may vary from those estimates. Quarterlyresults are not necessarily indicative of results that may be expected for thefull year. These condensed notes to unaudited consolidated financial statementsshould be read in conjunction with our Quarterly Report on Form 10-Q forthe period ended March 31, 2008, our 2007 Annual Report on Form 10-K,and the audited consolidated financial statements and footnotes included inBoise Inc.’s Current Report on Form 8-K filed with the Securities andExchange Commission (SEC) on February 28, 2008, which includes theaccounting policies of the Predecessor that we adopted in conjunction with theAcquisition.

 

For the Predecessorperiods 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 Predecessorperiods presented, income taxes, where applicable, were calculated as if thePredecessor were a separate taxable entity. For the period of January 1through February 21, 2008, and the three and six months ended June 30,2007, the majority of the businesses and assets of the Predecessor were heldand operated by limited liability companies, which are not subject toentity-level federal or state income taxation. In addition to the businessesand assets held and operated by limited liability companies, the Predecessorhad taxable corporations subject to federal, state, and local income taxes forwhich taxes were recorded. Information on the allocations and related-partytransactions is included in Note 4, Transactions With Related Parties.

 

 

***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. We have five pulp and papermills, five corrugated container plants, a corrugated sheet plant, and twopaper distribution facilities located in the United States. Our corporateheadquarters office is in Boise, Idaho.

 

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. Subsequent to the transaction, Boise Cascadetransferred the shares to its parent company, Boise Cascade Holdings, L.L.C.

 

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

 

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| ** **                                               | ** ** | **Preliminary  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 $9.15 average price per share                 |       | 346,395                                  |          |
| Lack  of marketability discount                          |       | (41,567                                  | )             |
| Total  equity                                            |       | 304,828                                  |          |
|                                                     |       |                                     |          |
| Note  payable to Boise Cascade at closing                |       | 41,000                                   |          |
| Working  capital adjustment                              |       | 17,334                                   |          |
| Total  note payable to Boise Cascade                     |       | 58,334                                   |          |
|                                                     |       |                                     |          |
| Fees  and expenses                                       |       | 60,927                                   |          |
|                                                     |       |                                     |          |
| Total  purchase price                                    | ** ** | **$**                                    | **1,663,285** | ** ** |

 

*Cash*

 

Upon closing, we paidBoise Cascade $1,252.3 million in cash related to the base purchase priceplus $24.9 million incurred by Boise Cascade for transaction financingcosts and fees. Immediately prior to the Acquisition, Boise Cascade contributed$38.0 million of cash to the acquired businesses.

 

*Equity*

 

The number of sharesissued to Boise Cascade totaled 37,857,374. The equity price per share wascalculated based on the average per-share closing price of our common stock forthe 20 trading days ending on the third trading day immediately prior to theconsummation of the Acquisition. Since that average price was below the $9.54floor provided in the purchase agreement, we determined a new measurement datein accordance with Issue No. 2 of Emerging Issues Task Force (EITF) 99-12,*Determination of the Measurement Date for theMarket Price of Acquirer Securities Issued in a Purchase Business Combination*.We calculated a $9.15 average price per share based on two days before andafter the Acquisition measurement date, which was February 14, 2008. Thevalue of stock consideration paid to Boise Cascade was reduced by a 12%discount for a lack of marketability, since the stock delivered asconsideration was not registered for resale.

 

*Note payable*

 

In connection with theAcquisition, Boise Inc. issued a $41.0 million subordinated promissorynote to Boise Cascade. After the Acquisition, and pursuant to the purchaseagreement, the note was amended to increase the amount payable to $58.3million, effective February 22, 2008. The increase of the note reflects$17.3 million of post-closing working capital adjustments in Boise Cascade’sfavor. After the transaction, Boise Cascade transferred the note payable to itsparent, Boise Cascade Holdings, L.L.C., and on June 10, 2008, BoiseCascade Holdings, L.L.C., sold the note payable to eight individual parties fora reported $53.8 million before transaction costs. The full amount of theoriginal note, as amended, together with accrued and unpaid interest from March 31,2008, is now represented by eight separate notes payable each with terms (otherthan the amount) identical to the original note payable. Because none of theeight holders of the notes is related to either Boise Inc. or Boise Cascade, weno longer record the notes as related-party notes on our Consolidated BalanceSheet. See Note 4, Transactions with Related Parties, and Note 13, Debt, forfurther information on the notes.

 

Fees and expenses consistprimarily of debt issuance fees and direct costs of the transaction.

 

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The purchase priceallocation is preliminary. The final purchase price allocation will be based onthe fair value of assets acquired and liabilities assumed. The purchase priceallocation will remain preliminary until we complete a valuation. Once fairvalues are finalized, we may have changes to the amounts we have included inour preliminary allocation below. We may also have adjustments to ourdepreciation and amortization expense, which will be made prospectively. Thefollowing tablesummarizes thepreliminary fair value allocation of the assets acquired and liabilitiesassumed at the date of the Acquisition as of June 30, 2008:

 
| ** **                | ** ** | **Preliminary  February 22,  2008  Fair Value** | ** **    |
|---------------------------|------------|-----------------------------------------------------------|---------------|
| ** **                | ** ** | **(thousands)**                                           | ** **    |
|                      |       |                                                      |          |
| Current  assets           |       | $                                                         | 590,778       |   |
| Property  and equipment   |       | 1,291,778                                                 |          |
| Fiber  farms and deposits |       | 11,006                                                    |          |
| Intangible  assets:       |       |                                                      |          |
| Trademark  and trade name |       | 6,800                                                     |          |
| Customer  list            |       | 11,400                                                    |          |
| Technology                |       | 5,040                                                     |          |
| Deferred  financing costs |       | 81,898                                                    |          |
| Other  long-term assets   |       | 4,445                                                     |          |
| Current  liabilities      |       | (251,169                                                  | )             |
| Long-term  liabilities    |       | (88,691                                                   | )             |
| Total  purchase price     | ** ** | **$**                                                     | **1,663,285** | ** ** |

 

The following pro formaresults are based on the individual historical results of Boise Inc. and thePredecessor (prior to the Acquisition on February 22, 2008) withadjustments to give effect to the combined operations as if the Acquisition hadbeen consummated on January 1, 2007. The pro forma results are intendedfor information purposes only and do not purport to represent what the combinedcompanies’ results of operations would actually have been had the transactionin fact occurred on January 1, 2007.

 
| ** **                                 | ** ** | **Pro Forma**                              | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **Three Months  Ended  June 30** | ** ** | **Six Months  Ended  June 30** | ** ** |
| ** **                                 | ** ** | **2007**                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(thousands, except per-share data)**     | ** ** |
|                                       |       |                                       |       |   |   |   |   |
| Sales                                      |       | $                                          | 582,622    |   | $ | 1,206,315 |   | $ | 1,161,323 |   |
| Net  loss                                  |       | (22,055                                    | )          | (45,242 | ) | (28,570 | ) |
| Net  loss per share—basic and diluted |       | (0.29                                      | )          | (0.59 | ) | (0.37 | ) |
|                                            |            |                                            |            |  |  |  |  |  |  |  |

 

 

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

 

For the three and six months ended June 30, 2008,the three months ended June 30, 2007, and the period of February 1(inception) through June 30, 2007, when we had publicly traded sharesoutstanding, net income (loss) per common share is computed by dividing netincome (loss) by the weighted average number of shares of common stockoutstanding during the period. Basic and diluted net income (loss) per share iscalculated as follows (in thousands, except per-share amounts):

 

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| ** **                                                                      | ** ** | **Boise Inc.**                           | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                      | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **February 1  (Inception)  Through  June 30,  2007** | ** ** |
|                                                                            |       |                                          |       |   |   |   |   |   |   |
| Net  income (loss)                                                              |       | $                                             | (18,050    | ) | $ | (34,421 | ) | $ | 269 |   | $ | 268 |   |
| Weighted  average number of common shares for basic net income (loss) per share |       | 77,260                                        |       | 69,971 |   | 14,445 |   | 12,834 |   |
| Incremental  effect of dilutive common stock equivalents:                       |       |                                          |       |   |   |   |   |   |   |
| Common  stock warrants (a) (b)                                             |       | —                                        |       | — |   | — |   | — |   |
| Restricted  stock (c)                                                           |       | —                                        |       | — |   | — |   | — |   |
| Restricted  stock units (c)                                                     |       | —                                        |       | — |   | — |   | — |   |
| Weighted  average number of shares for diluted net income (loss) per share      |       | 77,260                                        |       | 69,971 |   | 14,445 |   | 12,834 |   |
|                                                                            |       |                                          |       |   |   |   |   |   |   |
| Net  (loss) per share—basic and diluted (a) (b) (c)              |       | $                                             | (0.23      | ) | $ | (0.49 | ) | $ | 0.02 |   | $ | 0.02 |   |

 

----

(a)         Warrants to purchase 44.4 million shares of common stock for thethree and six months ended June 30, 2008, were not included in thecomputation of diluted net loss per share because the exercise price exceededthe average market price of our common stock for each respective reportingdate.

 

(b)        Warrants to purchase 44.4 million shares of common stock for thethree months ended June 30, 2007, and for the period of February 1(inception) through June 30, 2007, were not included in the computation ofdiluted net income per share because the warrants were contingentlyexercisable.

 

(c)         Restricted stock and restricted stock units for the three and six monthsended June 30, 2008, were not included in the computation of diluted netloss per share, because inclusion of these amounts would be antidilutive.

 

 

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

 

During thePredecessor periods of January 1 through February 21, 2008, and thethree and six months ended June 30, 2007, the Predecessor participated inBoise Cascade’s centralized cash management system. Cash receipts attributableto the Predecessor’s operations were collected by Boise Cascade, and cashdisbursements were funded by Boise Cascade. The net effect of thesetransactions has been reflected as “Net equity transactions with relatedparties” in the Consolidated Statements of Cash Flows. The following tableincludes the components of these related-party transactions:

 
| ** **                                               | ** ** | **Predecessor**                                      | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
| ** **                                               | ** ** | **(thousands)**                                      | ** ** |
|                                                     |       |                                                 |       |   |   |   |   |
| Cash  collections                                        |       | $                                                    | (354,222   | ) | $ | (577,422 | ) | $ | (1,153,020 | ) |
| Payment  of accounts payable                             |       | 336,605                                              |       | 509,085 |   | 1,049,942 |   |
| Capital  expenditures and acquisitions                   |       | 10,168                                               |       | 35,733 |   | 68,699 |   |
| Income  taxes                                            |       | 217                                                  |       | 1,160 |   | 1,229 |   |
| Corporate  general and administrative expense allocation |       | 1,995                                                |       | 3,436 |   | 6,794 |   |
| Net  equity transactions with related parties            | ** ** | **$**                                                | **(5,237** | **)** | **$** | **(28,008** | **)** | **$** | **(26,356** | **)** |

 

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*Related-PartySales*

 

During thePredecessor periods of January 1 through February 21, 2008, and thethree and six months ended June 30, 2007, the Predecessor sold paper andpaper products to OfficeMax Incorporated (OfficeMax) at sales prices that weredesigned to approximate market prices. For the Predecessor periods of January 1through February 21, 2008, and the three and six months ended June 30,2007, sales to OfficeMax were $90.1 million, $159.5 million, and$317.3 million, respectively. During each of these periods, sales toOfficeMax represented 25%, 27%, and 27% of total sales, respectively. Thesesales are included in “Sales, Related parties” in the Consolidated Statementsof Income (Loss). Subsequent to the Acquisition, OfficeMax is no longer arelated party. During the three and six months ended June 30, 2008, salesto OfficeMax were $147.0 million and $210.1 million, or 24% and 25%of total sales.

 

Boise Inc. and the Predecessor provided transportationservices to Boise Cascade. For the three and six months ended June 30,2008, Boise Inc. recorded $1.3 million and $1.8 million of sales fortransportation services. For the Period of January 1 through February 21,2008, and the three and six months ended June 30, 2007, the Predecessorrecorded $0.6 million, $1.3 million, and $2.5 million,respectively, of sales for transportation services. During these same periods,the Predecessor sold $10.8 million, $18.3 million, and$35.1 million of wood to Boise Cascade’s building materials distributionand wood products businesses. These sales are included in “Sales, Relatedparties” in the Consolidated Statements of Income (Loss).

 

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 and six months ended June 30, 2008, werecognized $3.8 million and $5.3 million in “Sales, Related parties”in our Consolidated Statements of Income (Loss) related to this agreement.

 

Subsequent to theAcquisition, Louisiana Timber Procurement Company, L.L.C., a fully consolidatedentity, began selling chips and logs to Boise Cascade. During the three and sixmonths ended June 30, 2008, we recorded $26.7 million of sales toBoise Cascade in “Sales, Related parties” in the Consolidated Statements ofIncome (Loss) and recorded approximately the same amounts of expenses in “Materials,labor, and other operating expenses.”

 

*Related-Party Costs and Expenses*

 

The Predecessor purchased fiber from related parties atprices that approximated market prices. During the Predecessor periods of January 1through February 21, 2008, and the three and six months ended June 30,2007, fiber purchases from related parties were $7.7 million,$10.3 million, and $21.3 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 periods, the Predecessor used services and administrative staff ofBoise Cascade. These services included, but were not limited to, finance,accounting, legal, information technology, and human resource functions. Thecosts not specifically identifiable to the Predecessor were allocated basedprimarily on average sales, assets, and labor costs. These costs are includedin “General and administrative expenses” in the Consolidated Statements ofIncome (Loss). The Predecessor believes the allocations are a reasonablereflection of its use of the services. However, had the Predecessor operated ona stand-alone basis, it estimates that its Corporate and Other segment wouldhave reported approximately $2.5 million, $4.5 million, and$9.0 million of segment expenses before interest, taxes, depreciation, andamortization for the Predecessor periods of January 1 through February 21,2008, and the three and six months ended June 30, 2007, respectively.

 

During the Predecessor periods, some of thePredecessor’s employees participated in Boise Cascade’s noncontributory definedbenefit pension and contributory defined contribution savings plans. ThePredecessor treated its participants in the pension plans as participants inmultiemployer plans. Accordingly, the Predecessor has not reflected any assetsor liabilities related to the plans on the 

 

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Consolidated Balance Sheet at December 31,2007. The Predecessor, however, recorded costs associated with the employeeswho participated in these plans in the Consolidated Statements of Income(Loss). For the Predecessor periods of January 1 through February 21,2008, and the three and six months ended June 30, 2007, the Statements ofIncome (Loss) included $3.9 million, $5.2 million, and$10.7 million, respectively, of expenses attributable to its participationin Boise Cascade’s defined benefit and defined contribution plans.

 

During the Predecessorperiods presented, the Predecessor’s employees and former employees alsoparticipated in Boise Cascade’s other postretirement healthcare benefit plans.All of the Predecessor’s postretirement healthcare benefit plans were unfunded(see Note 16, Retirement and Benefit Plans). In addition, some of thePredecessor’s employees participated in equity compensation programs.

 

*Note Payable*

 

In connection with theAcquisition, we issued a $41.0 million subordinated promissory note toBoise Cascade. After the Acquisition, and pursuant to the purchase agreement,the note was amended to increase the amount payable to $58.3 million, effectiveFebruary 22, 2008. The increase of the note reflects $17.3 million ofpost-closing working capital adjustments in Boise Cascade’s favor. The notebears interest at 15.75%, compounded quarterly. To the extent that interest isnot paid in cash, interest will be added to the principal amount of the note.The note matures on August 21, 2015, provided that if such date is morethan 181 days after the scheduled maturity date of the indebtedness underour credit agreements, then the maturity date shall automatically be deemed tobe 181 days after the latest maturity date of any such indebtedness. Wemay prepay the note at any time in whole or in part, subject to restrictionscontained in our credit agreements.

 

After the transaction,Boise Cascade transferred the note payable to its parent, Boise CascadeHoldings, L.L.C., and on June 10, 2008, Boise Cascade Holdings, L.L.C.,sold the note payable to eight individual parties for a reported $53.8 millionbefore transaction costs. The full amount of the original note, as amended,together with accrued and unpaid interest from March 31, 2008, is nowrepresented by eight separate notes payable, each with terms (other than theamount) identical to the original note payable. Because none of the eightholders of the notes is related to either Boise Inc. or Boise Cascade, we nolonger record the notes as related-party notes on our Consolidated BalanceSheet.

 

During the three and sixmonths ended June 30, 2008, and prior to the sale of the note, we recorded$1.8 million and $2.8 million of related-party interest expense in “Interestexpense” in our Consolidated Statements of Income (Loss). At June 30,2008, we had $61.7 million recorded in “Notes payable” on our ConsolidatedBalance Sheet.

 

 

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

 

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

 
| ** **                              | ** ** | **Boise Inc.**                           | ** ** | **Predecessor**                             | ** ** |
|-----------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                              | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                    |       |                                          |       |                                        |       |   |   |   |   |   |   |   |
| Changes  in retiree healthcare programs |       | $                                             | —     |                                        | $          | — |   |   | $ | — |   | $ | (4,367 | ) | $ | (4,367 | ) |
| Sales  of assets, net                   |       | (17                                           | )          | (20                                         | )          |   | (941 | ) | 316 |   | 1,342 |   |
| Closure  costs (a)                      |       | —                                        |       | —                                      |       |   | — |   | 724 |   | 2,037 |   |
| Other,  net                             |       | (79                                           | )          | (104                                        | )          |   | (48 | ) | 35 |   | 104 |   |
| ** **                              | ** ** | **$**                                         | **(96**    | **)**                                       | **$**      | **(124** | **)** | ** ** | **$** | **(989** | **)** | **$** | **(3,292** | **)** | **$** | **(884** | **)** |

 

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(a)          The three and six monthsended June 30, 2007, included expenses related to the closure of a paperconverting facility in Salem, Oregon, which was closed in third quarter 2007.

 

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During the period of February 1(inception) through June 30, 2007, and the three months ended June 30,2007, “Other (income) expense, net” was zero.

 

 

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

 

For the three monthsended June 30, 2008, we recorded $14,000 of income tax expense. We havenot recognized $4.7 million of tax benefits from the losses resulting fromour operations in the second quarter, because the realization of these benefitsis not considered more likely than not. During the six months ended June 30,2008, we recorded $3.4 million of income tax benefits, related to lossesincurred during the six month period. We have not recognized an additional $8.8million of tax benefits from these losses, because the realization of thesebenefits is not considered more likely than not. Valuation allowances wererecorded to offset these income tax benefits. Because of its pass-through taxstructure, the Predecessor recorded tax expense related only to smallsubsidiaries that are taxed as corporations.

 

For the three and sixmonths ended June 30, 2008, the effective tax rates were not meaningful asa result of the valuation allowance we recorded during these periods. Theeffective tax rates for the three months ended June 30, 2007, and theperiod of February (inception) through June 30, 2007, were 45.4% and45.5%, respectively. The primary reason for the difference in tax rates is theeffect of state and local income taxes.

 

During the Predecessorperiods of January 1 through February 21, 2008, and the three and sixmonths ended June 30, 2007, 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 taxrates were 37.6%, 39.3%, and 41.0%, respectively. During these periods, theprimary reason for the difference in tax rates is the effect of state income taxes.

 

During the three and sixmonths ended June 30, 2008, cash paid for taxes, net of refunds due, was$0.2 million and $1.7 million. During the three months ended June 30,2007, and the period of February 1 (inception) through June 30, 2007,we made no tax payments. During the Predecessor period of January 1through February 21, 2008, and the Predecessor three and six months ended June 30,2007, cash paid for taxes, net of refunds due, was $0.1 million,$1.2 million, and $1.2 million, respectively.

 

 

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

 

We lease ourdistribution centers as well as other property and equipment under operatingleases. During the Predecessor periods 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 option periods that are reasonably assured ofbeing exercised. Straight-line rent expense is also adjusted to reflect anyallowances or reimbursements provided by the lessor. Rental expense foroperating leases was as follows (in thousands):

 
| ** **       | ** ** | **Boise Inc.**                           | ** ** | **Predecessor**                             | ** ** |
|------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **       | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **February 1  (Inception)  Through  June 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
| ** **       | ** ** | ** **                                    | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental  expenses |       | $                                             | 3,750      |                                        | $          | 5,145 |   | $ | — |   |   | $ | 2,044 |   | $ | 3,233 |   | $ | 6,795 |   |
|                  |            |                                               |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For noncancelableoperating leases with remaining terms of more than one year, the minimum leasepayment requirements are $5.8 million for the remainder of 2008,$10.8 million in 2009, $10.4 million in 2010, $9.6 million in2011, $8.9 million in 2012, and $7.1 million in 2013, with totalpayments thereafter of $27.3 million. These future minimum lease paymentrequirements have not been 

 

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reduced by subleaserentals due in the future under noncancelable subleases. Minimum subleaseincome received in the future is not expected to be material.

 

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 averaging six years,with fixed payment terms similar to those in the original lease agreements.

 

 

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

 

We have a large, diversified customer base. A large portion of ouruncoated freesheet and office paper sales volume is sold to OfficeMax. We (asdid the Predecessor) market our newsprint through a subsidiary ofAbitibi-Consolidated Inc. (Abitibi) pursuant to an arrangement whereby Abitibipurchases all of the newsprint we produce at a price equal to the price atwhich Abitibi sells newsprint produced at its mills located in the southernUnited States, less associated expenses and a sales and marketing discount.Sales to OfficeMax and Abitibi represent concentrations in the volumes ofbusiness transacted and concentrations of credit risk. At June 30, 2008,we had $38.2 million and $30.2 million of accounts receivable duefrom OfficeMax and Abitibi, respectively.

 

 

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

 

Inventoriesinclude the following (in thousands):

 
| ** **                          | ** ** | **Boise Inc.**     | ** **  | **Predecessor**             | ** ** |
|-------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | **June 30,  2008** | ** **  | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
|                                |       |                    |        |                        |       |   |   |   |
| Finished  goods and work in process |       | $                       | 174,700     |                        | $          | — |   |   | $ | 163,554 |   |
| Raw  materials                      |       | 78,399                  |        | —                      |       |   | 72,712 |   |
| Supplies  and other                 |       | 87,603                  |        | —                      |       |   | 88,413 |   |
| ** **                          | ** ** | **$**                   | **340,702** | ** **                  | **$**      | **—** |   |   | **$** | **324,679** |   |

 

 

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

 

Property andequipment consisted of the following asset classes (in thousands):

 
| ** **                     | ** ** | **Boise Inc.**     | ** **    | **Predecessor**             | ** ** |
|--------------------------------|------------|-------------------------|---------------|-----------------------------|------------|
| ** **                     | ** ** | **June 30,  2008** | ** **    | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
|                           |       |                    |          |                        |       |   |   |   |
| Land  and land improvements    |       | $                       | 31,875        |                        | $          | — |   |   | $ | 31,592 |   |
| Buildings  and improvements    |       | 84,066                  |          | —                      |       |   | 185,509 |   |
| Machinery  and equipment       |       | 1,127,440               |          | —                      |       |   | 1,212,425 |   |
| Construction  in progress      |       | 83,732                  |          | —                      |       |   | 36,535 |   |
|                           |       | 1,327,113               |          | —                      |       |   | 1,466,061 |   |
| Less  accumulated depreciation |       | (42,884                 | )             | —                      |       |   | (273,717 | ) |
| ** **                     | ** ** | **$**                   | **1,284,229** | ** **                  | **$**      | **—** |   |   | **$** | **1,192,344** |   |

 

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Property and equipment acquired in the Acquisition wasrecorded at estimated fair value on the date of the Acquisition. The purchaseprice allocation is preliminary and will remain so until we complete avaluation. Once our purchase price allocation is completed, we will havechanges to the amounts shown above (see Note 2, Acquisition of BoiseCascade’s Paper and Packaging Operations, for more information).

 

 

***11.******                             ******Goodwill and IntangibleAssets***

 

Goodwill represents the excess of purchase price andrelated costs over the value assigned to the net tangible and intangible assetsof businesses acquired. We account for goodwill in accordance with theprovisions of SFAS No. 142,*Goodwilland Other Intangible Assets*, which requires us to assess ouracquired goodwill and intangible assets with indefinite lives for impairment atleast annually in the absence of an indicator of possible impairment andimmediately upon an indicator of possible impairment. We assess goodwill andintangible assets with indefinite lives in the fourth quarter of each yearusing a fair-value-based approach. We also evaluate the remaining useful livesof our finite-lived purchased intangible assets to determine whether anyadjustments to the useful lives are necessary.

 

We account for acquisitions using the purchase methodof accounting. As a result, we allocate the purchase price to the tangible andintangible assets acquired and liabilities assumed based on their respectivefair values as of the date of acquisition. In accordance with SFAS No. 141,*Business Combinations*, we have one yearfrom the purchase date to finalize or receive information to determine changesin estimates of the fair value of assets acquired and liabilities assumed.

 

We have not allocated any amounts related to theAcquisition to goodwill pending completion of the purchase price allocationvaluation. Previously recorded goodwill of the Predecessor of approximately$42.2 million at December 31, 2007, was eliminated as part of thepreliminary purchase price allocation.

 

Intangible assets represent the preliminary valuesassigned to trade names and trademarks, customer relationships, and technologyin connection with the Acquisition. Customer relationships will be amortizedover approximately ten years, and technology will be amortized over five years.During the three and six months ended June 30, 2008, intangible assetamortization was $0.2 million and $0.7 million. During the Predecessorperiods of January 1 through February 21, 2008, and the three and sixmonths ended June 30, 2007, intangible asset amortization was zero,$1.1 million, and $2.1 million, respectively. Our estimatedamortization expense is $1.1 million for the remainder of 2008,$2.1 million in 2009, 2010, 2011, and 2012, and $1.1 million in 2013.These estimates may change based on the final purchase price allocation.

 
| ** **                  | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                             | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | ** **                                                  | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
| Trade names and  trademarks |       | $                                                           | 6,800      |   | $ | — |   | $ | 6,800 |   |
| Customer  relationships     |       | 11,400                                                      |       | (380 | ) | 11,020 |   |
| Technology                  |       | 5,040                                                       |       | (336 | ) | 4,704 |   |
| ** **                  | ** ** | **$**                                                       | **23,240** | ** ** | **$** | **(716** | **)** | **$** | **22,524** |   |

 

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

 

 

***12.******                             ******Asset RetirementObligations***

 

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

 

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life of the related asset. Upon settlementof the liability, we will recognize a gain or loss for any difference betweenthe settlement amount and the liability recorded.

 

At June 30, 2008, we had$14.0 million of asset retirement obligations recorded on the ConsolidatedBalance Sheet. At December 31, 2007, the Predecessor had$13.3 million of asset retirement obligations recorded on the ConsolidatedBalance Sheet. These liabilities related primarily to landfill closure andclosed-site monitoring costs. These liabilities are based on the best estimateof current costs and are updated periodically to reflect current technology,laws and regulations, inflation, and other economic factors. No assets arelegally restricted for purposes of settling asset retirement obligations. Thetable below describes changes to the asset retirement obligations for BoiseInc. for the six months ended June 30, 2008, and the Predecessor’s yearended December 31, 2007 (in thousands):

 
| ** **                                                                    | ** ** | **Boise Inc.**     | ** ** | **Predecessor**             | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
| ** **                                                                    | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Asset retirement  obligation at beginning of period                           |       | $                       | —     |                        | $          | 10,771 |   |
| Asset retirement  liability recorded in preliminary purchase price allocation |       | 13,655                  |       | —                      |       |
| Liabilities  incurred                                                         |       | —                  |       | —                      |       |
| Accretion  expense                                                            |       | 382                     |       | 869                         |       |
| Payments                                                                      |       | (29                     | )          | (37                         | )          |
| Revisions in  estimated cash flows                                            |       | —                  |       | 1,700                       |       |
| Asset retirement  obligation at end of period                                 | ** ** | **$**                   | **14,008** | ** **                  | **$**      | **13,303** | ** ** |

 

We have additional asset retirementobligations with indeterminate settlement dates. The fair value of these assetretirement obligations cannot be estimated due to the lack of sufficientinformation to estimate the settlement dates of the obligations. These assetretirement obligations include, for example, (i) removal and disposal ofpotentially hazardous materials related to equipment and/or an operatingfacility if the equipment and/or facilities were to undergo major maintenance,renovation, or demolition; (ii) wastewater treatment ponds that may berequired to be drained and/or cleaned if the related operating facility isclosed; and (iii) storage sites or owned facilities for which removaland/or disposal of chemicals and other related materials are required if theoperating facility is closed. We will recognize a liability in the period inwhich sufficient information becomes available to reasonably estimate the fairvalue of these obligations.

 

 

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

 

At June 30, 2008, our long-term debt and theinterest rates on that debt were as follows:

 
| ** **                            | ** ** | **June 30, 2008** | ** **    |
|---------------------------------------|------------|-----------------------------|---------------|
| ** **                            | ** ** | **Amount**                  | ** **    | **Interest Rate** | ** ** |
| ** **                            | ** ** | **(thousands)**             | ** **    | ** ** | ** ** |
| Revolving credit  facility, due 2013  |       | $                           | 65,000        |   | 5.75 | % |
| Tranche A term  loan, due 2013        |       | 248,438                     |          | 6.06 | % |
| Tranche B term  loan, due 2014        |       | 473,813                     |          | 7.50 | % |
| Second Lien term  loan, due 2015      |       | 260,700                     |          | 11.00 | % |
| Current portion  of long-term debt    |       | (12,563                     | )             | 6.61 | % |
| Long-term debt,  less current portion |       | 1,035,388                   |          | 7.94 | % |
| Current portion  of long-term debt    |       | 12,563                      |          | 6.61 | % |
|                                  |       | 1,047,951                   |          |   |   |
|                                  |       |                        |          |   |   |
| 15.75% notes  payable, due 2015       |       | 61,655                      |          | 15.75 | % |
| ** **                            |       | **$**                       | **1,109,606** |   |   |   |

 

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*Senior Secured Credit Facilities*

 

Our senior secured credit facilitiesconsist of:

 

•                 A five-yearnonamortizing $250.0 million senior secured revolving credit facility withinterest at either the London Interbank Offered Rate (LIBOR) plus 325 basispoints or a calculated base rate plus 325 basis points (the Revolving CreditFacility and collectively with the Tranche A Term Loan Facility and the TrancheB Term Loan Facility, the First Lien Facilities);

•                 A five-yearamortizing $250.0 million senior secured Tranche A Term Loan Facility withinterest 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 plus 350 basis points (subject to a floor of 4.00%) or acalculated base rate plus 250 basis points (the Tranche B Term Loan Facility);and

•                 A seven-yearnonamortizing $260.7 million Second Lien Term Loan Facility with interest atLIBOR plus 700 basis points (subject to a floor of 5.50%) or a calculated baserate plus 600 basis points (the Second Lien Facility and together with theFirst Lien Facilities, the Credit Facilities).

 

Allborrowings under the Credit Facilities bear interest at a rate per annum equalto an applicable margin plus a customary base rate or Eurodollar rate. The baserate means, for any day, a rate per annum equal to the greater of (i) thePrime Rate in effect on such day and (ii) the Federal Funds Effective Ratein effect on such day plus 0.50%. In addition to paying interest, the Companypays a commitment fee to the lenders under the Revolving Credit Facility at arate of 0.50% per annum (which shall be reduced to 0.375% when the leverageratio is less than 2.25:1.00) times the daily average undrawn portion of theRevolving Credit Facility (reduced by the amount of letters of credit issuedand outstanding), which fee will accrue from the Acquisition closing date andshall be payable quarterly in arrears. At June 30, 2008, we had$65.0 million of borrowings outstanding under the Revolving CreditFacility. For the six months ended June 30, 2008, the average interestrate for our borrowings under our Revolving Credit Facility was 6.06%. Theminimum and maximum borrowings under the Revolving Credit Facility were zeroand $80.0 million for the six months ended June 30, 2008. Theweighted average amount of borrowings outstanding under the Revolving CreditFacility during the six months ended June 30, 2008, was$63.9 million. At June 30, 2008, we had availability of$159.2 million, which is net of outstanding letters of credit of$25.8 million, above the amount we had borrowed.

 

TheCompany’s obligations under its Credit Facilities are guaranteed by each ofBoise Paper Holdings, L.L.C.’s (the Borrower) existing and subsequentlyacquired domestic (and, to the extent no material adverse tax consequences toBZ Intermediate Holdings LLC (Holdings) or Borrower would result therefrom andas reasonably 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 $2,500,000 of consolidated earnings before interest, taxes, depreciation,and amortization (EBITDA) during any fiscal year of Borrower), and allintercompany debt. The Second Lien Facility is secured by a second-prioritysecurity interest in substantially all of the real, personal, and mixedproperty of Borrower and the Guarantors, including a second-priority securityinterest 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 $2,500,000 of consolidated EBITDAduring any fiscal year of Borrower), and all intercompany debt.

 

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 asset saleproceeds or proceeds received from the issuance of debt prior to the secondanniversary of the Acquisition closing date, such repayments will be made at (a) 102.0%of the amount repaid if such repayment occurs prior to the first anniversary ofthe Acquisition closing date and (b) 101.0% of the amount repaid if suchrepayment occurs 

 

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on or after the first anniversary ofthe Acquisition closing date and prior to the second anniversary of theAcquisition closing date.

 

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

 

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

 

Withrespect to a Second Lien Facility loan on any date of prepayment, 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 swap rate at theclose 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%.

 

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 theAcquisition closing date and prior to the fifth anniversary of the Acquisitionclosing date, and (iii) 101.0% of the amount repaid if such repaymentoccurs on or after the fifth anniversary of the Acquisition closing date andprior to the sixth anniversary of the Acquisition closing date.

 

Subjectto specified 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. Required debt principal repayments, excluding those fromexcess cash flows, total $5.5 million for the balance of 2008,$15.7 million in 2009, $26.6 million in 2010, $48.5 million in2011, $134.4 million in 2012, and $817.3 million thereafter.

 

The loandocumentation for the Credit Facilities contains, among other 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 agent of the First Lien Facilities or theSecond Lien Facility, as applicable, to be appropriate for the specifictransaction. The First Lien Facilities require Holdings and its subsidiaries tomaintain a minimum interest coverage ratio and a maximum leverage ratio, theSecond Lien Facility requires Holdings and its subsidiaries to maintain amaximum leverage ratio, and the Credit Facilities limit the ability of Holdingsand its subsidiaries to make capital expenditures.

 

In connection with the Acquisition, Boise Inc. issueda $41.0 million subordinated promissory note to Boise Cascade. After theAcquisition, and pursuant to the purchase agreement, the note was amended toincrease the amount payable to $58.3 million, effective February 22, 2008.The increase of the note reflects $17.3 million of post-closing workingcapital adjustments in Boise Cascade’s favor. With the exception of oursubsidiaries that are party to the Credit and Guaranty Agreement, dated as of 

 

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February 22,2008, each of our current and future domestic subsidiaries are joint andseveral obligors under this note, as reflected by a Subordinated GuarantyAgreement, which guarantees our obligations under the note.

 

After the transaction, Boise Cascade transferred thenote payable to its parent, Boise Cascade Holdings, L.L.C., and on June 10,2008, Boise Cascade Holdings, L.L.C., sold the note payable to eight individualparties for a reported $53.8 million before transaction costs. The full amountof the original note, as amended, together with accrued and unpaid interestfrom March 31, 2008, is now represented by eight separate notes payable,each with terms (other than the amount) identical to the original note payable.Because none of the eight holders of the notes is related to either Boise Inc.or Boise Cascade, we no longer record the notes as related-party notes on ourConsolidated Balance Sheet.

 

The notes bear interest at 15.75% per annum (computedon the basis of a 360-day year), payable quarterly (each such quarterly paymentdate, an Interest Payment Date). To the extent interest is not paid in cash, interestwill be added to the principal amount of the notes on each Interest PaymentDate. The notes mature on August 21, 2015, provided that if such date ismore than 181 days after the scheduled maturity date of the indebtedness underthe Credit Facilities, then the maturity date shall automatically be deemed tobe 181 days after the latest maturity date of any such indebtedness. Atmaturity, the amount of the notes will be approximately $185.6 million,assuming none of the interest has been paid in cash.

 

We may prepay the notes at any time in whole or inpart, without premium or penalty, subject to any restrictions contained in thesenior credit facilities. We must prepay the notes upon the occurrence of thefollowing events: (i) a Change of Control (as defined in the CreditFacilities); (ii) a sale or transfer of 50% or more of the company’sassets; and (iii) Events of Default (as provided in the notes). We mustuse the proceeds from the sale of equity or debt securities or borrowings torepay the notes, subject to any restrictions contained in our senior creditfacilities.

 

Boise Inc. and the Predecessor had noshort- or long-term debt outstanding at December 31, 2007.

 

*Other*

 

At June 30, 2008, we had$78.9 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheet related to the Acquisition. The amortization ofthese costs is recorded in interest expense using the effective interest methodover the life of the loans. We recorded $2.2 million and $3.0 millionof amortization expense for the three and six months ended June 30, 2008,in “Interest expense” in our Consolidated Statements of Income (Loss).

 

In April 2008, we entered into interest ratederivative instruments to hedge a portion of our interest rate risk as requiredunder the terms of the First Lien Facilities. At June 30, 2008, ouraverage effective interest rate was not affected by our interest ratederivatives, as the effective cap rates were above the interest rates on thehedged debt. For additional information on our interest rate derivatives, seeNote 14, Financial Instruments.

 

For the six months ended June 30,2008, cash payments for interest, net of interest capitalized, were$30.6 million. No payments were made during the period of February 1(inception) through June 30, 2007, or the Predecessor period of January 1through February 21, 2008, and the six months ended June 30, 2007.

 

 

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

 

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

 

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management objectives and strategiesfor undertaking various hedged transactions. For those derivatives designatedas cash flow or fair value hedges, we formally assess, both at the derivatives’inception and on an ongoing basis, whether the derivatives that are used inhedging transactions are highly effective in offsetting changes in the hedgeditems. The ineffective portion of hedging transactions is recognized in income(loss).

 

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

 

*Interest Rate Risk*

 

With the exception of the 15.75% notes payable,maturing in August 2015, our debt is variable-rate debt. At June 30,2008, the estimated value of the notes payable, based on then-current interestrates for similar obligations with like maturities, was approximately$7.4 million less than the amount recorded on our Consolidated BalanceSheet.

 

In April 2008, we entered into interest ratederivative instruments to hedge a portion of our interest rate risk as requiredunder the terms of the First Lien Facilities. We purchased interest rate capswith a term of three years and a cap rate of 5.50% on a notional amount of$260.0 million to hedge the interest rate on our Second Lien Facility. Wealso purchased interest rate caps to hedge part of the interest rate risk onour Tranche B Term Loan Facility with a cap rate of 5.00% on a notional amountof $425.0 million for the period of April 21, 2008, through March 31,2009; a notional amount of $350.0 million for the period of March 31,2009, through March 31, 2010; and a notional amount of $300.0 millionfor the period of March 31, 2010, through March 31, 2011.

 

*SecondLien Facility.*Weaccount for the interest rate derivatives with a notional amount of $260.0million that hedge our exposure to interest rate fluctuations on our SecondLien Facility as economic hedges. At June 30, 2008, we recorded the fair value of the interest rate derivatives, or$1.2 million, in “Other assets” on our Consolidated Balance Sheet. Duringthe three and six months ended June 30, 2008, we recorded the change infair value of these derivatives, or $0.5 million of expense, in “Change infair value of interest rate derivatives” in our Consolidated Statements ofIncome (Loss).

 

*First Lien Facility.*We account for the interest ratederivatives that hedge part of the interest rate risk on our Tranche B TermLoan Facility as cash flow hedges. These derivatives have a cap rate of 5.00%on a notional amount of $425.0 million for the period of April 21,2008, through March 31, 2009; a notional amount of $350.0 million for theperiod of March 31, 2009, through March 31, 2010; and a notionalamount of $300.0 million for the period of March 31, 2010, through March 31,2011. At June 30, 2008, we recorded the fair value of the interest ratederivatives, or $2.1 million, in “Other assets” and the change in the fairvalue of these derivatives in “Accumulated other comprehensive income” on ourConsolidated Balance Sheet. At June 30, 2008,assuming no changes in interest rates, we expect to reclassify$0.2 million of amounts recorded in “Accumulated other comprehensiveincome” as a decrease in interest expense during the remainder of 2008. At June 30,2008, there was no ineffectiveness related to these hedges.

 

*Energy Risk*

 

We enter into natural gas swaps, options, or acombination of these instruments to hedge the variable cash flow risk ofnatural gas purchases at index prices. As of June 30, 2008, we had enteredinto 

 

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derivativeinstruments related to approximately 45% of our forecasted natural gaspurchases from July 2008 through October 2008, approximately 40% ofour forecasted natural gas purchases from November 2008 through December 2008,and approximately 7% of our forecasted natural gas purchases from January 2009through March 2009. These derivatives include three-way collars, caps, andcall spreads.

 

A three-way collar is a combination of options: awritten put, a purchased call, and a written call. The purchased callestablishes a maximum price unless the market price exceeds the written call,at which point the maximum price would be New York Mercantile Exchange (NYMEX)price less the difference between the purchased call and the written callstrike price. The written put establishes a minimum price (the floor) BoiseInc. will pay for the volumes under contract. The following table summarizesour position related to these instruments as of June 30, 2008:

 
| ** **                   | ** ** | **Three-Way Cashless Collar**        | ** ** |
|------------------------------|------------|------------------------------------------------|------------|
| ** **                   | ** ** | **July 2008  Through  October 2008** | ** ** | **September 2008  Through  March 2009** | ** ** | **November 2008  Through  March 2009** | ** ** |
|                         |       |                                           |       |   |   |   |   |
| Volume hedged                |       | 1,000 mmBtu/day                                |       | 1,000 mmBtu/day |   | 1,000 mmBtu/day |   |
|                         |       |                                           |       |   |   |   |   |
| Strike price of  call sold   |       | $                                              | 13.00      |   | $ | 14.00 |   | $ | 14.00 |   |
| Strike price of  call bought |       | 10.00                                          |       | 11.00 |   | 11.00 |   |
| Strike price of  put sold    |       | 6.00                                           |       | 10.05 |   | 6.38 |   |
|                         |       |                                           |       |   |   |   |   |
| Approximate  percent hedged  |       | 3                                              | %          | 2 | % | 2 | % |
|                              |            |                                                |            |  |  |  |  |  |  |  |

 

A cap is a purchased call option that establishes amaximum price we will pay for the volumes under contract, plus the applicablecap premium. The following table summarizes our position related to theseinstruments as of June 30, 2008:

 
| ** **                   | ** ** | **Caps**                                      | ** ** | ** **                                           | ** ** | ** ** |
|------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------------|------------|------------|
| ** **                   | ** ** | **July 2008  Through  August 2008** | ** ** | **September 2008  Through  December 2008** | ** ** | ** ** | ** ** | ** ** |
|                         |       |                                          |       |                                                 |       |       |   |   |
| Volume hedged                |       | 16,000 mmBtu/day                              |       | 8,000 mmBtu/day                                      |       |       |   |   |
|                         |       |                                          |       |                                                 |       |       |   |   |
| Strike price of  call bought |       | $                                             | 10.50      |                                                 | $          | 10.50      |   |   |   |   |
| Cap premium                  |       | 1.30                                          |       | 1.79                                                 |       |       |   |   |
|                         |       |                                          |       |                                                 |       |       |   |   |
| Approximate  percent hedged  |       | 42                                            | %          | 19                                                   | %          |       |   |   |
|                              |            |                                               |            |                                                      |            |            |  |  |  |  |

 

A call spread is a combination of a purchased call anda written call. The purchased call establishes a maximum price unless themarket exceeds the written call, at which point the maximum price would be theNYMEX price, less the difference between the purchased call and the writtencall strike price, plus any applicable net premium associated with the twooptions. The following table summarizes our position related to theseinstruments as of June 30, 2008:

 

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| ** **                   | ** ** | **Call Spreads**                                | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **September 2008  Through  December 2008** | ** ** | **November 2008  Through  March 2009** | ** ** |
|                         |       |                                                 |       |   |   |
| Volume hedged                |       | 7,000 mmBtu/day                                      |       | 1,000 mmBtu/day |   |
|                         |       |                                                 |       |   |   |
| Strike price of  call sold   |       | $                                                    | 15.00      |   | $ | 15.00 |   |
| Strike price of  call bought |       | 10.50                                                |       | 10.50 |   |
| Net cap premium              |       | 2.14                                                 |       | 2.29 |   |
|                         |       |                                                 |       |   |   |
| Approximate  percent hedged  |       | 17                                                   | %          | 2 | % |
|                              |            |                                                      |            |  |  |  |  |

 

We have elected to account for these instruments aseconomic hedges. At June 30,2008, we recorded thefair value of the derivatives, or $4.0 million, in “Receivables, other” onour Consolidated Balance Sheet. During the three and six months ended June 30,2008, we recorded the change in fair value of the instruments, or$3.7 million and $3.9 million of expense, in “Materials, labor, andoperating expenses” in our Consolidated Statements of Income (Loss).

 

*Foreign Currency Risk*

 

At June 30,2008, we had no material foreign currency risk.

 

*Predecessor*

 

During the Predecessor periods presented,Boise Cascade occasionally used interest rate swaps to hedge variable interestrate risk. Because debt and interest costs were not allocated to thePredecessor, the effects of the interest rate swaps were not included in the Predecessorconsolidated financial statements.

 

*Fair Value Measurements*

 

In accordance withthe provisions of FASB Staff Position FSP No. 157-2 (see Note 15, Newand Recently Adopted Accounting Standards), we have applied the provisions ofSFAS No. 157 only to our financial assets and liabilities recorded at fairvalue, which consist of financial instruments that are used to hedge exposuresto interest rate and energy risks. For these financial instruments, fair valueis determined at each balance sheet date based on LIBOR rates and interest ratecurves and NYMEX price quotations, respectively, under the terms of thecontracts using current market information as of the reporting date. Thefollowing table provides a summary of the inputs used to develop these estimatedfair values under the hierarchy defined in SFAS No. 157:

 
| ** **                     | ** ** | **Fair Value Measurements at June 30, 2008, Using:** | ** ** |
|--------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                                                               | ** ** | **Quoted Prices  in Active  Markets for  Identical  Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Significant  Unobservable  Inputs  (Level 3)** | ** ** |
| ** **                     | ** ** | **(thousands)**                                                                         | ** ** |
| Assets:                        |       |                                                                                    |       |   |   |   |   |   |   |
| Interest rate  derivatives (a) |       | $                                                                                       | 3,333      |   | $ | — |   | $ | 3,333 |   | $ | — |   |
| Energy  derivatives (b)        |       | 3,991                                                                                   |       | — |   | 3,991 |   | — |   |
| ** **                     | ** ** | **$**                                                                                   | **7,324**  | ** ** | **$** | **—** | ** ** | **$** | **7,324** | ** ** | **$** | **—** |   |
|                           |       |                                                                                    |       |   |   |   |   |   |   |
| Liabilities                    |       | —                                                                                  |       | — |   | — |   | — |   |
| ** **                     | ** ** | **$**                                                                                   | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

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(a)          Includes $3.3 million recorded in “Other assets” on ourConsolidated Balance Sheet.

 

(b)         Includes $4.0 million recorded in “Receivables, Other”on our Consolidated Balance Sheet.

 

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As of June 30,2008, we did not have any fair value measurements using significantunobservable inputs (Level 3).

 

 

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

 

In May 2008, the FASB issued SFASNo. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No.162 defines the order in which accounting principles that are generallyaccepted should be followed. SFAS No. 162 is effective 60 days following theSEC’s approval of the Public Company Accounting Oversight Board (PCAOB)amendments to AU Section 411, The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles. We do not expect the adoption to havea material impact on our financial position or results of operations.

 

In March 2008, the FASB issuedSFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities.SFAS No. 161 requires enhanced disclosures about derivative instruments andhedging activities to enable investors to better understand their effects onfinancial position, financial performance, and cash flows. These requirementsinclude the disclosure of the fair values of derivative instruments and theirgains and losses in a tabular format. SFAS No. 161 is effective for fiscalyears beginning after November 15, 2008, which will require us to adopt theseprovisions in 2009. Early adoption of SFAS No. 161 is permitted. We arecurrently evaluating the impact SFAS No. 161 will have on our consolidatedfinancial statement disclosures.

 

In December 2007, the FASB issuedSFAS No. 141(R), Business Combinations, and SFAS No. 160, Accounting andReporting of Noncontrolling Interest in Consolidated Financial Statements, anAmendment of Accounting Research Bulletin (ARB) No. 51. These new standardswill significantly change the accounting for and reporting of businesscombination transactions and noncontrolling (minority) interests inconsolidated financial statements. SFAS Nos. 141(R) and 160 are required to beadopted simultaneously and are effective for the first annual reporting periodbeginning on or after December 15, 2008. Thus, we are required to adopt thesestandards on January 1, 2009. Earlier adoption is prohibited. The impact ofadopting these standards will be limited to business combinations occurring onor after January 1, 2009. 

 

In January 2008, we adopted SFASNo. 157, Fair Value Measurements. The adoption did not have a material impacton our financial position or results of operations. The statement established aframework for measuring fair value, and it enhanced the disclosures for fairvalue measurements. The statement applies when other accounting pronouncementsrequire or permit fair value measurements, but it does not require new fairvalue measurements. In accordance with the standard, in Note 14, FinancialInstruments, we expanded our disclosures about fair value measurements. Inaccordance with the provisions of FSP No. 157-2, Effective Date of FASBStatement No. 157, we have elected to defer implementation of SFAS No. 157 asit relates to nonfinancial assets and nonfinancial liabilities that arerecognized and disclosed at fair value in the financial statements on anonrecurring basis until January 1, 2009. We do not expect the implementationto have a material impact on our financial position or results of operations.

 

 

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

 

During the periods presented,some of our employees participated in our retirement plans, and some of thePredecessor’s employees participated in Boise Cascade’s retirement plans. Theseplans consist of noncontributory defined benefit pension plans, contributorydefined contribution savings plans, deferred compensation plans, andpostretirement healthcare benefit plans. Compensation expense was calculatedbased on costs directly attributable to our employees and, in the case of thePredecessor employees of the Paper Group, an allocation of expense related tocorporate employees that serviced all Boise Cascade business units.

 

*Obligations and Funded Status ofPostretirement Benefits and Pensions*

 

The Predecessor treatedparticipants in its pension plans as participants in multiemployer plans;accordingly, the Predecessor has not reflected any assets or liabilitiesrelated to the noncontributory defined benefit pension plans on itsConsolidated Balance Sheet at December 31, 2007. In connection 

 

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with the Acquisition, wehave treated the pension and postretirement benefit plans as company-sponsoredplans and have measured the benefit obligation and funded status as of February 22,2008. The funded status changes from period to period based on the investmentreturn from plan assets, contributions, benefit payments, and the discount rateused to measure the obligation.

 

*Components of Net Periodic Benefit Cost*

 

The components ofnet periodic benefit cost are as follows (in thousands):

 
| ** **                                     | ** ** | **Pension Benefits**                     | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                     | ** ** | **Boise Inc.**                           | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                             | 2,695      |   | $ | 3,829 |   |   | $ | 1,566 |   | $ | 2,832 |   | $ | 5,830 |   |
| Interest cost                                  |       | 6,091                                         |       | 8,663 |   |   | 3,458 |   | 5,379 |   | 11,046 |   |
| Expected return  on plan assets                |       | (5,947                                        | )          | (8,464 | ) |   | (3,452 | ) | (5,384 | ) | (11,239 | ) |
| Recognized  actuarial (gain) loss              |       | —                                        |       | — |   |   | (21 | ) | 67 |   | 134 |   |
| Amortization of  prior service costs and other |       | —                                        |       | — |   |   | 194 |   | 373 |   | 549 |   |
| Plan  settlement/curtailment (gain)            |       | —                                        |       | — |   |   | — |   | — |   | (46 | ) |
| Company-sponsored  plans                       |       | 2,839                                         |       | 4,028 |   |   | 1,745 |   | 3,267 |   | 6,274 |   |
| Multiemployer  pension plans                   |       | 93                                            |       | 136 |   |   | 75 |   | — |   | — |   |
| Net periodic  benefit costs                    | ** ** | **$**                                         | **2,932**  | ** ** | **$** | **4,164** | ** ** | ** ** | **$** | **1,820** | ** ** | **$** | **3,267** | ** ** | **$** | **6,274** | ** ** |
| ** **                                     | ** ** | ** **                                    | ** ** |
| ** **                                     | ** ** | **Other Benefits**                       | ** ** |
| ** **                                     | ** ** | **Boise Inc.**                           | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                           |       |                                          |       |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                             | —     |   | $ | — |   |   | $ | — |   | $ | 31 |   | $ | 84 |   |
| Interest cost                                  |       | 11                                            |       | 16 |   |   | 18 |   | 120 |   | 223 |   |
| Expected return  on plan assets                |       | —                                        |       | — |   |   | — |   | — |   | — |   |
| Recognized  actuarial (gain) loss              |       | —                                        |       | — |   |   | (12 | ) | — |   | — |   |
| Amortization of  prior service costs and other |       | —                                        |       | — |   |   | — |   | — |   | — |   |
| Plan  settlement/curtailment (gain)            |       | —                                        |       | — |   |   | — | ** ** | **—** |   | — |   |
| Net periodic  benefit costs                    |       | **$**                                         | **11**     | ** ** | **$** | **16** | ** ** | ** ** | **$** | **6** | ** ** | **$** | **151** | ** ** | **$** | **307** |   |
|                                                |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the remainder of 2008, we are not required tomake minimum contributions to our pension plans.

 

 

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

 

*Preferred Stock*

 

The Company is authorized to issue 1,000,000 shares ofpreferred stock with such designations, voting, and other rights andpreferences as may be determined from time to time by the board of directors.No shares were issued or outstanding at June 30, 2008, and December 31,2007.

 

*Common Stock*

 

We are authorized to issue 250,000,000 shares ofcommon stock, of which 79,722,147 shares were issued and outstanding at June 30,2008. Of these shares outstanding, 2,462,200 shares were

 

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restrictedstock (discussed below). At December 31, 2007, we had 51,750,000 shares ofcommon stock issued and outstanding, of which 16,555,860 shares were subject topossible conversion.

 

On February 5, 2008, stockholders owning12,543,778 shares exercised their conversion rights and voted against the Acquisitionof Boise Cascade. Such stockholders were entitled to receive their per-shareinterest in the proceeds from our initial public offering, which had been heldin trust. At December 31, 2007, cash held in trust was $403,989,389. Inconnection with the Acquisition, we paid $120,169,890 from our cash held intrust to these stockholders. The remaining cash held in trust was used toeffect the Acquisition.

 

*Warrants*

 

In connection with our public offering in June 2007,we issued 41,400,000 units (the Units). Each Unit consists of one share of ourcommon stock and one Redeemable Common Stock Purchase Warrant (the Warrants).Each Warrant entitles the holder to purchase one share of common stock at anexercise price of $7.50, commencing on the later of the completion of abusiness combination and one year from the effective date of the publicoffering and expiring four years from the effective date of the publicoffering. We may redeem the Warrants, at a price of $0.01 per Warrant, upon 30days’ notice while the Warrants are exercisable, only in the event that thelast 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 the consummation of the publicoffering, Aldabra 2 Acquisition Corp.’s chairman and chief executive officerpurchased a total of 3,000,000 Warrants (the Insider Warrants) at $1.00 perWarrant (for an aggregate purchase price of $3,000,000) privately. The amountpaid for the Warrants approximated fair value on the date of issuance. All ofthe proceeds received from these purchases were placed in cash held in trust.The Insider Warrants purchased were identical to the Warrants underlying theUnits issued in the public offering except that the Warrants may not be calledfor redemption and the Insider Warrants may be exercisable on a “cashlessbasis,” at the holder’s option, so long as such securities are held by suchpurchaser or his affiliates. At June 30, 2008, including 3,000,000 ofWarrants purchased by insiders, 44,400,000 Warrants were outstanding.

 

*Restricted Stock and Restricted Stock Units*

 

In May 2008, pursuant to the Boise Inc. Incentiveand Performance Plan (the Plan), we granted to directors and members ofmanagement 2.5 million shares of restricted stock and 0.6 millionrestricted stock units (collectively restricted stock). The restricted stockgrants include both service-condition vesting and market-condition vestingawards. Of the 3.1 million shares of restricted stock granted,1.2 million were service-condition vesting awards and 1.9 millionwere market-condition vesting awards. The weighted-average grant-date fairvalues of the restricted stock were $4.16 per share for theservice-condition vesting awards and $1.75 per share for the market-conditionawards. We account for awards granted under thePlan in our consolidated financial statements in accordance with SFAS No. 123(R).

 

In accordance with SFAS No. 123(R),we evaluate share-based compensation on a quarterly basis based on our estimateof expected restricted stock forfeiture, review of recent forfeiture activityand expected future turnover. We recognize the effect of adjusting theforfeiture rate for all expense amortization in the period that we change theforfeiture estimate. The effect of forfeiture adjustments during the three andsix months ended June 30, 2008 was zero.

 

*Market-ConditionVesting Awards*

 

Members ofmanagement were granted 1.9 million shares of restricted stock, which aresubject to performance-based vesting restrictions, as described below. Of this1.9 million, 0.7 million will vest on February 28, 2011, if theclosing price of Boise Inc. stock has been at least $10 per share for at least20 trading days in any period of 30 consecutive trading days between the grantdate and February 28, 2011. The weighted-average grant-date fair value ofthese awards was $2.03 per share. The remaining 1.2 million shares of therestricted stock grants will vest on February 28, 2011, if the closingprice of Boise Inc. stock has been at least $12.50 per share for at least 20trading days in any period of 30 consecutive trading days between the grantdate and February 28, 2011. The weighted-average grant-date fair value 

 

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of these awards was $1.57per share. Any shares not vested on February 28, 2011, will be forfeited.Additionally, members of management must be employed by Boise Inc. on February 28,2011, to receive these awards.

 

*Service-ConditionVesting Awards*

 

Directors and members ofmanagement were granted awards of 0.4 million and 0.8 million sharesof restricted stock subject to service-condition vesting. The restricted stock granted to directors vests on February 28,2009, whereas all other grants subject to service-condition vestingrestrictions vest as follows: one-third of the service-condition portion of thegrant shall vest on each of February 28, 2009, February 28, 2010, andFebruary 28, 2011, subject to EBITDA goals. Any shares not vested on orbefore February 28, 2011 will be forfeited.

 

*CompensationExpense*

 

We accrue compensation expense for therestricted stock based on the fair value on the date of the grant, as describedbelow. Compensation expense is recognized ratably over the vesting period forthe restricted stock grants that vest over time and ratably over the awardperiod for the restricted stock grants that vest based on the closing price ofBoise Inc. stock, as discussed above. During the three and six months ended June 30,2008, we recognized $0.8 million of compensation expense. Most of thesecosts were recorded in “General and administrative expenses” in ourConsolidated Statements of Income (Loss).

 

*Fair ValueMeasurement*

 

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

 

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.

 

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The following summarizes the activity ofour outstanding service- and market-condition restricted stock and unitsawarded under the Plan as of June 30, 2008, and changes during theperiod ended June 30, 2008.

 
| ** **                                     | ** ** | **Service-Condition Vesting Awards** | ** ** | **Market-Condition Vesting Awards**       | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares**                     | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** | **Aggregate  Fair Value (a)** | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** | **Aggregate  Fair Value (a)** | ** ** |
| ** **                                     | ** ** | **(thousands)**                                | ** ** | ** **                                          | ** ** | ** ** | ** ** | **(thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                           |       |                                           |       |                                                |       |   |   |   |   |   |   |   |   |
| Outstanding at May 2, 2008 (b)            |       | —                                         |       | $                                                   | —     |   | $ | — |   | — |   | $ | — |   | $ | — |   |
|                                           |       |                                           |       |                                                |       |   |   |   |   |   |   |   |   |
| Granted                                        |       | 1,185                                          |       | 4.16                                                |       | 4,927 |   | 1,929 |   | 1.75 |   | 3,368 |   |
| Vested                                         |       | —                                         |       | —                                              |       | — |   | — |   | — |   | — |   |
| Forfeited                                      |       | (6                                             | )          | 4.16                                                |       | (23 | ) | (13 | ) | 1.75 |   | (23 | ) |
| Outstanding at  June 30, 2008 (b)(c) | ** ** | **1,179**                                      | ** ** | **$**                                               | **4.16**   | ** ** | **$** | **4,904** | ** ** | **1,916** | ** ** | **$** | **1.75** | ** ** | **$** | **3,345** | ** ** |

 

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(a)                                  Represents the value of Boise Inc. stockon the date that the restricted stock vests.

 

(b)                                 Outstanding units are the same asnonvested units.

 

(c)                                  The weighted-average remaining contractualterm is approximately 2.3 years.

 

At June 30, 2008 we had approximately$4.3 million and $3.0 million of total unrecognized compensation costrelated to the nonvested service-condition and market-condition restrictedstock grants, respectively, under the Plan. The cost is expected to berecognized generally over a weighted average period of 2.1 years and2.7 years for the service-condition and market-condition awards,respectively. In accordance with SFAS No. 123 (R), unrecognizedcompensation expense is calculated net of estimated forfeitures of$0.2 million. During the three and six months ended June 30, 2008, werecognized $0.8 million of compensation expense, of which$0.6 million related to the grant-date fair value of service-conditionawards vested through June 30, 2008, and $0.2 million related to themarket-condition awards that generally vest on February 28, 2011.

* *

*Dividends*

 

We have not paid any cash dividends on ourcommon stock to date. The payment of cash dividends in the future is dependentupon our revenues and earnings, if any, capital requirements, and generalfinancial condition subsequent to the Acquisition. The payment of any dividendsis within the discretion of our board of directors, subject to the limitationsof our credit facilities.

 

*Predecessor*

 

During the Predecessor periods presented, equitycompensation was granted to the Predecessor’s employees under Boise Cascade’sequity compensation plans. During the Predecessor periods of January 1through February 21, 2008, and the three and six months ended June 30,2007, the Predecessor recognized $0.2 million, $0.4 million, and$0.8 million of compensation expense, most of which was recorded in “Generaland administrative expenses” in the Consolidated Statements of Income (Loss).

 

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***18.******                              ComprehensiveIncome (Loss)***

 

Comprehensive income (loss) includes the following (inthousands):

 
| ** **                                                               | ** ** | **Boise Inc.**                           | ** **  | **Predecessor**                               | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **Three  Months  Ended  June 30,  2008** | ** **  | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **February 1  (Inception)  Through  June 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
| ** **                                                               | ** ** | ** **                                    | ** **  | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                        |       | $                                             | (18,050     | )                                             | $          | 269 |   | $ | (34,421 | ) | $ | 268 |   |   | $ | 22,786 |   | $ | 16,535 |   | $ | 38,526 |   |
| Other  comprehensive income (loss) cash flow hedges, net of income taxes |       | 510                                           |        | —                                        |       | 510 |   | — |   |   | — |   | 18,752 |   | 9,376 |   |
| Comprehensive  income (loss)                                             | ** ** | **$**                                         | **(17,540** | **)**                                         | **$**      | **269** | ** ** | **$** | **(33,911** | **)** | **$** | **268** | ** ** | ** ** | **$** | **22,786** | ** ** | **$** | **35,287** | ** ** | **$** | **47,902** | ** ** |

 

 

***19.******                              SegmentInformation***

 

There are no material differences in Boise Inc.’sbasis of segmentation or in Boise Inc.’s basis of measurement of segment profitor loss from those disclosed in the Predecessor’s Note 15, SegmentInformation, of the Predecessor’s Notes to Consolidated Financial Statements inExhibit 99.2 of Boise Inc.’s Current Report on Form 8-K filed withthe SEC on February 28, 2008. We have not included segment informationrelated to the three months ended June 30, 2007, or the period of February 1(inception) through June 30, 2007, which represents the activities ofAldabra 2 Acquisition Corp., as the segment results related to this period areinsignificant.

 

An analysis of operations by segment is as follows:

 

**Boise Inc.**

| ** **                                                | ** ** | **Sales**  | ** ** | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|----------------|------------|
| **Three Months Ended  June 30, 2008** | ** ** | **Trade**  | ** ** | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                      |       |       |       |                 |       |                                   |       |           |       |   |   |   |   |   |   |
| Paper                                                     |       | $          | 393.6      |                 | $          | —                                 |       | $              | 17.3       |   | $ | 410.9 |   | $ | 7.8 |   | $ | 18.9 |   | $ | 26.8 |   |
| Packaging                                                 |       | 189.2      |       | 26.7                 |       | 1.2                                    |       | 217.1          |       | 4.6 |   | 13.0 |   | 17.6 |   |
| Corporate and  Other                                      |       | 3.8        |       | 5.1                  |       | 12.1                                   |       | 21.0           |       | (5.0 | ) | 0.8 |   | (4.3 | ) |
|                                                      |       | 586.6      |       | 31.8                 |       | 30.6                                   |       | 649.0          |       | 7.4 |   | 32.7 |   | 40.1 |   |
| Intersegment  eliminations                                |       | —     |       | —               |       | (30.6                                  | )          | (30.6          | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives        |       | —     |       | —               |       | —                                 |       | —         |       | 0.5 |   | — |   | — |   |
| Interest expense                                          |       | —     |       | —               |       | —                                 |       | —         |       | (26.1 | ) | — |   | — |   |
| Interest income                                           |       | —     |       | —               |       | —                                 |       | —         |       | 0.2 |   | — |   | — |   |
| ** **                                                | ** ** | **$**      | **586.6**  | ** **           | **$**      | **31.8**                               | ** ** | **$**          | **—** | ** ** | **$** | **618.4** | ** ** | **$** | **(18.0** | **)** | **$** | **32.7** | ** ** | **$** | **40.1** |   |

 

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**Predecessor**

| ** **                                                | ** ** | **Sales**  | ** ** | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|----------------|------------|
| **Three Months Ended  June 30, 2007** | ** ** | **Trade**  | ** ** | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                                     |       | $          | 226.1      |                 | $          | 159.5                                  |       | $              | 15.5       |   | $ | 401.1 |   | $ | 13.7 |   | $ | 16.1 |   | $ | 29.8 |   |
| Packaging                                                 |       | 173.9      |       | 18.3                 |       | 0.7                                    |       | 192.9          |       | 2.3 |   | 13.9 |   | 16.2 |   |
| Corporate and  Other                                      |       | 3.5        |       | 1.3                  |       | 9.6                                    |       | 14.4           |       | 1.1 | (a) | 0.8 |   | 1.9 |   |
|                                                      |       | 403.5      |       | 179.1                |       | 25.8                                   |       | 608.4          |       | 17.1 |   | 30.8 |   | 47.9 |   |
| Intersegment  eliminations                                |       | —     |       | —               |       | (25.8                                  | )          | (25.8          | )          | — |   | — |   | — |   |
| Interest income                                           |       | —     |       | —               |       | —                                 |       | —         |       | 0.1 |   | — |   | — |   |
| ** **                                                | ** ** | **$**      | **403.5**  | ** **           | **$**      | **179.1**                              | ** ** | **$**          | **—** | ** ** | **$** | **582.6** | ** ** | **$** | **17.2** | ** ** | **$** | **30.8** | ** ** | **$** | **47.9** |   |

 

 

**Boise Inc.**

| ** **                                              | ** ** | **Sales**  | ** ** | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** **     | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|----------------|------------|
| **Six Months Ended  June 30, 2008** | ** ** | **Trade**  | ** ** | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                                   |       | $          | 558.7      |                 | $          | —                                 |       | $              | 24.4       |   | $ | 583.1 |   | $ | 19.7 |   | $ | 26.1 |   | $ | 45.7 |   |
| Packaging                                               |       | 248.7      |       | 26.7                 |       | 1.6                                    |       | 277.0          |       | (15.1 | ) | 18.2 |   | 3.1 |   |
| Corporate and  Other                                    |       | 5.2        |       | 7.1                  |       | 16.8                                   |       | 29.1           |       | (7.3 | ) | 1.1 |   | (6.1 | ) |
|                                                    |       | 812.6      |       | 33.8                 |       | 42.8                                   |       | 889.2          |       | (2.7 | ) | 45.4 |   | 42.7 |   |
| Intersegment  eliminations                              |       | —     |       | —               |       | (42.8                                  | )          | (42.8          | )          | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives      |       | —     |       | —               |       | —                                 |       | —         |       | 0.5 |   | — |   | — |   |
| Interest expense                                        |       | —     |       | —               |       | —                                 |       | —         |       | (37.6 | ) | — |   | — |   |
| Interest income                                         |       | —     |       | —               |       | —                                 |       | —         |       | 2.0 |   | — |   | — |   |
| ** **                                              | ** ** | **$**      | **812.6**  | ** **           | **$**      | **33.8**                               | ** ** | **$**          | **—** | ** ** | **$** | **846.4** | ** ** | **$** | **(37.8** | **)** | **$** | **45.4** | ** ** | **$** | **42.7** |   |

 

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**Predecessor**

| ** **                                                   | ** ** | **Sales**  | ** ** | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** **     | ** ** |
|--------------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|----------------|------------|
| **January 1 Through  February 21, 2008** | ** ** | **Trade**  | ** ** | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                                   | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | **(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** | ** ** |

 

 

**Predecessor**

 
| ** **                                              | ** ** | **Sales**  | ** ** | **Income  (Loss)**   | ** ** | **Depre-  ciation,  Amorti-  zation,** | ** ** | ** **     | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------------|------------|----------------------------------------|------------|----------------|------------|
| **Six Months Ended  June 30, 2007** | ** ** | **Trade**  | ** ** | **Related  Parties** | ** ** | **Inter-  segment**                    | ** ** | **Total**      | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                              | ** ** | ** ** | ** ** | ** **           | ** ** | ** **                             | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Paper                                                   |       | $          | 449.0      |                 | $          | 317.2                                  |       | $              | 29.9       |   | $ | 796.1 |   | $ | 31.8 |   | $ | 32.7 |   | $ | 64.5 |   |
| Packaging                                               |       | 350.7      |       | 35.1                 |       | 1.1                                    |       | 386.9          |       | 10.4 |   | 27.3 |   | 37.7 |   |
| Corporate and  Other                                    |       | 6.7        |       | 2.6                  |       | 19.0                                   |       | 28.3           |       | (2.3 | )(a) | 1.6 |   | (0.7 | ) |
|                                                    |       | 806.4      |       | 354.9                |       | 50.0                                   |       | 1,211.3        |       | 39.9 |   | 61.6 |   | 101.5 |   |
| Intersegment  eliminations                              |       | —     |       | —               |       | (50.0                                  | )          | (50.0          | )          | — |   | — |   | — |   |
| Interest income                                         |       | —     |       | —               |       | —                                 |       | —         |       | 0.3 |   | — |   | — |   |
| ** **                                              | ** ** | **$**      | **806.4**  | ** **           | **$**      | **354.9**                              | ** ** | **$**          | **—** | ** ** | **$** | **1,161.3** | ** ** | **$** | **40.2** | ** ** | **$** | **61.6** | ** ** | **$** | **101.5** | ** ** |

 

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(a)         The three and six months ended June 30, 2007, include a$4.4 million gain for changes in retiree healthcare programs.

 

(b)        EBITDA represents income (loss) before interest, 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 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

 

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determine profitability; the exclusion of interestand 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 areconciliation of net income (loss) to EBITDA (in millions):

 
| ** **                                         | ** ** | **Boise Inc.**                           | ** ** | **Predecessor**                               | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six Months  Ended  June 30,  2008** | ** ** | **February 1  (Inception)  Through  June 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                               |       |                                          |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                                 |       | $                                             | (18.1      | )                                             | $          | 0.3 |   | $ | (34.4 | ) | $ | 0.3 |   |   | $ | 22.8 |   | $ | 16.5 |   | $ | 38.5 |   |
| Change in fair  value of interest rate derivatives |       | (0.5                                          | )          | —                                        |       | (0.5 | ) | — |   |   | — |   | — |   | — |   |
| Interest expense                                   |       | 26.1                                          |       | —                                        |       | 37.6 |   | — |   |   | — |   | — |   | — |   |
| Interest income                                    |       | (0.2                                          | )          | (0.5                                          | )          | (2.0 | ) | (0.5 | ) |   | (0.2 | ) | (0.1 | ) | (0.3 | ) |
| Income tax  provision (benefit)                    |       | —                                        |       | 0.2                                           |       | (3.4 | ) | 0.2 |   |   | 0.6 |   | 0.7 |   | 1.7 |   |
| Depreciation,  amortization, and depletion         |       | 32.7                                          |       | —                                        |       | 45.4 |   | — |   |   | 0.5 |   | 30.8 |   | 61.6 |   |
| EBITDA                                             | ** ** | **$**                                         | **40.1**   | ** **                                    | **$**      | **—** | ** ** | **$** | **42.7** | ** ** | **$** | **—** | ** ** | ** ** | **$** | **23.7** | ** ** | **$** | **47.9** | ** ** | **$** | **101.5** | ** ** |

 

 

***20.******                              Commitmentsand Guarantees***

 

*Commitments*

 

We havecommitments for fiber, leases, and utilities. Our lease commitments arediscussed further in Note 7, Leases. In addition, we have purchaseobligations for goods and services, capital expenditures, and raw materialsentered into in the normal course of business.

 

We are a party toa number of long-term log and fiber supply agreements. At June 30, 2008,our total obligation for log and fiber purchases under contracts with thirdparties was approximately $170.1 million. Under most of the log and fibersupply agreements, we have the right to cancel or reduce our commitments in theevent of a mill curtailment or shutdown. The prices under most of theseagreements is set quarterly or semiannually based on regional market prices,and the estimate is based on contract terms or current-quarter pricing. Our logand fiber obligations are subject to change based on, among other things, theeffect of governmental laws and regulations, our manufacturing operations notoperating in the normal course of business, log and fiber availability, and thestatus of environmental appeals. Except for deposits required pursuant to woodsupply contracts, these obligations are not recorded in our consolidatedfinancial statements until contract payment terms take effect.

 

We enter intoutility contracts for the purchase of electricity and natural gas. We alsopurchase these services under utility tariffs. The contractual and tariffarrangements include multiple-year commitments and minimum annual purchaserequirements. At June 30, 2008, we had approximately $28.0 million ofutility purchase commitments. These payment obligations were valued at pricesin effect on December 31, 2007, or determined pursuant to contractualterms, if available. Because we consume the energy in the manufacture of ourproducts, these obligations represent the face value of the contracts, notresale value.

 

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*Guarantees*

 

We provide guarantees, indemnifications, andassurances to others, which constitute guarantees as defined under FIN No. 45,*Guarantor’s Accounting and Disclosure Requirementsfor Guarantees*, *Including IndirectGuarantees of Indebtedness of Others*. See Note 13, Debt, included inthis Form 10-Q for a description of guarantees, including the approximateterms of the guarantees, how the guarantees arose, the events or circumstancesthat would require us to perform under the guarantees, and the maximumpotential undiscounted amounts of future payments we could be required to make.

 

 

***21.******                        LegalProceedings and Contingencies***

 

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

** **

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

 

***UnderstandingOur Financial Information***

 

The following discussion and analysis provides information managementbelieves to be relevant to understanding our financial condition and results ofoperations. We begin this discussion and analysis with some generalbackground related to our company followed by an overview of the effects of the“Acquisition of Boise Cascade’s Paper and Packaging Operations” and adiscussion of our operating segments. “Recent Trends and Operational Outlook”and “Factors That Affect Operating Results” are intended to give the reader anoverview of the goals and challenges and the direction of our business andchanges affecting our products. The analysis then reviews our “OperatingResults” followed by a discussion of relevant merger activity in our industryin “Industry Mergers and Acquisitions.” We then discuss our balance sheet andcash flows and our financial commitments in the section entitled “Liquidity andCapital Resources.”

 

This discussionand analysis includes statements regarding our expectations with respect to ourfuture performance, liquidity, and capital resources. Such statements, alongwith any other nonhistorical statements in the discussion, are forward-looking.These forward-looking statements involve risks and uncertainties. Our actualresults may differ materially from those contained in or implied by any of theforward-looking statements in this Form 10-Q. Factors that could cause orcontribute to such differences include, but are not limited to, those identifiedbelow and those discussed in  “Item 1A.Risk Factors” in our Annual Report on Form 10-K and our Quarterly Reportson Form 10-Q, as well as those factors listed in other documents we filewith the Securities and Exchange Commission (SEC). We do not assume anobligation to update any forward-looking statement.

 

***Background and Executive Overview***

 

Boise Inc.(formerly Aldabra 2 Acquisition Corp.) or “the Company,” “we,” “us,” or “our”was a blank check company, created on February 1, 2007 (inception) andorganized for the purpose of effecting a merger, capital stock exchange, assetacquisition, or other similar business combination with an operating business.On February 22, 2008, Boise Inc. completed the acquisition (theAcquisition) of Boise White Paper, L.L.C., Boise Packaging &Newsprint, L.L.C., Boise Cascade Transportation Holdings Corp. (collectively,the Paper Group), and other assets and liabilities related 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 “Acquisition of Boise Cascade’sPaper and Packaging Operations” below for more information related to theAcquisition.

 

The accompanying consolidated statements of income(loss) for the three and****six monthsended June 30, 2008, and cash flows for the six months ended June 30,2008, include the activities of Aldabra 2 Acquisition Corp. prior to theAcquisition and the operations of the acquired businesses from February 22,2008,

 

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throughJune 30, 2008. The consolidated statements of income (loss) for the periodof January 1 through February 21, 2008, and for the three and sixmonths ended June 30, 2007, and the consolidated statements of cash flowsfor the period of January 1 through February 21, 2008, and the sixmonths ended June 30, 2007, of the Predecessor are presented forcomparative purposes. The three months ended June 30, 2007, and the periodof February 1 (inception) through June 30, 2007, represent theactivities of Aldabra 2 Acquisition Corp.

 

This “Management’s Discussion and Analysis of Financial Condition andResults of Operations” at times refers to the combined activities of Boise Inc.and the Predecessor for each period specifically indicated, which we believe is****the most useful comparison between periods. TheAcquisition was accounted for in accordance with Statement of FinancialAccounting Standards (SFAS) No. 141, *Business Combinations,*resultingin a new basis of accounting from those previously reported by the Predecessor.However, sales and most operating cost items are substantially consistent withthose reflected by the Predecessor. Finished goods inventories were revalued toestimated selling prices less costs of disposal and a reasonable profit on thedisposal. Depreciation changed as a result of adjustments to the fair values ofproperty and equipment due to our preliminary purchase price allocation. Theseitems, along with changes in interest expense and income taxes, are explainedindependently where appropriate.

 

***Acquisition of Boise Cascade’sPaper and Packaging Operations***

 

On February 22, 2008, we acquired the paper,packaging, and most of the corporate and other segments of Boise Cascade forcash and securities. We have five pulp and paper mills, five corrugatedcontainer plants, a corrugated sheet plant, and two paper distributionfacilities located in the United States. Our corporate headquarters office is inBoise, Idaho.

 

The Acquisition was accounted for in accordance withthe provisions SFAS No. 141, *Business Combinations*.Upon completion of the transaction, Boise Cascade owned 37.9 million, or 49%,of our outstanding shares. Subsequent to the transaction, Boise Cascadetransferred the shares to its parent company, Boise Cascade Holdings, L.L.C.

 

The purchase price was paid with cash, the issuance ofshares of our common stock, and a note payable. These costs, includingestimated direct transaction costs and purchase price adjustments, aresummarized as follows:

 

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| ** **                                               | ** ** | **Preliminary  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 $9.15  average price per share                 |       | 346.4                                    |        |
| Lack of  marketability discount                          |       | (41.6                                    | )           |
| Total equity                                             |       | 304.8                                    |        |
|                                                     |       |                                     |        |
| Note payable to  Boise Cascade at closing                |       | 41.0                                     |        |
| Working capital  adjustment                              |       | 17.4                                     |        |
| Total note  payable to Boise Cascade                     |       | 58.4                                     |        |
|                                                     |       |                                     |        |
| Fees and  expenses                                       |       | 60.9                                     |        |
|                                                     |       |                                     |        |
| Total purchase  price                                    | ** ** | **$**                                    | **1,663.3** | ** ** |

 

*Cash*

 

Upon closing, we paid Boise Cascade$1,252.3 million in cash related to the base purchase price plus $24.9million incurred by Boise Cascade for transaction financing costs and fees.Immediately prior to the Acquisition, Boise Cascade contributed $38.0 millionof cash to the acquired businesses.

 

*Equity*

 

The number of shares issued to Boise Cascade totaled37,857,374. The equity price per share was calculated based on the averageper-share closing price of our common stock for the 20 trading days ending onthe third trading day immediately prior to the consummation of the Acquisition.Since that average price was below the $9.54 floor provided in the purchaseagreement, we determined a new measurement date in accordance with Issue No. 2of Emerging Issues Task Force (EITF) 99-12, *Determination of theMeasurement Date for the Market Price of Acquirer Securities Issued in aPurchase Business Combination*. We calculated a $9.15 average priceper share based on two days before and after the Acquisition measurement date,which was February 14, 2008. The value of stock consideration paid toBoise Cascade was reduced by a 12% discount for a lack of marketability, sincethe stock delivered as consideration was not registered for resale.

 

*Note payable*

 

In connection with the Acquisition, Boise Inc. issueda $41.0 million subordinated promissory note to Boise Cascade. After theAcquisition, and pursuant to the purchase agreement, the note was amended toincrease the amount payable to $58.3 million, effective February 22, 2008.The increase of the note reflects $17.3 million of post-closing workingcapital adjustments in Boise Cascade’s favor. After the transaction, BoiseCascade transferred the note payable to its parent, Boise Cascade Holdings,L.L.C., and on June 10, 2008, Boise Cascade Holdings, L.L.C., sold thenote payable to eight individual parties for a reported $53.8 million beforetransaction costs. The full amount of the original note, as amended, togetherwith accrued and unpaid interest from March 31, 2008, is now representedby eight separate notes payable, each with terms (other than the amount)identical to the original note payable. Because none of the eight holders ofthe notes is related to either Boise Inc. or Boise Cascade, we no longer recordthe notes as related-party notes payable on our Consolidated Balance Sheet. SeeNote 4, Transactions with Related Parties, and Note 13, Debt, in the Notes toUnaudited Quarterly Consolidated Financial Statements in “Part 1-Item 1.Consolidated Financial Statements” of this Form 10-Q for furtherinformation on the notes.

 

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Fees and expenses consist primarily of debt issuancefees and direct costs of the transaction.

 

The purchase price allocation is preliminary. Thefinal purchase price allocation will be based on the fair value of assetsacquired and liabilities assumed. The purchase price allocation will remainpreliminary until we complete a valuation. Once fair values are finalized, wemay have changes to the amounts we have included in our preliminary allocationbelow. We may also have adjustments to our depreciation and amortizationexpense, which will be made prospectively. The following table summarizes thepreliminary fair value allocation of the assets acquired and liabilitiesassumed at the date of the Acquisition as of June 30, 2008:

** **
| ** **                | ** ** | **Preliminary  February 22,  2008  Fair Value** | ** **  |
|---------------------------|------------|-----------------------------------------------------------|-------------|
| ** **                | ** ** | **(millions)**                                            | ** **  |
|                      |       |                                                      |        |
| Current assets            |       | $                                                         | 590.8       |   |
| Property and  equipment   |       | 1,291.8                                                   |        |
| Fiber farms and  deposits |       | 11.0                                                      |        |
| Intangible  assets:       |       |                                                      |        |
| Trademark and  trade name |       | 6.8                                                       |        |
| Customer list             |       | 11.4                                                      |        |
| Technology                |       | 5.0                                                       |        |
| Deferred  financing costs |       | 81.9                                                      |        |
| Other long-term  assets   |       | 4.5                                                       |        |
| Current liabilities       |       | (251.2                                                    | )           |
| Long-term  liabilities    |       | (88.7                                                     | )           |
| Total purchase  price     | ** ** | **$**                                                     | **1,663.3** | ** ** |

 

The following pro forma results are based on theindividual historical results of Boise Inc. and the Predecessor (prior to theAcquisition on February 22, 2008) with adjustments to give effect to thecombined operations as if the Acquisition had been consummated on January 1,2007. The pro forma results are intended for information purposes only and donot purport to represent what the combined companies’ results of operationswould actually have been had the transaction in fact occurred on January 1,2007.

 
| ** **                                 | ** ** | **Pro Forma**                                   | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **Three Months  Ended  June 30**           | ** ** | **Six Months  Ended  June 30** | ** ** |
| ** **                                 | ** ** | **2007**                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | **(millions, except per-share data)** | ** ** |
|                                       |       |                                                 |       |   |   |   |   |
| Sales                                      |       | $                                                    | 582.6      |   | $ | 1,206.3 |   | $ | 1,161.3 |   |
| Net loss                                   |       | (22.1                                                | )          | (45.2 | ) | (28.6 | ) |
| Net loss per  share—basic and diluted |       | (0.29                                                | )          | (0.59 | ) | (0.37 | ) |
|                                            |            |                                                      |            |  |  |  |  |  |  |  |

 

***Our Segments***

 

Boise Inc. operates its business in three reportablesegments, Paper, Packaging, and Corporate and Other (support services), and isheadquartered in Boise, Idaho. These segments represent distinct businessesthat are managed separately because of differing products and services. Each ofthese businesses requires distinct operating and marketing strategies.Management reviews the performance of the Company based on these segments.

 

*Paper.*OurPaper segment manufactures and sells uncoated freesheet (including commodityand premium cut-size office papers); a range of packaging papers (includingcorrugating medium, label and

 

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release papers, andflexible packaging papers); commodity and premium printing and convertingpapers (including commercial printing papers, envelope papers, and form-relatedproducts); and market pulp. Many of these paper products are commodityproducts, while others have specialized features that make these productspremium and specialty grades. Our premium grades include 100% recycled andcolored cut-size office papers, and our specialty grades includecustom-developed papers for such uses as label and release and flexible foodpackaging. In 2007, we completed an $80 million conversion of the W-3 machinein Wallula, Washington, to significantly grow label and release capacity. Weship to customers both directly from our mills and through distributioncenters. In the second quarter of 2008, approximately 41% of uncoated freesheetpaper sales volume, including approximately 70% of the office papers salesvolume, was sold to OfficeMax Incorporated (OfficeMax).

 

*Packaging*. OurPackaging segment manufactures and sells containerboard (linerboard) andnewsprint at our mill in DeRidder, Louisiana. In March of this year, wecompleted a $23 million linerboard expansion project, which added 50,000 tonsof linerboard capacity and will reduce per-unit fuel use and increase productcapabilities.

 

We also operate five corrugated containerplants in the Northwest and a sheet feeder plant in Texas. Our corrugatedcontainers are used primarily in the packaging of fresh fruit and vegetables,processed food, beverages, and other industrial and consumer products. OurTexas plant, known as Central Texas Corrugated, or CTC, produces corrugated sheetsthat are sold to sheet plants in the Southwest, where they are converted intocorrugated containers for a variety of customers. Our containerboard andcorrugated products are sold by our own sales personnel and by brokers.

 

We market our newsprint through asubsidiary of Abitibi-Consolidated Inc. (Abitibi) pursuant to an arrangementwhereby Abitibi purchases all of the newsprint we produce at a price equal tothe price at which Abitibi sells newsprint produced at its mills located in thesouthern United States, less associated expenses and a sales and marketingdiscount. The newsprint price is verified through a third-party review. Effectiveon shipments starting in June 2008, the agreement purchase price wasadjusted to include sales from both DeRidder and Bowater mills located in thesouthern United States.

 

*Corporate and Other*. OurCorporate and Other segment includes primarily corporate support services,related assets and liabilities, and foreign exchange gains and losses. Duringthe Predecessor periods presented, the Corporate and Other segment includedprimarily an allocation of Boise Cascade corporate support services and relatedassets and liabilities. These support services included, but were not limitedto, finance, accounting, legal, information technology, and human resourcefunctions. This segment also includes transportation assets, such as rail carsand trucks, that we use to transport our products from our manufacturing sites.Rail cars and trucks are generally leased. We provide transportation servicesnot only to our own facilities but also, on a limited basis, to third partieswhen geographic proximity and logistics are favorable.

 

In connection with the Acquisition, we entered into anoutsourcing services agreement under which we provide a number of corporatestaff services to Boise Cascade at our cost. These services include informationtechnology, accounting, and human resource services. The initial term of theagreement is for three years. It will automatically renew for one-year termsunless either party provides notice of termination to the other party at least12 months in advance of the applicable term. For the three and six monthsended June 30, 2008, we recorded $3.8 million and $5.3 millionin “Sales, Related parties” in our Consolidated Statements of Income (Loss)related to this agreement.

 

***Recent Trends and OperationalOutlook***

 

North American demand for packaging and communicationpaper products is heavily influenced by the level of general economic activity.In recent years, packaging paper demand has been growing, while growth in mostcommunication paper grades has been negatively affected by electronicsubstitution.

 

In June 2008, we announced a $55-per-ton priceincrease for linerboard, effective in July 2008. There is no assurancethat the announced price increase will be fully realized. Demand inagriculture, food, and beverage markets, which constitute over half of ourpackaging product end-use markets, has remained stable, while industrialmarkets have shown signs of easing as slower economic growth has reduced demandfor packaging papers in the U.S. The impact of weaker domestic demand has been

 

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somewhatoffset by a relatively weak U.S. dollar, which continues to help makeexport markets attractive for U.S. containerboard producers and U.S. marketsless attractive for overseas producers.

 

We announced a $60-per-ton price increase for cut-sizecopy paper and most printing and converting grades in the first quarter, whichhas been implemented. In late May, we announced a $60-per-ton increase acrossall of our communication papers for July. There is no assurance that theannounced price increase will be fully realized. Since most of our cut-sizeoffice paper is sold to OfficeMax under a contract whereby the price OfficeMaxpays is determined by a published index, changes in price for this product soldto OfficeMax tend to lag behind the general market by approximately60 days.

 

Overall North American demand for uncoated freesheet,which includes a wide range of paper grades, has been declining. According to theAmerican Forest and Paper Association (AF&PA), uncoated freesheet shipmentsdeclined 5.4% during the first half of 2008 compared with the same period in2007. Demand for commodity communications papers has continued to decline ascommunication paper products are negatively affected by the shift to electronicmedia for communications and less robust macroeconomic conditions. Demand forprinting and converting products, including envelope and forms, has softened asdirect mail advertising has slowed. Despite this overall trend, some segmentswhere we have a significant presence have continued to show some growth. Demandfor our packaging-driven grades, including label and release and flexiblepackaging papers, has been flat to modestly growing in 2008, as has demand forpremium office papers, including colored and high-recycled-content cut-sizepapers.

 

Two factors have contributed to the favorable pricingenvironment for uncoated freesheet. First, manufacturing capacity has beenclosed or converted, which has offset demand reduction. Second, the decreasedvalue of the U.S. dollar, relative to other currencies, has allowed theprofitable export of uncoated freesheet and made U.S. markets less attractiveto offshore producers. As a result, industry inventories are low relative to2007 levels, which has enabled increasing prices for many uncoated freesheetgrades.

 

North American newsprint demand has continued todecline. In December 2007, AbitibiBowater Inc. (AbitibiBowater), thelargest producer of newsprint in North America, announced the permanent closureof manufacturing facilities with approximately 1 million tons of annualcapacity of groundwood printing and newsprint papers. At the same time,AbitibiBowater announced price increases of $60 per ton, which were phased induring first quarter 2008, and followed with $60-per-ton increases for thesecond quarter, which were also largely implemented. In May, AbitibiBowaterannounced another $60-per-ton price increase which is expected to be phased induring the third quarter. The sales price for our newsprint, all of which issold to an AbitibiBowater subsidiary (Abitibi), is based upon the price atwhich Abitibi sells newsprint in the southern United States. There is noassurance that the announced price increases will be realized.

 

Our financial results continue to be negativelyaffected by significant cost increases. Wood fiber costs in the PacificNorthwest continued to be high by historical standards in second quarter 2008and did not decline seasonally as they did in 2007. These higher wood fibercosts are having a significant negative impact on the financial results of ourSt. Helens, Oregon, and Wallula, Washington, pulp and paper mills. As aresult, we may choose to change our operating configuration at thosefacilities, including potentially closing some or all of the St. Helens millif we cannot operate it profitably. We will continue to evaluate its ongoingfinancial performance. Our St. Helens pulp and paper mill and Wallula pulpand paper mill combined consume approximately 1 million bone-dry units(bdu) of wood in the Pacific Northwest annually under normal operations. In thefirst half of 2008, we expanded our whole-log chipping capacity and continuedpursuing alternative sources of fiber. At the end of June, pulpwood pricesbegan to move down, reflecting high log and chip inventories, putting downwardpressure on fiber pricing from second-quarter levels.  There is no assurance that this decline willcontinue.

 

Energy costs, particularly natural gas, are also highrelative to historical standards and have continued to increase through secondquarter 2008. Boise Inc.’s pulp and paper operations consume approximately14 million million British thermal units (mmBtu) of natural gas annuallyunder normal operations.

 

Chemical prices have continued to increase throughsecond quarter 2008, and many of Boise Inc.’s chemical suppliers have increasedtheir prices to us as contracts have allowed.

 

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In May and June of2008, downtime was taken at our International Falls, Minnesota, and Wallula,Washington, pulp and paper mills to perform annual maintenance work. The workat International Falls included additional planned long-term maintenance workon the recovery boiler. Our Jackson, Alabama, and St. Helens pulp and papermills are scheduled to have annual maintenance shutdowns in fourth quarter2008. There are no planned maintenance shutdowns or outages for third quarter2008.

 

Under purchase accountingrules, in connection with the Acquisition, we revalued our inventory toestimated 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 increasedapproximately $3.7 million and $10.2 million and were recognized duringthe three and six months ended June 30, 2008, respectively.

 

***Factors That Affect Operating Results***

 

Our results of operationsand financial performance are influenced by a variety of factors, including thefollowing:

 

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

 

·                  Volatility in raw material costs, energy prices, andcurrency values;

 

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

 

·                  Industry cycles and capacity utilization rates;

 

·                  The cost of and ability to obtain necessary financing;

 

·                  Continued compliance with government regulations;

 

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

 

·                  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;

 

·                  Our ability to implement our strategies;

 

·                  Actions of suppliers, customers, andcompetitors;

 

·                  The ability to secure skilled technicalpersonnel and staffing; and

 

·                  The other factors described in “Item 1A.Risk Factors” in our Annual Report on Form 10-K and our Quarterly Reportson Form 10-Q.

 

*Commodityand Premium and Specialty Products*

 

Manyof the products we manufacture and distribute are commodities that are widelyavailable and can be readily produced by our competitors. Because commodityproducts have few distinguishing qualities from producer to producer,competition for these products is based primarily on price, which is determinedby supply relative to demand. Generally, market conditions beyond our controldetermine the 

 

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price for our commodity products, and the price for any one or more ofthese products may fall below our cash costs. Therefore, our sales volume andprofitability with respect to these products depends on managing ourmanufacturing efficiency and cost structure, particularly raw material andenergy costs, which also exhibit commodity characteristics**.**

 

Premiumand specialty grades encompass our growing packaging and premium office papers,as well as select products among our mature printing and converting grades ofpaper. These grades are differentiated from competing products based onquality, product features and design, as well as related customer service, andwe are generally able to sell these products at higher prices than ourcommodity products. Some products, such as our label and release products, areproduced to meet highly technical customer specifications and, once qualifiedthrough customer trials, are sold on a longer-term contract basis, whichreduces price fluctuations. The technical features of these products and thequalification process required foster long-term relationships with customers.

 

A keytrend in demand for our commodity and premium and specialty communicationpapers is the continuing substitution of electronic media for print media. Thistrend negatively affects the demand for many of our communication paper grades,including office papers and printing and converting grades, such as envelopeand form-related products. Demand for packaging papers, including label andrelease and flexible packing papers, is driven by packaging demand and is notsignificantly impacted by electronic media substitution.

 

A fundamental componentof our strategy is to grow our packaging and premium office papers, wheredemand is growing, and shift away from more mature communication paper grades,such as newsprint and printing papers, where demand is declining. In our Papersegment, sales volumes of our label and release, flexible packaging, andpremium office grades grew 20%, compared with second quarter 2007, drivingsales volume of premium and specialty papers overall to approximately 36% ofuncoated freesheet tons sold during the three months ended June 30, 2008,compared with 31% for the same period in 2007.

 

The project to convertour W-3 paper machine in Wallula, Washington, to enable it to producelabel and release grades was a key step in providing us with the capacity toincrease production of premium and specialty paper grades. This project cameonline during second quarter 2007. During the second half of 2007, weidentified and resolved performance issues relating to equipment installedduring the machine rebuild. We continue to identify and resolve issues as weextend our grade mix and customer base for label and release papers.

 

*Demand*

 

Theoverall level of demand for the products we make and distribute is affected by,among other things, electronic media substitution, manufacturing activity,employment, consumer spending, and currency exchange rates. Accordingly, webelieve that our financial results depend in large part on generalmacroeconomic conditions in North America, as well as on regional economicconditions in the geographic markets in which we operate. While no singleproduct line drives our overall financial performance, individual product linesare influenced by conditions in their respective industries. For example:

 

·                  Historically, demand for uncoated freesheet correlated positively with general economic activity. However, demand forcommunication paper grades, such as uncoated freesheet printing and formspaper, which we produce, has decreased as the use of electronic transmissionand document storage alternatives has become more widespread and moreefficient.

 

·                  Demand for recycled-content papers is linked to an increased publicawareness of environmental and sustainability issues and is less sensitive togeneral economic activity. We produce grades that contain from 10% to 100%recycled content.

 

·                  Demand for our packaging products, including corrugated containers andsheets, containerboard, label and release, and flexible packaging papers, isdriven by packaging demand. This demand is affected by macroeconomic conditionsand is less susceptible to electronic media substitution.

 

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·                  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.The weakening U.S. dollar has made U.S. producers more attractive relative tooverseas competitors.

 

·                  Demand for newsprint depends uponprevailing levels of newspaper advertising and circulation. Demand fornewsprint in North America declined approximately 22% between 2003 and 2007,according to RISI, and has continued to decline in 2008 due in part to thegrowth of online media**.**

 

*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.

 

No newuncoated freesheet or linerboard machines have been built in North Americasince 1995. In addition, from 2003 to 2007, North American uncoated freesheet,containerboard, and newsprint capacities declined 10%, 2%, and 19%,respectively, according to RISI. New capacity additions are constrained by thehigh capital investment and long lead times required to plan, obtain regulatoryapprovals for, and build a new mill. A favorable pricing environment may promptmanufacturers to initiate expansion projects.

 

Industry supply of paperis also influenced by the level of imports and overseas production capacity,which has grown over the past decade. The weakening of the U.S. dollar hasmitigated the level of imports in recent years.

 

*OperatingCosts*

 

Themajor costs of production are wood fiber, energy, chemicals, and labor. Therelative size of these costs varies by segment. Given the significance of rawmaterial and energy costs to total operating expenses and the limited abilityto control these costs, compared with other operating costs, volatility inthese costs can materially affect operating margins. In addition, the timingand degree of price cycles of raw materials and energy differ with respect toeach type of raw material and energy used.

 

*Woodfiber.* 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.**                           | ** ** | **Predecessor**                             | ** ** | **Combined**                                         | ** ** | **Predecessor**                             | ** ** |
|------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|       |       |                                          |       |                                        |       |                                                 |       |                                        |       |   |   |   |   |
| Paper      |       | 30                                            | %          | 30                                          | %          | 26                                                   | %          | 29                                          | %          | 25 | % | 27 | % |
| Packaging  |       | 16                                            | %          | 14                                          | %          | 17                                                   | %          | 15                                          | %          | 17 | % | 18 | % |

 

The primary sources oflogs and wood fiber are timber and byproducts of timber, such as wood chips,wood shavings, and sawdust. Substantially all fiber is acquired from outsidesources. We convert logs and wood chips into pulp, which we use at our papermills to produce paper. On an aggregate basis, operating at capacity, we areable to produce pulp volume equal to all of our pulp requirements, purchasingand selling similar amounts on the open market**.**Recentincreases in fiber and energy costs in the Pacific Northwest, if extended, maylimit our ability to produce and profitably sell market pulp. An extendedperiod of lower pulp sales would change Boise Inc.’s aggregate structural pulpbalance from pulp neutral to one in which we are a net consumer of pulp.

 

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Logs and wood fiber arecommodities, and prices for logs and wood fiber have historically been cyclicaldue to changing levels of demand and supply. 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 fibersupply may be limited due to a reduction in primary manufacturing at sawmillsand plywood plants. Declines in log and fiber supply, driven primarily bychanges in public policy and government regulation, have been severe enough tocause the closure of numerous facilities in some of the regions in which weoperate. Any sustained undersupply and resulting increase in wood fiber pricescould decrease our production volumes and/or increase our operating costs.Prices for our products might not reflect increases or decreases in log andwood fiber prices, and as a result, our operating margins could fluctuate.Delivered fiber costs in all our operating regions have been negativelyimpacted by higher diesel costs, which increase the cost to harvest andtransport wood to the mills.

 

In Minnesota, overallfiber costs increased in the second quarter of 2008, compared with the secondquarter of 2007, driven mainly by increased purchased pulp costs at ourInternational Falls mill due to the planned maintenance shutdown in May. Thispurchased pulp replaced less expensive wood fiber, resulting in increasedcosts. Delivered log costs in Minnesota during second quarter 2008 were belowthe level of second quarter 2007. In the Northwest, residual fiber costsincreased sharply during the second half of the first quarter of 2008 andcontinued to be high by historical standards through the second quarter.Because residual fiber for our paper mills in the Northwest comes predominantlyfrom sawmills and plywood plants, continued curtailments in these mills, as aresult of decreased demand for these products related to the housing slowdown,negatively impact the availability and price of residual fiber for ourNorthwest pulp and paper operations. In second quarter 2008, standing timberprices in Louisiana decreased, compared with second quarter 2007, as weatherpatterns allowed better access to timberlands. However, wastepaper costsincreased in the second quarter. In our Alabama operating region, fiber costsincreased in the second quarter, driven by increased wood, pulp and wastepaperpricing.

 

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

 

Our costs for raw materials are influenced by increases in energycosts. Specifically, some of our key chemicals, including pulping and bleachingchemicals consumed in our paper and packaging mills, are heavily influenced byenergy costs. A number of our major suppliers have increased prices. Therelationship between industry supply and demand, rather than changes in thecost of raw materials, determines our ability to increase prices. Consequently,we may be unable to pass increases in our operating costs to our customers inthe short term.

 

*Energy.*Energy prices, particularly forelectricity, natural gas, and fuel oil, have been volatile in recent years andextremely volatile since the midpoint of first quarter 2008. Currently, energyprices are well above historical averages. In addition, we have limitedflexibility to switch between fuel sources in the short term; accordingly, wehave significant exposure to natural gas price changes. In the second quarterof 2008, natural gas prices continued to increase sharply. In normaloperations, Boise Inc. pulp and paper operations consume approximately 14 millionmmBtu of natural gas annually**.**Energy costsrepresent the following percentages of materials, labor, and other operatingexpenses, including fiber costs, for Boise Inc. and the Predecessor in each ofthe periods listed below:

 

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| ** ** | ** ** | **Boise Inc.**                           | ** ** | **Predecessor**                             | ** ** | **Combined**                                         | ** ** | **Predecessor**                             | ** ** |
|------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|       |       |                                          |       |                                        |       |                                                 |       |                                        |       |   |   |   |   |
| Paper      |       | 16                                            | %          | 16                                          | %          | 15                                                   | %          | 16                                          | %          | 13 | % | 15 | % |
| Packaging  |       | 13                                            | %          | 13                                          | %          | 14                                                   | %          | 13                                          | %          | 16 | % | 15 | % |

 

We enter into natural gasswaps, options, or a combination of these instruments to hedge the variablecash flow risk of natural gas purchases at index prices. As of June 30,2008, we had entered into derivative instruments related to approximately 45%of our forecasted natural gas purchases from July 2008 through October 2008,approximately 40% of our forecasted natural gas purchases from November 2008through December 2008, and approximately 7% of our forecasted natural gaspurchases from January 2009 through March 2009. These derivatives includethree-way collars, caps, 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) Boise Inc. will pay for the volumes under contract. The following tablesummarizes our position related to these instruments as of June 30, 2008:

 
| ** **                   | ** ** | **Three-Way Cashless Collar**        | ** ** |
|------------------------------|------------|------------------------------------------------|------------|
| ** **                   | ** ** | **July 2008  Through  October 2008** | ** ** | **September 2008  Through  March 2009** | ** ** | **November 2008  Through  March 2009** | ** ** |
|                         |       |                                           |       |   |   |   |   |
| Volume hedged                |       | 1,000 mmBtu/day                                |       | 1,000 mmBtu/day |   | 1,000 mmBtu/day |   |
|                         |       |                                           |       |   |   |   |   |
| Strike price of  call sold   |       | $                                              | 13.00      |   | $ | 14.00 |   | $ | 14.00 |   |
| Strike price of  call bought |       | 10.00                                          |       | 11.00 |   | 11.00 |   |
| Strike price of  put sold    |       | 6.00                                           |       | 10.05 |   | 6.38 |   |
|                         |       |                                           |       |   |   |   |   |
| Approximate  percent hedged  |       | 3                                              | %          | 2 | % | 2 | % |
|                              |            |                                                |            |  |  |  |  |  |  |  |

 

A cap is a purchased calloption that establishes a maximum price Boise Inc. will pay for the volumesunder contract, plus the applicable cap premium. The following table summarizesour position related to these instruments as of June 30, 2008:

 
|                         |   | **Caps**                                      |   |
|------------------------------|--------|-----------------------------------------------|--------|
|                         |   | **July 2008  Through  August 2008** |   | **September 2008  Through  December 2008** |   |
|                         |   |                                          |   |   |   |
| Volume hedged                |   | 16,000 mmBtu/day                              |   | 8,000 mmBtu/day |   |
|                         |   |                                          |   |   |   |
| Strike price of  call bought |   | $                                             | 10.50  |   | $ | 10.50 |   |
| Cap premium                  |   | 1.30                                          |   | 1.79 |   |
|                         |   |                                          |   |   |   |
| Approximate  percent hedged  |   | 42                                            | %      | 19 | % |
|                              |        |                                               |        |  |  |  |  |

 

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 anyapplicable net premium associated with the two options. The following tablesummarizes our position related to these instruments as of June 30, 2008:

 

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| ** **                   | ** ** | **Call Spreads**                                | ** ** |
|------------------------------|------------|------------------------------------------------------|------------|
| ** **                   | ** ** | **September 2008  Through  December 2008** | ** ** | **November 2008  Through  March 2009** | ** ** |
|                         |       |                                                 |       |   |   |
| Volume hedged                |       | 7,000 mmBtu/day                                      |       | 1,000 mmBtu/day |   |
|                         |       |                                                 |       |   |   |
| Strike price of  call sold   |       | $                                                    | 15.00      |   | $ | 15.00 |   |
| Strike price of  call bought |       | 10.50                                                |       | 10.50 |   |
| Net cap premium              |       | 2.14                                                 |       | 2.29 |   |
|                         |       |                                                 |       |   |   |
| Approximate  percent hedged  |       | 17                                                   | %          | 2 | % |
|                              |            |                                                      |            |  |  |  |  |

 

Wehave elected to account for these instruments as economic hedges. At June 30, 2008, we recorded the fair value of the derivatives, or$4.0 million, in “Receivables, other” on our Consolidated Balance Sheet.During the three and six months ended June 30, 2008, we recorded thechange in fair value of the instruments, or $3.7 million and$3.9 million of expense, in “Materials, labor, and operating expenses” inour Consolidated Statements of Income (Loss). We continue to enter intoadditional derivative instruments to hedge the variable cash flow risk ofnatural gas purchases.

 

*Chemicals.*Important chemicals we use in the production of ourproducts include starch, sodium chlorate, precipitated calcium carbonate,sodium hydroxide, and dyestuffs and optical brighteners. Purchases of chemicalsrepresent the following percentages of materials, labor, and other operatingexpenses, including fiber costs, for Boise Inc. and the Predecessor for each ofthe periods listed below:

 
| ** ** | ** ** | **Boise Inc.**                           | ** ** | **Predecessor**                             | ** ** | **Combined**                                         | ** ** | **Predecessor**                             | ** ** |
|------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|       |       |                                          |       |                                        |       |                                                 |       |                                        |       |   |   |   |   |
| Paper      |       | 14                                            | %          | 14                                          | %          | 13                                                   | %          | 14                                          | %          | 13 | % | 13 | % |
| Packaging  |       | 6                                             | %          | 5                                           | %          | 6                                                    | %          | 6                                           | %          | 6 | % | 5 | % |

 

We experienced higher chemical costs during second quarter 2008,compared with second quarter 2007, driven by substantially higher prices for commoditychemical inputs.

 

*Labor.* Labor costs tend to increase steadily due toinflation in healthcare and wage costs. Labor costs are not as volatile asenergy and wood fiber costs. As of June 30, 2008, we had approximately4,600 employees. Approximately 2,750, or 60%, of these employees work pursuantto collective bargaining agreements. We are currently in negotiations for ourWallula, Washington, packaging facility (126 employees represented by theUnited Steelworkers) and our Jackson, Alabama, converting facility (106employees represented by the United Steelworkers). The labor contract at ourpackaging plant in Salem, Oregon (92 employees represented by the Associationof Western Pulp & Paper Workers) will expire in December. We do notexpect material work interruptions or increases in our costs during the courseof the negotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

 

*Inflationaryand seasonal influences.*Our major costs of production arelabor, wood fiber, energy, and chemicals. Fiber costs in the Pacific Northwestare high by historical standards. Energy costs, particularly for electricity,natural gas, and fuel oil, have been volatile in recent years and currentlyexceed historical standards. We have also seen significantly higher chemicalcosts in the current year, compared with historical standards. We experiencesome seasonality, based primarily on buying patterns associated with particularproducts. For example, the demand for our corrugated containers is influencedby agricultural demand in the Pacific Northwest. In addition, seasonally coldweather increases costs, especially energy consumption, at all of ourmanufacturing facilities.

 

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***OperatingResults***

 

The following table sets forth operating results indollars and as a percentage of sales for the three months ended June 30,2008, and for the Predecessor three months ended June 30, 2007 (inmillions, except percent-of-sales data):

 
| ** **                                      | ** ** | **Boise Inc. (a)**                  | ** ** | ** ** | **Predecessor**                               | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|------------|-----------------------------------------------|------------|
| ** **                                      | ** ** | **Three  Months  Ended  June 30,  2008** | ** ** | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** |
|                                            |       |                                          |       |       |                                          |       |
| **Sales**                                       |       |                                          |       |       |                                          |       |
| Trade                                           | ** ** | $                                             | 586.6      |       |                                          | $          | 403.5 | ** ** |
| Related parties                                 |       | 31.8                                          |       |       | 179.1                                         |       |
|                                            |       | 618.4                                         |       |       | 582.6                                         |       |
|                                            |       |                                          |       |       |                                          |       |
| **Costs  and expenses**                         |       |                                          |       |       |                                          |       |
| Materials,  labor, and other operating expenses |       | 544.1                                         |       |       | 503.5                                         |       |
| Fiber costs from  related parties               |       | 7.0                                           |       |       | 10.3                                          |       |
| Depreciation,  amortization, and depletion      |       | 32.7                                          |       |       | 30.8                                          |       |
| Selling and  distribution expenses              |       | 14.8                                          |       |       | 14.5                                          |       |
| General and  administrative expenses            |       | 12.3                                          |       |       | 10.2                                          |       |
| Other (income)  expense, net                    |       | (0.1                                          | )          |       | (3.3                                          | )          |
|                                            |       | 610.8                                         |       |       | 566.0                                         |       |
|                                            |       |                                          |       |       |                                          |       |
| **Income  (loss) from operations**              | ** ** | **$**                                         | **7.6**    | ** ** | ** **                                    | **$**      | **16.6** | ** ** |
|                                            |       |                                          |       |       |                                          |       |
| **Sales**                                       |       |                                          |       |       |                                          |       |
| Trade                                           |       | 94.9                                          | %          |       | 69.3                                          | %          |
| Related parties                                 |       | 5.1                                           |       |       | 30.7                                          |       |
|                                            |       | 100.0                                         | %          |       | 100.0                                         | %          |
|                                            |       |                                          |       |       |                                          |       |
| **Costs  and expenses**                         |       |                                          |       |       |                                          |       |
| Materials,  labor, and other operating expenses |       | 88.0                                          | %          |       | 86.4                                          | %          |
| Fiber costs from  related parties               |       | 1.1                                           |       |       | 1.8                                           |       |
| Depreciation,  amortization, and depletion      |       | 5.3                                           |       |       | 5.3                                           |       |
| Selling and  distribution expenses              |       | 2.4                                           |       |       | 2.5                                           |       |
| General and  administrative expenses            |       | 2.0                                           |       |       | 1.8                                           |       |
| Other (income)  expense, net                    |       | —                                        |       |       | (0.6                                          | )          |
|                                            |       | 98.8                                          | %          |       | 97.2                                          | %          |
|                                            |       |                                          |       |       |                                          |       |
| **Income  (loss) from operations**              | ** ** | **1.2**                                       | **%**      | ** ** | **2.8**                                       | **%**      |

 

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(a)          We have not included information related to thethree months ended June 30, 2007, which represents the activities ofAldabra 2 Acquisition Corp., as the operating results related to this periodare insignificant.

 

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***Operating Results***

 

The following table sets forth operating results indollars and as a percentage of sales for the six months ended June 30,2008, the Predecessor periods of January 1 through February 21, 2008,and the six months ended June 30, 2007 (in millions, exceptpercent-of-sales data):

 
| ** **                                      | ** ** | **Boise Inc. (a)**                | ** ** | ** ** | **Predecessor**                                      | ** ** |
|-------------------------------------------------|------------|---------------------------------------------|------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Sales**                                       |       |                                        |       |       |                                                 |       |   |   |
| Trade                                           | ** ** | $                                           | 812.6      |       |                                                 | $          | 258.4 |   | $ | 806.4 | ** ** |
| Related parties                                 |       | 33.8                                        |       |       | 101.5                                                |       | 354.9 |   |
|                                            |       | 846.4                                       |       |       | 359.9                                                |       | 1,161.3 |   |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Costs  and expenses**                         |       |                                        |       |       |                                                 |       |   |   |
| Materials,  labor, and other operating expenses |       | 739.5                                       |       |       | 313.9                                                |       | 991.4 |   |
| Fiber costs from  related parties               |       | 25.7                                        |       |       | 7.7                                                  |       | 21.3 |   |
| Depreciation,  amortization, and depletion      |       | 45.4                                        |       |       | 0.5                                                  |       | 61.6 |   |
| Selling and  distribution expenses              |       | 20.8                                        |       |       | 9.1                                                  |       | 28.9 |   |
| General and  administrative expenses            |       | 16.8                                        |       |       | 6.6                                                  |       | 19.7 |   |
| Other (income)  expense, net                    |       | (0.1                                        | )          |       | (1.0                                                 | )          | (0.9 | ) |
|                                            |       | 848.1                                       |       |       | 336.8                                                |       | 1,122.0 |   |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Income  (loss) from operations**              | ** ** | **$**                                       | **(1.7**   | **)**      | ** **                                           | **$**      | **23.1** | ** ** | **$** | **39.3** | ** ** |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Sales**                                       |       |                                        |       |       |                                                 |       |   |   |
| Trade                                           |       | 96.0                                        | %          |       | 71.8                                                 | %          | 69.4 | % |
| Related parties                                 |       | 4.0                                         |       |       | 28.2                                                 |       | 30.6 |   |
|                                            |       | 100                                         | %          |       | 100.0                                                | %          | 100.0 | % |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Costs  and expenses**                         |       |                                        |       |       |                                                 |       |   |   |
| Materials,  labor, and other operating expenses |       | 87.4                                        | %          |       | 87.2                                                 | %          | 85.4 | % |
| Fiber costs from  related parties               |       | 3.0                                         |       |       | 2.2                                                  |       | 1.8 |   |
| Depreciation,  amortization, and depletion      |       | 5.4                                         |       |       | 0.1                                                  |       | 5.3 |   |
| Selling and  distribution expenses              |       | 2.5                                         |       |       | 2.5                                                  |       | 2.5 |   |
| General and  administrative expenses            |       | 2.0                                         |       |       | 1.9                                                  |       | 1.7 |   |
| Other (income)  expense, net                    |       | —                                      |       |       | (0.3                                                 | )          | (0.1 | ) |
|                                            |       | 100.3                                       | %          |       | 93.6                                                 | %          | 96.6 | % |
|                                            |       |                                        |       |       |                                                 |       |   |   |
| **Income  (loss) from operations**              | ** ** | **(0.3**                                    | **)%**     | ** ** | **6.4**                                              | **%**      | **3.4** | **%** |

 

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(a)   We have not included information related tothe period of February 1 (inception) through June 30, 2007, whichrepresents the activities of Aldabra 2 Acquisition Corp., as the operatingresults related to this period are insignificant.

 

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***Sales Volumes and Prices***

 

Set forth below are segmentsales volumes and average net selling prices for our principal products for thethree months ended June 30, 2008, the Predecessor three months ended June 30,2007, the six months ended June 30, 2008, the Predecessor period of January 1through February 21, 2008, the combined six months ended June 30,2008, and the Predecessor six months ended June 30, 2007:

** **
| ** **                               | ** ** | **Boise Inc.**                                                     | ** ** | **Predecessor**                               | ** ** | **Boise Inc.**                         | ** ** | **Predecessor**                                      | ** ** | **Combined**                                | ** ** | **Predecessor**                             | ** ** |
|------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                               | ** ** | **Three  Months  Ended  June 30,  2008**                           | ** ** | **Three  Months  Ended  June 30,  2007** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Six  Months  Ended  June 30,  2008** | ** ** | **Six  Months  Ended  June 30,  2007** | ** ** |
| ** **                               | ** ** | ** **                                                              | ** ** |
| ** **                               | ** ** | **(thousands  of short tons, except corrugated containers and sheets)** | ** ** |
| **Paper**                                |       |                                                                    |       |                                          |       |                                        |       |                                                 |       |                                        |       |                                        |       |
| Uncoated  freesheet                      |       | 350                                                                     |       | 375                                           |       | 504                                         |       | 236                                                  |       | 740                                         |       | 755                                         |       |
| Containerboard  (medium)                 |       | 35                                                                      |       | 34                                            |       | 52                                          |       | 19                                                   |       | 69                                          |       | 66                                          |       |
| Market pulp                              |       | 39                                                                      |       | 33                                            |       | 50                                          |       | 20                                                   |       | 72                                          |       | 57                                          |       |
|                                     |       | 424                                                                     |       | 442                                           |       | 606                                         |       | 275                                                  |       | 881                                         |       | 878                                         |       |
|                                     |       |                                                                    |       |                                          |       |                                        |       |                                                 |       |                                        |       |                                        |       |
| **Packaging**                            |       |                                                                    |       |                                          |       |                                        |       |                                                 |       |                                        |       |                                        |       |
| Containerboard  (linerboard)             |       | 66                                                                      |       | 59                                            |       | 78                                          |       | 36                                                   |       | 114                                         |       | 124                                         |       |
| Newsprint                                |       | 105                                                                     |       | 102                                           |       | 134                                         |       | 56                                                   |       | 191                                         |       | 209                                         |       |
| Corrugated  containers and sheets (mmsf) |       | 1,562                                                                   |       | 1,653                                         |       | 2,202                                       |       | 914                                                  |       | 3,116                                       |       | 3,287                                       |       |

 
| ** **                                 | ** ** | **(dollars  per short ton, except corrugated containers and sheets)** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Paper**                                  |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Uncoated  freesheet                        |       | $                                                                     | 925        |   | $ | 855 |   | $ | 914 |   | $ | 868 |   | $ | 899 |   | $ | 851 |   |
| Containerboard  (medium)                   |       | 455                                                                   |       | 422 |   | 455 |   | 454 |   | 454 |   | 422 |   |
| Market pulp                                |       | 543                                                                   |       | 535 |   | 549 |   | 535 |   | 545 |   | 527 |   |
|                                       |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| **Packaging**                              |       |                                                                  |       |   |   |   |   |   |   |   |   |   |   |
| Containerboard  (linerboard)               |       | $                                                                     | 394        |   | $ | 379 |   | $ | 393 |   | $ | 399 |   | $ | 395 |   | $ | 377 |   |
| Newsprint                                  |       | 544                                                                   |       | 494 |   | 537 |   | 494 |   | 524 |   | 510 |   |
| Corrugated  containers and sheets ($/mmsf) |       | 56                                                                    |       | 51 |   | 56 |   | 55 |   | 55 |   | 51 |   |

 

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The following presents adiscussion of sales and costs for the three months ended June 30, 2008,compared with the same period in 2007, as well as the combined six months endedJune 30, 2008, compared with the same period in 2007. The combined sixmonths ended June 30, 2008, represent the results of Boise Inc. for thesix months ended June 30, 2008, and the results of the Predecessor for theperiod from January 1 through February 21, 2008. The 2007 comparisonperiods are for Predecessor results only. See “Background and ExecutiveOverview” and “Acquisition of Boise Cascade’s Paper and Packaging Operations”in this Management’s Discussion and Analysis for more information related tothe Acquisition.

 

Management believes thiscombined presentation of the Boise Inc. and Predecessor statement of operationsis the most useful comparison between periods. The Acquisition was accountedfor in accordance with SFAS No. 141, *Business Combinations,*resultingin a new basis of accounting from those 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 preliminarypurchase price allocation. These items, along with changes in interest expenseand income taxes, are explained independently where appropriate.

 

***Three Months Ended June 30, 2008, Compared With the PredecessorThree Months Ended June 30, 2007***

 

*Sales*

 

For the three monthsended June 30, 2008, total sales increased $35.8 million, or 6%, to$618.4 million from $582.6 million during the three months ended June 30,2007. The increase was driven primarily by a 2% increase in Paper segment salesresulting from higher prices, partially offset by lower sales volumes and a 13%increase in Packaging segment sales driven by higher prices, partially offsetby lower corrugated container and sheet volume.

 

*Paper.* Sales increased $9.8 million, or 2%, to $410.9 million for the three months ended June 30,2008, from $401.1 million for the three months ended June 30, 2007.Pricing for uncoated freesheet, market pulp, and medium all improved from thesame period in 2007. Commodity uncoated freesheet sales prices increased 9%,compared with the second quarter of 2007, while premium and specialty pricesincreased 6%. Commodity uncoated freesheet volumes were down 13% from secondquarter 2007 due in part to growth in premium and specialty production, offsetby reduced demand in commodity grades, particularly printing and convertinggrades. To balance our production with demand, we curtailed production at ourInternational Falls mill. Premium and specialty sales volumes were up 8%,compared with the prior period due mainly to a 20% increase in sales of premiumoffice papers and label and release and flexible packaging grades**.**

 

*Packaging.*Sales increased $24.2 million, or 13%, to $217.1 million for the three months ended June 30,2008, from $192.9 million for the three months ended June 30, 2007.The increase was driven primarily by a 10% increase in pricing for bothcorrugated products and newsprint, while linerboard pricing improved 4%.Newsprint pricing is continuing to improve through 2008 in conjunction withcapacity reductions across the industry. Linerboard sales volumes increased13%, and newsprint sales volumes increased 3%, compared with the prior-yearquarter. Corrugated container and sheet volume was 6% lower due mainly to lowervolumes from our sheet plant in Texas as a result of slowing industrial marketsin that region.

 

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

##### *** ***

Materials, labor, andother operating expenses, including the cost of fiber from related parties,increased $37.3 million, or7%, to $551.1 million forthe three months ended June 30, 2008, from $513.8 million for thethree months ended June 30, 2007. The increase was driven primarily bysubstantial increases in fiber, energy, and chemical costs due mainly to higherprices.

 

Fiber, energy, and chemicalcosts were $142.3 million, $84.3 million, and $63.4 million, respectively, forthe three months ended June 30, 2008, and $119.2 million, $73.0 million,and $55.2 million, respectively, for the three months ended June 30, 2007.

 

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Fiber costs increased$22.2 million in our Paper segment due primarily to increased pulp costs,driven mainly by higher consumption at our International Falls mill due to theplanned maintenance shutdown in May, increased residual chip prices in thePacific Northwest, and higher fiber prices in our Alabama operating region. InPackaging, fiber costs increased $0.9 million due to increased wood andwastepaper costs.

 

Compared with the threemonths ended June 30, 2007, energy costs increased $12.4 million inour Paper segment, driven mainly by higher natural gas and electricity prices,and decreased $1.1 million in our Packaging segment, driven by increaseduse of alternative fuels, improved drying efficiency from the new shoe pressinstalled on the linerboard machine during the outage at DeRidder in the firstquarter, and lower electricity prices.

 

Chemical costs increased$6.6 million****in our Paper segment and increased$1.6 million in our Packaging segment driven by higher prices forcommodity chemicals, including caustic.

 

Under purchase accountingrules, in connection with the Acquisition we revalued our inventory toestimated 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 increasedapproximately $3.7 million during the three months ended June 30,2008.

 

Depreciation,amortization, and depletion for the three months ended June 30, 2008, was$32.7 million. For the Predecessor three months ended June 30, 2007,depreciation, amortization, and depletion was $30.8 million.

 

Selling and distributionexpenses increased $0.3 million,or 2%, to $14.8 million for the three months ended June 30, 2008,compared with $14.5 million during the three months ended June 30,2007. As a percentage of sales, selling and distribution expenses were 2.4% and2.5% for the months ended June 30, 2008 and 2007, respectively.

 

General andadministrative expenses increased $2.1 million,or 19%, to $12.3 million for the three months ended June 30, 2008,compared with $10.2 million during the three months ended June 30,2007, as a result of incremental costs associated with being a publicstand-alone company. As a percentage of sales, general and administrativeexpenses were 2.0% and 1.8% for the three months ended June 30, 2008 and2007, respectively.

 

*Other(income) expense, net.* “Other (income) expense, net” includes miscellaneous income andexpense items. During the three months ended June 30, 2008, we had$0.1 million of other income, compared with $3.3 million of incomeduring the Predecessor three months ended June 30, 2007. The three monthsended June 30, 2007, included a $4.4 million gain for changes inretiree healthcare programs and other miscellaneous expense items.

 

*Income (loss) from operations.* Income from operations forthe three months ended June 30, 2008, decreased $9.0 million to $7.6million, compared with $16.6 million in second quarter 2007. This decrease wasdriven primarily by higher input costs and the inventory purchase priceadjustments, partially offset by higher sales prices. Overall, we estimate thatour operating results for the three months ended June 30, 2008, werenegatively affected by approximately $3.7 million from inventory purchase priceadjustments.

 

*Other*

 

*Interest income.*For the three months ended June 30, 2008, interest income was$0.2 million, compared with $0.5 million for the three months ended June 30,2007.

 

*Interest expense.*For the three months ended June 30, 2008, interest expense was$26.1 million, of which $21.6 million was for debt under our seniorsecured credit facilities. The remaining $4.5 million of interest expensewas non-cash and consists of the following: $2.3 million related to thesubordinated promissory note to Boise Cascade and the subsequent notes payableto unrelated parties and $2.2 million for amortization of deferred financingfees. For additional information, refer to our discussion of debt under “Liquidityand Capital Resources” in this “Management’s Discussion and Analysis of 

 

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Financial Condition and Results ofOperations.” The debt of Boise Cascade was not allocated to the Predecessor inthe financial statements included in this Form 10-Q.

 

*Incometaxes*. For the three months ended June 30, 2008, werecorded $14,000 of income tax expense. We have not recognized $4.7 million oftax benefits from the losses resulting from our operations in the secondquarter, because the realization of these benefits is not considered morelikely than not. Valuation allowances were recorded to offset income taxbenefits. Because of its pass-through tax structure, the Predecessor recordedtax expense related only to small subsidiaries that are taxed as corporations.

 

***Six Months Ended June 30, 2008, Compared With the Six Months EndedJune 30, 2007***

 

*Sales*

 

For the combined sixmonths ended June 30, 2008, total sales increased $45.0 million, or4%, to $1,206.3 million from $1,161.3 million during the six monthsended June 30, 2007. The increase was driven primarily by a 5% increase inPaper segment sales as a result of higher prices and a 1% increase in Packagingsegment sales driven by higher prices, partially offset by lower volumes as aresult of the DeRidder outage in first quarter 2008 and lower corrugated containerand sheet volume.

 

*Paper.* Sales increased $40.5 million, or 5%, to $836.6 million for the combined six months ended June 30,2008, from $796.1 million for the six months ended June 30, 2007.This increase was driven by improved pricing for uncoated freesheet, marketpulp, and medium from the prior year. Commodity uncoated freesheet sales pricesincreased 6%, compared with the same period in 2007, while premium andspecialty prices increased 5%. Commodity uncoated freesheet volumes were down4% from the same period in 2007 due mainly to declining demand across mostgrades, particularly more mature printing and converting grades, includingforms and envelopes. Premium and specialty volumes were up 2%, compared withthe prior period, driven by a 12% increase in sales of premium office papersand label and release and flexible packaging grades.

 

*Packaging.*Sales increased $3.6 million, or 1%, to $390.5 million for the combined six months ended June 30,2008, from $386.9 million for the six months ended June 30, 2007. Theincrease was due primarily to higher prices for linerboard, corrugatedcontainers and sheets and newsprint, partially offset by lower sales volumes.Linerboard pricing was 5% higher than in the prior year, while corrugatedcontainer and sheet pricing improved 8% and newsprint pricing improved 3%.Overall volumes for linerboard and newsprint decreased 8% and 9%, respectively,as a result of the DeRidder outage in first quarter 2008. Corrugated containerand sheet volume decreased 5%, compared with the prior period, due mainly tolower volumes from our sheet plant in Texas as a result of slowing industrialmarkets.

 

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

##### *** ***

Materials, labor, andother operating expenses, including the cost of fiber from related parties,increased****$74.1 million, or 7%, to$1,086.8 million for thecombined six months ended June 30, 2008, from $1,012.7 million duringthe six months ended June 30, 2007. The increase was driven primarily byhigher input cost prices and increased fixed costs, mainly maintenance,associated with the DeRidder outage.

 

Fiber, energy, andchemical costs were $269.6 million, $167.1 million, and $125.4 million,respectively, for the combined six months ended June 30, 2008, and $246.3million, $155.8 million, and $108.7 million, respectively, for the six monthsended June 30, 2007. Fiber costs increased $26.4 million in our Paper segment, due primarily to higherwood and wastepaper costs in our Alabama operating region, increased purchasedpulp costs at our International Falls mill due to the planned maintenanceshutdown in May, and increased residual chip prices in the Pacific Northwest.In Packaging, fiber costs decreased $3.1 million due primarily to reducedconsumption during to the DeRidder outage in the first quarter, partiallyoffset by increased recycled fiber and wood costs.

 

Compared with the sixmonths ended June 30, 2007, energy costs increased $13.5 million in our Paper segment driven by higher fuel andelectricity costs and decreased $2.2 million in our Packaging segmentdriven by reduced consumption as a result of the outage in first quarter 2008,increased alternative fuel use, and improved drying efficiency, partiallyoffset by increased fuel and electricity prices.

 

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Chemical costs increased$11.9 million in our Paper segment and increased $4.8 million in ourPackaging segment driven by substantially higher prices for commodity chemicalinputs.

 

Under purchase accountingrules, in connection with the Acquisition we revalued our inventory toestimated 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 increased$10.2 million during the six months ended June 30, 2008.

 

Depreciation,amortization, and depletion for the six months ended June 30, 2008, was$45.4 million. The six months ended June 30, 2008, includesdepreciation, amortization, and depletion for the period from February 22,2008, through June 30, 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 ofthe Acquisition. For the Predecessor six months ended June 30, 2007,depreciation, amortization, and depletion was $61.6 million.

 

Selling and distributionexpenses increased $1.0 million,or 3%, to $29.9 million for the combined six months ended June 30,2008, from $28.9 million during the six months ended June 30, 2007.

 

General andadministrative expenses increased $3.7 million,or 19%, to $23.4 million for the combined six months ended June 30,2008, from $19.7 million during the six months ended June 30, 2007,mainly as a result of incremental costs associated with being a publicstand-alone company.

 

*Other(income) expense, net.* “Other (income) expense, net” includes miscellaneous income andexpense items. During the six months ended June 30, 2008, we had$1.1 million of other income, consisting primarily of a net gain on salesof assets of $1.0 million for the Predecessor period of January 1through February 21, 2008. During the six months ended June 30, 2007,we had a net $0.9 million of income, consisting of a $4.4 million gain onchanges in retiree healthcare programs offset by a $1.3 million net loss onsales of assets, $0.2 million of project costs, and $2.0 million ofmiscellaneous income items.

 

*Income (loss) from operations.*Income from operations for the combinedsix months ended June 30, 2008, decreased $17.8 million to$21.5 million, compared with $39.3 million for the six months ended June 30,2007. This decrease was caused primarily by higher input costs, the DeRiddermill outage, and the inventory purchase price adjustments, partially offset byhigher sales prices and lower depreciation, amortization, and depletionexpense. Overall, weestimate that our operating results for the six months ended June 30,2008, were negatively affected by approximately $20.5 million due to theDeRidder outage in the first quarter and $10.2 million from inventorypurchase price adjustments.

 

*Other*

 

*Interest income.*During the combinedsix months ended June 30,2008, interest income was $2.2 million, compared with $0.8 million for thesix months ended June 30, 2007. Boise Inc.’s interest income for theperiod prior to February 22, 2008, is attributable primarily to incomefrom interest earned on trust assets held by Aldabra 2 Acquisition Corp. priorto the Acquisition.

 

*Interest expense.*For the six months ended June 30, 2008, interest expense was$37.6 million, of which $31.3 million was for debt under our seniorsecured credit facilities. The remaining $6.3 million of interest expensewas non-cash and consists of the following: $3.3 million related to thesubordinated promissory note to Boise Cascade and the subsequent notes payableto unrelated parties and $3.0 million for amortization of deferredfinancing fees. For additional information, refer to our discussion of debtunder “Liquidity and Capital Resources” in this “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.” The debt of BoiseCascade was not allocated to the Predecessor in the financial statementsincluded in this Form 10-Q.

 

*Incometaxes*. For the six months ended June 30, 2008, werecorded $3.4 million of income tax benefits related to losses incurred duringthe six-month period. We have not recognized an additional $8.8 million of taxbenefits from these losses, because the realization of these benefits is notconsidered more likely than not. Valuation allowances were recorded to offsetincome tax benefits. Because of its 

 

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pass-through taxstructure, the Predecessor recorded tax expense related only to smallsubsidiaries that are taxed as corporations.

*** ***

***Industry Mergers and Acquisitions***

 

In March 2008, two of BoiseInc.’s major competitors announced their intention to combine their packagingbusinesses when International Paper agreed to acquire Weyerhaeuser’scontainerboard operations. This combination, if it is realized, would create alarger and potentially much stronger competitor. The impact of this merger onour operations and results is uncertain at this time.

 

***Liquidity and Capital Resources***

 

Webelieve that funds generated from operations and available borrowing capacitywill be adequate to fund debt service requirements, capital expenditures, andworking capital requirements for the next 12 months. Our ability to continue tofund these items may be affected by general economic, financial, competitive,legislative, and regulatory factors. We cannot assure that our business willgenerate sufficient 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 or to fund our other liquidity needs.

 

Unless otherwise noted, this discussion ofliquidity and capital resources refers to the combined activities of Boise Inc.and the Predecessor for each period presented.

 

***OperatingActivities***

 

We operate in a cyclical industry, and our operating cash flows varyaccordingly. Our principal operating cash expenditures are for compensation,fiber, energy, and interest. For the six months ended June 30, 2008 and 2007, operating activities provided $32.7 million and$89.2 million of cash, respectively.

 

Relative to 2007, cash provided by operations was negatively affected bylower combined net income (loss) for the six months ended June 30, 2008, which was the primary reason for the decrease in cash provided byoperations. As discussed under “Operating Results” above, the loss in the firsthalf of 2008 reflects the impact of the DeRidder outage, as well as higherinterest expense and inventory purchase price adjustments related to thetransaction.

 

In the first half of 2008, unfavorable changes in working capital used $5.8 millionof cash from operations, while unfavorable changes in working capital used$11.6 million of cash in the first half of 2007. Working capital issubject 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.

 

Increases in the level of receivables used $13.2million of cash from operations, which is attributable primarily to increasedreceivables in the Paper segment as a result of higher sales in June 2008,compared with December 2007. Prepaid expenses increased in both of ouroperating segments, using $5.8 million of cash from operations. These increaseswere primarily due to the timing of recurring expenses. Significantlyoffsetting the increased levels of accounts receivable and prepaid expenseswere increased levels of accounts payable and accrued expenses, which provided$15.3 million in cash from operations. The higher levels of accounts payableand accrued expenses reflect higher trade accounts payable in the Paper segmentand, to a lesser extent, in the Packaging segment. The higher level of tradepayables in the Paper segment was due in large part to increased raw materialand energy costs as well as costs associated with planned maintenance downtimetaken at the International Falls, Minnesota, and Wallula, Washington, pulp andpaper mills. The increase in trade payables in the Packaging segment reflectedincreased raw material and energy costs. These favorable changes in workingcapital were partially offset by lower levels of accrued compensation.

 

***Investment Activities***

 

*Acquisition*

 

On February 22,2008, Boise Inc. acquired the Paper, Packaging, and most of the Corporate andOther segments of Boise Cascade for a total purchase price of $1.7 billion,which included $1.3 billion of

 

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net cash and fees. Boise Inc. obtained $1.1 billion of financing inconjunction with the Acquisition, which is discussed below in “FinancingActivities.”

 

*Combined investing activities of Boise Inc. andPredecessor*

 

Cash investing activities used $840.0 million for the six months ended June 30,2008, compared with $462.4 million during the same period in2007. For the six months ended June 30, 2008, investing activitiesincluded $1.2 billion in cash spent for the Acquisition, excludingdeferred financing fees, as discussed above. Investing activities for the sixmonths ended June 30, 2007, included $399.5 million of cash held intrust related to the net proceeds of the initial public offering.

 

Combined cash capital expenditures for property,plant, and equipment for the six months ended June 30, 2008, were$46.0 million. This amount includes $10.2 million spent by thePredecessor for the period of January 1, 2008, through February 21,2008, and $35.8 million spent by us from February 22, 2008, through June 30,2008. Of these amounts, $9.6 million relates to the installation of a shoepress in our DeRidder, Louisiana, mill to reduce the use of energy in producinglinerboard. We estimate****total capitalspending of $23 million for the project, part of which was spent in 2007. As ofJune 30, 2008, cumulative cash spending on this project totaled$21.6 million, with the balance to be spent in 2008.

 

For the six months ended June 30, 2007, cash investing activitiesincluded $68.7 million of capital expenditures for the purchase of property,plant, and equipment. Approximately $33 million of these expendituresrelate to the reconfiguration of the paper machine at our pulp and paper millin Wallula, Washington, to produce both pressure sensitive paper and commodityuncoated freesheet.

 

Weexpect capital investments in 2008 to total approximately $100 million to$110 million**,** excluding acquisitions. Thislevel of capital expenditures could increase or decrease as a result of anumber of factors, including our financial results and future economicconditions. Our capital spending in 2008 will be for expansion, businessimprovement and quality/efficiency projects, replacement projects, and ongoingenvironmental compliance. Our efficiency projects are focused on opportunitiesto improve our energy efficiency.

 

***Financing Activities***

 

Cash provided byfinancing activities was $828.2 million for the six months ended June 30,2008, compared with $373.5 million during the same period in 2007. Financingactivities for the six months ended June 30, 2008, reflect approximately$1.1 billion of debt financing obtained in conjunction with the Acquisition,partially offset by $120.2 million paid to stockholders who exercised theirconversion rights, $94.3 million of deferred financing costs andunderwriting fees, and $37.7 million of debt repayments. Under our $250million revolving credit facility, there was $159.2 million ofavailability at June 30, 2008. Prior to the Acquisition, financingactivities have historically consisted primarily of intercompany loans obtainedby the Predecessor.

 

Our expected debt service obligation,assuming interest rates stay at June 30, 2008, levels, is estimated to beapproximately $47.9 million for the remainder of 2008 and$95.9 million for 2009, consisting of cash payments for principal,interest, and fees. These amounts remain subject to change, and such changesmay be material. For example, a 1% increase in interest rates would increaseinterest expense by approximately $5.7 million per year (based on debtlevels and interest rates as of June 30, 2008).

 

For the six months ended June 30,2007, cash financing activities included $414.0 million of gross proceeds fromthe initial public offering on June 22, 2007, as well $3.0 million relatedto the sale of insider warrants. In conjunction with the offering, we paid$16.6 million in underwriting discounts and commissions and incurredapproximately $0.6 million in other costs related to the offering. As discussedabove in “Investing Activities,” the net amount from the offering, or $399.5million, was deposited in a trust account. These funds were released from thetrust as a result of the Acquisition.

 

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At June 30, 2008,our long-term debt and the interest rates on that debt were as follows:

 
| ** **                            | ** ** | **June 30, 2008** | ** **  |
|---------------------------------------|------------|-----------------------------|-------------|
| ** **                            | ** ** | **Amount**                  | ** **  | **Interest Rate** | ** ** |
|                                  |       | **(millions)**              |        |   |   |
| Revolving credit  facility, due 2013  |       | $                           | 65.0        |   | 5.75 | % |
| Tranche A term  loan, due 2013        |       | 248.5                       |        | 6.06 | % |
| Tranche B term  loan, due 2014        |       | 473.8                       |        | 7.50 | % |
| Second Lien term  loan, due 2015      |       | 260.7                       |        | 11.00 | % |
| Current portion  of long-term debt    |       | (12.6                       | )           | 6.61 | % |
| Long-term debt,  less current portion |       | 1,035.4                     |        | 7.94 | % |
| Current portion  of long-term debt    |       | 12.6                        |        | 6.61 | % |
|                                  |       | 1,048.0                     |        |   |   |
|                                  |       |                        |        |   |   |
| 15.75% notes  payable, due 2015       |       | 61.6                        |        | 15.75 | % |
| ** **                            |       | **$**                       | **1,109.6** |   |   |   |

 

*Senior Secured Credit Facilities*

 

 Oursenior secured credit facilities consist of:

 

·                  A five-yearnonamortizing $250.0 million senior secured revolving credit facility withinterest at either the London Interbank Offered Rate (LIBOR) plus 325 basispoints or a calculated base rate plus 325 basis points (the Revolving CreditFacility and, collectively with the Tranche A Term Loan Facility and theTranche B Term Loan Facility, the First Lien Facilities);

 

·                  A five-yearamortizing $250.0 million senior secured Tranche A Term Loan Facility withinterest 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 plus 350 basis points (subject to a floor of 4.00%) or acalculated base rate plus 250 basis points (the Tranche B Term Loan Facility);and

 

·                  A seven-yearnonamortizing $260.7 million Second Lien Term Loan Facility with interest atLIBOR plus 700 basis points (subject to a floor of 5.50%) or a calculated baserate plus 600 basis points (the Second Lien Facility and together with theFirst 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 will accrue from theAcquisition closing date and shall be payable quarterly in arrears. At June 30,2008, we had $65.0 million of borrowings outstanding under the RevolvingCredit Facility. For the six months ended June 30, 2008, the averageinterest rate for our borrowings under our Revolving Credit Facility was 6.06%.The minimum and maximum borrowings under the Revolving Credit Facility werezero and $80.0 million for the six months ended June 30, 2008. Theweighted average amount of borrowings outstanding under the Revolving CreditFacility during the six months ended June 30, 2008, was$63.9 million. At June 30, 2008, we had availability of$159.2 million, which is net of outstanding letters of credit of$25.8 million, above the amount we had borrowed.

 

The Company’s obligations under its Credit Facilities areguaranteed by each of Boise Paper Holdings, L.L.C.’s (the Borrower) existingand subsequently acquired domestic (and, to the extent no material adverse taxconsequences to BZ Intermediate Holdings LLC (Holdings) or Borrower wouldresult therefrom and as reasonably requested by the administrative agent undereach Credit Facility, foreign) subsidiaries and Holdings (collectively, the Guarantors).The First Lien Facilities are secured by a 

 

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first-prioritysecurity interest in substantially all of the real, personal, and mixedproperty of Borrower and the Guarantors, including a first-priority securityinterest in 100% of the equity interests of Borrower and each domesticsubsidiary of Holdings, 65% of the equity interests of each of Holdings’ foreignsubsidiaries (other than Boise Hong Kong Limited so long as Boise Hong KongLimited does not account for more than $2,500,000 of consolidated earningsbefore interest, taxes, depreciation, and amortization (EBITDA) during anyfiscal year of Borrower), and all intercompany debt. The Second Lien Facilityis secured by a second-priority security interest in substantially all of thereal, personal, and mixed property of Borrower and the Guarantors, including asecond-priority security interest in 100% of the equity interests of Borrowerand each domestic subsidiary of Holdings, 65% of the equity interests of eachof Holdings’ foreign subsidiaries (other than Boise Hong Kong Limited so longas Boise Hong Kong Limited does not account for more than $2,500,000 ofconsolidated EBITDA during any fiscal year of Borrower), and all intercompanydebt.

 

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

 

Subject to the provisions of the intercreditor agreementbetween the First Lien Facility and the Second Lien Facility, in the event theSecond 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” as described below.

 

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” asdescribed 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.

 

With respect to a Second Lien Facility loan on any date ofprepayment, 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 swap rate at the close of business on the third business dayprior to the date of such prepayment with the termination date nearest to themake-whole termination date plus 7.00%) plus (b) the prepayment premiumthat would be due if such prepayment were made on the day after the make-wholetermination date, in each case discounted to the date of prepayment on aquarterly basis (assuming a 360-day year and actual days elapsed) at a rateequal to the sum of such swap rate plus 0.50%.

 

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.

 

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 

 

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borrowings.Required debt principal repayments,excluding those from excess cash flows, total $5.5 million for the balanceof 2008, $15.7 million in 2009, $26.6 million in 2010,$48.5 million in 2011, $134.4 million in 2012, and$817.3 million thereafter.

 

The loan documentation for the Credit Facilities contains,among other terms, representations and warranties, covenants, events of defaultand indemnification customary for loan agreements for similar leveragedacquisition financings, and other representations and warranties, covenants,and events of default deemed by the administrative agent of the First LienFacilities or the Second Lien Facility, as applicable, to be appropriate forthe specific transaction. The First Lien Facilities require Holdings and itssubsidiaries to maintain a minimum interest coverage ratio and a maximumleverage ratio, the Second Lien Facility requires Holdings and its subsidiariesto maintain a maximum leverage ratio, and the Credit Facilities limit theability of Holdings and its subsidiaries to make capital expenditures. At June 30,2008, we were in compliance with these covenants.

 

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

 

After the transaction,Boise Cascade transferred the note payable to its parent, Boise CascadeHoldings, L.L.C., and on June 10, 2008, Boise Cascade Holdings, L.L.C.,sold the note payable to eight individual parties for a reported $53.8 millionbefore transaction costs. The full amount of the original note, as amended,together with accrued and unpaid interest from March 31, 2008, is nowrepresented by eight separate notes payable, each with terms (other than theamount) identical to the original note payable. Because none of the eightholders of the notes is related to either Boise Inc. or Boise Cascade, we nolonger record the notes as related-party notes on our Consolidated BalanceSheet.

 

The notes bear interestat 15.75% per annum (computed on the basis of a 360-day year), payablequarterly (each such quarterly payment date, an Interest Payment Date). To theextent interest is not paid in cash, interest will be added to the principalamount of the 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 latest maturitydate of any such indebtedness. At maturity, the amount of the notes will beapproximately $185.6 million, assuming none of the interest has been paidin cash.

 

We may prepay the notesat any time in whole or in part, without premium or penalty, subject to anyrestrictions contained in the 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.

 

Boise Inc. and the Predecessor had noshort- or long-term debt outstanding at December 31, 2007.

 

*Other*

 

At June 30, 2008, we had$78.9 million of costs recorded in “Deferred financing costs” on ourConsolidated Balance Sheet related to the Acquisition. The amortization ofthese costs is recorded in interest expense using the effective interest methodover the life of the loans. We recorded $2.2 million and $3.0 millionof amortization expense for the three and six months ended June 30, 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. AtJune 30, 2008, our average 

 

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effective interest rate was not affected by our interest ratederivatives, as the effective cap rates were above the interest rates on thehedged debt. For additional information on our interest rate derivatives, seeNote 14, Financial Instruments, in “Part 1-Item 1. ConsolidatedFinancial Statements” of this Form 10-Q.

 

For the six months ended June 30,2008, cash payments for interest, net of interest capitalized, was$30.6 million. No payments were made during the period of February 1(inception) through June 30, 2007, or the Predecessor period of January 1through February 21, 2008, and the six months ended June 30, 2007.

 

***Contractual Obligations***

 

For information on contractual obligations, see thediscussion under the heading “Contractual Obligations” in “Part 1-Item 2.Management’s Discussion and Analysis of Financial Conditions and Results ofOperations” in our Quarterly Report on Form 10-Q for the period ended March 31,2008. As of June 30, 2008, there have been no material changes to ourcontractual obligations outside the normal course of business.

 

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

 

At June 30,2008, and December 31, 2007, we had no off-balance-sheet arrangements withunconsolidated entities. The Predecessor had no off-balance-sheet arrangementswith unconsolidated entities at December 31, 2007.

 

***Guarantees***

 

Note 20, Commitments and Guarantees, and Note 13, Debt, of the Notesto Unaudited Quarterly Consolidated Financial Statements in “Part 1-Item1. Consolidated Financial Statements” of this Form 10-Q describe thenature of our guarantees, including the approximate terms of the guarantees,how the guarantees arose, the events or circumstances that would require us toperform under the guarantees, and the maximum potential undiscounted amounts offuture payments we could be required to make.

 

***Environmental***

 

For information on environmental issues, see Boise Inc.’s CurrentReport on Form 8-K filed with the SEC on February 28, 2008. Therehave been no material changes to Boise Inc.’s environmental information fromthat disclosed for the Predecessor in the Current Report on Form 8-K filedwith the SEC on February 28, 2008.

 

***Critical Accounting Estimates***

 

Critical accountingestimates are those that are most important to the portrayal of our financialcondition and results. These estimates require management’s most difficult,subjective, or complex judgments, often as a result of the need to estimatematters that are inherently uncertain. We review the development, selection,and disclosure of our critical accounting estimates with the Audit Committee ofour board of directors. For information about critical accounting estimates,see the discussion under the heading “Critical Accounting Estimates” in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inBoise Inc.’s Current Report on Form 8-K filed with the SEC on February 28,2008, and in our Quarterly Report on Form 10-Q for the period ended March 31,2008. As of June 30, 2008, there have been no changes in Boise Inc.’scritical accounting estimates from those the Predecessor disclosed in BoiseInc.’s Current Report on Form 8-K filed with the SEC on February 28,2008, and those disclosed in our Quarterly Report on Form 10-Q for theperiod ended March 31, 2008.

 

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

 

In May 2008, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 162, *The Hierarchyof Generally Accepted Accounting Principles*. SFAS No. 162defines the order in which accounting principles that are generally acceptedshould be followed. SFAS No. 162 is effective 60 days following theSEC’s approval of the Public Company Accounting Oversight Board amendments to 

 

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AU Section 411,*The Meaning of Present Fairly in ConformityWith Generally Accepted Accounting Principles*. We do not expect theadoption to have a material impact on our financial position or results ofoperations.

 

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. SFAS No. 161is effective for fiscal years beginning after November 15, 2008, whichwill require us to adopt these provisions in 2009. Early adoption of SFAS No. 161is permitted. We are currently evaluating the impact SFAS No. 161will have on our consolidated financial statement disclosures.

 

In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations,*and SFAS No. 160,*Accounting and Reporting of NoncontrollingInterest in Consolidated Financial Statements, an Amendment of AccountingResearch Bulletin (ARB) No. 51.* These new standards willsignificantly change the accounting for and reporting of business combinationtransactions and noncontrolling (minority) interests in consolidated financialstatements. SFAS Nos. 141(R) and 160 are required to be adoptedsimultaneously and are effective for the first annual reporting periodbeginning on or after December 15, 2008. Thus, we are required to adoptthese standards on January 1, 2009. Earlier adoption is prohibited. We arecurrently evaluating the impact of adopting SFAS Nos. 141(R) and 160 onour consolidated financial statements. However, their impact will be limited tobusiness combinations occurring on or after January 1, 2009.

 

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, of the Notes to Unaudited Quarterly Consolidated FinancialStatements in “Part 1-Item 1. Consolidated Financial Statements” of this Form 10-Q,we expanded our disclosures about fair value measurements. In accordance withthe provisions of FASB Staff Position (FSP) No. 157-2, *Effective Date of FASB Statement No. 157*, we haveelected to defer implementation of SFAS No. 157 as it relates tononfinancial assets and nonfinancial liabilities that are recognized anddisclosed at fair value in the financial statements on a nonrecurring basisuntil January 1, 2009. We do not expect the implementation to have amaterial impact on our financial position or results of operations.

 

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

 

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

 

Inaccordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, as amended, werecord all derivative instruments as assets or liabilities on our ConsolidatedBalance Sheets at fair value. The fair value of these instruments is determinedby third parties. Changes in the fair value of derivatives are recorded ineither “Net income (loss)” or “Other comprehensive income (loss),” asappropriate. The gain or loss on derivatives designated as cash flow hedges isincluded in “Other comprehensive income (loss)” in the period in which changesin fair value occur and is reclassified to income (loss) in the period in whichthe hedged item affects income (loss), and any ineffectiveness is recognizedcurrently in our Consolidated Statements of Income (Loss). The fair value ofthe hedged 

 

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exposure is presumed to be themarket value of the hedge instrument when critical terms match. The gain orloss on derivatives designated as fair value hedges and the offsetting gain orloss on the hedged item attributable to the hedged risk are included in income(loss) in the period in which changes in fair value occur. The gain or loss onderivatives that have not been designated as hedging instruments is included inincome (loss) in the period in which changes in fair value occur.

 

*Interest Rate Risk*

 

Withthe exception of the 15.75% notes payable, maturing in August 2015, ourdebt is variable-rate debt. At June 30, 2008, the estimated value of thenotes payable, based on then-current interest rates for similar obligationswith like maturities, was approximately $7.4 million less than the amountrecorded on our Consolidated Balance Sheet.

 

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. Wepurchased interest rate caps with a term of three years and a cap rate of 5.50%on a notional amount of $260.0 million to hedge the interest rate on ourSecond Lien Facility. We also purchased interest rate caps to hedge part of theinterest rate risk on our Tranche B Term Loan Facility with a cap rate of 5.00%on a notional amount of $425.0 million for the period of April 21,2008, through March 31, 2009; a notional amount of $350.0 million for theperiod of March 31, 2009, through March 31, 2010; and a notionalamount of $300.0 million for the period of March 31, 2010, through March 31,2011.

 

*Second Lien Facility.*We account for the interest ratederivatives with a notional of $260.0 million that hedge our exposure tointerest rate fluctuations on our Second Lien Facility as economic hedges. At June 30, 2008, we recorded the fair value of the interest ratederivatives, or $1.2 million, in “Other assets” on our ConsolidatedBalance Sheet. During the three and six months ended June 30, 2008, werecorded the change in fair value of these derivatives, or $0.5 million ofexpense, in “Change in fair value of interest rate derivatives” in ourConsolidated Statements of Income (Loss).

 

*FirstLien Facility.*Weaccount for the interest rate derivatives that hedge part of the interest raterisk on our Tranche B Term Loan Facility as cash flow 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 June 30, 2008, we recorded the fair value of the interest rate derivatives, or$2.1 million, in “Other assets” and the change in the fair value of thesederivatives in “Accumulated other comprehensive income” on our ConsolidatedBalance Sheet. At June 30, 2008, assuming no changes in interest rates,we expect to reclassify $0.2 million of amounts recorded in “Accumulatedother comprehensive income” as a decrease in interest expense during theremainder of 2008. At June 30, 2008, there was no ineffectiveness relatedto these hedges.

 

*Energy Risk*

 

Forinformation on our energy risk, see “Factors That Affect Operating Results” in “Part 1-Item2. Management’s Discussion and Analysis of Financial Conditions and Results ofOperations” of this Form 10-Q.

 

*Foreign Currency Risk*

 

AtJune 30, 2008, we had no material foreign currency risk.

 

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*Predecessor*

 

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

 

*Fair Value Measurements*

 

In accordance with theprovisions of FASB Staff Position FSP No. 157-2 (see Note 15, New andRecently Adopted Accounting Standards of the Notes to Unaudited QuarterlyConsolidated Financial Statements in “Item 1. Consolidated Financial Statements”of this form 10-Q), we have applied the provisions of SFAS No. 157 only toour financial assets and liabilities recorded at fair value, which consist offinancial instruments that are used to hedge exposures to interest rate andenergy risks. For these financial instruments, fair value is determined at eachbalance sheet date based on LIBOR rates and interest rate curves and NYMEXprice quotations, respectively, under the terms of the contracts using currentmarket information as of the reporting date. The following table provides asummary of the inputs used to develop these estimated fair values under thehierarchy defined in SFAS No. 157:

 
| ** **                     | ** ** | **Fair Value Measurements at June 30, 2008, Using** | ** ** |
|--------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                                                              | ** ** | **Quoted Prices  in Active  Markets for  Identical   Assets   (Level 1)** | ** ** | **Significant   Other   Observable   Inputs   (Level 2)** | ** ** | **Significant  Unobservable  Inputs   (Level 3)** | ** ** |
| ** **                     |       | **(millions)**                                                                         |       |
| Assets:                        |       |                                                                                   |       |   |   |   |   |   |   |
| Interest rate  derivatives (a) |       | $                                                                                      | 3.3        |   | $ | — |   | $ | 3.3 |   | $ | — |   |
| Energy  derivatives (b)        |       | 4.0                                                                                    |       | — |   | 4.0 |   | — |   |
| ** **                     | ** ** | **$**                                                                                  | **7.3**    | ** ** | **$** | **—** | ** ** | **$** | **7.3** | ** ** | **$** | **—** |   |
|                           |       |                                                                                   |       |   |   |   |   |   |   |
| Liabilities                    |       | —                                                                                 |       | — |   | — |   | — |   |
| ** **                     | ** ** | **$**                                                                                  | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

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(a)           Includes $3.3 millionrecorded in “Other assets” on ourConsolidated Balance Sheet.

 

(b)           Includes $4.0 millionrecorded in “Receivables, Other” on ourConsolidated Balance Sheet.

 

As of June 30, 2008,we did not have any fair value measurements using significant unobservableinputs (Level 3).

** **

** **

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

 

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

 

*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 inour reports filed under the Exchange Act, such as this Form 10-Q, isrecorded, processed, summarized, and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms. We have alsodesigned our disclosure controls to provide reasonable assurance that suchinformation is accumulated and 

 

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communicated to our senior management,including the chief executive officer (CEO) and chief financial officer (CFO),as appropriate, 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 participationof our CEO and CFO, has evaluated the effectiveness of the design and operationof our disclosure controls and procedures as of the end of the quarter coveredby the quarterly report on this Form 10-Q. Based on that evaluation, theCEO and CFO 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.

 

As a result of management’sevaluation of the design and operation of our disclosure controls and procedures,we identified a number of changes during the first quarter of 2008 thatmaterially affected, or would be reasonably likely to materially affect, thecompany’s internal control over financial reporting. All of these changesrelated to the Acquisition of the packaging and paper assets of Boise Cascade.Specifically, as a result of the Acquisition, our existing financial reportingprocesses were all expanded and/or modified. To accommodate the Acquisition ofour operating assets, we implemented significant disclosure controls andprocedures related to financial reporting, revenue and receivables, purchasingand payables, property and equipment, treasury, inventory, payroll, employeebenefits, nonrecurring transactions, information technology, and other controlfunctions. The vast majority of these controls and procedures had beenimplemented previously by Boise Cascade.

 

Inaddition, and also in conjunction with the Acquisition, we have enhanced ourgovernance framework through the formation of new board committees(Compensation, Governance, and Executive Committees) and the adoption andimplementation of a new code of ethics, governance guidelines, disclosurecommittee and procedures, and standing board resolutions that govern theauthority delegated to management. This governance framework is intended toensure that information and communication flows are effective and to monitorperformance, including performance of internal control procedures.

 

*Limitations on the Effectiveness of Controls andProcedures*

 

In designing and evaluating ourdisclosure controls and procedures, we recognize that disclosure controls andprocedures, no matter how well-conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the disclosurecontrols and procedures are met. Additionally, in designing disclosure controlsand procedures, our management necessarily was required to apply its judgmentin evaluating 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.

 

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**PART II—OTHER INFORMATION**

 

 

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

 

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 financial position, resultsof operations, or cash flows.

 

 

***ITEM 1A.******          ******RISKFACTORS***

 

This Quarterly Report on Form 10-Qcontains forward-looking statements. Statements that are not historical orcurrent facts, including statements about our expectations, anticipatedfinancial results, projected capital expenditures, and future business prospects,are forward-looking statements. You can identify these statements by our use ofwords such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,”and other similar expressions. You can find examples of these statementsthroughout this report, including the “Recent Trends and Operational Outlook”section of “Management’s Discussion and Analysis of Financial Condition andResults of Operations.” We cannot guarantee that our actual results will beconsistent with the forward-looking statements we make in this report. Youshould review carefully the risk factors listed in “Item 1A. Risk Factors” ofour Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q,as well as those factors listed in other documents we file with the SEC. We donot assume an obligation to update any forward-looking statements. There havebeen no material changes to our risk factors as of June 30, 2008, fromthose disclosed previously in our Quarterly Report on Form 10-Q for theperiod ended March 31, 2008.

 

 

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

 

None.

 

 

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

 

None.

 

 

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

 

None.

 

 

***ITEM 5.******             ******OTHERINFORMATION***

 

(a)   None.

 

(b)   On and effective July 11, 2008, our board ofdirectors amended and restated the company’s bylaws. The company amended Article IIof its bylaws to revise the deadline for advance notice required for astockholder to bring a matter before an annual meeting of stockholders. Underthe amended bylaws, notice may be given no earlier than 120 days (previously 90days) or more than 150 days (previously 120 days) prior to the firstanniversary date of the preceding year’s annual meeting (previously the datethat proxy materials were first mailed to stockholders). To bring businessbefore the company’s annual meeting to be held in 2009, stockholders must givenotice no later than December 1, 2008, and no sooner than November 1,2008. A stockholder may have to comply with additional advance noticeprovisions with respect to proposals the stockholder wishes to have included inthe company’s proxy statement.

 

The company’s amended bylawsalso require a stockholder’s notice to include additional information aboutdirector nominees and about the stockholder (and beneficial owner, ifapplicable) bringing business before a stockholder’s meeting. These enhanceddisclosure 

 

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requirements relate to nomineeand/or proponent’s ownership positions in the company’s securities, as well asother information regarding economic interests of the nominee and/or proponentin the company.

 

 

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

 

Requiredexhibits are listed in the Index to Exhibits and 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:August 6, 2008

 

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**BOISE INC.**

 

**INDEX TOEXHIBITS**

 

Filed With the Quarterly Report on Form 10-Q for the Quarter Ended June 30,2008

 
| **Number** | ** ** | **Description**                                                                                                                                         |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                    |
| 3 (a)      |       | Bylaws of Boise Inc., Amended and Restated Effective as of July 11,  2008                                                                          |
|       |       |                                                                                                                                                    |
| 10.1       |       | 2008 Annual Incentive Award Notifications with respect to Boise Inc.  Incentive and Performance Plan                                                    |
|       |       |                                                                                                                                                    |
| 10.2       |       | Form of Restricted Stock Award Agreement for Non-Employee  Directors                                                                               |
|       |       |                                                                                                                                                    |
| 10.3       |       | Form of Restricted Stock Unit Award Agreement for Non-Employee  Directors                                                                          |
|       |       |                                                                                                                                                    |
| 10.4 (b)   |       | Form of Restricted Stock Award Agreement for Officers                                                                                              |
|       |       |                                                                                                                                                    |
| 10.5 (b)   |       | Form of Restricted Stock Unit Award Agreement for Officers                                                                                         |
|       |       |                                                                                                                                                    |
| 10.6 (c)   |       | Letter Agreement dated May 22, 2008, between Boise Inc., Boise  Paper Holdings, L.L.C., Boise Cascade Holdings, L.L.C., and Boise Cascade,  L.L.C. |
|       |       |                                                                                                                                                    |
| 10.7 (d)   |       | Severance Letter dated May 9, 2008, by and between Miles A.  Hewitt and Boise Paper Holdings, L.L.C.                                               |
|       |       |                                                                                                                                                    |
| 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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| (a)       |   | Filed as Exhibit 3.1 to Current Report on Form 8-K filed July 14,  2008, and incorporated herein by reference.                        |
|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|      |   |                                                                                                                                                 |
| (b)       |   | Filed as Exhibits 99.1 and 99.2, respectively, to Current Report on Form 8-K  filed May 6, 2008, and incorporated herein by reference.     |
|      |   |                                                                                                                                                 |
| (c)       |   | Filed as Exhibit 99.1 to Current Report on Form 8-K filed May 29,  2008, and incorporated herein by reference.                        |
|      |   |                                                                                                                                                 |
| (d)  |   | Filed as Exhibit 10.22 to Post-Effective Amendment No. 1 to Form S-1  filed June 13, 2008, and incorporated herein by reference. |

 

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