Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-Q**

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

 

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

 

**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 ofregistrant as specified in its charter)

 

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

 

**1111West Jefferson Street, Suite 200Boise, Idaho 83702-5388**

(Address of principal executive offices) (Zip Code)

 

**(208)384-7000**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements 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. See the definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

Large accelerated filer o          Acceleratedfiler o          Non-acceleratedfiler x          Smallerreporting 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 October 31, 2008** |
|---------------------------------|------------|-----------------------------------------------------|
| Common Stock,  $.0001 Par Value |       | 79,722,147                                          |

 

 

 

----

Tableof Contents

 

**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 | 20 |
|                                        | 15. | New and  Recently Adopted Accounting Standards | 23 |
|                                        | 16. | Retirement and  Benefit Plans | 24 |
|                                        | 17. | Stockholders’ Equity | 25 |
|                                        | 18. | Comprehensive  Income (Loss) | 29 |
|                                        | 19. | Segment Information | 29 |
|                                        | 20. | Commitments and  Guarantees | 33 |
|                                        | 21. | Legal  Proceedings and Contingencies | 34 |
|                                        |   |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 34 |
|                                        |   | Understanding  Our Financial Information | 34 |
|                                        |   | Background and Executive Overview | 34 |
|                                        |   | Acquisition  of Boise Cascade’s Paper and Packaging Operations | 35 |
|                                        |   | Our Segments | 37 |
|                                        |   | Recent  Trends and Operational Outlook | 38 |
|                                        |   | Factors  That Affect Operating Results | 40 |
|                                        |   | Operating Results | 46 |
|                                        |   | Industry Mergers and Acquisitions | 53 |
|                                        |   | Liquidity and Capital Resources | 53 |
|                                        |   | Contractual  Obligations | 60 |
|                                        |   | Off-Balance-Sheet  Activities | 60 |
|                                        |   | Guarantees | 60 |
|                                        |   | Environmental | 60 |
|                                        |   | Critical  Accounting Estimates | 60 |
|                                        |   | New and  Recently Adopted Accounting Standards | 62 |
|                                        |   |   |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk | 63 |
|                                        |   |   |
| Item 4T.                               | Controls and  Procedures | 65 |
|                                        |   |   |
| **PART II—OTHER  INFORMATION**    |
| Item 1.                                | Legal Proceedings | 67 |
|                                        |   |   |
| Item 1A.                               | Risk Factors | 67 |
|                                        |   |   |
| Item 2.                                     | Unregistered  Sales of Equity Securities and Use of Proceeds | 67 |
|                                        |   |   |
| Item 3.                                     | Defaults  Upon Senior Securities | 67 |
|                                        |   |   |
| Item 4.                                     | Submission  of Matters to a Vote of Securityholders | 67 |
|                                        |   |   |
| Item 5.                                     | Other Information | 68 |
|                                        |   |   |
| Item 6.                                | Exhibits | 68 |

 

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.

 

i

----

Tableof Contents

 

**PART I—FINANCIAL INFORMATION**

 

***ITEM1.******                                                ******CONSOLIDATED FINANCIAL 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  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** **      | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** |
| ** **                                         | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Sales**                                          | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| Trade                                              |       | $                                                  | 610,909    |                                               | $               | —     |   |   | $ | 409,393 |   |
| Related parties                                    |       | 22,209                                             |       | —                                             |            |       | 174,337 |   |
|                                               |       | 633,118                                            |       | —                                             |            |       | 583,730 |   |
|                                               |       |                                               |       |                                               |            |       |   |   |
| **Costs  and expenses**                            | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses    |       | 526,731                                            |       | —                                             |            |       | 472,865 |   |
| Fiber costs from  related parties                  |       | 21,213                                             |       | —                                             |            |       | 9,527 |   |
| Depreciation,  amortization, and depletion         |       | 31,426                                             |       | —                                             |            |       | 22,969 |   |
| Selling and  distribution expenses                 |       | 13,803                                             |       | —                                             |            |       | 14,720 |   |
| General and  administrative expenses               |       | 9,891                                              |       | 134                                                |            |       | 12,608 |   |
| Other (income)  expense, net                       |       | (36                                                | )          | —                                             |            |       | 317 |   |
|                                               |       | 603,028                                            |       | 134                                                |            |       | 533,006 |   |
| ** **                                         | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Income  (loss) from operations**                 |       | 30,090                                             |       | (134                                               | )               |       | 50,724 |   |
|                                               |       |                                               |       |                                               |            |       |   |   |
| Foreign exchange  gain (loss)                      |       | (449                                               | )          | —                                             |            |       | 605 |   |
| Change in fair  value of interest rate derivatives |       | (306                                               | )          | —                                             |            |       | — |   |
| Interest expense                                   |       | (27,484                                            | )          | (3                                                 | )               |       | — |   |
| Interest income                                    |       | 153                                                |       | 5,259                                              |            |       | 190 |   |
|                                               |       | (28,086                                            | )          | 5,256                                              |            |       | 795 |   |
|                                               |       |                                               |       |                                               |            |       |   |   |
| **Income  before income taxes**                    |       | 2,004                                              |       | 5,122                                              |            |       | 51,519 |   |
| Income tax  (provision) benefit                    |       | 2,379                                              |       | (2,331                                             | )               |       | (1,301 | ) |
| **Net  income**                                    | ** ** | **$**                                              | **4,383**  | ** **                                         | **$**           | **2,791**  | ** ** | ** ** | **$** | **50,218** | ** ** |
| ** **                                         | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Weighted  average common shares outstanding:**   | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Basic**                                          | ** ** | **77,259,947**                                     | ** ** | **51,750,000**                                     |            |       | — |   |
| **Diluted**                                        | ** ** | **78,438,847**                                     | ** ** | **51,750,000**                                     |            |       | — |   |
| ** **                                         | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Net  income per common share:**                  | ** ** | ** **                                         | ** ** | ** **                                         | ** **      | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **$**                                              | **0.06**   | ** **                                         | **$**           | **0.05**   | ** ** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

1

----

Tableof Contents

 

**BoiseInc.**

**(FormerlyAldabra 2 Acquisition Corp., a Corporation in the Development Stage)**

**Consolidated Statements of Income (Loss)**

(unaudited, inthousands, except share data)

 
| ** **                                         | ** ** | **Boise Inc.**                               | ** **  | ** **                                                          | **Predecessor** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------------|-------------|---------------------------------------------------------------------|-----------------|------------|
| ** **                                         | ** ** | **Nine  Months  Ended  September 30,  2008** | ** **  | **February 1  (Inception)  Through  September 30,  2007** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
| ** **                                         | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Sales**                                          | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trade                                              |       | $                                                 | 1,423,536   |                                                                | $               | —     |   |   | $ | 258,430 |   | $ | 1,215,777 |   |
| Related parties                                    |       | 55,977                                            |        | —                                                              |            |       | 101,490 |   | 529,276 |   |
|                                               |       | 1,479,513                                         |        | —                                                              |            |       | 359,920 |   | 1,745,053 |   |
|                                               |       |                                              |        |                                                                |            |       |   |   |   |   |
| **Costs  and expenses**                            | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Materials,  labor, and other operating expenses    |       | 1,266,250                                         |        | —                                                              |            |       | 313,931 |   | 1,464,284 |   |
| Fiber costs from  related parties                  |       | 46,857                                            |        | —                                                              |            |       | 7,662 |   | 30,834 |   |
| Depreciation,  amortization, and depletion         |       | 76,862                                            |        | —                                                              |            |       | 477 |   | 84,536 |   |
| Selling and  distribution expenses                 |       | 34,563                                            |        | —                                                              |            |       | 9,097 |   | 43,587 |   |
| General and  administrative expenses               |       | 26,702                                            |        | 152                                                                 |            |       | 6,606 |   | 32,335 |   |
| Other (income)  expense, net                       |       | (160                                              | )           | —                                                              |            |       | (989 | ) | (567 | ) |
|                                               |       | 1,451,074                                         |        | 152                                                                 |            |       | 336,784 |   | 1,655,009 |   |
| ** **                                         | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income  (loss) from operations**                 |       | 28,439                                            |        | (152                                                                | )               |       | 23,136 |   | 90,044 |   |
|                                               |       |                                              |        |                                                                |            |       |   |   |   |   |
| Foreign exchange  gain (loss)                      |       | (1,511                                            | )           | —                                                              |            |       | 54 |   | 1,207 |   |
| Change in fair  value of interest rate derivatives |       | 204                                               |        | —                                                              |            |       | — |   | — |   |
| Interest expense                                   |       | (65,064                                           | )           | (3                                                                  | )               |       | (2 | ) | — |   |
| Interest income                                    |       | 2,152                                             |        | 5,769                                                               |            |       | 161 |   | 475 |   |
|                                               |       | (64,219                                           | )           | 5,766                                                               |            |       | 213 |   | 1,682 |   |
|                                               |       |                                              |        |                                                                |            |       |   |   |   |   |
| **Income  (loss) before income taxes**             |       | (35,780                                           | )           | 5,614                                                               |            |       | 23,349 |   | 91,726 |   |
| Income tax  (provision) benefit                    |       | 5,742                                             |        | (2,555                                                              | )               |       | (563 | ) | (2,982 | ) |
| **Net  income (loss)**                             | ** ** | **$**                                             | **(30,038** | **)**                                                               | **$**           | **3,059**  | ** ** | ** ** | **$** | **22,786** | ** ** | **$** | **88,744** | ** ** |
| ** **                                         | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Weighted  average common shares outstanding:**   | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **72,418,643**                                    | ** **  | **27,628,512**                                                      |            |       | — |   | — |   |
| ** **                                         | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  income (loss) per common share:**           | ** ** | ** **                                        | ** **  | ** **                                                          | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted**                             | ** ** | **$**                                             | **(0.41**   | **)**                                                               | **$**           | **0.11**   | ** ** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

2

----

Tableof Contents

 

**Boise Inc.**

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

**Consolidated Balance Sheets**

(unaudited, in thousands)

 
| ** **                                           | ** ** | **Boise Inc.**          | ** **    | ** **                  | **Predecessor** | ** **  |
|------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|-----------------|-------------|
| ** **                                           | ** ** | **September 30,  2008** | ** **    | **December 31,  2007** | ** **      | ** **  | **December 31,  2007** | ** ** |
|                                                 |       |                         |          |                        |            |        |   |   |
| **ASSETS**                                           |       |                         |          |                        |            |        |   |   |
|                                                 |       |                         |          |                        |            |        |   |   |
| **Current**                                          |       |                         |          |                        |            |        |   |   |
| Cash and cash  equivalents                           |       | $                            | 27,128        |                        | $               | 186         |   |   | $ | 8 |   |
| Cash held in  trust                                  |       | —                       |          | 403,989                     |            |        | — |   |
| Receivables                                          |       |                         |          |                        |            |        |   |   |
| Trade, less  allowances of $880, $0, and $1,063 |       | 245,141                      |          | —                      |            |        | 181,799 |   |
| Related parties                                      |       |                         | 4,154         |                        | —          |        |   | 36,452 |   |
| Other                                                |       | 5,451                        |          | —                      |            |        | 10,224 |   |
| Inventories                                          |       | 334,502                      |          | —                      |            |        | 324,679 |   |
| Deferred income  taxes                               |       | 15,137                       |          | 85                          |            |        | — |   |
| Other                                                |       | 13,570                       |          | 59                          |            |        | 6,936 |   |
|                                                 |       | 645,083                      |          | 404,319                     |            |        | 560,098 |   |
|                                                 |       |                         |          |                        |            |        |   |   |
| **Property**                                         |       |                         |          |                        |            |        |   |   |
| Property and  equipment, net                         |       | 1,286,450                    |          | —                      |            |        | 1,192,344 |   |
| Fiber farms and  deposits                            |       | 14,213                       |          | —                      |            |        | 17,843 |   |
|                                                 |       | 1,300,663                    |          | —                      |            |        | 1,210,187 |   |
|                                                 |       |                         |          |                        |            |        |   |   |
| **Deferred  financing costs**                        |       | 75,368                       |          | —                      |            |        | — |   |
| **Goodwill**                                         |       | —                       |          | —                      |            |        | 42,218 |   |
| **Intangible  assets, net**                          |       | 35,860                       |          | —                      |            |        | 23,967 |   |
| **Other  assets**                                    |       | 6,929                        |          | 3,293                       |            |        | 9,242 |   |
| **Total  assets**                                    | ** ** | **$**                        | **2,063,903** | ** **                  | **$**           | **407,612** | ** ** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

3

----

Tableof Contents

 

**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** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|-----------------|-------------|
| ** **                                                                                                                                                                                                                             | ** ** | **September 30,  2008** | ** **    | **December 31,  2007** | ** **      | ** **  | **December 31,  2007** | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                         |       |                         |          |                        |            |        |   |   |
|                                                                                                                                                                                                                                   |       |                         |          |                        |            |        |   |   |
| **Current**                                                                                                                                                                                                                            |       |                         |          |                        |            |        |   |   |
| Current portion  of long-term debt                                                                                                                                                                                                     |       | $                            | 14,125        |                        | $               | —      |   |   | $ | — |   |
| Income taxes  payable                                                                                                                                                                                                                  |       | 450                          |          | 1,280                       |            |        | 306 |   |
| Accounts payable                                                                                                                                                                                                                       |       |                         |          |                        |            |        |   |   |
| Trade                                                                                                                                                                                                                                  |       | 209,049                      |          | —                      |            |        | 178,686 |   |
| Related parties                                                                                                                                                                                                                        |       | 9,427                        |          | —                      |            |        | 299 |   |
| Accrued  liabilities                                                                                                                                                                                                                   |       |                         |          |                        |            |        |   |   |
| Compensation and  benefits                                                                                                                                                                                                             |       | 44,532                       |          | —                      |            |        | 53,573 |   |
| Interest payable                                                                                                                                                                                                                       |       | 753                          |          | —                      |            |        | — |   |
| Deferred  underwriting fee                                                                                                                                                                                                             |       | —                       |          | 12,420                      |            |        | — |   |
| Other                                                                                                                                                                                                                                  |       | 23,524                       |          | 1,015                       |            |        | 16,716 |   |
|                                                                                                                                                                                                                                   |       | 301,860                      |          | 14,715                      |            |        | 249,580 |   |
|                                                                                                                                                                                                                                   |       |                         |          |                        |            |        |   |   |
| **Debt**                                                                                                                                                                                                                               |       |                         |          |                        |            |        |   |   |
| Long-term debt,  less current portion                                                                                                                                                                                                  |       | 1,031,075                    |          | —                      |            |        | — |   |
| Notes payable                                                                                                                                                                                                                          |       | 64,083                       |          | —                      |            |        | — |   |
|                                                                                                                                                                                                                                   |       | 1,095,158                    |          | —                      |            |        | — |   |
|                                                                                                                                                                                                                                   |       |                         |          |                        |            |        |   |   |
| **Other**                                                                                                                                                                                                                              |       |                         |          |                        |            |        |   |   |
| Deferred income  taxes                                                                                                                                                                                                                 |       | 22,448                       |          | —                      |            |        | 896 |   |
| Compensation and  benefits                                                                                                                                                                                                             |       | 63,747                       |          | —                      |            |        | 6,030 |   |
| Other long-term  liabilities                                                                                                                                                                                                           |       | 31,060                       |          | —                      |            |        | 29,427 |   |
|                                                                                                                                                                                                                                   |       | 117,255                      |          | —                      |            |        | 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                                                                                                                                                                                                            |       | 573,990                      |          | 227,640                     |            |        | — |   |
| Accumulated  other comprehensive income                                                                                                                                                                                                |       | 178                          |          | —                      |            |        | — |   |
| Income  accumulated during development stage                                                                                                                                                                                           |       | —                       |          | 5,492                       |            |        | — |   |
| Accumulated  deficit                                                                                                                                                                                                                   |       | (24,546                      | )             | —                      |            |        | — |   |
| **Total  stockholders’ equity**                                                                                                                                                                                                   |       | 549,630                      |          | 233,137                     |            |        | 1,559,779 |   |
|                                                                                                                                                                                                                                   |       |                         |          |                        |            |        |   |   |
| **Total  liabilities and stockholders’ equity**                                                                                                                                                                                   | ** ** | **$**                        | **2,063,903** | ** **                  | **$**           | **407,612** | ** ** | ** ** | **$** | **1,845,712** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

4

----

Tableof Contents

 

**Boise Inc.**

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

**Consolidated Statements of Cash Flows**

(unaudited, in thousands)

 
| ** **                                                                       | ** ** | **Boise Inc.**                               | ** ** | ** **                                                          | **Predecessor** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------|-----------------|------------|
| ** **                                                                       | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **February 1  (Inception)  Through  September 30,  2007** | ** **      | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
| **Cash  provided by (used for) operations**                                      |       |                                              |       |                                                                |            |       |   |   |   |   |
| Net income  (loss)                                                               |       | $                                                 | (30,038    | )                                                                   | $               | 3,059      |   |   | $ | 22,786 |   | $ | 88,744 |   |
| Items in net  income (loss) not using (providing) cash                           |       |                                              |       |                                                                |            |       |   |   |   |   |
| Depreciation,  amortization, and depletion of deferred financing costs and other |       | 83,803                                            |       | —                                                              |            |       | 477 |   | 84,536 |   |
| Share-based  compensation expense                                                |       | 1,934                                             |       | —                                                              |            |       | — |   | — |   |
| Related-party  interest expense                                                  |       | 2,760                                             |       | —                                                              |            |       | — |   | — |   |
| Notes payable  interest expense                                                  |       | 2,989                                             |       | —                                                              |            |       | — |   | — |   |
| Interest income  on cash held in trust                                           |       | —                                            |       | (5,766                                                              | )               |       | — |   | — |   |
| Pension and  other postretirement benefit expense                                |       | 7,128                                             |       | —                                                              |            |       | 1,826 |   | 9,938 |   |
| Deferred income  taxes                                                           |       | (5,742                                            | )          | —                                                              |            |       | 11 |   | 130 |   |
| Change in fair  value of energy derivatives                                      |       | 7,471                                             |       | —                                                              |            |       | (37 | ) | 375 |   |
| Change in fair  value of interest rate derivatives                               |       | (204                                              | )          | —                                                              |            |       | — |   | — |   |
| Gain on changes  in retiree healthcare programs                                  |       | —                                            |       | —                                                              |            |       | — |   | (4,367 | ) |
| (Gain) loss on  sales of assets, net                                             |       | 4                                                 |       | —                                                              |            |       | (943 | ) | 1,271 |   |
| Other                                                                            |       | 1,511                                             |       | —                                                              |            |       | (54 | ) | (1,207 | ) |
| Decrease  (increase) in working capital, net of acquisitions                     |       |                                              |       |                                                                |            |       |   |   |   |   |
| Receivables                                                                      |       | (1,851                                            | )          | —                                                              |            |       | (23,522 | ) | (31,030 | ) |
| Inventories                                                                      |       | (20,660                                           | )          | —                                                              |            |       | 5,343 |   | (8,083 | ) |
| Prepaid expenses                                                                 |       | (5,400                                            | )          | (53                                                                 | )               |       | 875 |   | (793 | ) |
| Accounts payable  and accrued liabilities                                        |       | 29,869                                            |       | 14                                                                  |            |       | (10,718 | ) | 8,001 |   |
| Current and  deferred income taxes                                               |       | (1,488                                            | )          | 2,463                                                               |            |       | 335 |   | 1,831 |   |
| Pension and  other postretirement benefit payments                               |       | (291                                              | )          | —                                                              |            |       | (1,826 | ) | (9,938 | ) |
| Other                                                                            |       | (3,388                                            | )          | —                                                              |            |       | 2,326 |   | 548 |   |
| Cash provided by  (used for) operations                                          |       | 68,407                                            |       | (283                                                                | )               |       | (3,121 | ) | 139,956 |   |
|                                                                             |       |                                              |       |                                                                |            |       |   |   |   |   |
| **Cash  provided by (used for) investment**                                      |       |                                              |       |                                                                |            |       |   |   |   |   |
| Acquisition of  businesses and facilities                                        |       | (1,215,641                                        | )          | (694                                                                | )               |       | — |   | — |   |
| Cash released  from (held in) trust, net                                         |       | 403,989                                           |       | (398,765                                                            | )               |       | — |   | — |   |
| Expenditures for  property and equipment                                         |       | (58,928                                           | )          | —                                                              |            |       | (10,168 | ) | (106,021 | ) |
| Sales of assets                                                                  |       | 241                                               |       | —                                                              |            |       | 17,662 |   | 5,163 |   |
| Other                                                                            |       | (1,838                                            | )          | —                                                              |            |       | 863 |   | 1,759 |   |
| Cash provided by  (used for) investment                                          |       | (872,177                                          | )          | (399,459                                                            | )               |       | 8,357 |   | (99,099 | ) |
|                                                                             |       |                                              |       |                                                                |            |       |   |   |   |   |
| **Cash  provided by (used for) financing**                                       |       |                                              |       |                                                                |            |       |   |   |   |   |
| Issuances of  long-term debt                                                     |       | 1,105,700                                         |       | —                                                              |            |       | — |   | — |   |
| Payments of  long-term debt                                                      |       | (60,500                                           | )          | —                                                              |            |       | — |   | — |   |
| 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 | ) | (40,856 | ) |
| Other                                                                            |       | —                                            |       | (640                                                                | )               |       | — |   | — |   |
| Cash provided by  (used for) financing                                           |       | 830,712                                           |       | 399,825                                                             |            |       | (5,237 | ) | (40,856 | ) |
|                                                                             |       |                                              |       |                                                                |            |       |   |   |   |   |
| **Increase  (decrease) in cash and cash equivalents**                            |       | 26,942                                            |       | 83                                                                  |            |       | (1 | ) | 1 |   |
|                                                                             |       |                                              |       |                                                                |            |       |   |   |   |   |
| **Balance  at beginning of the period**                                          |       | 186                                               |       | —                                                              |            |       | 8 |   | 7 |   |
| **Balance  at end of the period**                                                | ** ** | **$**                                             | **27,128** | ** **                                                          | **$**           | **83**     | ** ** | ** ** | **$** | **7** | ** ** | **$** | **8** | ** ** |

 

See accompanying notes tounaudited quarterly consolidated financial statements.

 

5

----

Tableof Contents

 

***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****ninemonths ended September 30, 2008, and cash flows for the nine months ended September 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 September 30, 2008. The consolidated statements of income(loss) for the period of January 1 through February 21, 2008, and forthe three and nine months ended September 30, 2007, and the consolidatedstatements of cash flows for the period of January 1 through February 21,2008, and the nine months ended September 30, 2007, of the Predecessor arepresented for comparative purposes. The three months ended September 30,2007, and the period of 

 

6

----

Tableof Contents

 

February 1(inception) through September 30, 2007, represents the activities ofAldabra 2 Acquisition Corp.

 

The quarterly consolidated financial statementspresented have not been audited by an independent registered public accountingfirm but, in the opinion of management, include all adjustments, consisting ofnormal, recurring adjustments, necessary to present fairly the results for the periodspresented. The preparation of the consolidated financial statements involvesthe use of estimates and accruals. Actual results may vary from thoseestimates. Quarterly results are not necessarily indicative of results that maybe expected for the full year. These condensed notes to unaudited consolidatedfinancial statements should be read in conjunction with our Quarterly Reportson Form 10-Q, our 2007 Annual Report on Form 10-K, and the auditedconsolidated financial statements and footnotes included in Boise Inc.’sCurrent Report on Form 8-K filed with the Securities and ExchangeCommission (SEC) on February 28, 2008, which includes the accountingpolicies of the Predecessor that we adopted in conjunction with theAcquisition, as well as the other reports we file with the SEC.

 

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 the Predecessorwere a separate taxable entity. For the period of January 1 through February 21,2008, and the three and nine months ended September 30, 2007, the majorityof the businesses and assets of the Predecessor were held and operated bylimited liability companies, which are not subject to entity-level federal orstate income taxation. In addition to the businesses and assets held andoperated by limited liability companies, the Predecessor had taxablecorporations subject to federal, state, and local income taxes for which taxeswere recorded. Information on the allocations and related-party transactions isincluded in Note 4, Transactions With Related Parties.

 

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

 

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

 

On February 22,2008, we acquired the paper, packaging, and most of the corporate and othersegments of Boise Cascade for cash and securities. 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 direct transaction costs and purchase price adjustments,are summarized as follows:

 

7

----

Table of Contents

 
| ** **                                               | ** ** | **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 $9.15  average price per share                 |       | 346,395                     |          |
| Lack of  marketability discount                          |       | (41,567                     | )             |
| Total equity                                             |       | 304,828                     |          |
|                                                     |       |                        |          |
| Note payable to  Boise Cascade at closing                |       | 41,000                      |          |
| Working capital  adjustment                              |       | 17,334                      |          |
| Total note  payable to Boise Cascade                     |       | 58,334                      |          |
|                                                     |       |                        |          |
| Fees and  expenses                                       |       | 60,967                      |          |
|                                                     |       |                        |          |
| Total purchase  price                                    | ** ** | **$**                       | **1,663,325** | ** ** |

 

*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 $58.3 millioneffective February 22, 2008. The increase of the note reflects$17.3 million of postclosing 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 for$53.8 million, including accrued interest but before transaction costs.The full amount of the original note, as amended, together with accrued andunpaid interest from March 31, 2008, is now represented by eight separatenotes payable, each with terms (other than the amount) identical to theoriginal note payable. Because none of the eight holders of the notes arerelated to either Boise Inc. or Boise Cascade, we no longer record the notes asrelated-party notes payable on our Consolidated Balance Sheet. See Note 4,Transactions With Related Parties, and Note 13, Debt, for further informationon the notes.

 

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

 

8

----

Table of Contents

 

We have substantiallycompleted our purchase price allocation of the fair value of assets acquiredand liabilities assumed. However, we continue to evaluate the amounts includedin our allocation as information is received from third parties. We expect tobe complete by the one-year anniversary date of the Acquisition. The followingtable summarizes the fair value allocation of the assets acquired andliabilities assumed in the Acquisition as of September 30, 2008:

 
| ** **                | ** ** | **February 22,  2008,  Fair Value** | ** **    |
|---------------------------|------------|-----------------------------------------------|---------------|
| ** **                | ** ** | **(thousands)**                               | ** **    |
|                      |       |                                          |          |
| Current assets            |       | $                                             | 571,936       |   |
| Property and  equipment   |       | 1,305,616                                     |          |
| Fiber farms and  deposits |       | 11,006                                        |          |
| Intangible  assets:       |       |                                          |          |
| Trademark and  trade name |       | 16,800                                        |          |
| Customer list             |       | 13,700                                        |          |
| Technology                |       | 6,860                                         |          |
| Deferred  financing costs |       | 81,898                                        |          |
| Other long-term  assets   |       | 4,465                                         |          |
| Current  liabilities      |       | (247,292                                      | )             |
| Long-term  liabilities    |       | (101,664                                      | )             |
| Total purchase  price     | ** ** | **$**                                         | **1,663,325** | ** ** |

 

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  September 30** | ** ** | **Nine Months  Ended  September 30** | ** ** |
| ** **                                          | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                |       | **(thousands,  except per-share data)**         |       |
|                                                |       |                                            |       |   |   |   |   |
| Sales                                               |       | $                                               | 583,730    |   | $ | 1,839,433 |   | $ | 1,745,053 |   |
| Net income  (loss)                                  |       | 16,365                                          |       | (40,961 | ) | (12,205 | ) |
| Net income  (loss) per share—basic and diluted |       | 0.21                                            |       | (0.53 | ) | (0.16 | ) |
|                                                     |            |                                                 |            |  |  |  |  |  |  |  |

 

***3.******                                     ******Net Income (Loss) PerCommon Share***

 

For the three and nine months ended September 30,2008, the three months ended September 30, 2007, and the period of February 1(inception) through September 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):

 

9

----

Table of Contents

 
| ** **                                                                      | ** ** | **Boise Inc.**                                | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **February 1  (Inception)  Through  September 30,  2007** | ** ** |
|                                                                            |       |                                               |       |   |   |   |   |   |   |
| Net income  (loss)                                                              |       | $                                                  | 4,383      |   | $ | (30,038 | ) | $ | 2,791 |   | $ | 3,059 |   |
|                                                                            |       |                                               |       |   |   |   |   |   |   |
| Weighted average  number of common shares for basic net income (loss) per share |       | 77,260                                             |       | 72,419 |   | 51,750 |   | 27,629 |   |
| Incremental  effect of dilutive common stock equivalents:                       |       |                                               |       |   |   |   |   |   |   |
| Common stock  warrants (a) (b)                                             |       | —                                             |       | — |   | — |   | — |   |
| Restricted stock  (c)                                                           |       | 898                                                |       | — |   | — |   | — |   |
| Restricted stock  units (c)                                                     |       | 281                                                |       | — |   | — |   | — |   |
| Weighted average  number of shares for diluted net income (loss) per share      |       | 78,439                                             |       | 72,419 |   | 51,750 |   | 27,629 |   |
|                                                                            |       |                                               |       |   |   |   |   |   |   |
| Net income  (loss) per share—basic and diluted (a) (b) (c)       |       | **$**                                              | **0.06**   | ** ** | **$** | **(0.41** | **)** | **$** | **0.05** | ** ** | **$** | **0.11** |   |

 

----

| (a)    |   | Warrants  to purchase 44.4 million shares of common stock for the three and nine  months ended September 30, 2008, were not included in the computation of  diluted net income (loss) per share because the exercise price exceeded the  average market price of our common stock for each respective reporting date.   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                              |
| (b)    |   | Warrants  to purchase 44.4 million shares of common stock for the nine months  ended September 30, 2007, and for the period of February 1  (inception) through September 30, 2007, were not included in the  computation of diluted net income per share because the warrants were  contingently exercisable. |
|   |   |                                                                                                                                                                                                                                                                                                                              |
| (c)    |   | Restricted  stock and restricted stock units for the nine months ended September 30,  2008, were not included in the computation of diluted net loss per share  because inclusion of these amounts would be antidilutive.                                                                                                    |

 

***4.******                                     ******Transactions With RelatedParties***

 

During the Predecessor periods of January 1through February 21, 2008, and the three and nine months ended September 30,2007, the Predecessor participated in Boise Cascade’s centralized cashmanagement system. Cash receipts attributable to the Predecessor’s operationswere collected by Boise Cascade, and cash disbursements were funded by BoiseCascade. The net effect of these transactions has been reflected as “Net equitytransactions with related parties” in the Consolidated Statements of CashFlows. The following table includes the components of these related-partytransactions:

 
| ** **                                               | ** ** | **Predecessor**                                      | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
| ** **                                               | ** ** | **(thousands)**                                      | ** ** |
|                                                     |       |                                                 |       |   |   |   |   |
| Cash collections                                         |       | $                                                    | (354,222   | ) | $ | (567,015 | ) | $ | (1,720,035 | ) |
| Payment of  accounts payable                             |       | 336,605                                              |       | 511,749 |   | 1,561,691 |   |
| Capital  expenditures and acquisitions                   |       | 10,168                                               |       | 37,322 |   | 106,021 |   |
| Income taxes                                             |       | 217                                                  |       | (208 | ) | 1,021 |   |
| Corporate  general and administrative expense allocation |       | 1,995                                                |       | 3,652 |   | 10,446 |   |
| Net equity  transactions with related parties            | ** ** | **$**                                                | **(5,237** | **)** | **$** | **(14,500** | **)** | **$** | **(40,856** | **)** |

 

10

----

Table of Contents

 

*Related-Party Sales*

 

During the Predecessorperiods of January 1 through February 21, 2008, and the three andnine months ended September 30, 2007, the Predecessor sold paper and paperproducts 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 nine months ended September 30,2007, sales to OfficeMax were $90.1 million, $154.5** **million,and $471.8 million, respectively. During each of these periods, sales toOfficeMax represented 25%, 26%, 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 nine months ended September 30, 2008,sales to OfficeMax were $147.4 million and $357.5 million, or 23% and24% of total sales.

 

Boise Inc. and thePredecessor provided transportation services to Boise Cascade. For the threeand nine months ended September 30, 2008, Boise Inc. recorded$1.1 million and $2.8 million of sales for transportation services.For the Period of January 1 through February 21, 2008, and the threeand nine months ended September 30, 2007, the Predecessor recorded$0.6 million, $1.4 million**,** and$3.9 million, respectively, of sales for transportation services. Duringthese same periods, the Predecessor sold $10.8 million,$18.4 million, and $53.6 million of wood to Boise Cascade. Thesesales are included in “Sales, Related parties” in the Consolidated Statementsof 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 nine months ended September 30, 2008, werecognized $3.7 million and $9.1 million in “Sales, Related parties”and the same amounts in “Cost and expenses” in our Consolidated Statements ofIncome (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 andnine months ended September 30, 2008, we recorded $17.4 million and$44.1 million of sales to Boise Cascade in “Sales, Related parties” in theConsolidated Statements of Income (Loss) and recorded approximately the sameamounts of expenses in “Materials, labor, and other operating expenses.”

 

*Related-Party Costs and Expenses*

 

ThePredecessor purchased fiber from related parties at prices that approximatedmarket prices. During the Predecessor periods of January 1 through February 21,2008, and the three and nine months ended September 30, 2007, fiberpurchases from related parties were $7.7 million, $9.5 million, and$30.8 million, respectively. Most of these purchases related to chip andlog purchases from Boise Cascade’s wood products business. All of the costsassociated with these purchases were recorded as “Fiber costs from relatedparties” in the Consolidated Statements of Income (Loss).

 

During thePredecessor periods, the Predecessor used services and administrative staff ofBoise Cascade. These services included, but were not limited to, finance,accounting, legal, information technology, and human resource functions. Thecosts not specifically identifiable to the Predecessor were allocated basedprimarily on average sales, assets, and labor costs. These costs are includedin “General and administrative expenses” in the Consolidated Statements ofIncome (Loss). The Predecessor believes the allocations are a reasonablereflection of its use of the services. However, had the Predecessor operated ona stand-alone basis, it estimates that its Corporate and Other segment wouldhave reported approximately $2.5 million, $4.5 million, and $13.5 millionof segment expenses before interest, taxes, depreciation, and amortization forthe Predecessor periods of January 1 through February 21, 2008, andthe three and nine months ended September 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 

 

11

----

Table ofContents

 

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 nine months ended September 30, 2007, theStatements of Income (Loss) included $3.9 million, $6.1 million, and$16.8 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.

 

*NotePayable*

 

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 millioneffective February 22, 2008. The increase of the note reflects$17.3 million of postclosing working capital adjustments in Boise Cascade’sfavor. The note bears interest at 15.75% compounded quarterly. To the extentthat interest is not paid in cash, interest will be added to the principalamount of the note. The note matures on August 21, 2015, provided that ifsuch date is more than 181 days after the scheduled maturity date of theindebtedness under our credit agreements, then the maturity date shallautomatically be deemed to be 181 days after the latest maturity date ofany such indebtedness. We may prepay the note at any time in whole or in part,subject to restrictions contained 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 $53.8 million,including accrued interest but 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(other than the amount) identical to the original note payable. Because none ofthe eight holders of the notes is related to either Boise Inc. or BoiseCascade, we no longer record the notes as related-party notes on ourConsolidated Balance Sheet.

 

In 2008, prior to thesale of the note, we recorded $2.8 million of related-party interestexpense in “Interest expense” in our Consolidated Statements of Income (Loss).At September 30, 2008, we had $64.1 million recorded in “Notespayable” on our Consolidated Balance 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  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                                    |       |                                               |       |                                              |       |   |   |   |   |   |   |   |
| Changes in  retiree healthcare programs |       | $                                                  | —     |                                              | $          | — |   |   | $ | — |   | $ | — |   | $ | (4,367 | ) |
| Sales of assets,  net                   |       | 24                                                 |       | 4                                                 |       |   | (941 | ) | (71 | ) | 1,271 |   |
| Closure costs  (a)                      |       | —                                             |       | —                                            |       |   | — |   | 174 |   | 2,211 |   |
| Other, net                              |       | (60                                                | )          | (164                                              | )          |   | (48 | ) | 214 |   | 318 |   |
| ** **                              | ** ** | **$**                                              | **(36**    | **)**                                             | **$**      | **(160** | **)** | ** ** | **$** | **(989** | **)** | **$** | **317** | ** ** | **$** | **(567** | **)** |

 

----

| (a) |   | The  three and nine months ended September 30, 2007, included expenses  related to the closure of a paper converting facility in Salem, Oregon, which  was closed in third quarter 2007. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

12

----

Table of Contents

 

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

 

***6.******                                     ******Income Taxes***

 

For the three months ended September 30, 2008, werecorded $2.4 million of income tax benefits. These tax benefits relateprimarily to the release of valuation allowances we previously recorded againstdeferred tax assets. We released these valuation allowances because wedetermined it is more likely than not that we will use our deferred tax assetsto offset deferred tax liabilities. During the nine months ended September 30,2008, we recorded $5.7 million of income tax benefits related to lossesincurred during the nine-month period. As a result of significantly completingour purchase price allocation, during the three months ended September 30,2008, we recorded $12.4 million of deferred tax liabilities. At September 30,2008, our deferred tax liability, net of deferred tax assets, was $7.3 million.Because of its pass-through tax structure, the Predecessor recorded tax expenserelated only to small subsidiaries that are taxed as corporations.

 

For the three months ended September 30, 2008,the effective tax rate was not meaningful. For the nine months ended September 30,2008, the effective tax benefit rate was 16.05%. The primary reason for thedifference from the statutory income tax rate of 38.7% is due to nondeductiblepermanent items. The effective tax rate for each of the three months ended September 30,2007, and the period of February 1 (inception) through September 30,2007, was 45.5%.

 

During the Predecessor periods of January 1through February 21, 2008, and the three and nine months ended September 30,2007, the majority of the Predecessor businesses and assets were held andoperated by limited liability companies, which are not subject to entity-levelfederal or state income taxation. For the separate Predecessor subsidiariesthat are taxed as corporations, the effective tax rates were 37.6%, 43.3%, and41.8%, respectively. During these periods, the primary reason for thedifference in tax rates is the effect of state income taxes.

 

During the nine monthsended September 30, 2008, cash paid for taxes, net of refunds due, was$1.9 million. During the period of February 1 (inception) through September 30,2007, we made $0.1 million of tax payments. During the Predecessor period of January 1through February 21, 2008, cash paid for taxes, net of refunds due, was immaterialand $1.5 million during the Predecessor nine months ended September 30,2007.

 

***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  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **February 1  (Inception)  Through  September 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
| ** **      | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rental expenses |       | $                                                  | 4,153      |                                              | $          | 9,298 |   | $ | — |   |   | $ | 2,044 |   | $ | 3,174 |   | $ | 9,969 |   |
|                 |            |                                                    |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For noncancelableoperating leases with remaining terms of more than one year, the minimum leasepayment requirements are $2.9 million for the remainder of 2008,$11.6 million in 2009, $11.1 million in 2010, $10.3 million in2011, $9.7 million in 2012, and $8.1 million in 2013, with total 

 

13

----

Table of Contents

 

payments thereafter of$26.0 million. These future minimum lease payment requirements have notbeen reduced by sublease rentals due in the future under noncancelablesubleases. Minimum sublease income received in the future is not expected to bematerial.

 

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 averagingfive years, with fixed payment terms similar to those in the originallease 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 September 30,2008, we had $47.5 million and $29.3 million of accounts receivabledue from OfficeMax and Abitibi, respectively.

 

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

 

Inventoriesinclude the following (in thousands):

 
| ** **                          | ** ** | **Boise Inc.**          | ** **  | **Predecessor**             | ** ** |
|-------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                          | ** ** | **September 30,  2008** | ** **  | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
|                                |       |                         |        |                        |       |   |   |   |
| Finished goods  and work in process |       | $                            | 202,046     |                        | $          | — |   |   | $ | 192,161 |   |
| Raw materials                       |       | 61,247                       |        | —                      |       |   | 43,686 |   |
| Supplies and  other                 |       | 71,209                       |        | —                      |       |   | 88,832 |   |
| ** **                          | ** ** | **$**                        | **334,502** | ** **                  | **$**      | **—** | ** ** | ** ** | **$** | **324,679** |   |

 

***10.******                              ******Property and Equipment,Net***

 

Property and equipment consisted of the followingasset classes (in thousands):

 
| ** **                     | ** ** | **Boise Inc.**          | ** **    | **Predecessor**             | ** ** |
|--------------------------------|------------|------------------------------|---------------|-----------------------------|------------|
| ** **                     | ** ** | **September 30,  2008** | ** **    | **December 31,  2007** | ** ** | ** ** | **December 31,  2007** | ** ** |
|                           |       |                         |          |                        |       |   |   |   |
| Land and land  improvements    |       | $                            | 31,875        |                        | $          | — |   |   | $ | 31,592 |   |
| Buildings and  improvements    |       | 182,042                      |          | —                      |       |   | 185,509 |   |
| Machinery and  equipment       |       | 1,105,202                    |          | —                      |       |   | 1,212,425 |   |
| Construction in  progress      |       | 38,836                       |          | —                      |       |   | 36,535 |   |
|                           |       | 1,357,955                    |          | —                      |       |   | 1,466,061 |   |
| Less accumulated  depreciation |       | (71,505                      | )             | —                      |       |   | (273,717 | ) |
| ** **                     | ** ** | **$**                        | **1,286,450** | ** **                  | **$**      | **—** |   |   | **$** | **1,192,344** |   |

 

Property and equipment acquired in the Acquisition wasrecorded at estimated fair value on the date of the Acquisition. We have substantiallycompleted our purchase price allocation of the fair value of property andequipment or assets acquired and liabilities assumed. However, we may havechanges to the amount we have included in our allocation up to the one-yearanniversary date of the Acquisition (see Note 2, Acquisition of BoiseCascade’s Paper and Packaging Operations, for more information).

 

14

----

Table of Contents

 

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

 

Goodwill represents theexcess of purchase price and related costs over the value assigned to the nettangible and intangible assets of businesses acquired. We account for goodwillin accordance with the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets*,which requires us to assess our acquired goodwill and intangible assets withindefinite lives for impairment at least annually in the absence of anindicator of possible impairment and immediately upon an indicator of possibleimpairment. We assess goodwill and intangible assets with indefinite lives inthe fourth quarter of each year using a fair-value-based approach. We alsoevaluate the remaining useful lives of our finite-lived purchased intangible assetsto determine whether any adjustments to the useful lives are necessary.

 

We account foracquisitions using the purchase method of accounting. As a result, we allocatethe purchase price to the tangible and intangible assets acquired andliabilities assumed based on their respective fair values as of the date ofacquisition. In accordance with SFAS No. 141,*Business Combinations*, we have one year from the purchasedate to finalize or receive information to determine changes in estimates ofthe fair value of assets acquired and liabilities assumed.

 

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

 

Intangible assetsrepresent the values assigned to trade names and trademarks, customerrelationships, and technology in connection with the Acquisition. Customerrelationships will be amortized over approximately ten years, and technologywill be amortized over five years. Trade names and trademarks are notamortized. During the three and nine months ended September 30, 2008,intangible asset amortization was $0.8 million and $1.5 million.During the Predecessor periods of January 1 through February 21,2008, and the three and nine months ended September 30, 2007, intangibleasset amortization was zero, $1.3 million, and $3.5 million,respectively. Our estimated amortization expense is $0.5 million for theremainder of 2008, $2.1 million in 2009, 2010, 2011, and 2012, and$1.1 million in 2013. These estimates may change if we receive newinformation concerning these assets up to the one-year anniversary from thepurchase date.

 
| ** **                  | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|-----------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Gross Carrying  Amount**                                   | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Amount** | ** ** |
| ** **                  | ** ** | ** **                                                        | ** ** | **(thousands)** | ** ** | ** ** | ** ** |
|                        |       |                                                              |       |   |   |   |   |
| Trade names and  trademarks |       | $                                                                 | 16,800     |   | $ | — |   | $ | 16,800 |   |
| Customer  relationships     |       | 13,700                                                            |       | (761 | ) | 12,939 |   |
| Technology                  |       | 6,860                                                             |       | (739 | ) | 6,121 |   |
| ** **                  | ** ** | **$**                                                             | **37,360** | ** ** | **$** | **(1,500** | **)** | **$** | **35,860** |   |

 

Intangible assetsof the Predecessor totaling $24.0 million at December 31, 2007, wereeliminated as part of the purchase price allocations.

 

***12.          Asset Retirement Obligations***

 

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

 

15

----

Table of Contents

 

At September 30, 2008, we had$13.9 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 and closed-sitemonitoring costs. These liabilities are based on the best estimate of currentcosts and are updated periodically to reflect current technology, laws andregulations, inflation, and other economic factors. No assets are legallyrestricted for purposes of settling asset retirement obligations. The tablebelow describes changes to the asset retirement obligations for Boise Inc. forthe nine months ended September 30, 2008, and the Predecessor’s year endedDecember 31, 2007 (in thousands):

 
| ** **                                                                    | ** ** | **Boise Inc.**          | ** ** | **Predecessor** | ** **                  |
|-------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------|-----------------------------|
| ** **                                                                    | ** ** | **September 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                                                            |       | 652                          |       |            | 869                         |   |
| Payments                                                                      |       | (450                         | )          |            | (37                         | ) |
| Revisions in  estimated cash flows                                            |       | —                       |       |            | 1,700                       |   |
| Asset retirement  obligation at end of period                                 | ** ** | **$**                        | **13,857** | ** **      | ** **                  | **$** | **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 September 30,2008, our long-term debt and the interest rates on that debt were as follows:

 

 

 
| ** **                            | ** ** | **September 30, 2008** | ** **    |
|---------------------------------------|------------|----------------------------------|---------------|
| ** **                            | ** ** | **Amount**                       | ** **    | **Interest Rate** | ** ** |
| ** **                            | ** ** | **(thousands)**                  | ** **    | ** ** | ** ** |
| ** **                            | ** ** | ** **                       | ** **    | ** ** | ** ** |
| Revolving credit  facility, due 2013  |       | $                                | 65,000        |   | 7.00 | % |
| Tranche A term  loan, due 2013        |       | 246,875                          |          | 7.06 | % |
| Tranche B term  loan, due 2014        |       | 472,625                          |          | 7.50 | % |
| Second lien term  loan, due 2015      |       | 260,700                          |          | 11.00 | % |
| Current portion  of long-term debt    |       | (14,125                          | )             | 7.21 | % |
| Long-term debt,  less current portion |       | 1,031,075                        |          | 8.25 | % |
| Current portion  of long-term debt    |       | 14,125                           |          | 7.21 | % |
|                                  |       | 1,045,200                        |          |   |   |
|                                  |       |                             |          |   |   |
| 15.75% notes  payable, due 2015       |       | 64,083                           |          | 15.75 | % |
| ** **                            |       | **$**                            | **1,109,283** |   |   |   |

 

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

 

16

----

Table of Contents

 

*Senior Secured Credit Facilities*

 

Oursenior secured credit facilities consist of:

 
| · |   | A  five-year nonamortizing $250.0 million senior secured revolving credit  facility with interest at either the London Interbank Offered Rate (LIBOR)  plus 325 basis points or a calculated base rate plus 325 basis points (the  Revolving Credit Facility and collectively with the Tranche A Term Loan  Facility and the Tranche B Term Loan Facility, the First Lien Facilities); |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | A  five-year amortizing $250.0 million senior secured Tranche A Term Loan  Facility with interest at LIBOR plus 325 basis points or a calculated base  rate plus 325 basis points (the Tranche A Term Loan Facility);                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | A  six-year amortizing $475.0 million senior secured Tranche B Term Loan  Facility with interest at LIBOR plus 350 basis points (subject to a floor of  4.00%) or a calculated base rate plus 250 basis points (the Tranche B Term  Loan Facility); and                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                   |
| · |   | A  seven-year nonamortizing $260.7 million Second Lien Term Loan Facility with  interest at LIBOR plus 700 basis points (subject to a floor of 5.50%) or a  calculated base rate plus 600 basis points (the Second Lien Facility and  together with the First Lien Facilities, the Credit Facilities).                                                                                 |

 

All borrowings under the Credit Facilities bear interest at arate per annum equal to an applicable margin plus a customary base rate orEurodollar rate. The base rate means, for any day, a rate per annum equal tothe greater of (i) the Prime Rate in effect on such day and (ii) theFederal Funds Effective Rate in effect on such day plus 0.50%. In addition topaying interest, the Company pays a commitment fee to the lenders under theRevolving Credit Facility at a rate of 0.50% per annum (which shall be reducedto 0.375% when the leverage ratio is less than 2.25:1.00) times the dailyaverage undrawn portion of the Revolving Credit Facility (reduced by the amountof letters of credit issued and outstanding), which fee will accrue from theAcquisition closing date and shall be payable quarterly in arrears. At September 30,2008, we had $65.0 million of borrowings outstanding under the RevolvingCredit Facility. For the nine months ended September 30, 2008, the averageinterest rate for our borrowings under our Revolving Credit Facility was 5.95%.The minimum and maximum borrowings under the Revolving Credit Facility werezero and $80.0 million for the nine months ended September 30, 2008.The weighted average amount of borrowings outstanding under the RevolvingCredit Facility during the nine months ended September 30, 2008, was$60.2 million. At September 30, 2008, we had availability of $158.1 million,which is net of outstanding letters of credit of $26.9 million, above theamount we had borrowed.

 

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 BZ IntermediateHoldings LLC (Holdings), a wholly owned consolidated entity of Boise Inc. andthe parent company of Boise Paper Holdings, L.L.C. (the Borrower), and itssubsidiaries to maintain 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.

 

*Guarantees*

 

The Company’s obligations under its Credit Facilities areguaranteed by each of the Borrower’s existing and subsequently acquireddomestic (and, to the extent no material adverse tax consequences to Holdingsor Borrower would result therefrom and as reasonably requested by theadministrative agent under each Credit Facility, foreign) subsidiaries andHoldings (collectively, the Guarantors). The First Lien Facilities are securedby a first-priority security interest in substantially all of the real,personal, and mixed property of Borrower and the Guarantors, including afirst-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 $2.5 million ofconsolidated earnings before interest, taxes, depreciation, and amortization(EBITDA) during any fiscal year of Borrower), and all intercompany debt. 

 

17

----

Table ofContents

 

The Second Lien Facility is secured by asecond-priority security interest in substantially all of the real, personal,and mixed property of Borrower and the Guarantors, including a second-prioritysecurity interest in 100% of the equity interests of Borrower and each domesticsubsidiary of Holdings, 65% of the equity interests of each of Holdings'foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise HongKong Limited does not account for more than $2.5 million of consolidated EBITDAduring any fiscal year of Borrower), and all intercompany debt.

 

*Prepayments*

 

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

 

Subject to the provisions of theintercreditor agreement between the First Lien Facility and the Second LienFacility, in the event the Second Lien Facility is prepaid as a result of avoluntary or mandatory prepayment (other than as a result of a mandatoryprepayment with respect to insurance/condemnation proceeds or excess cash flow)at any time prior to the third anniversary of the Acquisition closing date,Borrower shall pay a prepayment premium equal to the “make-whole premium”described below.

 

At any time after the thirdanniversary of the Acquisition closing date and prior to the sixth anniversaryof the Acquisition closing date, subject to the provisions of the First LienFacilities, the Second Lien Facility may be prepaid in whole or in part subjectto the “call premium” described below, provided that loans bearing interestwith reference to the reserve-adjusted Eurodollar rate will be prepayable onlyon the last day of the related interest period unless Borrower pays any relatedbreakage costs.

 

With respect to a Second LienFacility loan on any date of prepayment, the “make-whole premium” means thepresent value of (a) all required interest payments due on such SecondLien Facility loan from the date of prepayment through and including themake-whole termination date, excluding accrued interest (assuming that theinterest rate applicable to all such interest is the LIBOR swap rate at theclose of business on the third business day prior to the date of such prepaymentwith the termination date nearest to the make-whole termination date plus7.00%) 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 “call premium” means that inthe event all or any portion of the Second Lien Facility is repaid as a resultof a voluntary prepayment or mandatory prepayment with respect to asset saleproceeds or proceeds received from the issuance of debt after the thirdanniversary of the Acquisition closing date and prior to the sixth anniversaryof the Acquisition closing date, such repayments will be made at (i) 105.0%of the amount repaid if such repayment occurs on or after the third anniversaryof the Acquisition closing date and prior to the fourth anniversary of theAcquisition closing date, (ii) 103.0% of the amount repaid if suchrepayment occurs on or after the fourth anniversary of the Acquisition closingdate and prior to the fifth anniversary of the Acquisition closing date, and (iii) 101.0%of the amount repaid if such repayment occurs on or after the fifth anniversaryof the Acquisition closing date and prior to the sixth anniversary of theAcquisition closing date.

 

*Other Provisions*

 

Subject to specified exceptions,the Credit Facilities require that the proceeds from certain asset sales,casualty insurance, certain debt issuances, and 75% (subject to step-downsbased on certain leverage ratios) of the excess cash flow for each fiscal yearmust be used to pay down outstanding borrowings. Required debt principalrepayments under the Credit Facilities, excluding those from excess cash flows,total $2.8 million for the balance of 2008, $15.7 million in 2009,$26.6 million in 2010, $48.5 million in 2011, $134.4 million in2012, and $817.2 million thereafter.

 

18

----

Table ofContents

 

*Notes 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 $58.3 millioneffective February 22, 2008. The increase of the note reflects$17.3 million of postclosing working capital adjustments in Boise Cascade’sfavor. With the exception of our subsidiaries that are party to the Credit andGuaranty Agreement dated as of February 22, 2008, each of our current andfuture domestic subsidiaries are joint and several obligors under this note, asreflected by a Subordinated Guaranty Agreement, which guarantees ourobligations 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 $53.8 million,including accrued interest but 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(other than the amount) identical to the original note payable. Because none ofthe eight holders of the notes is related to either Boise Inc. or BoiseCascade, we no longer record the notes as related-party notes on ourConsolidated Balance Sheet.

 

The notes bear interestat 15.75% per annum (computed on the basis of a 360-day year) payable quarterly(each such quarterly payment date, an Interest Payment Date). To the extentinterest is not paid in cash, interest will be added to the principal amount ofthe notes on each Interest Payment Date. The notes mature on August 21,2015, provided that if such date is more than 181 days after the scheduledmaturity date of the indebtedness under the Credit Facilities, then thematurity date shall automatically be deemed to be 181 days after the latestmaturity date of any such indebtedness. At maturity, the amount of the noteswill be approximately $185.6 million, assuming none of the interest hasbeen paid in cash.

 

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

 

*Other*

 

At September 30, 2008, we had$75.4 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 $3.5 million and $6.5 millionof amortization expense for the three and nine months ended September 30,2008, in “Interest expense” in our Consolidated Statements of Income (Loss).

 

In April 2008, weentered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. AtSeptember 30, 2008, our average effective interest rate was not affectedby our interest rate derivatives, as the effective cap rates were above theinterest rates on the hedged debt. For additional information on our interestrate derivatives, see Note 14, Financial Instruments.

 

For the nine months ended September 30,2008, cash payments for interest, net of interest capitalized, were$51.6 million. No payments were made during the period of February 1(inception) through September 30, 2007, or the Predecessor period of January 1through February 21, 2008, and the nine months ended September 30,2007.

 

19

----

Tableof Contents

 

***14.******                             ******FinancialInstruments***

 

Weare exposed to market risks including changes in interest rates, energy prices,and foreign currency exchange rates. We employ a variety of practices to managethese risks, including operating and financing activities and, where deemedappropriate, the use of derivative instruments. Derivative instruments are usedonly for risk management purposes and not for speculation or trading.Derivatives are such that a specific debt instrument, contract, or anticipatedpurchase determines the amount, maturity, and other specifics of the hedge. Ifa derivative contract is entered into, we either determine that it is aneconomic hedge or we designate the derivative as a cash flow or fair valuehedge. We formally document all relationships between hedging instruments andthe 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 in hedgingtransactions are highly effective in offsetting changes in the hedged items.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 in either“Net income (loss)” or “Other comprehensive income (loss),” as appropriate. Thegain or 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*

 

Withthe exception of the 15.75% notes payable, maturing in August 2015, ourdebt is variable-rate debt. At September 30, 2008, the estimated value ofthe notes payable, based on then-current interest rates for similar obligationswith like maturities, was approximately $6.1 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 LIBOR cap rate of5.00% 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 accountfor the interest rate derivatives with a notional amount of $260.0 million thathedge our exposure to interest rate fluctuations on our Second Lien Facility aseconomic hedges. At September 30, 2008, we recorded the fair value of theinterest rate derivatives, or $0.8 million, in “Other assets” on ourConsolidated Balance Sheet. During the three and nine months ended September 30,2008, we recorded the change in fair value of these derivatives, or$0.3 million of expense and $0.2 million of income, in “Change infair value of interest rate derivatives” in our Consolidated Statements ofIncome (Loss). During the three and nine months ended September 30, 2008,we recorded $0.1 million in “Interest expense” for the amortization of thepremiums paid for the interest rate derivatives.

 

*FirstLien Facility.*We account for the interest rate derivativesthat hedge part of the interest rate risk on our Tranche B Term Loan Facilityas cash flow hedges. These derivatives have a cap rate of 5.00% on a notionalamount of $425.0 million for the period of April 21, 2008, through March 31,2009; a 

 

20

----

Table ofContents

 

notional amount of$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 September 30, 2008, we recorded thefair value of the interest rate derivatives, or $1.5 million, in “Otherassets.”  During the three months endedSeptember 30, 2008, we recorded the change in the fair value of thesederivatives, or a $0.5 million loss, in “Accumulated other comprehensiveincome” on our Consolidated Balance Sheet. No amounts were reclassified tointerest expense. During the three and nine months ended September 30,2008, we recorded $0.1 million and $0.3 million in “Interest expense”for the amortization of the premiums paid for the interest rate derivatives. AtSeptember 30, 2008, there was no ineffectiveness related to these hedges.

 

*Energy Risk*

 

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 September 30,2008, we had entered into derivative instruments related to approximately 72%,70%, and 62% of our forecasted natural gas purchases for the months of October 2008,November 2008, and December 2008, respectively. We also entered intoderivative instruments related to approximately 54% of our forecasted naturalgas purchases for the period of January through February 2009,approximately 51% of our forecasted natural gas purchases for March 2009,and approximately 37% of our forecasted natural gas purchases from April 2009through October 2009. These derivatives include three-way collars, caps,call spreads, and swaps.

 

A three-way collar is acombination of options: a written put, a purchased call, and a written call.The purchased call establishes a maximum price unless the market price exceedsthe written call, at which point the maximum price would be New York MercantileExchange (NYMEX) price less the difference between the purchased call and thewritten call strike price. The written put establishes a minimum price (thefloor) for the volumes under contract. The following table summarizes ourposition related to these instruments as of September 30, 2008:

 
| ** **                   | ** ** | **Three-Way Cashless Collar** | ** ** |
|------------------------------|------------|-----------------------------------------|------------|
| ** **                   | ** ** | **October 2008**                   | ** ** | **October 2008  Through  March 2009** | ** ** | **November 2008  Through  March 2009** | ** ** | **April 2009  Through  October 2009** | ** ** | **April 2009  Through  October 2009** | ** ** |
|                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Volume hedged                |       | 1,000 mmBtu/day                    |       | 1,000 mmBtu/day |   | 1,000 mmBtu/day |   | 1,000 mmBtu/day |   | 3,000 mmBtu/day |   |
|                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Strike price of  call sold   |       | $                                       | 13.00      |   | $ | 14.00 |   | $ | 14.00 |   | $ | 14.00   |   | $ | 12.00   |   |
| Strike price of  call bought |       | 10.00                                   |       | 11.00 |   | 11.00 |   | 11.00   |   | 9.00   |   |
| Strike price of  put sold    |       | 6.00                                    |       | 10.05 |   | 6.38 |   | 6.50   |   | 6.50   |   |
| 3-way collar  premium        |       | —                                  |       | — |   | — |   | 0.095 |   | 0.287 |   |
|                         |       |                                    |       |   |   |   |   |   |   |   |   |
| Approximate  percent hedged  |       | 3                                       | %          | 2 | % | 2 | % | 3 | % | 8 | % |
|                              |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

A cap is a purchased calloption that establishes a maximum price we will pay for the volumes undercontract, plus the applicable cap premium. The following table summarizes ourposition related to these instruments as of September 30, 2008:

 
| ** **                   | ** ** | **Caps**              | ** ** | ** **                                          | ** ** | ** ** |
|------------------------------|------------|-----------------------|------------|-----------------------------------------------------|------------|------------|
| ** **                   | ** ** | **October 2008** | ** ** | **November 2008  Through  December 2008** | ** ** | ** ** | ** ** | ** ** |
|                         |       |                  |       |                                                |       |       |   |   |
| Volume hedged                |       | 8,000 mmBtu/day       |       | 8,000 mmBtu/day                                     |       |       |   |   |
|                         |       |                  |       |                                                |       |       |   |   |
| Strike price of  call bought |       | $                     | 10.50      |                                                | $          | 10.50      |   |   |   |   |
| Cap premium                  |       | 1.79                  |       | 1.79                                                |       |       |   |   |
|                         |       |                  |       |                                                |       |       |   |   |
| Approximate  percent hedged  |       | 21                    | %          | 18                                                  | %          |       |   |   |
|                              |            |                       |            |                                                     |            |            |  |  |  |  |

 

21

----

Table of Contents

 

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 September 30,2008:

 
| ** **                   | ** ** | **Call Spreads** | ** ** |
|------------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **October 2008** | ** ** | **November 2008  Through  December 2008** | ** ** | **January 2009  Through  March 2009** | ** ** | **April 2009  Through  October 2009** | ** ** |
|                         |       |                  |       |   |   |   |   |   |   |
| Volume hedged                |       | 10,000 mmBtu/day |       | 14,000 mmBtu/day |   | 21,000 mmBtu/day |   | 10,000 mmBtu/day |   |
|                         |       |                  |       |   |   |   |   |   |   |
| Strike price of  call sold   |       | $                     | 15.00      |   | $ | 15.00 |   | $ | 15.00 |   | $ | 15.00 |   |
| Strike price of  call bought |       | 10.50                 |       | 10.50 |   | 10.50 |   | 10.50 |   |
| Net cap premium              |       | 2.14                  |       | 2.16 |   | 1.27 |   | 0.84 |   |
|                         |       |                  |       |   |   |   |   |   |   |
| Approximate  percent hedged  |       | 26                    | %          | 31 | % | 47 | % | 26 | % |
|                              |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

A swapfixes the price of the volumes under contract by paying our counterparty afixed price for such volumes and receiving the variable NYMEX price for eachmonth from our counterparty. The following table summarizes our positionrelated to fixed price swap instruments as of September 30, 2008:

 
| ** **                  | ** ** | **Swaps**             | ** ** |
|-----------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **October 2008** | ** ** | **November 2008** | ** ** | **December 2008** | ** ** | **January 2009  Through  February 2009** | ** ** |
|                        |       |                  |       |   |   |   |   |   |   |
| Volume hedged               |       | 7,500 mmBtu/day  |       | 7,500 mmBtu/day |   | 4,000 mmBtu/day |   | 1,500 mmBtu/day |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Fixed price                 |       | $                     | 8.10       |   | $ | 8.33 |   | $ | 8.19 |   | $ | 8.07 |   |
|                        |       |                  |       |   |   |   |   |   |   |
| Approximate  percent hedged |       | 20                    | %          | 17 | % | 9 | % | 3 | % |
|                             |            |                       |            |  |  |  |  |  |  |  |  |  |  |

 

Wehave elected to account for these instruments as economic hedges. At September 30,2008, we recorded the fair value of the derivatives, or $7.4 million, in“Accrued liabilities, Other” on our Consolidated Balance Sheet. During thethree and nine months ended September 30, 2008, we recorded the change infair value of the instruments, or $11.3 million and $7.5 million ofexpense,****in “Materials, labor, and operatingexpenses” in our Consolidated Statements of Income (Loss).

 

*Foreign Currency Risk*

 

While we are exposed to foreigncurrency risk in our operations, none of this risk was material to ourfinancial position or results of operations as of September 30, 2008.

 

22

----

Table of Contents

 

*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 thePredecessor consolidated financial statements.

 

*Fair Value Measurements*

 

In accordance with theprovisions 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 theseestimated fair values under the hierarchy defined in SFAS No. 157:

 
| ** **                     | ** ** | **Fair Value Measurements at September 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) |       | $                                                                                            | 2,280      |   | $ | — |   | $ | 2,280 |   | $ | — |   |
| ** **                     | ** ** | **$**                                                                                        | **2,280**  | ** ** | **$** | **—** | ** ** | **$** | **2,280** | ** ** | **$** | **—** |   |
|                           |       |                                                                                         |       |   |   |   |   |   |   |
| Liabilities:                   |       |                                                                                         |       |   |   |   |   |   |   |
| Energy  derivatives (b)        |       | $                                                                                            | 7,350      |   | $ | — |   | $ | 7,350 |   | $ | — |   |
| ** **                     | ** ** | **$**                                                                                        | **7,350**  | ** ** | **$** | **—** | ** ** | **$** | **7,350** | ** ** | **$** | **—** | ** ** |

 

----

(a)          Includes $2.3 million recorded in “Other assets” on ourConsolidated Balance Sheet.

 

(b)         Includes $7.4 million recorded in “Accrued Liabilities,Other” on our Consolidated Balance Sheet.

 

Asof September 30, 2008, we did not have any fair value measurements usingsignificant unobservable inputs (Level 3).

 

***15.          New and Recently Adopted Accounting Standards***

 

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

 

In June 2008, the FASB issued FSP No. EITF03-6-1, *Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities*.FSP No. EITF 03-6-1 states that unvested share-based payment awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of earnings per share pursuant to the two-class method. FSP EITF03-6-1 is effective for financial statements issued for fiscal years beginningafter December 15, 2008, and interim periods within those years. Allprior-period earnings per share data presented shall be adjusted retrospectively(including interim financial statements, summaries of earnings, and selectedfinancial data) to conform with the provisions of this staff position. Earlyapplication is not permitted. We currently do not have any share-

 

23

----

Table of Contents

 

based awards that would qualify as participatingsecurities. Therefore, application of this FSP is not expected to have aneffect on our financial position, results of operations or earnings per share.

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*. SFAS No. 162 defines the order in which accountingprinciples that are generally accepted should be followed. SFAS No. 162 iseffective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board (PCAOB) amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*. We do not expect theadoption to have a material impact on our financial position or results ofoperations.

 

In April 2008, the FASB issued FSP FAS142-3, *Determination of the Useful Life ofIntangible Assets.*FSP FAS 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*.This new guidance also provides additional disclosure requirements related torecognized intangible assets. FSP FAS 142-3 is effective for fiscal yearsbeginning after December 15, 2008, which will require us to adopt theseprovisions in 2009. Early adoption is prohibited. We do not expect the adoptionto have a material impact on our financial position or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures About Derivative Instruments and HedgingActivities*. SFAS No. 161 requires enhanced disclosures aboutderivative instruments and hedging activities to enable investors to betterunderstand their effects on financial position, financial performance, and cashflows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. 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. 161 willhave on our consolidated financial statement disclosures.

 

In January 2008, we adopted SFAS No. 157,*Fair Value Measurements*. The adoption didnot have a material impact on our financial position or results of operations.The statement established a framework for measuring fair value, and it enhancedthe disclosures for fair value measurements. The statement applies when otheraccounting pronouncements require or permit fair value measurements, but itdoes not require new fair value measurements. In accordance with the standard,in Note 14, Financial Instruments, we expanded our disclosures about fairvalue measurements. In accordance with the provisions of 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.

 

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. Theimpact of adopting these standards will be limited to business combinationsoccurring on or after January 1, 2009.

 

***16.******                              Retirementand Benefit Plans***

 

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

 

24

----

Table of Contents

 

*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 with theAcquisition, we have treated the pension and postretirement benefit plans ascompany-sponsored plans and have measured the benefit obligation and fundedstatus as of February 22, 2008. The funded status changes from period toperiod based on the investment return from plan assets, contributions, benefitpayments, and the discount rate used to measure the obligation.

 

*Componentsof Net Periodic Benefit Cost*

 

The components of netperiodic benefit cost are as follows (in thousands):

 
| ** **                                     | ** ** | **Pension Benefits**                          | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **Boise Inc.**                                | ** ** | **Predecessor** | ** ** |
| ** **                                     | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                                           |       |                                               |       |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                                  | 2,697      |   | $ | 6,526 |   |   | $ | 1,566 |   | $ | 3,136 |   | $ | 8,966 |   |
| Interest cost                                  |       | 6,101                                              |       | 14,764 |   |   | 3,458 |   | 5,822 |   | 16,868 |   |
| Expected return  on plan assets                |       | (5,959                                             | )          | (14,422 | ) |   | (3,452 | ) | (5,953 | ) | (17,192 | ) |
| Recognized  actuarial (gain) loss              |       | —                                             |       | — |   |   | (21 | ) | 69 |   | 203 |   |
| Amortization of  prior service costs and other |       | —                                             |       | — |   |   | 194 |   | 318 |   | 867 |   |
| Plan curtailment  gain                         |       | —                                             |       | — |   |   | — |   | — |   | (46 | ) |
| Company-sponsored  plans                       |       | 2,839                                              |       | 6,868 |   |   | 1,745 |   | 3,392 |   | 9,666 |   |
| Multiemployer  pension plans                   |       | 97                                                 |       | 233 |   |   | 75 |   | — |   | — |   |
| Net periodic  benefit costs                    | ** ** | **$**                                              | **2,936**  | ** ** | **$** | **7,101** | ** ** | ** ** | **$** | **1,820** | ** ** | **$** | **3,392** | ** ** | **$** | **9,666** | ** ** |

 
| ** **                        | ** ** | **Other Benefits**                            | ** ** |
|-----------------------------------|------------|----------------------------------------------------|------------|
| ** **                        | ** ** | **Boise Inc.**                                | ** ** | **Predecessor** | ** ** |
| ** **                        | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                              |       |                                               |       |   |   |   |   |   |   |   |   |   |
| Service cost                      |       | $                                                  | 1          |   | $ | 1 |   |   | $ | — |   | $ | (9 | ) | $ | 75 |   |
| Interest cost                     |       | 10                                                 |       | 26 |   |   | 18 |   | 8 |   | 231 |   |
| Expected return  on plan assets   |       | —                                             |       | — |   |   | — |   | — |   | — |   |
| Recognized  actuarial (gain) loss |       | —                                             |       | — |   |   | (12 | ) | (34 | ) | (34 | ) |
| Net periodic  benefit costs       | ** ** | **$**                                              | **11**     | ** ** | **$** | **27** | ** ** | ** ** | **$** | **6** | ** ** | **$** | **(35** | **)** | **$** | **272** | ** ** |

 

During the remainder of2008, we are not required to make minimum contributions to our pension plans.

 

***17.          Stockholders’ Equity***

 

*Preferred Stock*

 

The Company is authorizedto issue 1,000,000 shares of preferred stock with such designations, voting,and other rights and preferences as may be determined from time to time by theboard of directors. No shares were issued or outstanding at September 30,2008, and December 31, 2007.

 

25

----

Table of Contents

 

*Common Stock*

 

We are authorized toissue 250,000,000 shares of common stock, of which 79,722,147 shares wereissued and outstanding at September 30, 2008. Of these shares outstanding,2,462,200 shares were restricted stock (discussed below). At December 31,2007, we had 51,750,000 shares of common stock issued and outstanding, of which16,555,860 shares were subject to possible conversion.

 

On February 5, 2008,stockholders owning 12,543,778 shares exercised their conversion rights andvoted against the Acquisition of Boise Cascade. Such stockholders were entitledto receive their per-share interest in the proceeds from our initial publicoffering, which had been held in trust. At December 31, 2007, cash held intrust was $403,989,389. In connection with the Acquisition, we paid$120,169,890 from our cash held in trust to these stockholders. The remainingcash held in trust was used to effect the Acquisition.

 

*Warrants*

 

In connection with ourpublic offering in June 2007, we issued 41,400,000 units (the Units). EachUnit consists of one share of our common stock and one Redeemable Common StockPurchase Warrant (the Warrants). Each Warrant entitles the holder to purchaseone share of common stock at an exercise price of $7.50, commencing on thelater of the completion of a business combination and one year from theeffective date of the public offering and expiring four years from theeffective date of the public offering. We may redeem the Warrants, at a priceof $0.01 per Warrant, upon 30 days’ notice while the Warrants are exercisable,only in the event that the last sale price of the common stock is at least$14.25 per share for any 20 trading days within a 30-trading-day period endingon the third day prior to the date on which notice of redemption is given. In June 2008,we filed a posteffective amendment on Form S-1 to register the shares ofour common stock covered by these warrants.

 

Simultaneously with theconsummation of the public offering, Aldabra 2 Acquisition Corp.’s chairman andchief executive officer privately purchased a total of 3,000,000 Warrants (theInsider Warrants) at $1.00 per Warrant (for an aggregate purchase price of$3,000,000). The amount paid for the Warrants approximated fair value on thedate of issuance. All of the proceeds received from these purchases were placedin cash held in trust. The Insider Warrants purchased were identical to theWarrants underlying the Units issued in the public offering except that theWarrants may not be called for redemption and the Insider Warrants may beexercisable on a “cashless basis,” at the holder’s option, so long as suchsecurities are held by such purchaser or his affiliates. At September 30,2008, including 3,000,000 Insider Warrants, 44,400,000 Warrants wereoutstanding.

 

*Restricted Stock and RestrictedStock Units*

 

In May 2008, pursuant to the Boise Inc. Incentive andPerformance Plan (the Plan), we granted to directors and members of management2.5 million shares of restricted stock and 0.6 million restrictedstock units (collectively restricted stock). The restricted stock grantsinclude both service-condition vesting and market-condition vesting awards. Ofthe 3.1 million shares of restricted stock granted, 1.2 million wereservice-condition vesting awards, and 1.9 million were market-conditionvesting awards. The weighted-average grant-date fair values of the restrictedstock were $4.16 per share for the service-condition vesting awards and$1.75 per share for the market-condition vesting awards. We accountfor awards granted under the Plan in our consolidated financial statements inaccordance with SFAS No. 123(R).

 

In accordance with SFAS No. 123(R), we evaluate share-basedcompensation on a quarterly basis based on our estimate of expected restrictedstock forfeiture, review of recent forfeiture activity, and expected futureturnover. We recognize the effect of adjusting the forfeiture rate for allexpense amortization in the period that we change the forfeiture estimate. Theeffect of forfeiture adjustments during the three and nine months ended September 30,2008, was zero.

 

*Market-Condition Vesting Awards*

 

Members of management were granted 1.9 millionshares of restricted stock, which are subject to market-based vestingrestrictions, as described below. Of this 1.9 million, 0.7 millionwill vest on February 28, 2011, if the closing price of Boise Inc. stockhas been at least $10 per share for at least 

 

26

----

Table of Contents

 

20 trading days in any period of 30 consecutivetrading days between the grant date and February 28, 2011. Theweighted-average grant-date fair value of these awards was $2.03 per share. Theremaining 1.2 million shares of the restricted stock grants will vest on February 28,2011, if the closing price of Boise Inc. stock has been at least $12.50 pershare for at least 20 trading days in any period of 30 consecutive trading daysbetween the grant date and February 28, 2011. The weighted-averagegrant-date fair value of these awards was $1.57 per share. Any shares notvested on February 28, 2011, will be forfeited. Additionally, members ofmanagement must be employed by Boise Inc. on February 28, 2011, to receivethese awards.

 

*Service-Condition Vesting Awards*

 

Directors and members of management were grantedawards of 0.4 million and 0.8 million shares of restricted stocksubject to service-condition vesting. The restricted stock granted to directorsvests on February 28, 2009, whereas all other grants subject toservice-condition vesting restrictions vest as follows: one-third of theservice-condition portion of the grant shall vest on each of February 28,2009, February 28, 2010, and February 28, 2011, subject to EBITDAgoals. Any shares not vested on or before February 28, 2011, will beforfeited.

 

*Compensation Expense*

 

We accrue compensation expense for the restricted stock based on the fairvalue on the date of the grant, as described below. Compensation expense isrecognized ratably over the vesting period for the restricted stock grants thatvest over time and ratably over the award period for the restricted stockgrants that vest based on the closing price of Boise Inc. stock, as discussedabove. During the three and nine months ended September 30, 2008, werecognized $1.2 million and $1.9 million of compensation expense.Most of these costs were recorded in “General and administrative expenses” inour Consolidated Statements of Income (Loss).

 

*Fair Value Measurement*

 

SFAS No. 123(R) requires different valuation calculations forequity grants that have a service condition and equity grants that have amarket condition. The fair value of service-condition restricted stockis determined based on the number of shares or units granted and the quotedprice of our stock at the date of grant and is expensed on a straight-line basisover the vesting period. The fair value on the date of grant of theserestricted stock grants was $4.16 per share. Compensation expense isadjusted if the service condition is 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 on theaward date. Because the market-based restrictions representa more difficult threshold to meet before payout, with greater uncertainty thatthe market condition will be satisfied, these awards have a lower fair valuethan those that vest based solely on the passage of time. However, compensationexpense is required to be recognized under SFAS No. 123(R) for anaward 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. The fair value of market-condition restricted stock orunits is estimated at the grant date using a Monte Carlo simulation. We assumeda risk-free rate of 2.59%, an expected stock volatility of 58.60%, and a stockprice for Boise Inc.’s common shares of $4.16 per share. The $4.16 per sharevalue is based on Boise Inc.’s closing stock price on the date of grant.Expense is recognized on a straight-line basis over the service period.

 

The following summarizes the activity of our outstanding service- andmarket-condition restricted stock and units awarded under the Plan as of September 30,2008, and changes during the period ended September 30, 2008:

 

27

----

Tableof Contents

 
| ** **                                          | ** ** | **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)** | ** ** | **(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  September 30, 2008 (b)(c) | ** ** | **1,179**                                      | ** ** | **$**                                               | **4.16**   | ** ** | **$** | **4,904** | ** ** | **1,916** | ** ** | **$** | **1.75** | ** ** | **$** | **3,345** | ** ** |

 

----

(a)       Represents the value of Boise Inc. stock on the date that the restrictedstock vests.

 

(b)       Outstanding units are the same as nonvested units.

 

(c)       The remaining weighted-average contractual term is approximately 2.2 years.

 

At September 30, 2008, we had approximately $3.4 million and$2.7 million of total unrecognized compensation cost related to thenonvested service-condition and market-condition restricted stock grants,respectively, under the Plan. The cost is expected to be recognized generallyover a weighted average period of 2.0 years and 2.4 years for theservice-condition and market-condition awards, respectively. In accordance withSFAS No. 123 (R), unrecognized compensation expense is calculated net ofestimated forfeitures of $0.2 million. During the three and nine monthsended September 30, 2008, we recognized $1.2 million and$1.9 million of compensation expense, of which $0.8 million and$1.4 million related to the grant-date fair value of service-conditionawards vested through September 30, 2008, and $0.3 million and $0.6 millionrelated to the market-condition awards that generally vest on February 28,2011.

 

*Dividends*

 

In June 2007, our board of directors authorized stock dividends of0.5 million shares of common stock and 0.2 million shares of commonstock for each outstanding share of common stock at June 12, 2007, and June 19,2007, respectively.

 

We have not paid any cash dividends on our common stock to date. Thepayment of cash dividends in the future is dependent upon our revenues andearnings, if any, capital requirements, and general financial conditionsubsequent to the Acquisition. The payment of any dividends is within thediscretion of our board of directors, subject to the limitations of our creditfacilities.

 

*Predecessor*

 

During the Predecessorperiods presented, equity compensation was granted to the Predecessor’semployees under Boise Cascade’s equity compensation plans. During thePredecessor periods of January 1 through February 21, 2008, and thethree and nine months ended September 30, 2007, the Predecessor recognized$0.2 million, $0.4 million, and $1.2 million of compensation expense,most of which was recorded in “General and administrative expenses” in theConsolidated Statements of Income (Loss).

 

28

----

Tableof Contents

 

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

 

Comprehensive income(loss) includes the following (in thousands):

 
| ** **                                                               | ** ** | **Boise Inc.**                           | ** ** | ** **                                    | **Predecessor** | ** **                                   |
|--------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|-----------------|----------------------------------------------|
| ** **                                                               | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** **      | **Nine  Months  Ended  September 30,  2008** | ** ** | **February 1  (Inception)  Through  September 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
| ** **                                                               | ** ** | ** **                                    | ** ** | ** **                                    | ** **      | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                                       |       | $                                             | 4,383      |                                          | $               | 2,791                                        |   | $ | (30,038 | ) | $ | 3,059 |   |   | $ | 22,786 |   | $ | 50,218 |   | $ | 88,744 |   |
| Other  comprehensive income (loss) cash flow hedges, net of income taxes |       | (332                                          | )          | —                                        |            | 178                                          |   | — |   |   | — |   | — |   | 9,376 |   |
| Comprehensive income  (loss)                                             | ** ** | **$**                                         | **4,051**  | ** **                                    | **$**           | **2,791**                                    | ** ** | **$** | **(29,860** | **)** | **$** | **3,059** | ** ** | ** ** | **$** | **22,786** | ** ** | **$** | **50,218** | ** ** | **$** | **98,120** | ** ** |

 

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

 

                There are nomaterial differences in Boise Inc.’s basis of segmentation or in Boise Inc.’sbasis of measurement of segment profit or loss from those disclosed in thePredecessor’s Note 15, Segment Information, of the Predecessor’s Notes toConsolidated Financial Statements in Exhibit 99.2 of Boise Inc.’s CurrentReport on Form 8-K filed with the SEC on February 28, 2008.

 

                An analysis of operationsby segment is as follows:

 
| **Boise Inc.**                                            | ** ** |
|----------------------------------------------------------------|------------|
| ** **                                                     | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                                     | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **zation,** | ** ** | ** ** | ** ** |
| **Three Months Ended  September 30, 2008** | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
|                                                           |       | **(millions)** |   |
|                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                                          |       | $ | 412.9 |   | $ | — |   | $ | 18.1 |   | $ | 431.0 |   | $ | 25.3 |   | $ | 24.1 |   | $ | 49.4 |   |
| Packaging                                                      |       | 194.4 |   | 17.4 |   | 1.1 |   | 212.9 |   | 10.1 |   | 6.3 |   | 16.4 |   |
| Corporate and  Other                                           |       | 3.6 |   | 4.8 |   | 12.3 |   | 20.7 |   | (5.8 | ) | 1.0 |   | (4.7 | ) |
|                                                           |       | 610.9 |   | 22.2 |   | 31.5 |   | 664.6 |   | 29.6 |   | 31.4 |   | 61.1 |   |
| Intersegment     eliminations                   |       | — |   | — |   | (31.5 | ) | (31.5 | ) | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives             |       | — |   | — |   | — |   | — |   | (0.3 | ) | — |   | — |   |
| Interest expense                                               |       | — |   | — |   | — |   | — |   | (27.5 | ) | — |   | — |   |
| Interest income                                                |       | — |   | — |   | — |   | — |   | 0.2 |   | — |   | — |   |
| ** **                                                     | ** ** | **$** | **610.9** | ** ** | **$** | **22.2** | ** ** | **$** | **—** | ** ** | **$** | **633.1** | ** ** | **$** | **2.0** | ** ** | **$** | **31.4** | ** ** | **$** | **61.1** | ** ** |

 

29

----

Tableof Contents

 
| **Boise Inc.**                                | ** ** |
|----------------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **zation,** | ** ** | ** ** | ** ** |
| **Three Months Ended****September 30, 2007**  | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
|                                               |       | **(millions)** |   |
|                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                              |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Packaging                                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Corporate and  Other                               |       | — |   | — |   | — |   | — |   | (0.1 | ) | — |   | (0.1 | ) |
|                                               |       | — |   | — |   | — |   | — |   | (0.1 | ) | — |   | (0.1 | ) |
| Intersegment eliminations                          |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest expense                                   |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest income                                    |       | — |   | — |   | — |   | — |   | 5.2 |   | — |   | — |   |
| ** **                                         | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **5.1** | ** ** | **$** | **—** | ** ** | **$** | **(0.1** | **)** |

 
| **Boise Inc.**                                | ** ** |
|----------------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **zation,** | ** ** | ** ** | ** ** |
| **Nine Months Ended****September 30, 2008**   | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
|                                               |       | **(millions)** |   |
|                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                              |       | $ | 971.6 |   | $ | — |   | $ | 42.5 |   | $ | 1,014.1 |   | $ | 45.0 |   | $ | 50.1 |   | $ | 95.1 |   |
| Packaging                                          |       | 443.1 |   | 44.1 |   | 2.7 |   | 489.9 |   | (5.0 | ) | 24.5 |   | 19.5 |   |
| Corporate and  Other                               |       | 8.8 |   | 11.9 |   | 29.1 |   | 49.8 |   | (13.1 | ) | 2.3 |   | (10.8 | ) |
|                                               |       | 1,423.5 |   | 56.0 |   | 74.3 |   | 1,553.8 |   | 26.9 |   | 76.9 |   | 103.8 |   |
| Intersegment eliminations                          |       | — |   | — |   | (74.3 | ) | (74.3 | ) | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives |       | — |   | — |   | — |   | — |   | 0.2 |   | — |   | — |   |
| Interest expense                                   |       | — |   | — |   | — |   | — |   | (65.1 | ) | — |   | — |   |
| Interest income                                    |       | — |   | — |   | — |   | — |   | 2.2 |   | — |   | — |   |
| ** **                                         | ** ** | **$** | **1,423.5** | ** ** | **$** | **56.0** | ** ** | **$** | **—** | ** ** | **$** | **1,479.5** | ** ** | **$** | **(35.8** | **)** | **$** | **76.9** | ** ** | **$** | **103.8** |   |

 

30

----

Table of Contents

 
| **Boise Inc.**                                                 | ** ** |
|---------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | **Depre-  ciation,** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Sales** | ** ** | **Income** | ** ** | **Amorti-** | ** ** | ** ** | ** ** |
| **February 1 (Inception)****Through  September 30, 2007** | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **(Loss)  Before  Taxes** | ** ** | **zation,  and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
|                                                                |       | **(millions)** |   |
|                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                                               |       | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Packaging                                                           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Corporate and  Other                                                |       | — |   | — |   | — |   | — |   | (0.2 | ) | — |   | (0.2 | ) |
|                                                                |       | — |   | — |   | — |   | — |   | (0.2 | ) | — |   | (0.2 | ) |
| Intersegment eliminations                                           |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Change in fair  value of interest rate derivatives                  |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest expense                                                    |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   |
| Interest income                                                     |       | — |   | — |   | — |   | — |   | 5.8 |   | — |   | — |   |
| ** **                                                          | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **5.6** | ** ** | **$** | **—** | ** ** | **$** | **(0.2** | ) |

 
| **Predecessor**                                    | ** ** |
|----------------------------------------------------|------------|
| ** **                                         | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                         | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **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** | ** ** |

 

31

----

Table of Contents

 
| **Predecessor**                                   | ** ** |
|---------------------------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **zation,** | ** ** | ** ** | ** ** |
| **Three Months Ended****September 30, 2007** | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                             |       | $ | 231.6 |   | $ | 154.5 |   | $ | 16.0 |   | $ | 402.1 |   | $ | 50.1 |   | $ | 12.0 |   | $ | 62.1 |   |
| Packaging                                         |       | 173.7 |   | 18.4 |   | 0.9 |   | 193.0 |   | 4.2 |   | 10.3 |   | 14.5 |   |
| Corporate and  Other                              |       | 4.1 |   | 1.4 |   | 9.7 |   | 15.2 |   | (3.0 | ) | 0.7 |   | (2.3 | ) |
|                                              |       | 409.4 |   | 174.3 |   | 26.6 |   | 610.3 |   | 51.3 |   | 23.0 |   | 74.3 |   |
| Intersegment eliminations                         |       | — |   | — |   | (26.6 | ) | (26.6 | ) | — |   | — |   | — |   |
| Interest income                                   |       | — |   | — |   | — |   | — |   | 0.2 |   | — |   | — |   |
| ** **                                        | ** ** | **$** | **409.4** | ** ** | **$** | **174.3** | ** ** | **$** | **—** | ** ** | **$** | **583.7** | ** ** | **$** | **51.5** | ** ** | **$** | **23.0** | ** ** | **$** | **74.3** | ** ** |

 
| **Predecessor**                                  | ** ** |
|--------------------------------------------------|------------|
| ** **                                       | ** ** | ** ** | ** ** | **Income** | ** ** | **Depre-  ciation,  Amorti-** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Sales** | ** ** | **(Loss)** | ** ** | **zation,** | ** ** | ** ** | ** ** |
| **Nine Months Ended****September 30, 2007** | ** ** | **Trade** | ** ** | **Related  Parties** | ** ** | **Inter-  segment** | ** ** | **Total** | ** ** | **Before  Taxes** | ** ** | **and  Depletion** | ** ** | **EBITDA  (b)** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **(millions)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Paper                                            |       | $ | 680.6 |   | $ | 471.8 |   | $ | 45.9 |   | $ | 1,198.3 |   | $ | 81.9 |   | $ | 44.7 |   | $ | 126.6 |   |
| Packaging                                        |       | 524.4 |   | 53.6 |   | 1.9 |   | 579.9 |   | 14.6 |   | 37.6 |   | 52.2 |   |
| Corporate and  Other                             |       | 10.8 |   | 3.9 |   | 28.8 |   | 43.5 |   | (5.3 | )(a) | 2.2 |   | (3.0 | )(a) |
|                                             |       | 1,215.8 |   | 529.3 |   | 76.6 |   | 1,821.7 |   | 91.2 |   | 84.5 |   | 175.8 |   |
| Intersegment eliminations                        |       | — |   | — |   | (76.6 | ) | (76.6 | ) | — |   | — |   | — |   |
| Interest income                                  |       | — |   | — |   | — |   | — |   | 0.5 |   | — |   | — |   |
| ** **                                       | ** ** | **$** | **1,215.8** | ** ** | **$** | **529.3** | ** ** | **$** | **—** | ** ** | **$** | **1,745.1** | ** ** | **$** | **91.7** | ** ** | **$** | **84.5** | ** ** | **$** | **175.8** | ** ** |

 

----

(a)   The nine months ended September 30, 2007, include a$4.4 million gain for changes in retiree healthcare programs.

 

(b)   EBITDA represents income (loss) before interest (interest expense,interest income, and change in fair value of interest rate derivatives), incometax provision (benefit), and depreciation, amortization, and depletion. EBITDAis the primary measure used by our chief operating decision makers to evaluatesegment operating performance and to decide how to allocate resources tosegments. We believe EBITDA is useful to investors because it provides a meansto evaluate the operating performance of our segments and our company on anongoing basis using criteria that are used by our internal decision makers and becauseit is frequently used by investors and other interested parties in theevaluation of companies with substantial financial leverage. We believe EBITDAis a meaningful 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 U.S. generally acceptedaccounting principles (GAAP) and should not be considered as an alternative tonet income (loss), income (loss) from operations, or any other performancemeasure derived in accordance with GAAP or as an alternative to cash flow fromoperating activities as a measure of our liquidity. The use of EBITDA insteadof net income (loss) or segment income (loss) has limitations as an analyticaltool, including the inability to determine profitability; the

 

32

----

Tableof Contents

 

exclusion of interest and associated significant cash requirements; andthe exclusion of depreciation, amortization, and depletion, which representsignificant and unavoidable operating costs, given the level of ourindebtedness and the capital expenditures needed to maintain our businesses.Management compensates for these limitations by relying on our GAAP results.Our measures of EBITDA are not necessarily comparable to other similarly titledcaptions of other companies due to potential inconsistencies in the methods ofcalculation.

 

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

 
| ** **                                         | ** ** | **Boise Inc.**                           | ** ** | ** **                                    | **Predecessor** | ** **                                   |
|----------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|-----------------|----------------------------------------------|
| ** **                                         | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** **      | **Nine  Months  Ended  September 30,  2008** | ** ** | **February 1  (Inception)  Through  September 30,  2007** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                                               |       |                                          |       |                                          |            |                                         |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                                 |       | $                                             | 4.4        |                                          | $               | 2.8                                          |   | $ | (30.0 | ) | $ | 3.1 |   |   | $ | 22.8 |   | $ | 50.2 |   | $ | 88.7 |   |
| Change in fair  value of interest rate derivatives |       | 0.3                                           |       | —                                        |            | (0.2                                         | ) | — |   |   | — |   | — |   | — |   |
| Interest expense                                   |       | 27.5                                          |       | —                                        |            | 65.1                                         |   | — |   |   | — |   | — |   | — |   |
| Interest income                                    |       | (0.2                                          | )          | (5.2                                          | )               | (2.2                                         | ) | (5.8 | ) |   | (0.2 | ) | (0.2 | ) | (0.5 | ) |
| Income tax  provision (benefit)                    |       | (2.4                                          | )          | 2.3                                           |            | (5.7                                         | ) | 2.6 |   |   | 0.6 |   | 1.3 |   | 3.0 |   |
| Depreciation, amortization,  and depletion         |       | 31.4                                          |       | —                                        |            | 76.9                                         |   | — |   |   | 0.5 |   | 23.0 |   | 84.5 |   |
| EBITDA                                             | ** ** | **$**                                         | **61.1**   | ** **                                    | **$**           | **(0.1**                                     | **)** | **$** | **103.8** | ** ** | **$** | **(0.2** | **)** | ** ** | **$** | **23.7** | ** ** | **$** | **74.3** | ** ** | **$** | **175.8** | ** ** |

 

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

 

*Commitments*

 

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

 

We are a party to a number of long-term log and fibersupply agreements. At September 30, 2008, our total obligation for log andfiber purchases under contracts with third parties was approximately$167.0 million. Under most of the log and fiber supply agreements, we havethe right to cancel or reduce our commitments in the event of a millcurtailment or shutdown. The prices under most of these agreements is setquarterly or semiannually based on regional market prices, and the estimate isbased on contract terms or current-quarter pricing. Our log and fiberobligations are subject to change based on, among other things, the effect ofgovernmental laws and regulations, our manufacturing operations not operatingin the normal course of business, log and fiber availability, and the status ofenvironmental appeals. Except for deposits required pursuant to wood supplycontracts, these obligations are not recorded in our consolidated financialstatements until contract payment terms take effect.

 

We enter into utility contracts for the purchase ofelectricity and natural gas. We also purchase these services under utilitytariffs. The contractual and tariff arrangements include multiple-yearcommitments and minimum annual purchase requirements. At September 30,2008, we had approximately $25.0 million of utility purchase commitments.These payment obligations were valued at prices in effect on December 31, 2007,or determined pursuant to contractual terms, if available. Because we consumethe energy in the manufacture of our products, these obligations represent theface value of the contracts, not resale value.

 

33

----

Tableof Contents

 

*Guarantees*

 

We provide guarantees,indemnifications, and assurances to others, which constitute guarantees asdefined under FIN No. 45, *Guarantor’s Accounting andDisclosure Requirements for Guarantees*, *IncludingIndirect Guarantees of Indebtedness of Others*. See Note 13, Debt,included in this Form 10-Q for a description of guarantees, including theapproximate terms of the guarantees, how the guarantees arose, the events orcircumstances that would require us to perform under the guarantees, and themaximum potential undiscounted amounts of future payments we could be requiredto make.

 

***21.******        Legal Proceedings andContingencies***

 

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

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

 

***Understanding Our 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 a discussionof our operating segments. “Recent Trends and Operational Outlook” and “FactorsThat Affect Operating Results” are intended to give the reader an overview ofthe goals and challenges and the direction of our business and changesaffecting our products. The analysis then reviews our “Operating Results”followed by a discussion of relevant merger activity in our industry in “IndustryMergers and Acquisitions.” We then discuss our balance sheet and cash flows andour financial commitments in the section entitled “Liquidity and CapitalResources.”

 

This discussion and analysis includes statementsregarding our expectations with respect to our future performance, liquidity,and capital resources. Such statements, along with any other nonhistoricalstatements in the discussion, are forward-looking. These forward-lookingstatements involve risks and uncertainties. Our actual results may differmaterially from those contained in or implied by any of the forward-lookingstatements in this Form 10-Q. Factors that could cause or contribute to such differencesinclude, but are not limited to, those identified below and those discussedin  “Item 1A.  Risk Factors” in our Annual Report on Form 10-Kand our Quarterly Reports on Form 10-Q, as well as those factors listed inother documents we file with the Securities and Exchange Commission (SEC). Wedo not assume an obligation to update any forward-looking statement.

 

***Background and Executive Overview***

 

Boise Inc. (formerly Aldabra 2 Acquisition Corp.) or “theCompany,” “we,” “us,” or “our” was a blank check company created on February 1,2007 (inception) and organized for the purpose of effecting a merger, capitalstock exchange, asset acquisition, or other similar business combination withan operating business. On February 22, 2008, Boise Inc. completed theacquisition (the Acquisition) of Boise White Paper, L.L.C., Boise Packaging &Newsprint, L.L.C., Boise Cascade Transportation Holdings Corp. (collectively,the Paper Group), and other assets and liabilities related to the operation ofthe paper, packaging and newsprint, and transportation businesses of the PaperGroup and part of the headquarters operations of Boise Cascade, L.L.C. (BoiseCascade). The business we acquired is referred to in this report on Form 10-Qas the “Predecessor.” The Acquisition was accomplished through the Company’sacquisition of Boise Paper Holdings, L.L.C. See “Acquisition of Boise Cascade’sPaper and Packaging Operations” below for more information related to theAcquisition.

 

The accompanyingconsolidated statements of income (loss) for the three and****ninemonths ended September 30, 2008, and cash flows for the nine months ended September 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 September 30, 2008. The consolidated statements of 

 

34

----

Tableof Contents

 

income (loss) for theperiod of January 1 through February 21, 2008, and for the three andnine months ended September 30, 2007, and the consolidated statements ofcash flows for the period of January 1 through February 21, 2008, andthe nine months ended September 30, 2007, of the Predecessor are presentedfor comparative purposes. The three months ended September 30, 2007, andthe period of February 1 (inception) through September 30, 2007,represent the activities of Aldabra 2 Acquisition Corp.

 

This “Management’s Discussion and Analysisof Financial Condition and Results of Operations” at times refers to thecombined activities of Boise Inc. and the Predecessor for each periodspecifically indicated, which we believe is****themost useful comparison between periods. The Acquisition was accounted for inaccordance with Statement of Financial Accounting Standards (SFAS) No. 141,*Business Combinations,*resulting in anew basis of accounting from those previously reported by the Predecessor.However, sales and most operating cost items are substantially consistent withthose reported 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.

 

***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 SFAS No. 141, *Business Combinations*. Upon completion of the transaction,Boise Cascade owned 37.9 million, or 49%, of our outstanding shares. Subsequentto the transaction, Boise Cascade transferred 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 direct transaction costs and purchase price adjustments,are summarized as follows:

 
| ** **                                               | ** ** | **February 22,  2008** | ** **  |
|----------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                               | ** ** | **(millions)**              | ** **  |
|                                                     |       |                        |        |
| Cash paid to  Boise Cascade                              |       | $                           | 1,252.3     |   |
| Cash paid to  Boise Cascade for financing and other fees |       | 24.9                        |        |
| Less: cash  contributed by Boise Cascade                 |       | (38.0                       | )           |
| Net cash                                                 |       | 1,239.2                     |        |
|                                                     |       |                        |        |
| Equity at $9.15  average price per share                 |       | 346.4                       |        |
| Lack of  marketability discount                          |       | (41.6                       | )           |
| Total equity                                             |       | 304.8                       |        |
|                                                     |       |                        |        |
| Note payable to  Boise Cascade at closing                |       | 41.0                        |        |
| Working capital  adjustment                              |       | 17.3                        |        |
| Total note  payable to Boise Cascade                     |       | 58.3                        |        |
|                                                     |       |                        |        |
| Fees and  expenses                                       |       | 61.0                        |        |
|                                                     |       |                        |        |
| Total purchase  price                                    | ** ** | **$**                       | **1,663.3** | ** ** |

 

35

----

Tableof Contents

 

*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 financing costsand 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 withthe Acquisition, 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 $58.3 millioneffective February 22, 2008. The increase of the note reflects$17.3 million of postclosing 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 for$53.8 million, including accrued interest but before transaction costs.The full amount of the original note, as amended, together with accrued andunpaid interest from March 31, 2008, is now represented by eight separatenotes payable, each with terms (other than the amount) identical to theoriginal note payable. Because none of the eight holders of the notes arerelated to either Boise Inc. or Boise Cascade, we no longer record the notes asrelated-party notes payable on our Consolidated Balance Sheet. See Note 4,Transactions With Related Parties, and Note 13, Debt, in the Notes to UnauditedQuarterly Consolidated Financial Statements in “Part I, Item 1.Consolidated Financial Statements” of this Form 10-Q for furtherinformation on the notes.

 

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

 

We have substantiallycompleted our purchase price allocation of the fair value of assets acquiredand liabilities assumed. However, we continue to evaluate the amounts includedin our allocation as information is received from third parties. We expect tobe complete by the one-year anniversary date of the Acquisition. The followingtable summarizes the fair value allocation of the assets acquired andliabilities assumed in the Acquisition as of September 30, 2008:

 

36

----

Table of Contents

** **
| ** **                | ** ** | **February 22,  2008,  Fair Value** | ** **  |
|---------------------------|------------|-----------------------------------------------|-------------|
| ** **                | ** ** | **(millions)**                                | ** **  |
|                      |       |                                          |        |
| Current assets            |       | $                                             | 571.9       |   |
| Property and  equipment   |       | 1,305.6                                       |        |
| Fiber farms and  deposits |       | 11.0                                          |        |
| Intangible  assets:       |       |                                          |        |
| Trademark and  trade name |       | 16.8                                          |        |
| Customer list             |       | 13.7                                          |        |
| Technology                |       | 6.9                                           |        |
| Deferred  financing costs |       | 81.9                                          |        |
| Other long-term  assets   |       | 4.5                                           |        |
| Current  liabilities      |       | (247.3                                        | )           |
| Long-term  liabilities    |       | (101.7                                        | )           |
| Total purchase  price     | ** ** | **$**                                         | **1,663.3** | ** ** |

 

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  September 30** | ** ** | **Nine Months  Ended  September 30** | ** ** |
| ** **                                          | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                          | ** ** | **(millions,  except per-share data)**          | ** ** |
|                                                |       |                                            |       |   |   |   |   |
| Sales                                               |       | $                                               | 583.7      |   | $ | 1,839.4 |   | $ | 1,745.1 |   |
| Net income (loss)                                   |       | 16.4                                            |       | (41.0 | ) | (12.2 | ) |
| Net income  (loss) per share—basic and diluted |       | 0.21                                            |       | (0.53 | ) | (0.16 | ) |
|                                                     |            |                                                 |            |  |  |  |  |  |  |  |

 

***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.*Our Paper segmentmanufactures and sells uncoated freesheet (including commodity and premiumcut-size office papers); a range of packaging papers (including corrugatingmedium, label and release papers, and flexible packaging papers); commodity andpremium printing and converting papers (including commercial printing papers,envelope papers, and form-related products); and market pulp. Many of thesepaper products are commodity products, while others have specialized featuresthat make these products premium and specialty grades. Our premium gradesinclude 100% recycled and colored cut-size office papers, and our specialtygrades include custom-developed papers for such uses as label and release andflexible food packaging. In 2007, we completed an $80 million conversion of theW-3 paper machine in Wallula, Washington, to significantly grow label andrelease capacity. We ship to customers both directly from our mills and throughdistribution centers. In the third quarter of 2008, approximately 37% ofuncoated freesheet paper sales volume, including approximately 68% of theoffice papers sales volume, was sold to OfficeMax Incorporated (OfficeMax).

 

37

----

Table of Contents

 

*Packaging*. Our Packaging segment manufactures andsells containerboard (linerboard) and newsprint at our mill in DeRidder,Louisiana. In March of this year, we completed a $23 millionlinerboard expansion project, which reduced our exposure to fossil fuels andincreased product capabilities.

 

We also operate five corrugated container plants in the Northwest and asheet feeder plant in Texas. Our corrugated containers are used primarily inthe packaging of fresh fruit and vegetables, processed food, and beverages, aswell as industrial and consumer products. Our Waco, Texas, plant, known asCentral Texas Corrugated, or CTC, produces corrugated sheets that are sold tosheet plants in the Southwest, where they are converted into corrugatedcontainers for a variety of customers. Our containerboard and corrugatedproducts are sold by our own sales personnel and by brokers.

 

We market our newsprint through a subsidiary of Abitibi-Consolidated Inc.(Abitibi) pursuant to an arrangement whereby Abitibi purchases all of thenewsprint we produce at a price equal to the price at which Abitibi sellsnewsprint produced at its mills located in the southern United States(including its recently acquired Bowater mills), less associated expenses and asales and marketing discount. The newsprint price is verified through athird-party review.

 

*Corporateand Other*. Our Corporate and Other segment includes primarilycorporate support services, related assets and liabilities, and foreignexchange gains and losses. During the Predecessor periods presented, theCorporate and Other segment included primarily an allocation of Boise Cascadecorporate support services and related assets and liabilities. These supportservices included, but were not limited to, finance, accounting, legal,information technology, and human resource functions. This segment alsoincludes transportation assets, such as rail cars and trucks, that we use totransport our products from our manufacturing sites. Rail cars and trucks aregenerally leased. We provide transportation services not only to our ownfacilities but also, on a limited basis, to third parties when geographicproximity and logistics are favorable.

 

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 nine months ended September 30, 2008,we recorded $3.7 million and $9.1 million in “Sales, Related parties” and thesame amounts in “Costs and expenses” in our Consolidated Statements of Income(Loss) related to this agreement.

 

***Recent Trends and Operational Outlook***

 

In September 2008,the outlook for the U.S. economy deteriorated considerably as the globalfinancial crisis unfolded and credit markets began to contract sharply.Historically, North American demand for our products has been influenced bylevels of economic activity, and an economic downturn could have a negativeimpact on our sales volumes and financial performance.

 

In June 2008, weannounced a $55-per-ton price increase for linerboard, which we implementedduring the third quarter on domestic sales and passed through to our corrugatedproducts. In September, we announced a $60-per-ton increase for linerboardeffective October 2008. There is no assurance that the announced priceincrease will be realized. Demand in agriculture, food, and beverage markets,which constitute over half of our packaging product end-use markets, hasremained relatively stable, while industrial markets continue to slow due toweaker economic growth. The impact of weaker domestic demand has been 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.

 

In late May 2008, weannounced a $60-per-ton price increase across all uncoated freesheetcommunication papers, which was largely implemented during the third quarter.Since a large portion of our cut-size office paper is sold to OfficeMax under acontract whereby the price OfficeMax pays is determined by a published index,changes in price for this product sold to OfficeMax tend to lag behind thegeneral market by approximately 60 days.

 

38

----

Tableof Contents

 

Two factors havecontributed to the favorable pricing environment for uncoated freesheet. First,industry manufacturing capacity has been closed or converted, which has offsetdemand reduction. Second, the value of the U.S. dollar, relative to othercurrencies, has allowed the profitable export of uncoated freesheet and madeU.S. markets less attractive to offshore producers. As a result, industryinventories are low relative to 2007 levels, which has enabled increasingprices for many uncoated freesheet grades.

 

Overall North Americandemand for uncoated freesheet, which includes a wide range of paper grades, hasbeen declining. According to the American Forest and Paper Association(AF&PA), uncoated freesheet shipments declined 6.2% through September 2008,compared with the same period in 2007. Demand for commodity communicationpapers has continued to decline as communication paper products are negativelyaffected by the shift to electronic media for communications and weakeningmacroeconomic conditions. Compounding this, demand for printing and convertingproducts, including envelopes and forms, has softened as direct-mailadvertising has slowed. Despite this overall trend, some segments where we havea significant presence have continued to show growth. Demand for ourpackaging-driven grades, including label and release and flexible packagingpapers, has been flat to modestly growing in 2008, as has demand for premiumoffice papers, including colored and high-recycled-content cut-size papers.

 

North American newsprintdemand has continued its long-term decline. However, in May, AbitibiBowaterannounced a $60-per-ton price increase, which was largely phased in during thethird quarter. In August, AbitibiBowater announced an additional $60-per-tonincrease to be phased in during fourth quarter 2008. AbitibiBowateralso announced curtailment of a total of approximately 250,000 tons ofnewsprint production over fourth quarter 2008 and first quarter 2009. The salesprice for our newsprint, all of which is marketed by Abitibi, is based upon theprice at which Abitibi sells newsprint in the southern United States. There isno assurance that the announced price increases will be realized.

 

Wood fiber costs in thePacific Northwest declined during third quarter 2008, compared with secondquarter prices but continued to be high by historical standards. Similarly,energy and chemical costs were high, compared with historical levels. Thesehigher wood fiber, energy, and chemical costs continue to have a significantnegative impact on the financial results of our St. Helens, Oregon, andWallula, Washington, pulp and paper mills. As a result, we may choose to changeour operating configuration at those facilities, including potentially closingsome or all of the St. Helens mill if we cannot operate it profitably. Wewill continue to evaluate its ongoing financial performance. OurSt. Helens and Wallula pulp and paper mill combined consume approximately1 million bone-dry units (bdu) of wood in the Pacific Northwest annuallyunder normal operations. During 2008, we expanded our whole-log chippingcapacity and began utilizing alternative sources of fiber, such as softwoodsawdust, where possible.

 

Natural gas prices, asubstantial component of our energy costs, declined in third quarter 2008 butwere still high relative to historical standards. Since the Acquisition, wehave employed natural gas caps as our primary hedging tool to mitigate naturalgas price volatility and allow us to benefit from declining natural gas prices.In the third quarter, the value of these derivative instruments declined asnatural gas prices fell, which resulted in a noncash mark-to-market expense of$11.3 million for third quarter 2008. Boise Inc.’s pulp and paperoperations consume approximately 14 million million British thermal units(mmBtu) of natural gas annually under normal operations.

 

Chemical prices havecontinued to increase through third quarter 2008, and many of Boise Inc.’schemical suppliers have increased their prices to us as contracts have allowed.A substantial portion of our chemical purchases are made based on annualcontracts. Many of these contracts are being renegotiated and will take effectin early 2009. This may result in significant price increases on some keycommodity chemicals.

 

In September of2008, operations at our DeRidder, Louisiana, paper mill were affected byHurricanes Gustav and Ike. Operations were shut down in an orderly fashion inanticipation of the hurricanes, and the facility sustained minimal damage. Lostproduction as a result of the hurricanes was approximately 18,000 tons,including approximately 8,000 tons of newsprint and 10, 000 tons of linerboard.This loss of production, coupled with the costs incurred in shutting down andrestarting the mill, negatively affected operating earnings by approximately$5.5 million. In addition, the wet weather 

 

39

----

Tableof Contents

 

and flooding caused bythe hurricanes may adversely affect fiber costs in the region as dry timberstands become harder to access. The company’s containerboard and newsprintoperations in DeRidder have an annual capacity of over 1 million tons.

 

During the quarter andinto October, we selectively curtailed shifts and slowed production on selecteduncoated freesheet machines to balance production with demand. We may elect totake additional downtime if market conditions warrant.

 

In October 2008, wesuccessfully completed our annual maintenance shutdown at our Jackson, Alabama,pulp and paper mill. We have no further scheduled maintenance shutdowns infourth quarter 2008.

 

***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 limited to durable and nondurable goods production,white-collar employment, electronic substitution, and relative currency values;

 

·      Volatility in raw materialcosts, energy prices, and currency values;

 

·      Volatility in fiber costsand supply due to the impact of biomass energy;

 

·      The commodity nature of ourproducts and their price movements, which are driven largely by supply anddemand;

 

·      Industry cycles and capacityutilization rates;

 

·      The cost of and ability toobtain necessary financing and creditworthiness of lenders;

 

·      Continued compliance withgovernment regulations;

 

·      Pension returns andpotential legislation;

 

·      Legislative or regulatoryenvironments, requirements, or changes affecting the businesses in which we areengaged;

 

·      Labor and personnelrelations;

 

·      Credit or currency risksaffecting our revenue and profitability;

 

·      Major equipment failure;

 

·      Severe weather phenomenasuch as drought, hurricanes and significant rainfall, tornadoes, and fire;

 

·      Our customer concentrationand the ability of our customers to pay;

 

·      Our ability to implement ourstrategies;

 

·      Actionsof suppliers, customers, and competitors;

 

·      Theability to secure skilled technical personnel and staffing; and

 

·      Theother factors described in “Item 1A. Risk Factors” in our Annual Report onForm 10-K and our Quarterly Reports on Form 10-Q.

 

40

----

Tableof Contents

 

*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 price for our commodity products, and the price for any one ormore of these products may fall below our cash costs. Therefore, our salesvolume and profitability with respect to these products depend 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 communication papers is the continuing substitution ofelectronic media for print media. This trend negatively affects the demand formany of our communication paper grades, including newsprint, printing andconverting grades, and commodity office papers. Demand for packaging papers,including label and release and flexible packaging papers, is driven bypackaging demand and is not significantly affected by electronic mediasubstitution.

 

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 25% in third quarter 2008, compared with thirdquarter 2007, driving sales volume of premium and specialty papers overall toapproximately 37% of uncoated freesheet tons sold during the three months endedSeptember 30, 2008, compared with 32% 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. We continue to identify and resolve issuesas we extend 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. Recent events,including the global financial and credit crisis, indicate a deterioration inthe macroeconomic outlook. While an economic downturn could negatively affectoverall demand, no single product line drives our overall financialperformance, and individual product lines are influenced by conditions in theirrespective industries. For example:

 

·      Historically, demand for uncoated freesheetcorrelated 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 toan increased public awareness of environmental and sustainability issues and isless sensitive to general economic activity. We produce grades that containfrom 10% to 100% recycled content.

 

41

----

Tableof Contents

 

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

 

·      A large share of the demand for corrugatedcontainers and, therefore, containerboard is driven by unprocessed andprocessed food production and manufacturing, specifically the manufacture ofnondurable goods. In addition, inventory stocking or liquidation of these goodshas an impact, as do currency exchange rates that affect thecost-competitiveness of foreign manufacturers. Although the U.S. dollar hasstrengthened recently, it still remains relatively weak by historical standardsand continues to benefit U.S. producers relative to overseas competitors.

 

·      Demand fornewsprint depends upon prevailing levels of newspaper advertising andcirculation. Demand for newsprint in North America declined approximately 22%between 2003 and 2007, according to RISI, and has continued to decline in 2008due in part to the growth 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.

 

From2003 to 2007, North American uncoated freesheet, containerboard, and newsprintcapacities declined 10%, 2%, and 19%, respectively, according to ResourceInformation Systems, Inc. (RISI). New capacity additions are constrainedby the high capital investment and long lead times required to plan, obtainregulatory approvals for, and build a new mill. A favorable pricing environmentmay prompt manufacturers 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. A weakened U.S. dollar has mitigated thelevel 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 in thesecosts can materially affect operating margins. In addition, the timing anddegree of price cycles of raw materials and energy differ with respect to eachtype of raw material and energy used.

 

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

 
| ** ** | ** ** | **Boise Inc.**                                      | ** ** | **Predecessor**                                   | ** ** | **Combined**                                         | ** ** | **Predecessor**                                   | ** ** |
|------------|------------|----------------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  September 30,   2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|       |       |                                                     |       |                                              |       |                                                 |       |                                              |       |   |   |   |   |
| Paper      |       | 29                                                       | %          | 30                                                | %          | 26                                                   | %          | 29                                                | %          | 31 | % | 28 | % |
| Packaging  |       | 15                                                       | %          | 14                                                | %          | 17                                                   | %          | 15                                                | %          | 16 | % | 17 | % |

 

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

 

42

----

Table of Contents

 

logs and wood chips intopulp, which we use at our paper mills to produce paper. On an aggregate basis,operating at capacity, we are able to produce pulp volume equal to all of ourpulp requirements, purchasing and selling similar amounts on the open market.High fiber and energy costs may limit our ability to produce and profitablysell market pulp, which is produced in the Pacific Northwest. Fiber****costs have eased in the Pacific Northwest through thequarter but remain high by historical standards. An extended period of lowerpulp sales volume would change Boise Inc.’s aggregate structural pulp balancefrom pulp neutral to one in which we are a net consumer of pulp.

 

Logs and wood fiber are commodities, and prices forlogs and wood fiber have historically been cyclical due to changing levels ofdemand and supply. Log and fiber supply may be limited by public policy orgovernment regulation as well as fire, insect infestation, disease, ice storms,windstorms, hurricanes, flooding, other weather conditions, and other naturaland man-made causes. Residual fiber supply may be limited due to a reduction inprimary manufacturing at sawmills and plywood plants. Declines in log and fibersupply, driven primarily by changes in public policy and government regulation,have been severe enough to cause the closure of numerous facilities in some ofthe regions in which we operate. Any sustained undersupply and resulting increasein wood fiber prices could decrease our production volumes and/or increase ouroperating costs. Prices for our products might not reflect increases ordecreases in log and wood fiber prices, and as a result, our operating marginscould fluctuate. Delivered fiber costs in all our operating regions have beennegatively affected by the cost of diesel, which remains relatively high byhistorical standards despite recent declines. High diesel costs increase thecost to harvest and transport wood to the mills.

 

In Minnesota, overallfiber costs decreased in the third quarter of 2008, compared with the thirdquarter of 2007, driven by lower consumption of purchased pulp, as weselectively curtailed shifts and slowed production to balance production withdemand. In the Pacific Northwest, fiber costs in third quarter 2008 increased,compared with third quarter 2007, due primarily to higher residual chip prices,which continue to be high by historical standards. Compared with second quarter2008, residual fiber costs in the Pacific Northwest declined during thirdquarter 2008, reflecting higher pulpwood and chip inventories in the region.Because residual fiber for our paper mills in the Northwest comes predominantlyfrom sawmills and plywood plants, continued curtailments at these mills, as aresult of decreased demand for these products related to the housing slowdown,negatively affect the availability and price of residual fiber for our PacificNorthwest pulp and paper operations. In third quarter 2008, fiber costs at ourDeRidder mill increased as wood prices increased, driven primarily by highercosts for diesel. In our Alabama operating region, fiber costs increased in thethird quarter, driven by increased pulp and wastepaper pricing and increasingwood prices, due primarily to increases in diesel costs.

 

*Other RawMaterials and Energy Purchasing and Pricing.*We purchaseother raw materials and energy used to manufacture our products in both theopen market and through long-term contracts. These contracts are generally withregional suppliers who agree to supply all of our needs for a certain rawmaterial or energy at a single facility. These contracts normally containminimum purchase requirements and are for terms of various lengths. They alsocontain price adjustment mechanisms that take into account changes in marketprices. Therefore, although our long-term contracts provide us with supplies ofraw materials and energy that are more stable than open-market purchases, inmany cases, they may not alleviate 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.*Energyprices, particularly for electricity, natural gas, and fuel oil, have beenvolatile in recent years and extremely volatile since the midpoint of firstquarter 2008. Currently, energy prices are above historical averages. Inaddition, we have limited flexibility to switch between fuel sources in theshort term; accordingly, we have significant exposure to natural gas pricechanges. In the third quarter of 2008, natural gas prices declined from highsecond quarter levels. Under normal operations, Boise Inc. pulp and paperoperations consume approximately 14 mmBtu of natural gas annually**.**Energy costs represent the following percentages ofmaterials, labor, and other operating expenses, including fiber costs, forBoise Inc. and the Predecessor in each of the periods listed below:

 

43

----

Tableof Contents

 
| ** ** | ** ** | **Boise Inc.**                                | ** ** | **Predecessor**                                   | ** ** | **Combined**                                         | ** ** | **Predecessor**                                         | ** ** |
|------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months   Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|       |       |                                               |       |                                              |       |                                                 |       |                                                    |       |   |   |   |   |
| Paper      |       | 18                                                 | %          | 17                                                | %          | 15                                                   | %          | 16                                                      | %          | 14 | % | 14 | % |
| Packaging  |       | 16                                                 | %          | 14                                                | %          | 14                                                   | %          | 14                                                      | %          | 14 | % | 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 September 30,2008, we had entered into derivative instruments related to approximately 72%,70%, and 62% of our forecasted natural gas purchases for the months of October 2008,November 2008, and December 2008, respectively. We also entered intoderivative instruments related to approximately 54% of our forecasted naturalgas purchases for the period of January through February 2009,approximately 51% of our forecasted natural gas purchases for March 2009,and approximately 37% of our forecasted natural gas purchases from April 2009through October 2009. These derivatives include three-way collars, caps,call spreads, and swaps.

 

Wehave elected to account for these instruments as economic hedges. At September 30,2008, we recorded the fair value of the derivatives, or$7.4 million, in “Accrued liabilities, Other” on our Consolidated BalanceSheet. During the three and nine months ended September 30, 2008, werecorded the change in fair value of the instruments, or $11.3 million and$7.5 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 weuse in the production of our products include starch, sodium chlorate,precipitated calcium carbonate, caustic, sodium hydroxide, and dyestuffs andoptical brighteners. Purchases of chemicals represent the following percentagesof materials, 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  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months   Ended  September 30,  2008** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|       |       |                                               |       |                                              |       |                                                 |       |                                                    |       |   |   |   |   |
| Paper      |       | 16                                                 | %          | 15                                                | %          | 13                                                   | %          | 15                                                      | %          | 15 | % | 14 | % |
| Packaging  |       | 7                                                  | %          | 6                                                 | %          | 6                                                    | %          | 6                                                       | %          | 6 | % | 5 | % |

 

We experiencedhigher chemical costs during third quarter 2008, compared with third quarter2007, driven by substantially higher prices for commodity chemicalinputs. Many of our chemicals are purchased under long-term contracts, whichprovide more stability than open-market purchases. Many of these contracts arebeing renegotiated and will take effect in early 2009. This may result insignificant price increases for some key commodity chemicals.

 

*Labor.* Labor costs tend toincrease steadily due to inflation in healthcare and wage costs. Labor costsare not as volatile as energy and wood fiber costs. As of September 30,2008, we had approximately 4,550 employees. Approximately 2,700, or 59%, ofthese employees work pursuant to collective bargaining agreements. In August,we reached four-year agreements at our Wallula, Washington, packaging facility(123 employees represented by the United Steelworkers; contract runs throughDecember, 2011) and at our Jackson, Alabama, converting facility (113 employeesrepresented by the United Steelworkers; contract runs through July, 2012). Thelabor contract at our packaging plant in Salem, Oregon (94 employeesrepresented by the Association of Western Pulp & Paper Workers) willexpire in December 2008, and the union has notified us that they will notbe ready to start negotiations 

 

44

----

Table of Contents

 

until late January 2009. We do not expectmaterial work interruptions or increases in our costs during the course of thenegotiations with our collective bargaining units. Nevertheless, if ourexpectations are not accurate, we could experience a material labor disruptionor significantly increased labor costs at one or more of our facilities, any ofwhich could prevent us from meeting customer demand or reduce our sales andprofitability.

 

*Inflationaryand Seasonal Influences.*Our major costs of production are labor, wood fiber, energy, andchemicals. Fiber costs in the Pacific Northwest remain high by historicalstandards. Energy costs, particularly for electricity, natural gas, and fueloil, have been volatile in recent years and are relatively high by historicalstandards. We have also seen significantly higher chemical costs in the currentyear, compared with historical standards. Fiber, energy, and chemical costswere $136.4 million, $95.6 million, and $71.7 million, respectively, for thirdquarter 2008 compared with $127.5 million, $67.4 million, and $59.7 million,respectively, for third quarter 2007. Combined, this represents a cost increaseof $49.1 million in third quarter 2008 compared with third quarter 2007. 

 

We experience some seasonality, based primarily on buying patternsassociated with particular products. For example, the demand for our corrugatedcontainers is influenced by agricultural demand in the Pacific Northwest. Inaddition, seasonally cold weather increases costs, especially energyconsumption, at all of our manufacturing facilities.

 

45

----

Table of Contents

 

***Operating Results***

 

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

 
| ** **                                      | ** ** | **Boise Inc. (a)**                       | ** ** | ** ** | **Predecessor**                                    | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------|------------|------------|----------------------------------------------------|------------|
| ** **                                      | ** ** | **Three  Months  Ended  September 30,  2008** | ** ** | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** |
|                                            |       |                                               |       |       |                                               |       |
| **Sales**                                       |       |                                               |       |       |                                               |       |
| Trade                                           |       | $                                                  | 610.9      |       |                                               | $          | 409.4 |   |
| Related parties                                 |       | 22.2                                               |       |       | 174.3                                              |       |
|                                            |       | 633.1                                              |       |       | 583.7                                              |       |
|                                            |       |                                               |       |       |                                               |       |
| **Costs  and expenses**                         |       |                                               |       |       |                                               |       |
| Materials,  labor, and other operating expenses |       | 526.7                                              |       |       | 472.9                                              |       |
| Fiber costs from  related parties               |       | 21.2                                               |       |       | 9.5                                                |       |
| Depreciation,  amortization, and depletion      |       | 31.4                                               |       |       | 23.0                                               |       |
| Selling and  distribution expenses              |       | 13.8                                               |       |       | 14.7                                               |       |
| General and  administrative expenses            |       | 9.9                                                |       |       | 12.6                                               |       |
| Other (income)  expense, net                    |       | —                                             |       |       | 0.3                                                |       |
|                                            |       | 603.0                                              |       |       | 533.0                                              |       |
|                                            |       |                                               |       |       |                                               |       |
| **Income  from operations**                     | ** ** | **$**                                              | **30.1**   | ** ** | ** **                                         | **$**      | **50.7** | ** ** |
|                                            |       |                                               |       |       |                                               |       |
| **Sales**                                       |       |                                               |       |       |                                               |       |
| Trade                                           |       | 96.5                                               | %          |       | 70.1                                               | %          |
| Related parties                                 |       | 3.5                                                |       |       | 29.9                                               |       |
|                                            |       | 100.0                                              | %          |       | 100.0                                              | %          |
|                                            |       |                                               |       |       |                                               |       |
| **Costs  and expenses**                         |       |                                               |       |       |                                               |       |
| Materials,  labor, and other operating expenses |       | 83.2                                               | %          |       | 81.0                                               | %          |
| Fiber costs from  related parties               |       | 3.3                                                |       |       | 1.7                                                |       |
| Depreciation,  amortization, and depletion      |       | 4.9                                                |       |       | 3.9                                                |       |
| Selling and  distribution expenses              |       | 2.2                                                |       |       | 2.5                                                |       |
| General and  administrative expenses            |       | 1.6                                                |       |       | 2.2                                                |       |
| Other (income)  expense, net                    |       | —                                             |       |       | —                                             |       |
|                                            |       | 95.2                                               | %          |       | 91.3                                               | %          |
|                                            |       |                                               |       |       |                                               |       |
| **Income  from operations**                     | ** ** | **4.8**                                            | **%**      | ** ** | **8.7**                                            | **%**      |

 

----

(a)          We have notincluded information related to the three months ended September 30, 2007,which represents the activities of Aldabra 2 Acquisition Corp., as theoperating results related to this period are insignificant.

 

46

----

Table of Contents

 

***OperatingResults***

 

The following table setsforth operating results in dollars and as a percentage of sales for the ninemonths ended September 30, 2008, the Predecessor periods of January 1through February 21, 2008, and the nine months ended September 30,2007 (in millions, except percent-of-sales data):

 
| ** **                                      | ** ** | **Boise Inc. (a)**                      | ** ** | ** ** | **Predecessor**                                      | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Sales**                                       |       |                                              |       |       |                                                 |       |   |   |
| Trade                                           |       | $                                                 | 1,423.5    |       |                                                 | $          | 258.4 |   | $ | 1,215.8 |   |
| Related  parties                                |       | 56.0                                              |       |       | 101.5                                                |       | 529.3 |   |
|                                            |       | 1,479.5                                           |       |       | 359.9                                                |       | 1,745.1 |   |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Costs and expenses**                          |       |                                              |       |       |                                                 |       |   |   |
| Materials,  labor, and other operating expenses |       | 1,266.2                                           |       |       | 313.9                                                |       | 1,464.3 |   |
| Fiber  costs from related parties               |       | 46.9                                              |       |       | 7.7                                                  |       | 30.8 |   |
| Depreciation,  amortization, and depletion      |       | 76.9                                              |       |       | 0.5                                                  |       | 84.5 |   |
| Selling  and distribution expenses              |       | 34.6                                              |       |       | 9.1                                                  |       | 43.7 |   |
| General  and administrative expenses            |       | 26.7                                              |       |       | 6.6                                                  |       | 32.4 |   |
| Other  (income) expense, net                    |       | (0.2                                              | )          |       | (1.0                                                 | )          | (0.6 | ) |
|                                            |       | 1,451.1                                           |       |       | 336.8                                                |       | 1,655.1 |   |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Income from operations**                      | ** ** | **$**                                             | **28.4**   | ** ** | ** **                                           | **$**      | **23.1** | ** ** | **$** | **90.0** | ** ** |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Sales**                                       |       |                                              |       |       |                                                 |       |   |   |
| Trade                                           |       | 96.2                                              | %          |       | 71.8                                                 | %          | 69.7 | % |
| Related  parties                                |       | 3.8                                               |       |       | 28.2                                                 |       | 30.3 |   |
|                                            |       | 100.0                                             | %          |       | 100.0                                                | %          | 100.0 | % |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Costs and expenses**                          |       |                                              |       |       |                                                 |       |   |   |
| Materials,  labor, and other operating expenses |       | 85.6                                              | %          |       | 87.2                                                 | %          | 83.9 | % |
| Fiber  costs from related parties               |       | 3.2                                               |       |       | 2.2                                                  |       | 1.8 |   |
| Depreciation,  amortization, and depletion      |       | 5.2                                               |       |       | 0.1                                                  |       | 4.8 |   |
| Selling  and distribution expenses              |       | 2.3                                               |       |       | 2.5                                                  |       | 2.5 |   |
| General  and administrative expenses            |       | 1.8                                               |       |       | 1.9                                                  |       | 1.9 |   |
| Other  (income) expense, net                    |       | —                                            |       |       | (0.3                                                 | )          | (0.1 | ) |
|                                            |       | 98.1                                              | %          |       | 93.6                                                 | %          | 94.8 | % |
|                                            |       |                                              |       |       |                                                 |       |   |   |
| **Income from operations**                      | ** ** | **1.9**                                           | **%**      | ** ** | **6.4**                                              | **%**      | **5.2** | **%** |

 

----

(a)          Wehave not included information related to the period of February 1(inception) through September 30, 2007, which represents the activities ofAldabra 2 Acquisition Corp., as the operating results related to this periodare insignificant.

 

47

----

Tableof Contents

 

***Sales Volumes and Prices***

 

Setforth below are segment sales volumes and average net selling prices for ourprincipal products for the three months ended September 30, 2008, thePredecessor three months ended September 30, 2007, the nine months ended September 30,2008, the Predecessor period of January 1 through February 21, 2008,the combined nine months ended September 30, 2008, and the Predecessornine months ended September 30, 2007:

** **
| ** **                                | ** ** | **Boise Inc.**                                                                                            | ** ** | **Predecessor**                                    | ** ** | **Boise Inc.**                               | ** ** | **Predecessor**                                      | ** ** | **Combined**                                      | ** ** | **Predecessor**                                   | ** ** |
|-------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **Three  Months  Ended  September 30,  2008**                                                             | ** ** | **Three  Months  Ended  September 30,  2007** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **January 1  Through  February 21,  2008** | ** ** | **Nine  Months  Ended  September 30,  2008** | ** ** | **Nine  Months  Ended  September 30,  2007** | ** ** |
|                                      |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| ** **                                | ** ** | **(thousands of short tons, except corrugated containers and sheets)** | ** ** |
| **Paper**                                 |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| Uncoated  freesheet                       |       | 364                                                                                                            |       | 363                                                |       | 868                                               |       | 236                                                  |       | 1,104                                             |       | 1,118                                             |       |
| Containerboard  (medium)                  |       | 34                                                                                                             |       | 34                                                 |       | 84                                                |       | 19                                                   |       | 103                                               |       | 99                                                |       |
| Market  pulp                              |       | 35                                                                                                             |       | 44                                                 |       | 87                                                |       | 20                                                   |       | 107                                               |       | 101                                               |       |
|                                      |       | 433                                                                                                            |       | 441                                                |       | 1,039                                             |       | 275                                                  |       | 1,314                                             |       | 1,318                                             |       |
|                                      |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| **Packaging**                             |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| Containerboard  (linerboard)              |       | 62                                                                                                             |       | 59                                                 |       | 140                                               |       | 36                                                   |       | 176                                               |       | 183                                               |       |
| Newsprint                                 |       | 97                                                                                                             |       | 97                                                 |       | 232                                               |       | 56                                                   |       | 288                                               |       | 306                                               |       |
| Corrugated  containers and sheets (mmsf)  |       | 1,616                                                                                                          |       | 1,689                                              |       | 3,818                                             |       | 914                                                  |       | 4,732                                             |       | 4,976                                             |       |
|                                      |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| ** **                                | ** ** | **(dollars per short ton, except corrugated containers and sheets)**   | ** ** |
|                                      |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| **Paper**                                 |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| Uncoated  freesheet                       |       | $                                                                                                              | 955        |                                               | $          | 876                                               |       | $                                                    | 931        |                                              | $          | 868                                               |       | $ | 918 |   | $ | 859 |   |
| Containerboard  (medium)                  |       | 484                                                                                                            |       | 432                                                |       | 466                                               |       | 454                                                  |       | 464                                               |       | 426                                               |       |
| Market  pulp                              |       | 496                                                                                                            |       | 544                                                |       | 528                                               |       | 535                                                  |       | 529                                               |       | 534                                               |       |
|                                      |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| **Packaging**                             |       |                                                                                                           |       |                                               |       |                                              |       |                                                 |       |                                              |       |                                              |       |
| Containerboard  (linerboard)              |       | $                                                                                                              | 392        |                                               | $          | 385                                               |       | $                                                    | 393        |                                              | $          | 399                                               |       | $ | 394 |   | $ | 380 |   |
| Newsprint                                 |       | 594                                                                                                            |       | 468                                                |       | 561                                               |       | 494                                                  |       | 548                                               |       | 496                                               |       |
| Corrugated  containers and sheets ($/msf) |       | 58                                                                                                             |       | 53                                                 |       | 57                                                |       | 55                                                   |       | 56                                                |       | 52                                                |       |

 

48

----

Table of Contents

 

The following presents adiscussion of sales and costs for the three months ended September 30,2008, compared with the same period in 2007, as well as the combined ninemonths ended September 30, 2008, compared with the same period in 2007.The combined nine months ended September 30, 2008, represent the resultsof Boise Inc. for the nine months ended September 30, 2008, and theresults of the Predecessor for the period from January 1 through February 21,2008. Unless otherwise indicated, the 2007 comparison periods are forPredecessor results only. See “Background and Executive Overview” and “Acquisitionof Boise Cascade’s Paper and Packaging Operations” in this Management’sDiscussion and Analysis for more information related to the 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.

 

***ThreeMonths Ended September 30, 2008, Compared With the Predecessor ThreeMonths Ended September 30, 2007***

 

*Sales*

 

For the three monthsended September 30, 2008, total sales increased $49.4 million, or 8%,to $633.1 million from $583.7 million during the three months ended September 30,2007. The increase was driven primarily by a 7% increase in Paper segment salesresulting from higher prices and a 10% increase in Packaging segment sales,driven by higher prices and increased linerboard sales volumes, partiallyoffset by lower corrugated container and sheet sales volumes.

 

*Paper.* Sales increased $28.9 million, or 7%, to$431.0 million for thethree months ended September 30, 2008, from $402.1 million for thethree months ended September 30, 2007. Overall uncoated freesheet salesprices increased 9% in third quarter 2008, compared with the third quarter of2007, driven by a 10% increase in commodity grade pricing and a 7% increase inpremium and specialty pricing. Medium sales prices improved 12% over the sameperiod in 2007, while pricing for market pulp declined 9% from the prior yearperiod. Commodity uncoated freesheet volumes were down 7% from third quarter2007 due in part to continued growth in label and release production at ourWallula, Washington, mill, which displaces commodity production, and reduceddemand in commodity grades, particularly printing and envelope grades. Tobalance our production with demand, we selectively curtailed shifts and slowedproduction on selected uncoated freesheet machines during the quarter. Premiumand specialty sales volumes were up 15%, compared with the prior period, dueprimarily to a 25% increase in sales of premium office papers and label andrelease and flexible packaging grades**.**

 

*Packaging.*Sales increased $19.9 million, or 10%, to$212.9 million for thethree months ended September 30, 2008, from $193.0 million for thethree months ended September 30, 2007. The increase was driven primarilyby a 9% increase in pricing for corrugated products, a 27% increase in pricingfor newsprint, and a 2% increase in pricing for linerboard. Newsprint pricingis continuing to improve through 2008 as capacity across the industry has beenreduced and price increases have been announced. Linerboard sales volumesincreased 5%, while newsprint sales volumes were flat, compared with the samequarter in the prior year. Corrugated container and sheet sales volume was 4%lower in third quarter 2008, compared with third quarter 2007, due primarily tolower volumes from our sheet plant in Texas as a result of slowing industrialmarkets in that region and market disruption caused by Hurricane Ike.

 

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

##### *** ***

Materials, labor, and other operating expenses,including the cost of fiber from related parties, increased $65.5 million, or 14%, to$547.9 million for thethree months ended September 30, 2008, from $482.4 million for thethree months ended September 30, 2007. The increase was driven primarilyby increases in fiber, energy, and chemical costs due mainly to higher per-unitprices, and increased 

 

49

----

Table of Contents

 

noncash mark-to-market expenses of $11.3 millionassociated with natural gas hedging. Since the Acquisition, we have employednatural gas caps as our primary hedging tool to allow us to benefit fromdeclining natural gas prices.

 

Fiber, energy, andchemical costs were $136.4 million, $95.6 million, and$71.7 million, respectively, for the three months ended September 30,2008, and $127.5 million, $67.4 million, and $59.7 million,respectively, for the three months ended September 30, 2007.

 

Fiber costs increased $9.3 million in our Papersegment, compared with third quarter 2007, due primarily to higher unit costsfor wood, purchased pulp, and secondary fiber, partially offset by decreased purchasedpulp consumption as we selectively curtailed shifts and slowed production tobalance production with demand. In Packaging, fiber costs decreased$0.3 million due to decreased wood consumption, driven mainly by shutdownsfrom Hurricanes Gustav and Ike, partially offset by increased wood pricesdriven primarily by increased diesel prices.

 

Compared with the threemonths ended September 30, 2007, energy costs increased $21.2 millionin our Paper segment, driven mainly by higher prices for natural gas, includingnon-cash mark-to-market expenses of $9.5 million associated with natural gashedging, electricity, and wood fuel. Energy costs increased $7.0 millionin our Packaging segment, driven by higher prices for electricity and naturalgas, including noncash mark-to-market expenses of $1.8 million associated withnatural gas hedging, partially offset by reduced consumption of natural gas.

 

Chemical costs increased$8.8 million****in our Paper segment andincreased $3.3 million in our Packaging segment, driven by higher pricesfor commodity chemicals, including caustic and sulfuric acid.

 

Depreciation, amortization, and depletion for thethree months ended September 30, 2008, was $31.4 million. For thePredecessor three months ended September 30, 2007, depreciation,amortization, and depletion was $23.0 million. The three months ended September 30,2007, exclude approximately $10.4 million of depreciation due to the paper andpackaging assets being classified as assets held for sale in September 2007.

 

Selling and distribution expenses decreased $0.9 million, or 6%, to$13.8 million for the three months ended September 30, 2008, comparedwith $14.7 million during the three months ended September 30, 2007.As a percentage of sales, selling and distribution expenses were 2.2% and 2.5%for the months ended September 30, 2008 and 2007, respectively.

 

General andadministrative expenses decreased $2.7 million, or 22%, to$9.9 million for the three months ended September 30, 2008, comparedwith $12.6 million during the three months ended September 30, 2007,due primarily to lower professional fees and payroll costs, offset partly byhigher information technology costs as we implement a new informationtechnology system in our Paper segment. As a percentage of sales, general andadministrative expenses were 1.6% and 2.2% for the three months ended September 30,2008 and 2007, respectively.

 

*Other (Income)Expense, Net.* “Other (income) expense, net” includesmiscellaneous income and expense items. During the three months ended September 30,2008, we had an insignificant amount of other income, compared with$0.3 million of expense during the Predecessor three months ended September 30,2007. The three months ended September 30, 2007, included$0.2 million of expenses related to the closure of the paper convertingfacility in Salem, Oregon, and $0.1 million of other miscellaneous expenseitems.

 

*Income (Loss) From Operations.* Income from operations for the three months ended September 30,2008, decreased $20.6 million to $30.1 million, compared with$50.7 million in third quarter 2007. This decrease was driven primarily byhigher input costs, noncash mark-to-market expenses associated with natural gashedging, increased depreciation and amortization expense, and reduced linerboardand newsprint sales volumes as a result of Hurricanes Gustav and Ike, partiallyoffset by higher sales prices. Overall, we estimate that our operating resultsfor the three months ended September 30, 2008, were negatively affected by$11.3 million from noncash mark-to-market expenses associated with naturalgas hedging and approximately $5.5 million from lost production and costsas a result of the hurricanes, as well as approximately $10.4 million ofincreased depreciation and amortization 

 

50

----

Table of Contents

 

expense as a result of our Predecessorsuspending depreciation and amortization of its long-lived assets in September 2007.

 

*Other*

 

*Interest Income.*For thethree months ended September 30, 2008, interest income was$0.2 million, compared with $5.4 million for the combined threemonths ended September 30, 2007. Boise Inc.’s interest income for theperiod prior to February 22, 2008, is attributable primarily to incomefrom interest earned in trust assets held by Aldabra 2 Acquisition Corp. priorto the Acquisition.

 

*Interest Expense.*For thethree months ended September 30, 2008, interest expense was$27.5 million, of which $21.6 million was for debt under our seniorsecured credit facilities. The remaining $5.9 million of interest expensewas noncash and consists of the following: $2.4 million related to thenotes payable to unrelated parties and $3.5 million for amortization ofdeferred financing fees. For additional information, refer to our discussion ofdebt under “Liquidity and Capital Resources” in this “Management’s Discussionand Analysis of Financial Condition and Results of Operations.” The debt ofBoise Cascade was not allocated to the Predecessor in the financial statementsincluded in this Form 10-Q.

 

*IncomeTaxes*. For the three months ended September 30,2008, we recorded $2.4 million of income tax benefits. These tax benefitsrelate primarily to the release of valuation allowances we previously recordedagainst deferred tax assets. We released these valuation allowances because wedetermined it is more likely than not that we will use our deferred tax assetsto offset deferred tax liabilities. As a result of significantly completing ourpurchase price allocation, during the three months ended September 30,2008, we recorded $12.4 million of deferred tax liabilities. At September 30,2008, our deferred tax liability, net of deferred tax assets, was $7.3 million.Because of its pass-through tax structure, the Predecessor recorded tax expenserelated only to small subsidiaries that are taxed as corporations.

 

***NineMonths Ended September 30, 2008, Compared With the Nine Months Ended September 30,2007***

 

*Sales*

 

For the combined ninemonths ended September 30, 2008, total sales increased $94.3 million,or 5%, to $1,839.4 million from $1,745.1 million during the ninemonths ended September 30, 2007. The increase was driven primarily by a 6%increase in Paper segment sales as a result of higher prices and a 4% increasein Packaging segment sales driven by higher prices, partially offset by lowervolumes as a result of the DeRidder, Louisiana, outage in first quarter 2008and lower corrugated container and sheet sales volumes.

 

*Paper.* Sales increased $69.3 million, or 6%, to$1,267.6 million for thecombined nine months ended September 30, 2008, from $1,198.3 millionfor the nine months ended September 30, 2007. This increase was driven byimproved pricing for uncoated freesheet and medium from the prior year,partially offset by lower market pulp pricing. Commodity uncoated freesheetsales prices increased 7%, compared with the same period in 2007, while premiumand specialty prices increased 5%. Commodity uncoated freesheet volumes weredown 5% from the same period in 2007 due primarily to declining demand acrossmost grades, particularly more mature printing and converting grades, includingenvelope and offset grades. Premium and specialty volumes were up 6%, comparedwith the prior period, driven by a 17% increase in sales of premium officepapers and label and release and flexible packaging grades.

 

*Packaging.*Sales increased $23.5 million, or 4%, to$603.4 million for thecombined nine months ended September 30, 2008, from $579.9 millionfor the nine months ended September 30, 2007. The increase was dueprimarily to higher prices for linerboard, corrugated containers and sheets,and newsprint, partially offset by lower sales volumes. Linerboard pricing was4% higher than in the prior year, while corrugated container and sheet pricingimproved 8%, and newsprint pricing improved 10%. Overall sales volumes forlinerboard and newsprint decreased 4% and 6%, respectively, primarily as aresult of the DeRidder outage in first quarter 2008. Corrugated container andsheet volumes, decreased 5%, 

 

51

----

Table of Contents

 

compared with the prior period, driven mainly by lowervolumes from our sheet plant in Texas as a result of slowing industrial marketsand market disruption caused by Hurricane Ike.

 

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

##### *** ***

Materials, labor, and other operating expenses,including the cost of fiber from related parties, increased$139.6 million, or 9%, to $1,634.7 million for the combined nine months ended September 30, 2008, from$1,495.1 million during the nine months ended September 30, 2007. Theincrease was driven primarily by higher input and fixed costs, mainly maintenance,associated with the DeRidder outage.

 

Fiber, energy, and chemical costs were$406.0 million, $262.7 million, and $197.1 million,respectively, for the combined nine months ended September 30, 2008, and$373.8 million, $223.1 million, and $168.4 million,respectively, for the nine months ended September 30, 2007. Fiber costsincreased $35.7 million inour Paper segment, due primarily to higher prices for wood, purchased pulp, andsecondary fiber, and increased consumption of purchased pulp at our InternationalFalls mill due to the planned maintenance shutdown in May**.**In Packaging, fiber costs decreased $3.5 million, due primarily to reducedconsumption during the DeRidder outage in the first quarter, partially offsetby increased wood prices and recycled fiber costs.

 

Compared with the nine months ended September 30,2007, energy costs increased $34.7 millionin our Paper segment, driven by higher fuel and electricity prices, andincreased $4.8 million in our Packaging segment, driven by increased electricityand natural gas prices.

 

Chemical costs increased $20.6 million in ourPaper segment and increased $8.1 million in our Packaging segment drivenby substantially higher prices for commodity chemical inputs.

 

Under purchase accounting rules, in connection withthe Acquisition, we revalued our inventory to estimated selling prices lesscosts of disposal and a reasonable profit allowance for the selling effort. Asa result of these purchase accounting adjustments, our materials, labor, andother operating expenses increased $10.2 million during the nine monthsended September 30, 2008.

 

Depreciation, amortization, and depletion for the ninemonths ended September 30, 2008, was $76.9 million. The nine monthsended September 30, 2008, includes depreciation, amortization, anddepletion for the period from February 22, 2008, through September 30,2008. For the Predecessor period of**January 1through February 21, 2008, depreciation, amortization, and depletion was$0.5 million due to the suspension of depreciation for the assets beingheld for sale as a result of the Acquisition. For the Predecessor nine monthsended September 30, 2007, depreciation, amortization, and depletion was$84.5 million.

 

Selling and distribution expenses remained flat at $43.7 million forthe combined nine months ended September 30, 2008, and the nine monthsended September 30, 2007.

 

General and administrative expenses increased $0.9 million, or 3%, to$33.3 million for the combined nine months ended September 30, 2008,from $32.4 million during the nine months ended September 30, 2007.As a percentage of sales, general and administrative expenses improved to 1.8%for the nine months ended September 30, 2008, compared with 1.9% in theprior year.

 

*Other (Income)Expense, Net.* “Other (income) expense, net” includesmiscellaneous income and expense items. During the combined nine months ended September 30,2008, we had $1.2 million of other income, consisting primarily of a netgain on sales of assets of $1.0 million for the Predecessor period of January 1through February 21, 2008. During the nine months ended September 30,2007, we had $0.6 million of income, consisting of a $4.4 million gain onchanges in retiree healthcare programs offset by a $1.3 million net losson sales of assets, $2.2 million of expenses related to the closure of thepaper converting facility in Salem and $0.3 million of miscellaneousincome items.

 

*Income (Loss) From Operations.* Income from operations for the combined nine months ended September 30,2008, decreased $38.5 million to $51.5 million, compared with$90.0 million for the nine months ended September 30, 2007. Thisdecrease was caused primarily by higher input costs, the DeRidder mill outagein first quarter 2008, noncash mark-to-market expenses associated with naturalgas hedging and inventory purchase price adjustments, partially offset byhigher sales prices and lower 

 

52

----

Table of Contents

 

depreciation, amortization, and depletion expense. Overall, we estimate that our operating results for the nine monthsended September 30, 2008, were negatively affected by approximately $20.5million due to the DeRidder outage in the first quarter, $10.2 millionfrom inventory purchase price adjustments, $7.5 million from noncashmark-to-market energy hedge expenses and approximately $5.5 million from lostproduction and costs as a result of Hurricanes Gustav and Ike.

 

*Other*

 

*Interest Income.*During the combinednine months ended September 30, 2008, interest income was $2.2 million, comparedwith $6.2 million for the combined nine months ended September 30,2007. Boise Inc.’s interest income for the period prior to February 22,2008, is attributable primarily to income from interest earned on trust assetsheld by Aldabra 2 Acquisition Corp. prior to the Acquisition.

 

*Interest Expense.*For thenine months ended September 30, 2008, interest expense was$65.1 million, of which $52.9 million was for debt under our seniorsecured credit facilities. The remaining $12.2 million of interest expensewas noncash and consists of the following: $5.7 million related to thesubordinated promissory note to Boise Cascade and the subsequent notes payableto unrelated parties and $6.5 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 nine months ended September 30,2008, we recorded $5.7 million of income tax benefits related to lossesincurred during the nine-month period and the release of valuation allowanceswe previously recorded against deferred tax assets. We released these valuationallowances because we determined it is more likely than not that we will useour deferred tax assets to offset deferred tax liabilities. As a result ofsignificantly completing our purchase price allocation, during the nine monthsended September 30, 2008, we recorded $12.4 million of deferred taxliabilities. At September 30, 2008, our deferred tax liability, net ofdeferred tax assets, was $7.3 million. Because of its pass-through taxstructure, the Predecessor recorded tax expense related only to smallsubsidiaries that are taxed as corporations.

 

***Industry Mergers andAcquisitions***

 

In August 2008,International Paper completed the acquisition of Weyerhaeuser’s containerboardoperations, creating a larger and potentially much stronger competitor. Theimpact of this merger on our operations and results is uncertain at this time.

 

***Liquidity and Capital Resources***

 

We believe that fundsgenerated from operations and available borrowing capacity will be adequate tofund debt service requirements, capital expenditures, and working capitalrequirements for the next 12 months. Our ability to continue to fund theseitems may be affected by general economic, financial, competitive, legislative,and regulatory factors. A continuing deterioration in the U.S. economy couldhave a significant impact on our business. Significant declines in the demandfor or pricing of our products or increases in the cost of raw materials couldhave a significant, negative effect on our ability to maintain compliance withour financial loan covenants and/or meet our debt service obligations. Wecannot assure that our business will generate sufficient cash flow fromoperations or that future borrowings will be available for use under ourrevolving credit facility in an amount sufficient to enable us to pay ourindebtedness 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 nine months ended September 30, 2008 and2007, operating activities provided $65.3 million and $139.7 millionof cash, respectively.

 

53

----

Table of Contents

 

Relative to 2007, cash provided by operations was negatively affected bylower combined net income (loss) for the nine months ended September 30, 2008,which was the primary reason for the decrease in cash provided by operations.As discussed under “Operating Results” above, the loss during 2008 reflects theimpact of the DeRidder outage, as well as higher interest expense and higherinput costs.

 

In 2008, unfavorable changes in working capital used $26.1 million ofcash from operations, while unfavorable changes in working capital used$31.9 million of cash in 2007. Working capital is subject to cyclicaloperating needs, the timing of the collection of receivables, the payment ofpayables and expenses, and to a lesser extent, seasonal fluctuations in ouroperations.

 

Increases in the level of receivables used$25.4 million of cash from operations, which is attributable primarily toincreased receivables in the Paper segment as a result of higher sales in September 2008,compared with December 2007. To a lesser extent, increased levels ofreceivables in the Packaging segment also contributed to the unfavorable changein this working capital item. Inventories increased, using $15.3 millionof cash from operations, and prepaid expenses increased, using$4.5 million of cash from operations. Partially offsetting the increasedlevels of accounts receivable, inventories, and prepaid expenses were increasedlevels of accounts payable and accrued expenses, which provided$19.2 million of cash from operations. The higher levels of accountspayable and accrued expenses reflect higher trade accounts payable across allof our segments. These favorable changes in working capital were partiallyoffset by lower levels of accrued compensation.

 

We have four definedbenefit pension plans. Pension funding requirements depend in part on returnson plan assets. Recent declines in the equity markets may require us to makelarger than previously anticipated contributions to our pension plans. As of October 31,2008, our pension assets had a market value of $236 million, compared with$324 million as of February 22, 2008, the date we assumed theobligation for these plans. Assuming a negative 20% return on plan assets forcalendar year 2008 and a return to our assumed rate of return on plan assets of7.25% in 2009 and 2010, we estimate that we would be required to contributeapproximately $4 million in 2009 and approximately $46 million in 2010. Theamount of required contributions will depend, among other things, on actualreturns on plan assets, changes in interest rates which affect our discountrate assumptions, changes in pension funding requirement laws, and modificationsto our plans. We may also elect to make additional voluntary contributions inany year, which could reduce the amount of required contributions in futureyears. We are not required to, and do not plan to, contribute to our pensionplans in 2008.

 

***InvestmentActivities***

 

*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 net cash and fees. Boise Inc. obtained $1.1billion of financing in conjunction with the Acquisition, which is discussedbelow in “Financing Activities.”

 

*Combined Investing Activities of Boise Inc. andPredecessor*

 

Cash investing activities used $863.8 million for the nine months ended September 30,2008, compared with $498.6 million during the same period in2007. For the nine months ended September 30, 2008, investing activitiesincluded $1.2 billion in cash spent for the Acquisition, excludingdeferred financing fees, as discussed above. Investing activities for the ninemonths ended September 30, 2007, included $398.8 million of net cashheld in trust related primarily to the net proceeds of the initial publicoffering. The $398.8 million of net cash held in trust includes $399.5 millionof cash deposited from the initial public offering net of $0.7 million ofcash used from the trust to pay initial business, legal, and accounting duediligence expenses on prospective business combinations, general andadministrative expenses, and corporate income and franchise taxes. For the ninemonths ended September 30, 2007, investing activities also included$0.7 million of cash paid for acquisition costs.

 

Combined cash capital expenditures for property,plant, and equipment for the nine months ended September 30, 2008, were$69.1 million. This amount includes $10.2 million spent by thePredecessor for the period of January 1, 2008, through February 21,2008, and $58.9 million spent by us 

 

54

----

Table of Contents

 

from February 22, 2008, through September 30,2008. Of these amounts, $10.3 million relates to the installation of ashoe press in our DeRidder mill in March to reduce the use of energy inproducing linerboard. We estimate****totalcapital spending of $23 million for the project, part of which was spentin 2007. As of September 30, 2008, cumulative cash spending on thisproject totaled $22.3 million, with the remainder to be spent in fourthquarter 2008.

 

For the nine months ended September 30, 2007, cash investingactivities were primarily for purchases of property and equipment, which used$106.0 million of cash, while the remaining amount was used for environmentalcompliance and to improve energy efficiency. Approximately $42 million ofthe expenditures for property and equipment related to the reconfiguration ofthe paper machine at our pulp and paper mill in Wallula to produce bothpressure-sensitive label and release paper and commodity uncoated freesheetpaper. As of September 30, 2007, total spending on this project wasapproximately $80 million. Additionally, cash investing activities werefor environmental compliance and to improve energy efficiency. Investingactivities also included $5.2 million of proceeds from the sales ofassets.

 

We expect capitalinvestments in 2008 to total approximately $90 million to $100 million,excluding acquisitions. Our capital spending in 2008 will be for expansion,business improvement and quality/efficiency projects, replacement projects, andongoing environmental compliance. Our efficiency projects are focused onopportunities to improve our energy efficiency.

 

***FinancingActivities***

 

Cash provided by financing activities was$825.5 million for the nine months ended September 30, 2008, comparedwith $359.0 million during the same period in 2007. Financing activitiesfor the nine months ended September 30, 2008, reflect approximately $1.1billion 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 $60.5 million of debt repayments. Under our $250million revolving credit facility, $158.1 million was available at September 30,2008. Prior to the Acquisition, financing activities have historicallyconsisted primarily of intercompany loans obtained by the Predecessor.

 

Our expected debt service obligation, assuminginterest rates stay at September 30, 2008, levels, is estimated to beapproximately $24.5 million for the remainder of 2008 and$102.2 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 $10.5 million per year (based on debtlevels and interest rates as of September 30, 2008).

 

For the nine months endedSeptember 30, 2007, cash financing activities included $414.0 million ofgross proceeds from the initial public offering on June 22, 2007, as well$3.0 million related to the sale of insider warrants. In conjunction with theoffering, we paid $16.6 million in underwriting discounts and commissions andincurred approximately $0.6 million in other costs related to the offering. Asdiscussed above in “Investing Activities,” the net amount from the offering, or$399.5 million, was deposited in a trust account. These funds were releasedfrom the trust as a result of the Acquisition.

 

55

----

Table of Contents

 

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

 
| ** **                            | ** ** | **September 30, 2008** | ** **  |
|---------------------------------------|------------|----------------------------------|-------------|
| ** **                            | ** ** | **Amount**                       | ** **  | **Interest Rate** | ** ** |
| ** **                            | ** ** | **(millions)**                   | ** **  | ** ** | ** ** |
|                                  |       |                             |        |   |   |
| Revolving  credit facility, due 2013  |       | $                                | 65.0        |   | 7.00 | % |
| Tranche  A term loan, due 2013        |       | 246.9                            |        | 7.06 | % |
| Tranche  B term loan, due 2014        |       | 472.6                            |        | 7.50 | % |
| Second  lien term loan, due 2015      |       | 260.7                            |        | 11.00 | % |
| Current  portion of long-term debt    |       | (14.1                            | )           | 7.21 | % |
| Long-term  debt, less current portion |       | 1,031.1                          |        | 8.25 | % |
| Current  portion of long-term debt    |       | 14.1                             |        | 7.21 | % |
|                                  |       | 1,045.2                          |        |   |   |
|                                  |       |                             |        |   |   |
| 15.75%  notes payable, due 2015       |       | 64.1                             |        | 15.75 | % |
| ** **                            |       | **$**                            | **1,109.3** |   |   |   |

 

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

 

*Senior Secured Credit Facilities*

 

Our senior secured creditfacilities consist of:

 

·                  Afive-year nonamortizing $250.0 million senior secured revolving credit facilitywith interest at either the London Interbank Offered Rate (LIBOR) plus 325basis points or a calculated base rate plus 325 basis points (the RevolvingCredit Facility and, collectively with the Tranche A Term Loan Facility and theTranche B Term Loan Facility, the First Lien Facilities);

 

·                  Afive-year amortizing $250.0 million senior secured Tranche A Term Loan Facilitywith interest at LIBOR plus 325 basis points or a calculated base rate plus 325basis points (the Tranche A Term Loan Facility);

 

·                  A six-yearamortizing $475.0 million senior secured Tranche B Term Loan Facility withinterest at LIBOR 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

 

·                  Aseven-year nonamortizing $260.7 million Second Lien Term Loan Facility withinterest at LIBOR plus 700 basis points (subject to a floor of 5.50%) or acalculated base rate plus 600 basis points (the Second Lien Facility andtogether with the First Lien Facilities, the Credit Facilities).

 

All borrowings under the CreditFacilities bear interest at a rate per annum equal to an applicable margin plusa customary base rate or Eurodollar rate. The base rate means, for any day, arate per annum equal to the greater of (i) the Prime Rate in effect onsuch day and (ii) the Federal Funds Effective Rate in effect on such dayplus 0.50%. In addition to paying interest, the Company pays a commitment feeto the lenders under the Revolving Credit Facility at a rate of 0.50% per annum(which shall be reduced to 0.375% when the leverage ratio is less than2.25:1.00) times the daily average undrawn portion of the Revolving CreditFacility (reduced by the amount of letters of credit issued and outstanding),which fee will accrue from the Acquisition closing date and shall be payablequarterly in arrears. At September 30, 2008, we had $65.0 million ofborrowings outstanding under the Revolving Credit Facility. For the nine monthsended September 30, 2008, the average interest rate for our borrowingsunder our Revolving Credit Facility was 5.95%. The minimum and maximumborrowings under the Revolving Credit Facility were zero and $80.0 millionfor the nine months ended September 30, 2008. The weighted average amountof borrowings outstanding under the Revolving Credit Facility during the ninemonths ended September 30, 2008, was $60.2 million. At September 30,2008, we had availability of $158.1 million, which is net of outstandingletters of credit of $26.9 million, above the amount we had borrowed.

 

56

----

Tableof Contents

 

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

 

*Covenants*

 

The First and Second LienFacilities require BZ Intermediate Holdings LLC (Holdings), a wholly ownedconsolidated entity of Boise Inc. and the parent company of Boise PaperHoldings, L.L.C. (the Borrower), and its subsidiaries to maintain financialcovenant ratios. At September 30, 2008, Holdings is required to maintain aminimum interest coverage ratio of 2.25:1.00 and a maximum leverage ratio of4.75:1.00 under the First Lien Facilities. The interest coverage ratiois defined in our loan agreements at the end of any fiscal quarter as the ratioof (i) Consolidated Adjusted EBITDA for the four-fiscal-quarter periodthen ended to (ii) Consolidated Interest Expense payable in cash for suchfour-fiscal-quarter period. The leverage ratio is defined in our loanagreements at the end of any fiscal quarter as the ratio of (i) ConsolidatedTotal Debt as of such day to (ii) Consolidated Adjusted EBITDA for thefour-fiscal-quarter period ending on such date. Differences between ourfinancial statements and Holdings’ financial statements are related primarilyto notes payable held by Boise Inc. and the related interest expense on thosenotes, interest income, income taxes, and other miscellaneous expenses.

 

The Credit Facilities also limitthe ability of Holdings and its subsidiaries to make capital expendituresgenerally limited to $150 million per year.

 

At September 30,2008, we were in compliance with the financial covenants under our CreditFacilities.

 

*Guarantees*

 

The Company’s obligations under itsCredit Facilities are guaranteed by each of the Borrower’s existing andsubsequently acquired domestic (and, to the extent no material adverse taxconsequences to Holdings or Borrower would result therefrom and as reasonablyrequested by the administrative agent under each Credit Facility, foreign)subsidiaries and Holdings (collectively, the Guarantors). The First LienFacilities are secured by a first-priority security interest in substantiallyall of the real, personal, and mixed property of Borrower and the Guarantors,including a first-priority security interest in 100% of the equity interests ofBorrower and each domestic subsidiary of Holdings, 65% of the equity interestsof each of Holdings’ foreign subsidiaries (other than Boise Hong Kong Limitedso long as Boise Hong Kong Limited does not account for more than$2.5 million of consolidated earnings before interest, taxes,depreciation, and amortization (EBITDA) during any fiscal year of Borrower),and all intercompany debt. The Second Lien Facility is secured by asecond-priority security interest in substantially all of the real, personal,and mixed property of Borrower and the Guarantors, including a second-prioritysecurity interest in 100% of the equity interests of Borrower and each domesticsubsidiary of Holdings, 65% of the equity

 

57

----

Table of Contents

 

interests of each of Holdings’ foreign subsidiaries(other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does notaccount for more than $2.5 million of consolidated EBITDA during anyfiscal year of Borrower), and all intercompany debt.

 

*Prepayments*

 

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

 

Subject to the provisions of theintercreditor agreement between the First Lien Facility and the Second LienFacility, in the event the Second Lien Facility is prepaid as a result of avoluntary or mandatory prepayment (other than as a result of a mandatoryprepayment with respect to insurance/condemnation proceeds or excess cash flow)at any time prior to the third anniversary of the Acquisition closing date,Borrower shall pay a prepayment premium equal to the “make-whole premium”described below.

 

At any time after the third anniversaryof the Acquisition closing date and prior to the sixth anniversary of theAcquisition closing date, subject to the provisions of the First LienFacilities, the Second Lien Facility may be prepaid in whole or in part subjectto the “call premium” described below, provided that loans bearing interestwith reference to the reserve-adjusted Eurodollar rate will be prepayable onlyon the last day of the related interest period unless Borrower pays any relatedbreakage costs.

 

With respect to a Second LienFacility loan on any date of prepayment, the “make-whole premium” means thepresent value of (a) all required interest payments due on such SecondLien Facility loan from the date of prepayment through and including themake-whole termination date, excluding accrued interest (assuming that theinterest rate applicable to all such interest is the LIBOR 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 “call premium” means that inthe event all or any portion of the Second Lien Facility is repaid as a resultof a voluntary prepayment or mandatory prepayment with respect to asset saleproceeds or proceeds received from the issuance of debt after the thirdanniversary of the Acquisition closing date and prior to the sixth anniversaryof the Acquisition closing date, such repayments will be made at (i) 105.0%of the amount repaid if such repayment occurs on or after the third anniversaryof the Acquisition closing date and prior to the fourth anniversary of theAcquisition closing date, (ii) 103.0% of the amount repaid if suchrepayment occurs on or after the fourth anniversary of the Acquisition closingdate and prior to the fifth anniversary of the Acquisition closing date, and (iii) 101.0%of the amount repaid if such repayment occurs on or after the fifth anniversaryof the Acquisition closing date and prior to the sixth anniversary of theAcquisition closing date.

 

*Other Provisions*

 

Subject to specified exceptions,the Credit Facilities require that the proceeds from certain asset sales,casualty insurance, certain debt issuances, and 75% (subject to step-downsbased on certain leverage ratios) of the excess cash flow for each fiscal yearmust be used to pay down outstanding borrowings. Required debt principalrepayments under the Credit Facilities, excluding those from excess cash flows,total $2.8 million for the balance of 2008, $15.7 million in 2009,$26.6 million in 2010, $48.5 million in 2011, $134.4 million in2012, and $817.2 million thereafter.

 

58

----

Table ofContents

 

*Notes 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 $58.3 millioneffective February 22, 2008. The increase of the note reflects$17.3 million of postclosing working capital adjustments in Boise Cascade’sfavor. With the exception of our subsidiaries that are party to the Credit andGuaranty Agreement dated as of February 22, 2008, each of our current andfuture domestic subsidiaries are joint and several obligors under this note, asreflected by a Subordinated Guaranty Agreement, which guarantees ourobligations 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 $53.8 million,including accrued interest but 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(other than the amount) identical to the original note payable. Because none ofthe eight holders of the notes is related to either Boise Inc. or BoiseCascade, we no longer record the notes as related-party notes on ourConsolidated Balance Sheet.

 

The notes bear interestat 15.75% per annum (computed on the basis of a 360-day year) payable quarterly(each such quarterly payment date, an Interest Payment Date). To the extentinterest is not paid in cash, interest will be added to the principal amount ofthe notes on each Interest Payment Date. The notes mature on August 21,2015, provided that if such date is more than 181 days after the scheduledmaturity date of the indebtedness under the Credit Facilities, then thematurity date shall automatically be deemed to be 181 days after the latestmaturity date of any such indebtedness. At maturity, the amount of the noteswill be approximately $185.6 million, assuming none of the interest hasbeen paid in cash.

 

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

 

*Other*

 

At September 30, 2008, we had$75.4 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 $3.5 million and $6.5 millionof amortization expense for the three and nine months ended September 30,2008, in “Interest expense” in our Consolidated Statements of Income (Loss).

 

In April 2008, weentered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. AtSeptember 30, 2008, our average effective interest rate was not affectedby our interest rate derivatives, as the effective cap rates were above theinterest rates on the hedged debt. For additional information on our interestrate derivatives, see Note 14, Financial Instruments, in “Part I,Item 1. Consolidated Financial Statements” of this Form 10-Q.

 

For the nine months ended September 30,2008, cash payments for interest, net of interest capitalized, were$51.6 million. No payments were made during the period of February 1(inception) through September 30, 2007, or the Predecessor period of January 1through February 21, 2008, and the nine months ended September 30,2007.

 

59

----

Table of Contents

 

***Contractual Obligations***

 

For information on contractual obligations, see thediscussion under the heading “Contractual Obligations” in “Part I, 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 September 30, 2008, there have been no material changes to ourcontractual obligations outside the normal course of business.

 

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

 

At September 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 I, 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 onenvironmental issues, see Boise Inc.’s Current Report on Form 8-K filedwith the SEC on February 28, 2008. There have been no material changes toBoise Inc.’s environmental information from that disclosed for the Predecessorin the Current Report on Form 8-K filed with 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. Except as noted below, there have been no changes in Boise Inc.’scritical accounting estimates as of September 30, 2008, from those thePredecessor disclosed in Boise Inc.’s Current Report on Form 8-K filedwith the SEC on February 28, 2008, and those disclosed in our QuarterlyReport on Form 10-Q for the period ended March 31, 2008.

 

Some of our employeesparticipate in noncontributory defined pension plans that were eithertransferred from or spun off from Boise Cascade. The salaried defined benefitpension plan is available only to employees who were formerly employed byOfficeMax before November 2003. The pension benefit for salaried employeesis based primarily on the employees’ years of service and highest five-yearaverage compensation. The benefit for hourly employees is generally based on afixed amount per year of service. The Predecessor treated participants in theseplans as participants in multiemployer plans. Accordingly, the Predecessor didnot reflect any assets or liabilities related to the noncontributory definedbenefit pension plans on its Consolidated Balance Sheet. The Predecessor did,however, record costs associated with the employees who participated in theseplans in its Consolidated Statements of Income (Loss). Expenses attributable toparticipation in noncontributory defined benefit plans for the three and ninemonths ended September 30, 2008, were $2.9 million and $7.1 million. Theseexpenses were $1.8 million, $3.4 million, and $9.7 million for thePredecessor periods of January 1 through February 21, 2008, and thethree and nine months ended September 30, 2007, respectively.

 

60

----

Table of Contents

 

We account for pensionexpense in accordance with SFAS No. 87, *Employers’Accounting for Pensions*. This statement requires the calculation ofpension expense and liabilities using actuarial assumptions, including discountrates, expected return on plan assets, expected rate of compensation increases,retirement rates, mortality rates, expected contributions, and other factors.We based the assumptions used in this analysis to calculate pension expense onthe following factors:

 

*DiscountRate Assumption*. The discount rate assumption was determinedusing a spot rate yield curve constructed to replicate Aa-graded corporatebonds. The plan’s projected cash flows were duration-matched to this yieldcurve to develop an appropriate discount rate.

 

*AssetReturn Assumption*. The expected rate of return on plan assetswas based on the average rate of earnings expected on invested funds.

 

*Rate ofCompensation Increases*. This assumption reflected long-termactual experience, the near-term outlook, and assumed inflation.

 

*Retirementand Mortality Rates*. These rates were developed to reflectactual and projected plan experience.

 

*PlanModifications*. Plan obligations and expenses were based onexisting retirement plan provisions. No assumption was made regarding futurechanges to benefit provisions beyond those to which we are presently committed.For example, changes we might commit to in future labor contracts are notincluded.

 

We believe that theaccounting estimate related to pensions is a critical accounting estimatebecause it is highly susceptible to change from period to period. As discussedabove, the future effects of pension plans on our financial position andresults of operations will depend on economic conditions, employeedemographics, mortality rates, retirement rates, investment performance, andfunding decisions, among other factors. The following table presents selectedassumptions used and expected to be used in the measurement of pension expensein the following periods:

 
| ** **                              | ** ** | **Year Ending  December 31,**               | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                              | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(millions, except for percentages)** | ** ** |
|                                    |       |                                                  |       |                                       |       |   |   |
| Pension expense                    |       | $                                                     | 10.0       |                                       | $          | 13.1 |   | $ | 14.4 |   |
| Discount  rate                          |       | 6.50                                                  | %          | 5.90                                       | %          | 5.60 | % |
| Expected  rate of return on plan assets |       | 7.25                                                  | %          | 7.25                                       | %          | 7.25 | % |
| Rate  of compensation increases         |       | 4.25                                                  | %          | 4.25                                       | %          | 4.25 | % |
|                                         |            |                                                       |            |                                            |            |  |  |  |  |  |

 

A decline in our actualasset returns will affect the amount of expense we recognize in future years.However, under pension accounting rules, this impact is recognized over time.For example, assuming a negative return on plan assets of 20% for calendar year2008 and a return to our assumed rate of return on plan assets of 7.25% in eachof 2009 and 2010, our 2008 expense would not be changed, our 2009 expense couldincrease about $5 million and our 2010 expense could be about$10 million over the amount shown above for our estimated 2008 pensionexpense. In addition, we could be required to reduce our equity section in “Accumulatedother comprehensive income” to record minimum pension liabilities underaccounting rules. The amount of expense and minimum pension liability werecognize will depend on, among other things, actual returns on plan assets,changes in interest rates which affect our discount rate assumptions, andmodifications to our plans.

 

Pension fundingrequirements depend in part on returns on plan assets. Recent declines in theglobal equity markets may require us to make larger than previously anticipatedcontributions to our 

 

61

----

Table of Contents

 

pension plans. As of October 31,2008, our pension assets had a market value of $236 million, compared with$324 million as of February 22, 2008, the date we assumed theobligation for these plans. Assuming a negative 20% return on plan assets forcalendar year 2008 and a return to our assumed rate of return on plan assets of7.25% in 2009 and 2010, we estimate that we would be required to contributeapproximately $4 million in 2009 and approximately $46 million in 2010. Theamount of required contributions will depend, among other things, on actualreturns on plan assets, changes in interest rates which effect our discountrate assumptions, changes in pension funding requirement laws, andmodifications to our plans. We may also elect to make additional voluntarycontributions in any year, which could reduce the amount of requiredcontributions in future years. We are not required to, and we do not plan to,contribute to our pension plans in 2008.

 

***New and RecentlyAdopted Accounting Standards***

 

On October 10, 2008, the Financial AccountingStandards Board (FASB) issued FASB Staff Position (FSP) No. 157-3, *Determining the Fair Value of a Financial Asset Whenthe Market for That Asset Is Not Active*, which clarifies the applicationof SFAS No. 157 in a market that is not active and provides an example toillustrate key considerations in determining the fair value of a financialasset when the market for that financial asset is not active. FSP 157-3became effective on October 10, 2008, and its adoption did not have amaterial impact on our financial position or results of operations.

 

In June 2008, the FASB issued FSP No. EITF03-6-1, *Determining Whether InstrumentsGranted in Share-Based Payment Transactions Are Participating Securities*.FSP No. EITF 03-6-1 states that unvested share-based payment awards thatcontain nonforfeitable rights to dividends or dividend equivalents (whetherpaid or unpaid) are participating securities and shall be included in thecomputation of earnings per share pursuant to the two-class method. FSP EITF03-6-1 is effective for financial statements issued for fiscal years beginningafter December 15, 2008, and interim periods within those years. Allprior-period earnings per share data presented shall be adjustedretrospectively (including interim financial statements, summaries of earnings,and selected financial data) to conform with the provisions of this staffposition. Early application is not permitted. We currently do not have anyshare-based awards that would qualify as participating securities. Therefore,application of this FSP is not expected to have an effect on our financialposition, results of operations, or earnings per share.

 

In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of Generally Accepted AccountingPrinciples*. SFAS No. 162 defines the order in which accountingprinciples that are generally accepted should be followed. SFAS No. 162 iseffective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*. We do not expect theadoption to have a material impact on our financial position or results ofoperations.

 

In April 2008, the FASB issued FSP FAS142-3, *Determination of the Useful Life ofIntangible Assets.*FSP FAS 142-3 amends the factors that should beconsidered in developing renewal or extension assumptions used to determine theuseful life of a recognized intangible asset under FASB Statement No. 142,*Goodwill and Other Intangible Assets*.This new guidance also provides additional disclosure requirements related torecognized intangible assets. FSP FAS 142-3 is effective for fiscal yearsbeginning after December 15, 2008, which will require us to adopt theseprovisions in 2009. Early adoption is prohibited. We do not expect the adoptionto have a material impact on our financial position, or results of operations.

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures About Derivative Instruments and HedgingActivities*. SFAS No. 161 requires enhanced disclosures aboutderivative instruments and hedging activities to enable investors to betterunderstand their effects on financial position, financial performance, and cashflows. These requirements include the disclosure of the fair values ofderivative instruments and their gains and losses in a tabular format. 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 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 

 

62

----

Table of Contents

 

it does not require new fair value measurements. Inaccordance with the standard, in Note 14, Financial Instruments, of theNotes to Unaudited Quarterly Consolidated Financial Statements in “Part I,Item 1. Consolidated Financial Statements” of this Form 10-Q, we expandedour disclosures about fair value measurements. In accordance with theprovisions of FSP No. 157-2, *Effective Date of FASBStatement No. 157*, we have elected to defer until January 1,2009, implementation of SFAS No. 157 as it relates to nonfinancial assetsand nonfinancial liabilities that are recognized and disclosed at fair value inthe financial statements on a nonrecurring basis until. We do not expect theimplementation to have a material impact on our financial position or resultsof operations.

 

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. Theimpact of adopting these standards will be limited to business combinationsoccurring on or after January 1, 2009.

 

***ITEM 3.          QUANTITATIVEAND 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 as cashflow 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 exposure is presumed to be the market value of the hedge instrumentwhen critical terms match. The gain or loss on derivatives designated as fair valuehedges and the offsetting gain or loss on the hedged item attributable to thehedged risk are included in income (loss) in the period in which changes infair value occur. The gain or loss on derivatives that have not been designatedas hedging instruments is included in income (loss) in the period in whichchanges in fair value occur.

 

*Interest Rate Risk*

 

With the exception of the15.75% notes payable, maturing in August 2015, our debt is variable-ratedebt. At September 30, 2008, the estimated value of the notes payable,based on then-current interest rates for similar obligations with likematurities, was approximately $6.1 million less than the amount recordedon our Consolidated Balance Sheet.

 

In April 2008, weentered into interest rate derivative instruments to hedge a portion of ourinterest rate risk as required under the terms of the First Lien Facilities. 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 

 

63

----

Table of Contents

 

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 London InterbankOffered Rate (LIBOR) 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 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.

 

*Second Lien Facility.*We accountfor the interest rate derivatives with a notional amount of $260.0 million thathedge our exposure to interest rate fluctuations on our Second Lien Facility aseconomic hedges. At September 30, 2008, we recorded the fair value of theinterest rate derivatives, or $0.8 million, in “Other assets” on ourConsolidated Balance Sheet. During the three and nine months ended September 30,2008, we recorded the change in fair value of these derivatives, or$0.3 million of expense and $0.2 million of income, in “Change infair value of interest rate derivatives” in our Consolidated Statements of Income(Loss). During the three and nine months ended September 30, 2008, werecorded $0.1 million in “Interest expense” for the amortization of thepremiums paid for the interest rate derivatives.

 

*FirstLien Facility.*We account for the interest rate derivativesthat hedge part of the interest rate risk on our Tranche B Term Loan Facilityas cash flow hedges. These derivatives have a cap rate of 5.00% on a notionalamount of $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. At September 30,2008, we recorded the fair value of the interest rate derivatives, or$1.5 million, in “Other assets.”  Duringthe three months ended September 30, 2008, we recorded the change in the fairvalue of these derivatives, or a $0.5 million loss, in “Accumulated othercomprehensive income” on our Consolidated Balance Sheet. No amounts werereclassified to interest expense. During the three and nine months ended September 30,2008, we recorded $0.1 million and $0.3 million in “Interest expense”for the amortization of the premiums paid for the interest rate derivatives. AtSeptember 30, 2008, there was no ineffectiveness related to these hedges.

 

*Energy Risk*

 

Forinformation on our energy risk, see “Factors That Affect Operating Results” in “Part I,Item 2. Management’s Discussion and Analysis of Financial Conditions and Resultsof Operations” and Note 14, Financial Instruments of the Notes to UnauditedQuarterly Consolidated Financial Statements in “Item 1. Consolidated FinancialStatements” of this Form 10-Q.

 

*Foreign Currency Risk*

 

While we are exposed to foreign currencyrisk in our operations, none of this risk was material to our financialposition or results of operations as of September 30, 2008.

 

*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 thePredecessor consolidated financial statements.

 

*Fair Value Measurements*

 

In accordance with the provisions of FinancialAccounting Standards (FASB) Staff Position (FSP) No. 157-2 (seeNote 15, New and Recently Adopted Accounting Standards, of the Notes toUnaudited Quarterly Consolidated Financial Statements in “Part I, Item 1.Consolidated Financial Statements” of this form 10-Q), we have applied theprovisions of SFAS No. 157 to only our financial assets and liabilitiesrecorded at fair value, which consist of financial instruments that are used tohedge exposures to interest rate and energy risks. For these financialinstruments, fair value is determined at each balance sheet date based on LIBORrates and interest rate curves and New York Mercantile Exchange (NYMEX) pricequotations under the terms of the contracts using current market information asof the reporting date. The following table provides a summary of the inputsused to develop these estimated fair values under the hierarchy defined in SFASNo. 157:

 

64

----

Table of Contents

 
| ** **                     | ** ** | **Fair Value Measurements at September 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) |       | $                                                                                           | 2.3        |   | $ | — |   | $ | 2.3 |   | $ | — |   |
| ** **                     | ** ** | **$**                                                                                       | **2.3**    | ** ** | **$** | **—** | ** ** | **$** | **2.3** |   | **$** | **—** |   |
|                           |       |                                                                                        |       |   |   |   |   |   |   |
| Liabilities:                   |       |                                                                                        |       |   |   |   |   |   |   |
| Energy  derivatives (b)        |       | $                                                                                           | 7.4        |   | $ | — |   | $ | 7.4 |   | $ | — |   |
| ** **                     | ** ** | **$**                                                                                       | **7.4**    | ** ** | **$** | **—** | ** ** | **$** | **7.4** | ** ** | **$** | **—** | ** ** |

 

----

(a)          Includes $2.3 million recorded in “Other assets” on ourConsolidated Balance Sheet.

 

(b)         Includes $7.4 million recorded in “Accrued Liabilities,Other” on our Consolidated Balance Sheet.

 

Asof September 30, 2008, we did not have any fair value measurements usingsignificant unobservable inputs (Level 3).

** **

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

 

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

 

*Evaluationof Disclosure Controls and Procedures*

 

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

 

We evaluate the effectiveness of our disclosure controls andprocedures on at least a quarterly basis. A number of key components in ourinternal control system assist us in these evaluations. Since the Acquisition,we have had a disclosure committee. The committee meets regularly and receivesinput from our senior management, general counsel, internal audit staff, andindependent accountants. This committee is charged with considering andevaluating the materiality of information and reviewing the company’sdisclosure obligations on a timely basis. Our internal audit department alsoevaluates components of our internal controls on an ongoing basis. To assist inits evaluations, the internal audit staff identifies, documents, and tests ourdisclosure controls and procedures. Our intent is to maintain disclosurecontrols and procedures as dynamic processes that change as our business andworking environments change.

 

Our management, with the participation of our CEO and CFO, hasevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the quarter covered by the quarterly reporton this Form 10-Q. Based on that evaluation, the CEO and CFO haveconcluded that, as of such date, our disclosure controls and procedures wereeffective in meeting the objectives for which they were designed and wereoperating at a reasonable assurance level.

 

65

----

Table of Contents

 

As a result of management’s evaluation of the designand operation of our disclosure controls and procedures, we identified a numberof changes during the first quarter of 2008 that materially affected, or wouldbe reasonably likely to materially affect, the company’s internal control overfinancial reporting. All of these changes related to the acquisition of thepackaging and paper assets of Boise Cascade. Specifically, as a result of theAcquisition, our existing financial reporting processes were all expandedand/or modified. To accommodate the Acquisition of our operating assets, weimplemented significant disclosure controls and procedures related to financialreporting, revenue and receivables, purchasing and payables, property andequipment, treasury, inventory, payroll, employee benefits, nonrecurringtransactions, information technology, and other control functions. Most ofthese controls and procedures had been implemented previously by Boise Cascade.Our management identified no changes during the third quarter of 2008 thatmaterially affected, or would be reasonably likely to materially affect, ourinternal controls over financial reporting.

 

In addition, and also inconjunction with the Acquisition, we have enhanced our governance frameworkthrough the formation of new board committees (Compensation, Governance, andExecutive Committees) and the adoption and implementation of a new code ofethics, governance guidelines, disclosure committee and procedures, andstanding board resolutions that govern the authority delegated to management.This governance framework is intended to ensure that information andcommunication flows are effective and to monitor performance, includingperformance of internal control procedures.

 

*Limitationson the Effectiveness of Controls and Procedures*

 

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

 

66

----

Table of Contents

 

**PART II—OTHER INFORMATION**

 

***ITEM 1.          LEGALPROCEEDINGS***

 

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

 

***ITEM 1A.       RISKFACTORS***

 

This Quarterly Report on Form 10-Qcontains forward-looking statements. Statements that are not historical orcurrent facts, including statements about our expectations, anticipatedfinancial results, projected capital expenditures, and future businessprospects, are forward-looking statements. You can identify these statements byour use of words such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,”and other similar expressions. You can find examples of these statementsthroughout this report, including the “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. Except asnoted below, there have been no material changes to our risk factors as of September 30,2008, from those disclosed previously in our Quarterly Report on Form 10-Qfor the period ended March 31, 2008.

 

***Sincethe Acquisition, the market price of our common stock has declinedsignificantly, and we face possible delisting from the New York Stock Exchange(NYSE).***

 

Shares of our commonstock are currently listed on the NYSE. The market price of our common stockhas declined significantly since the Acquisition. On the date of theAcquisition, February 22, 2008, the closing price of our common stock was$8.50 per share. As of October 31,2008, the closing price of our common stock was $0.60 per share and our marketcapitalization was $47.8 million.

 

The NYSE’s quantitativelisting standards require NYSE listed companies to have an average marketcapitalization of at least $75.0**million over any consecutivethirty trading-day period and that the average closing price of any listedsecurity not fall below $1.00 per share for any consecutive thirty trading-dayperiod. We do not currently meet these standards, and we anticipate the NYSEwill notify us that we do not currently comply with the NYSE’s continuedlisting requirements.

 

Once we receive noticefrom the NYSE, we must respond within 45 days of the date of notice with abusiness plan that demonstrates our ability to achieve compliance with themarket capitalization requirement within eighteen months from the receipt ofthe notice. If we do not submit a business plan demonstrating our ability toachieve such continued listing standards or the NYSE does not accept our plan,the NYSE will initiate suspension and delisting procedures. Further, we willhave six months from the date of the notice (or, if later, by our next annualmeeting of shareholders, if shareholder approval is necessary) to cure theshare price deficiency. If we are not compliant by this date, our common stockwill also be subject to suspension and delisting by the NYSE. Although we intendto cure the deficiencies and to return to compliance with the NYSE continuedlisting requirements, there can be no assurance that we will be able to do so.

 

If our common stock isdelisted from the NYSE, or if it becomes apparent to us that we will be unableto meet the NYSE’s continued listing standards in the near future, we intend toseek to have our common stock listed or quoted on another national securitiesexchange or quotation system. However, we may be unable to list or quote ourcommon stock on another national securities exchange or quotation system. Evenif our common stock is listed or quoted on such other exchange or system, themarket for our common stock may not be as liquid as it has been on the NYSE. Asa result, if we are delisted by the NYSE, even if we are able to transfer ourlisting to another exchange or quotation system, the market price for ourcommon stock may become more volatile than it has been historically. Delistingof our common stock would likely cause a reduction in the liquidity of aninvestment in our common stock. Delisting also could reduce the ability ofholders of our common stock to purchase or sell our securities as quickly andinexpensively as they would have been able to do had our common stock remainedlisted. This lack of liquidity also could make it more difficult for us toraise capital in the future and could depress the value of our common stock.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

67

----

Tableof Contents

 

***ITEM 5.          OTHERINFORMATION***

 

(a)          None.

 

(b)         On and effective July 11, 2008, our board of directors amended andrestated the company’s bylaws. The company amended Article II of itsbylaws to revise the deadline for advance notice required for a stockholder tobring a matter before an annual meeting of stockholders. Under the amendedbylaws, notice may be given no earlier than 120 days (previously 90 days) ormore than 150 days (previously 120 days) prior to the first anniversary date ofthe preceding year’s annual meeting (previously the date that proxy materialswere first mailed to stockholders). To bring business before the company’sannual meeting to be held in 2009, stockholders must give notice no later than December 1,2008, and no sooner than November 1, 2008. A stockholder may have tocomply with additional advance notice provisions with respect to proposals thestockholder wishes to have included in the company’s proxy statement.

 

The company’s amended bylaws also require a stockholder’snotice to include additional information about director nominees and about thestockholder (and beneficial owner, if applicable) bringing business before astockholders meeting. These enhanced disclosure requirements relate to thenominee and/or proponent’s ownership positions in the company’s securities, aswell as other information regarding economic interests of the nominee and/orproponent in the company.

 

***ITEM 6.          EXHIBITS***

 

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

 

68

----

Table of Contents

 

**SIGNATURES**

 

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

 

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

 

Date: November 4,2008

 

69

----

Table of Contents

 

**BOISEINC.**

 

**INDEX TO EXHIBITS**

 

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

 
| **Number** | ** ** | **Description**                                                                                        |
|------------|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                             |
| 3 (a)      |       | Bylaws of Boise Inc.,  Amended and Restated Effective as of July 11, 2008                         |
|       |       |                                                                                                   |
| 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. |

 

----

(a)                  Filedas Exhibit 3.1 to Current Report on Form 8-K filed July 14,2008, and incorporated herein by reference.

 

70

----