Edgar Filing: BOISE INC.

BZ-9.30.2011-10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2011



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

1111 West Jefferson Street, Suite 200

Boise, Idaho 83702-5388

(Address of principal executive offices) (Zip Code)

(208) 384-7000

(Registrants’ telephone number, including area code)



Commission File Number	Exact Name of Registrant as Specified in Its Charter	State or Other Jurisdiction of Incorporation or Organization	I.R.S. Employer Identification No.
001-33541	Boise Inc.	Delaware	20-8356960
333-166926-04	BZ Intermediate Holdings LLC	Delaware	27-1197223

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Boise Inc.	Yes x	No ¨
BZ Intermediate Holdings LLC	Yes x	No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Boise Inc.	Yes x	No ¨
BZ Intermediate Holdings LLC	Yes x	No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act:



Boise Inc.	Large accelerated filer	¨	Accelerated filer	ý
	Non-accelerated filer	¨	Smaller reporting company	¨
	(Do not check if smaller reporting company)

BZ Intermediate Holdings LLC	Large accelerated filer	¨	Accelerated filer	¨
	Non-accelerated filer	ý	Smaller reporting company	¨
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Boise Inc.	Yes ¨	No x
BZ Intermediate Holdings LLC	Yes ¨	No x

Indicate the number of shares outstanding of each of the issuers’ classes of common stock, as of the latest practicable date.

There were 106,425,545 common shares, $0.0001 per share par value, of Boise Inc. outstanding as of October 31, 2011.

This Form 10-Q is a combined quarterly report being filed separately by two registrants: Boise Inc. and BZ Intermediate Holdings LLC. BZ Intermediate Holdings LLC meets the conditions set forth in general instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format. Unless the context indicates otherwise, any reference in this report to the "Company," "we," "us," "our," or "Boise" refers to Boise Inc. together with BZ Intermediate Holdings LLC and its consolidated subsidiaries.

Table of Contents

PART I—FINANCIAL INFORMATION



Item 1.	Financial Statements	1

	Boise Inc. and Subsidiaries Consolidated Financial Statements	1

	BZ Intermediate Holdings LLC and Subsidiaries Consolidated Financial Statements	5

	Condensed Notes to Unaudited Quarterly Consolidated Financial Statements	9
	1. Nature of Operations and Basis of Presentation	9
	2. Acquisition of Tharco Packaging, Inc.	10
	3. Net Income Per Common Share	12
	4. Income Taxes	12
	5. Transactions With Related Parties	13
	6. Leases	14
	7. Concentrations of Risk	14
	8. Inventories	14
	9. Property and Equipment	14
	10. Goodwill and Intangible Assets	15
	11. Debt	16
	12. Financial Instruments	18
	13. Retirement and Benefit Plans	20
	14. Stockholders’ Equity and Capital	20
	15. New and Recently Adopted Accounting Standards	22
	16. Comprehensive Income	24
	17. Segment Information	24
	18. Commitments, Guarantees, and Legal Proceedings	27
	19. Subsequent Event	27
	20. Consolidating Guarantor and Nonguarantor Financial Information	28

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
	Background	39
	Executive Summary	39
	Factors That Affect Our Operating Results	42
	Our Operating Results	44
	Industry Activities	48
	Liquidity and Capital Resources	49
	Contractual Obligations	51
	Off-Balance-Sheet Activities	52
	Guarantees	52
	Inflationary and Seasonal Influences	52
	Working Capital	52
	Environmental	52
	Critical Accounting Estimates	53
	New and Recently Adopted Accounting Standards	53

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	53



PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3.	Defaults Upon Senior Securities	56

Item 4.	(Removed and Reserved)	56

Item 5.	Other Information	56

Item 6.	Exhibits	56

All reports we file with the Securities and Exchange Commission (SEC) are available free of charge via the Electronic Data Gathering Analysis and Retrieval (EDGAR) System on the SEC website at www.sec.gov. We also provide copies of our SEC filings at no charge upon request and make electronic copies of our reports available through our website at www.boiseinc.com as soon as reasonably practicable after filing such material with the SEC.

PART I—FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

Boise Inc.

Consolidated Statements of Income

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



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2011			2010			2011			2010
Sales
Trade	$	619,396		$	543,505		$	1,772,500		$	1,540,368
Related parties	12,346			10,550			31,140			29,353
	631,742			554,055			1,803,640			1,569,721

Costs and expenses
Materials, labor, and other operating expenses	483,885			412,847			1,417,956			1,240,926
Fiber costs from related parties	4,786			4,905			13,609			19,904
Depreciation, amortization, and depletion	36,374			32,457			106,438			96,855
Selling and distribution expenses	29,799			13,884			78,655			41,872
General and administrative expenses	14,396			12,594			41,715			36,622
Other (income) expense, net	(130		)	382			134			(238		)
	569,110			477,069			1,658,507			1,435,941

Income from operations	62,632			76,986			145,133			133,780

Foreign exchange gain (loss)	(482		)	386			(295		)	750
Loss on extinguishment of debt	—			—			—			(22,225		)
Interest expense	(15,725		)	(16,100		)	(48,164		)	(48,752		)
Interest income	58			105			210			203
	(16,149		)	(15,609		)	(48,249		)	(70,024		)

Income before income taxes	46,483			61,377			96,884			63,756
Income tax provision	(18,119		)	(25,454		)	(37,929		)	(27,208		)
Net income	$	28,364		$	35,923		$	58,955		$	36,548

Weighted average common shares outstanding:
Basic	115,657			80,664			101,250			80,366
Diluted	117,955			84,082			106,791			84,123

Net income per common share:
Basic	$	0.25		$	0.45		$	0.58		$	0.45
Diluted	$	0.24		$	0.43		$	0.55		$	0.43

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets

(unaudited, dollars in thousands)



	September 30, 2011		December 31, 2010
ASSETS

Current
Cash and cash equivalents	$	169,628	$	166,833
Short-term investments	—		10,621
Receivables
Trade, less allowances of $792 and $603	236,154		188,589
Other	6,976		3,839
Inventories	290,397		261,471
Deferred income taxes	18,856		16,658
Prepaid and other	11,809		5,214
	733,820		653,225

Property
Property and equipment, net	1,208,499		1,199,035
Fiber farms and deposits	20,694		18,285
	1,229,193		1,217,320

Deferred financing costs	26,025		30,396
Goodwill	103,242		—
Intangible assets, net	97,316		29,605
Other assets	8,240		8,444
Total assets	$	2,197,836	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Balance Sheets (continued)

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



	September 30, 2011			December 31, 2010
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current
Current portion of long-term debt	$	103,125		$	43,750
Income taxes payable	129			82
Accounts payable	190,607			179,214
Accrued liabilities
Compensation and benefits	57,999			54,574
Interest payable	23,509			10,535
Other	23,462			16,123
	398,831			304,278

Debt
Long-term debt, less current portion	647,456			738,081

Other
Deferred income taxes	155,630			88,200
Compensation and benefits	101,718			121,318
Other long-term liabilities	51,393			40,278
	308,741			249,796

Commitments and contingent liabilities

Stockholders’ equity
Preferred stock, $0.0001 par value per share: 1,000 shares authorized; none issued	—			—
Common stock, $0.0001 par value per share: 250,000 shares authorized; 108,052 shares and 84,845 shares issued and outstanding	12			8
Treasury stock, 13,371 shares and none	(76,328		)	—
Additional paid-in capital	841,134			581,442
Accumulated other comprehensive income (loss)	(77,072		)	(78,822		)
Retained earnings	155,062			144,207
Total stockholders’ equity	842,808			646,835

Total liabilities and stockholders’ equity	$	2,197,836		$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Boise Inc.

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)



	Nine Months Ended
	September 30
	2011			2010
Cash provided by (used for) operations
Net income	$	58,955		$	36,548
Items in net income not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other	111,123			102,856
Share-based compensation expense	2,676			2,774
Pension expense	8,569			7,429
Deferred income taxes	33,806			27,196
Change in fair value of energy derivatives	(244		)	1,502
Other	1,317			(625		)
Loss on extinguishment of debt	—			22,225
Decrease (increase) in working capital, net of acquisitions
Receivables	(17,711		)	21,725
Inventories	(9,998		)	(4,802		)
Prepaid expenses	(1,301		)	3,655
Accounts payable and accrued liabilities	10,619			13,605
Current and deferred income taxes	1,912			(543		)
Pension payments	(25,659		)	(18,463		)
Other	1,481			208
Cash provided by operations	175,545			215,290
Cash provided by (used for) investment
Acquisition of businesses and facilities, net of cash acquired	(201,289		)	—
Expenditures for property and equipment	(83,869		)	(66,697		)
Purchases of short-term investments	(3,494		)	(17,675		)
Maturities of short-term investments	14,114			17,090
Sales of assets	1,757			646
Other	(251		)	1,689
Cash used for investment	(273,032		)	(64,947		)
Cash provided by (used for) financing
Issuances of long-term debt	75,000			300,000
Payments of long-term debt	(106,250		)	(327,846		)
Payments of deferred financing costs	(160		)	(11,861		)
Repurchases of common stock	(76,328		)	—
Equity yield enhancement program	(25,000		)	—
Proceeds from exercise of warrants	284,785			—
Payments of special dividend	(47,916		)	—
Other	(3,849		)	(6,580		)
Cash provided by (used for) financing	100,282			(46,287		)
Increase in cash and cash equivalents	2,795			104,056
Balance at beginning of the period	166,833			69,393
Balance at end of the period	$	169,628		$	173,449

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Income

(unaudited, dollars in thousands)



	Three Months Ended						Nine Months Ended
	September 30						September 30
	2011			2010			2011			2010
Sales
Trade	$	619,396		$	543,505		$	1,772,500		$	1,540,368
Related parties	12,346			10,550			31,140			29,353
	631,742			554,055			1,803,640			1,569,721

Costs and expenses
Materials, labor, and other operating expenses	483,885			412,847			1,417,956			1,240,926
Fiber costs from related parties	4,786			4,905			13,609			19,904
Depreciation, amortization, and depletion	36,374			32,457			106,438			96,855
Selling and distribution expenses	29,799			13,884			78,655			41,872
General and administrative expenses	14,396			12,594			41,715			36,622
Other (income) expense, net	(130		)	382			134			(238		)
	569,110			477,069			1,658,507			1,435,941

Income from operations	62,632			76,986			145,133			133,780

Foreign exchange gain (loss)	(482		)	386			(295		)	750
Loss on extinguishment of debt	—			—			—			(22,225		)
Interest expense	(15,725		)	(16,100		)	(48,164		)	(48,752		)
Interest income	58			105			210			203
	(16,149		)	(15,609		)	(48,249		)	(70,024		)

Income before income taxes	46,483			61,377			96,884			63,756
Income tax provision	(18,119		)	(25,421		)	(37,929		)	(26,334		)
Net income	$	28,364		$	35,956		$	58,955		$	37,422

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets

(unaudited, dollars in thousands)



	September 30, 2011		December 31, 2010
ASSETS

Current
Cash and cash equivalents	$	169,628	$	166,833
Short-term investments	—		10,621
Receivables
Trade, less allowances of $792 and $603	236,154		188,589
Other	6,976		3,839
Inventories	290,397		261,471
Deferred income taxes	18,856		16,658
Prepaid and other	11,809		5,214
	733,820		653,225

Property
Property and equipment, net	1,208,499		1,199,035
Fiber farms and deposits	20,694		18,285
	1,229,193		1,217,320

Deferred financing costs	26,025		30,396
Goodwill	103,242		—
Intangible assets, net	97,316		29,605
Other assets	8,240		8,444
Total assets	$	2,197,836	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Balance Sheets (continued)

(unaudited, dollars in thousands)



	September 30, 2011		December 31, 2010
LIABILITIES AND CAPITAL

Current
Current portion of long-term debt	$	103,125	$	43,750
Income taxes payable	129		82
Accounts payable	190,607		179,214
Accrued liabilities
Compensation and benefits	57,999		54,574
Interest payable	23,509		10,535
Other	23,462		16,123
	398,831		304,278

Debt
Long-term debt, less current portion	647,456		738,081

Other
Deferred income taxes	147,083		79,451
Compensation and benefits	101,718		121,318
Other long-term liabilities	51,443		40,530
	300,244		241,299

Commitments and contingent liabilities

Capital
Business unit equity	851,305		655,332

Total liabilities and capital	$	2,197,836	$	1,938,990

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

BZ Intermediate Holdings LLC

Consolidated Statements of Cash Flows

(unaudited, dollars in thousands)



	Nine Months Ended
	September 30
	2011			2010
Cash provided by (used for) operations
Net income	$	58,955		$	37,422
Items in net income not using (providing) cash
Depreciation, depletion, and amortization of deferred financing costs and other	111,123			102,856
Share-based compensation expense	2,676			2,774
Pension expense	8,569			7,429
Deferred income taxes	33,950			26,307
Change in fair value of energy derivatives	(244		)	1,502
Other	1,317			(625		)
Loss on extinguishment of debt	—			22,225
Decrease (increase) in working capital, net of acquisitions
Receivables	(17,711		)	21,725
Inventories	(9,998		)	(4,802		)
Prepaid expenses	(1,301		)	3,655
Accounts payable and accrued liabilities	10,619			13,605
Current and deferred income taxes	1,768			(528		)
Pension payments	(25,659		)	(18,463		)
Other	1,481			208
Cash provided by operations	175,545			215,290
Cash provided by (used for) investment
Acquisition of businesses and facilities, net of cash acquired	(201,289		)	—
Expenditures for property and equipment	(83,869		)	(66,697		)
Purchases of short-term investments	(3,494		)	(17,675		)
Maturities of short-term investments	14,114			17,090
Sales of assets	1,757			646
Other	(251		)	1,689
Cash used for investment	(273,032		)	(64,947		)
Cash provided by (used for) financing
Issuances of long-term debt	75,000			300,000
Payments of long-term debt	(106,250		)	(327,846		)
Payments of deferred financing costs	(160		)	(11,861		)
Proceeds from Boise Inc., net	135,541			—
Other	(3,849		)	(6,580		)
Cash provided by (used for) financing	100,282			(46,287		)
Increase in cash and cash equivalents	2,795			104,056
Balance at beginning of the period	166,833			69,393
Balance at end of the period	$	169,628		$	173,449

See accompanying condensed notes to unaudited quarterly consolidated financial statements.

Condensed Notes to Unaudited Quarterly Consolidated Financial Statements

1. Nature of Operations and Basis of Presentation

Nature of Operations

Boise Inc. is a large, diverse United States-based manufacturer of paper and packaging products. The products we manufacture include papers used for communication, such as office papers, commercial printing papers, envelopes, forms, and newsprint, as well as papers that are associated with packaging, including label and release and flexible papers used for food wrap and other applications. We also manufacture linerboard and corrugating medium, which are combined to make containerboard, the base raw material in our corrugated sheets and containers. We own mill operations in the following locations: Jackson, Alabama; International Falls, Minnesota; St. Helens, Oregon; and Wallula, Washington, all of which manufacture uncoated freesheet paper. We also own a mill in DeRidder, Louisiana, which produces linerboard as well as newsprint. Additionally, we have a network of eight corrugated container plants located in the Western U.S.; four corrugated sheet plants in Georgia, Nevada, Texas, and Washington; a corrugated sheet feeder plant in Texas; and four distribution facilities.

The following sets forth our operating structure:

As of September 30, 2011, we had approximately 5,000 employees. Approximately 53% of these employees worked pursuant to collective bargaining agreements. Approximately 13% work pursuant to collective bargaining agreements that will expire within one year.

Basis of Presentation

Boise Inc., headquartered in Boise, Idaho, operates and reports its business in three reportable segments: Paper, Packaging, and Corporate and Other (support services). See Note 17, Segment Information, for additional information about our reportable segments.

The unaudited consolidated financial statements included herein are those of the following:


•	Boise Inc. and its wholly owned subsidiaries, including BZ Intermediate Holdings LLC (BZ Intermediate).


•	BZ Intermediate and its wholly owned subsidiaries, parent company to Boise Paper Holdings, L.L.C. (Boise Paper Holdings).

There are no significant differences between the results of operations, financial condition, and cash flows of Boise Inc. and those of BZ Intermediate other than income taxes and common stock activity. Unless the context indicates otherwise, the terms "Company," "we," "us," "our," or "Boise" refer to Boise Inc. and its consolidated subsidiaries, including BZ Intermediate.

The quarterly consolidated financial statements presented have not been audited by an independent registered public accounting firm but, in the opinion of management, include all adjustments, consisting of normal,

recurring adjustments, necessary to present fairly the results for the periods presented. The preparation of the consolidated financial statements involves the use of estimates and accruals. Actual results may vary from those estimates. Quarterly results are not necessarily indicative of results that may be expected for the full year. These condensed notes to unaudited quarterly consolidated financial statements should be read in conjunction with our 2010 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and the other reports we file with the Securities and Exchange Commission (SEC).

2. Acquisition of Tharco Packaging, Inc.

On March 1, 2011, our wholly owned subsidiary Boise Paper Holdings acquired 100% of the outstanding stock of Tharco Packaging, Inc. (Tharco) for a preliminary purchase price of $201.3 million (the Tharco Acquisition). We financed the acquisition with existing cash and $75 million in borrowings on our revolving credit facility, which is discussed further in Note 11, Debt. The acquisition expands and diversifies our presence in packaging markets; extends our geographical reach from the Pacific Northwest to California, Colorado, Arizona, and Georgia; and will increase our containerboard integration to approximately 85%.

Our purchase price allocation is preliminary. When finalized, we may have modest changes to the amounts we have included in our preliminary allocation. The following table summarizes our preliminary allocation of the purchase price to the assets acquired and liabilities assumed, based on our current estimates of the fair value at the date of the Tharco Acquisition (dollars in thousands):



	March 1, 2011
	Fair Value
Current assets (a)	$	53,850
Property and equipment (b)	27,505
Intangible assets (c):
Customer relationships	61,200
Trademarks and trade name	10,900
Noncompete agreement	300
Goodwill (d)	103,242
Other long-term assets	477
Assets acquired	257,474

Current liabilities	21,130
Deferred tax liability	32,336
Unfavorable leases	2,583
Other long-term liabilities	136
Liabilities assumed	56,185

Net assets acquired	$	201,289

____________


(a)	Includes $29.6 million of receivables and $20.7 million of inventories.


(b)	We are depreciating the property and equipment acquired on a straight-line basis over their estimated remaining lives, which range from one to 20 years.


(c)	We are amortizing the intangible assets on a straight-line basis over the following (in years):



Customer relationships	17
Trademarks and trade name	15
Noncompete agreement	2

(d)

The Tharco Acquisition resulted in $103.2 million of goodwill, which we recorded in our Packaging segment. Goodwill is the excess of purchase price over the fair value of tangible and identifiable intangible assets acquired and liabilities assumed. The goodwill recognized in the transaction is not deductible for income tax purposes. However, we assumed $12.9 million of goodwill in the transaction that Tharco had been amortizing in connection with previous acquisitions, which we will continue to amortize and deduct for income tax purposes.

We expensed $0.7 million of costs related to the Tharco Acquisition for legal, professional, and advisory services during the nine months ended September 30, 2011. All costs were expensed as incurred and recorded in "Other (income) expense, net" in our Consolidated Statements of Income.

The nine months ended September 30, 2011, included $159.8 million of net sales and $4.2 million of operating income from Tharco's operations. Tharco's operating income was negatively affected by $2.2 million of expense related to the inventory purchase price adjustments that were recognized in March 2011. These results are included in our Packaging segment.

The following pro forma financial information presents the combined results of operations as if Tharco had been combined with us on January 1, 2010. The pro forma results are intended for information purposes only and do not purport to represent what the combined companies' results of operations would actually have been had the transaction in fact occurred on January 1, 2010. They also do not reflect any cost savings, operating synergies, or revenue enhancements that we may achieve or the costs necessary to achieve those cost savings, operating synergies, revenue enhancements, or integration efforts (dollars in thousands, except per-share amounts).



	Pro Forma
	Nine Months Ended September 30, 2011		Year Ended December 31, 2010
Sales	$	1,845,291	$	2,355,737
Net income (a)	$	59,799	$	67,647
Net income per share—diluted	$	0.56	$	0.80

____________

(a)

The September 30, 2011, pro forma financial information was adjusted to exclude $2.2 million of expense related to inventory purchase price adjustments and $3.4 million of expenses for legal, accounting, and other advisory-related services, including costs incurred by Tharco prior to closing on March 1, 2011. The December 31, 2010, pro forma financial information was adjusted to include these charges. Pro forma net income for the year ended December 31, 2010, includes $22.2 million of noncash expense associated with refinancing our debt in 2010.

3. Net Income Per Common Share

Net income per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Net income per common share is not applicable to BZ Intermediate, because it does not have common shares. For the three and nine months ended September 30, 2011 and 2010, Boise Inc.'s basic and diluted net income per share is calculated as follows (dollars and shares in thousands, except per-share data):



	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011		2010
Net income	$	28,364	$	35,923	$	58,955	$	36,548
Weighted average number of common shares for basic net income per share (a)	115,657		80,664		101,250		80,366
Incremental effect of dilutive common stock equivalents:
Common stock warrants (a) (b)	—		—		2,960		—
Stock options (c)	—		—		2		—
Restricted stock and restricted stock units	2,298		3,418		2,579		3,757
Weighted average number of shares for diluted net income per share (a) (b)	117,955		84,082		106,791		84,123

Net income per share:
Basic (a)	$	0.25	$	0.45	$	0.58	$	0.45
Diluted (a)	$	0.24	$	0.43	$	0.55	$	0.43

____________


(a)	During the nine months ended September 30, 2011, 40.3 million warrants were exercised, resulting in the issuance of 38.4 million additional common shares. For the nine months ended September 30, 2011, the exercise added 21.4 million to the number of weighted average shares included in basic net income per share.

During the nine months ended September 30, 2011, 13.4 million common shares were repurchased resulting in a decrease to the number of weighted average shares included in the basic and diluted net income per share calculation by 4.3 million and 1.4 million, respectively.


(b)	For the three and nine months ended September 30, 2010, warrants to purchase 44.4 million shares of common stock, which are accounted for under the treasury stock method, were not included in the computation of diluted net income per share, because the exercise price exceeded the average market price of our common stock.


(c)	For the three months ended September 30, 2011 the stock options were antidilutive.

4. Income Taxes

For the three and nine months ended September 30, 2011, Boise Inc. and BZ Intermediate recorded $18.1 million and $37.9 million, respectively, of income tax expense. For the three and nine months ended September 30, 2011, Boise Inc.’s and BZ Intermediate's effective tax rates were 39.0% and 39.1%.

For the three and nine months ended September 30, 2010, Boise Inc. recorded $25.5 million and $27.2 million, respectively, of income tax expense. For the three and nine months ended September 30, 2010, Boise Inc.'s effective tax rates were 41.5% and 42.7%. For the three and nine months ended September 30, 2010, BZ Intermediate recorded $25.4 million and $26.3 million, respectively, of income tax expense. For the three and nine months ended September 30, 2010, BZ Intermediate’s effective tax rates were 41.4% and 41.3%.

In all periods, the primary reasons for the difference from the federal statutory income tax rate of 35.0% were the effects of state income taxes and discrete tax items.

Uncertain Income Tax Positions

Both Boise Inc. and BZ Intermediate recognize interest and penalties related to uncertain tax positions as income tax expense in the Consolidated Statements of Income. Interest expense related to uncertain tax positions was nominal for the nine months ended September 30, 2011 and 2010. We did not record any penalties associated with our uncertain tax positions during the nine months ended September 30, 2011 and 2010.

Other

Due to Internal Revenue Code Section 382, changes in our ownership limit the amount of net operating losses that we may utilize in any one year. However, we believe it is more likely than not that our net operating losses will be fully realized before they expire in 2028 and 2029.

We file federal income tax returns in the U.S. and state income tax returns in various state jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. BZ Intermediate is a wholly owned, consolidated entity of Boise Inc., and its tax return is filed under the consolidated tax return of Boise Inc. Open tax years for Boise Inc. are 2010, 2009, 2008, and 2007.

During the nine months ended September 30, 2011, payments made for taxes, net of refunds received, were $1.9 million, and during the nine months ended September 30, 2010, refunds received for taxes, net of payments made, were $0.1 million.

5. Transactions With Related Parties

For the period of February 22, 2008, through early March 2010, Boise Cascade Holdings, L.L.C. (Boise Cascade) held a significant equity interest in us, and our transactions with Boise Cascade were recorded as related-party transactions. In early March 2010, Boise Cascade sold all of its remaining investment in us, and accordingly, it is no longer a related party. As a result, beginning in March 2010, transactions (discussed below) of Louisiana Timber Procurement Company, L.L.C. (LTP) represent the only significant related-party activity recorded in our Consolidated Financial Statements.

Related-Party Sales

LTP is a variable-interest entity that is 50% owned by Boise Inc. and 50% owned by Boise Cascade. LTP procures saw timber, pulpwood, residual chips, and other residual wood fiber to meet the wood and fiber requirements of Boise Inc. and Boise Cascade. We are the primary beneficiary of LTP, as we have the power to direct the activities that most significantly affect the economic performance of LTP. Therefore, we consolidate LTP in our financial statements in our Packaging segment. At September 30, 2011, and December 31, 2010, the carrying amounts of LTP's assets and liabilities on our Consolidated Balance Sheets were $3.6 million and $2.1 million, which related primarily to noninventory working capital items. During the three and nine months ended September 30, 2011, we recorded $12.3 million and $31.1 million, respectively, of LTP sales to Boise Cascade in "Sales, Related parties" in the Consolidated Statements of Income and approximately the same amount in expenses. During the three and nine months ended September 30, 2010, we recorded $10.6 million and $26.7 million, respectively, of LTP sales to Boise Cascade in "Sales, Related parties" in the Consolidated Statements of Income and approximately the same amount of expenses in "Materials, labor, and other operating expenses." The sales were at prices designed to approximate market prices.

We have an outsourcing services agreement under which we provide a number of corporate staff services to Boise Cascade at our cost. The agreement, as extended, expires on February 22, 2013. It will automatically renew for one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the expiration date. Services we provide to Boise Cascade under this agreement as well as other services include transportation, information technology, accounting, and human resource services. During the nine months ended September 30, 2010, we recorded $2.3 million of revenues in "Sales, Related parties" in our Consolidated Statements of Income.

Related-Party Costs and Expenses

During the three and nine months ended September 30, 2011, fiber purchases from related parties were $4.8 million and $13.6 million, respectively, and during the three and nine months ended September 30, 2010, fiber

purchases from related parties were $4.9 million and $19.9 million, respectively. In 2011, most of these purchases related to chip and log purchases by LTP from Boise Cascade’s wood products business. In 2010, the purchases included both direct chip and log purchases from Boise Cascade while they were a related party and LTP's purchases from Boise Cascade. All of the costs associated with these purchases were recorded as "Fiber costs from related parties" in the Consolidated Statements of Income. Fiber purchases from Boise Cascade subsequent to February 2010 are recorded as “Materials, labor, and other operating expenses” in the Consolidated Statements of Income.

6. Leases

We lease our distribution centers, as well as other property and equipment, under operating leases, including facilities and equipment acquired in the Tharco Acquisition. For purposes of determining straight-line rent expense, the lease term is calculated from the date of possession of the facility, including any periods of free rent and any renewal option periods that are reasonably assured of being exercised. Straight-line rent expense is also adjusted to reflect any allowances or reimbursements provided by the lessor. We had an insignificant amount of sublease rental income in the periods presented below. Accordingly, our future minimum lease payment requirements have not been reduced by sublease rental income. Rental expense for operating leases is as follows (dollars in thousands):



	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011		2010
Rental expense	$	6,185	$	3,820	$	17,312	$	11,350

For noncancelable operating leases with remaining terms of more than one year, the minimum lease payment requirements are as follows (dollars in thousands):



	Remaining 2011		2012		2013		2014		2015		2016 & Thereafter
Minimum payment	$	5,101	$	20,287	$	16,352	$	13,356	$	11,064	$	19,559

Substantially all lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to purchase the leased property. Additionally, some agreements contain renewal options averaging approximately five years, with fixed payment terms similar to those in the original lease agreements.

7. Concentrations of Risk

Sales to OfficeMax represent a concentration in the volume of business transacted and in revenue generated from those transactions. Sales to OfficeMax were $125.3 million and $369.7 million, respectively, during the three and nine months ended September 30, 2011, representing 20% of total sales for those periods. During the three and nine months ended September 30, 2010, sales to OfficeMax were $123.2 million and $378.1 million, respectively, representing 22% and 24% of total sales for those periods. At September 30, 2011, and December 31, 2010, we had $36.8 million and $30.3 million, respectively, of accounts receivable due from OfficeMax. Pursuant to an agreement entered into in June 2011, we expect OfficeMax to continue to represent a concentration of our revenues and transacted business. Any significant change in the willingness of OfficeMax to purchase our products or a significant deterioration in the financial condition of OfficeMax that affects their ability to pay could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

8. Inventories

The majority of our inventories are valued at the lower of cost or market, where cost is based on the average cost method of inventory valuation. Manufactured inventories include costs for materials, labor, and factory overhead. Other inventories are valued at the lower of either standard cost, which approximates cost based on actual first-in, first-out usage pattern, or market.

Inventories include the following (dollars in thousands):



	September 30, 2011		December 31, 2010
Finished goods	$	144,227	$	133,295
Work in process	33,422		24,940
Fiber	38,940		36,166
Other raw materials and supplies	73,808		67,070
	$	290,397	$	261,471

9. Property and Equipment

Property and equipment consist of the following asset classes (dollars in thousands):



	September 30, 2011			December 31, 2010
Land	$	31,845		$	31,875
Buildings and improvements	234,256			219,345
Machinery and equipment	1,329,544			1,260,265
Construction in progress	47,563			27,667
	1,643,208			1,539,152
Less accumulated depreciation	(434,709		)	(340,117		)
	$	1,208,499		$	1,199,035

Depreciation expense during the three and nine months ended September 30, 2011, was $32.6 million and $96.3 million, respectively, and during the three and nine months ended September 30, 2010, was $29.9 million and $89.6 million, respectively.

10. Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. At September 30, 2011, we had $103.2 million of goodwill recorded on our Consolidated Balance Sheet, all of which was recorded in connection with the Tharco Acquisition in our Packaging segment. For further information regarding the Tharco Acquisition, see Note 2, Acquisition of Tharco Packaging, Inc. At September 30, 2011, the net carrying amount of intangible assets with indefinite lives, which represents the trade names and trademarks acquired from Boise Cascade, L.L.C., in 2008, was $16.8 million, all of which is recorded in our Paper segment. All of our other intangible assets amortize based on their estimated useful lives.

We maintain two reporting units for purposes of our goodwill and intangible asset impairment testing, Paper and Packaging, which are the same as our operating segments discussed in Note 17, Segment Information. We test the goodwill and indefinite-lived intangible assets in each of our reporting units for impairment annually in the fourth quarter or sooner if events or changes in circumstances indicate that the carrying value of the asset may exceed fair value. Additionally, we evaluate the remaining useful lives of our finite-lived purchased intangible assets to determine whether any adjustments to the useful lives are necessary. During third quarter 2011, in connection with the volatility in the stock market, the price of our common stock and corresponding market capitalization declined to less than the book value of our net assets. We concluded that a goodwill impairment test does not need to be performed as it is not more likely than not that the fair value of our Packaging reporting unit had fallen below its carrying amount at September 30, 2011. See "Critical Accounting Estimates" within “Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10‑Q for further information.

The following table sets forth our intangible asset amortization for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):



	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011		2010
Intangible asset amortization	$	1,813	$	688	$	4,689	$	2,065

Our estimated future amortization expense for the remainder of 2011 and each of the next five years is as follows (dollars in thousands):



	Remaining 2011		2012		2013		2014		2015		2016
Amortization expense	$	1,813	$	7,241	$	5,971	$	5,717	$	5,717	$	5,717

The gross carrying amount, accumulated amortization, and net carrying amount of our intangible assets at September 30, 2011, and December 31, 2010, were as follows (dollars in thousands):



	As of September 30, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	74,900	$	(7,009	)	$	67,891
Trademarks and trade names	27,700		(436		)	27,264
Technology and other	6,895		(4,946		)	1,949
Noncompete agreements	300		(88		)	212
	$	109,795	$	(12,479	)	$	97,316

	As of December 31, 2010
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Trademarks and trade names	$	16,800	$	—		$	16,800
Customer relationships	13,700		(3,882		)	9,818
Technology and other	6,895		(3,908		)	2,987
	$	37,395	$	(7,790	)	$	29,605

11. Debt

At September 30, 2011, and December 31, 2010, our long-term debt and the interest rates on that debt were as follows (dollars in thousands):



	September 30, 2011					December 31, 2010
	Amount			Interest Rate		Amount			Interest Rate
Revolving credit facility, due 2013	$	—		—	%	$	—		—	%
Tranche A term loan, due 2013	150,581			3.00		181,831			3.06
9% senior notes, due 2017	300,000			9.00		300,000			9.00
8% senior notes, due 2020	300,000			8.00		300,000			8.00
Current portion of long-term debt	(103,125		)	3.00		(43,750		)	3.06
Long-term debt, less current portion	647,456			8.10		738,081			7.48
Current portion of long-term debt	103,125			3.00		43,750			3.06
	$	750,581		7.40	%	$	781,831		7.24	%

As of September 30, 2011, Boise Inc.’s and BZ Intermediate’s debt consisted of the following:


•	The Revolving Credit Facility: A five-year nonamortizing $250.0 million senior secured revolving credit facility with interest at either the London Interbank Offered Rate (LIBOR) plus an applicable margin, which is currently 275 basis points, or a calculated base rate plus an applicable margin, which is

currently 175 basis points (collectively with the Tranche A term loan facility, the Amended Credit Facilities).


•	The Tranche A Term Loan Facility: A five-year amortizing senior secured loan facility with interest at LIBOR plus an applicable margin, which is currently 275 basis points, or a calculated base rate plus an applicable margin, which is currently 175 basis points. The Tranche A term loan facility was originally issued at $250.0 million.


•	The 9% Senior Notes: An eight-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 9%.


•	The 8% Senior Notes: A ten-year nonamortizing $300.0 million senior unsecured debt obligation with annual interest at 8%.

In addition to paying interest, we pay a commitment fee to the lenders under the revolving credit facility at a rate of 0.375% per annum (which shall be increased to 0.50% when the leverage ratio is equal to or greater than 2.25:1.00) times the daily average undrawn portion of the revolving credit facility (reduced by the amount of letters of credit issued and outstanding). We also pay letter of credit fees of 275 basis points times the average daily maximum outstanding amount of the letters of credit and a fronting fee of 15 basis points to the issuing bank of outstanding letters of credit. These fees are payable quarterly and in arrears.

The borrowings under the revolving credit facility ranged from a low of zero to a high of $75.0 million during the nine months ended September 30, 2011. The weighted average amount of borrowings outstanding under the revolving credit facility during the nine months ended September 30, 2011, was $15.1 million. At September 30, 2011, we had availability of $243.7 million, which is net of outstanding letters of credit of $6.3 million.

The Amended Credit Facilities and the senior note agreements contain certain restrictions relating to dividend payments, capital expenditures, financial ratios, guarantees, and the incurrence of additional indebtedness, which are discussed in Note 11, Debt, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2010 Form 10-K.

Other Provisions

Subject to specified exceptions, the Amended Credit Facilities require that the proceeds from certain asset sales, casualty insurance, and certain debt issuances be used to pay down outstanding borrowings. As of September 30, 2011, required debt principal repayments were as follows (dollars in thousands):



	Remaining 2011		2012		2013		2014-2016		Thereafter
Required debt principal repayments	$	12,500	$	129,688	$	8,393	$	—	$	600,000

Other

At September 30, 2011, and December 31, 2010, we had $26.0 million and $30.4 million, respectively, of costs recorded in “Deferred financing costs” on our Consolidated Balance Sheet. The amortization of these costs is recorded in interest expense using the effective interest method over the life of the loans. For the three and nine months ended September 30, 2011, we recorded $1.5 million and $4.5 million, respectively, of amortization expense in "Interest expense" in our Consolidated Statements of Income, and for the three and nine months ended September 30, 2010, we recorded $1.5 million and $5.3 million, respectively.

For the nine months ended September 30, 2011 and 2010, cash payments for interest were $30.6 million and $23.6 million, respectively.

Financing

We have initiated discussions with lenders to enter into a new $200 million senior secured term loan facility and to increase our revolving credit facility from $250 million to $500 million. We will use the proceeds to repay the outstanding borrowings on our existing Tranche A term loan facility and for general corporate purposes. We expect to complete the new borrowings in November 2011.

12. Financial Instruments

Our primary objective in holding derivative financial instruments is to manage cash flow risk related to natural gas purchases and, to a lesser extent, interest rate risk. We do not use derivative instruments for speculative purposes.

Interest Rate Risk

With the exception of the Amended Credit Facilities, our debt is fixed-rate debt. At September 30, 2011, the book value of our fixed-rate debt was $600.0 million, and the fair value was estimated to be $625.0 million. The difference between the book value and fair value is due to the difference between the period-end market interest rate and the stated rate of our fixed-rate, long-term debt. We estimated the fair value based on quoted market prices for our debt.

During first quarter 2011, we liquidated our certificates of deposit portfolio and recognized an insignificant loss upon liquidation. At December 31, 2010, the fair value of the certificates of deposit was $10.6 million, and they were valued using third-party valuations based on quoted market prices.

Energy Risk

We enter into transactions to hedge the variable cash flow risk of natural gas purchases. At September 30, 2011, these derivatives included caps, call spreads, swaps, and three-way collars, which we account for as economic hedges. Some of our swaps are accounted for as cash flow hedges. As of September 30, 2011, we had entered into derivative instruments related to the following approximate percentages of our forecasted natural gas purchases:



	October 2011		November 2011 Through March 2012		April 2012 Through October 2012		November 2012 Through March 2013		April 2013 Through October 2013		November 2013 Through March 2014		April 2014 Through October 2014
Approximate percent hedged	45	%	65	%	53	%	49	%	45	%	31	%	32	%

Economic Hedges

For derivative instruments that are designated and qualify as economic hedges, the gain or loss on the derivatives are recognized in earnings. The effects of our economic hedging instruments in our Consolidated Statements of Income were as follows (dollars in thousands):



	Gain (Loss) Recognized in Earnings
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2011			2010			2011		2010			Location of Gain (Loss)
Natural gas contracts	$	(439	)	$	(884	)	$	244	$	(1,502	)	Materials, labor, and other operating expenses
Interest rate contracts	—			(1		)	—		(43		)	Interest expense
Total	$	(439	)	$	(885	)	$	244	$	(1,545	)

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of "Accumulated other comprehensive income (loss)" on our Consolidated Balance Sheets and is recognized in "Materials, labor, and other operating expenses" or "Interest expense" in our Consolidated Statements of Income in the period in which the hedged transaction affects earnings. Financial instruments designated as cash flow hedges are assessed both at inception and quarterly thereafter to ensure they are effective in offsetting changes in the cash flows of the related underlying exposures. The fair value of the instruments are reclassified out of accumulated other comprehensive income (loss) to earnings if the hedge

ceases to be highly effective or if the hedged transaction is no longer probable. The effects of our cash flow hedging instruments in our Consolidated Balance Sheets and Consolidated Statements of Income were as follows (dollars in thousands):



	Gain (Loss) Recognized in Accumulated OCI (Effective Portion)										Gain (Loss) Reclassified From Accumulated OCI Into Earnings
	Three Months Ended					Nine Months Ended					Three Months Ended				Nine Months Ended					Location of Gain (Loss) Reclassified From Accumulated OCI Into Earnings
	September 30					September 30					September 30				September 30
	2011			2010		2011			2010		2011		2010		2011		2010
Natural gas contracts (a)	$	(1,355	)	$	—	$	(1,355	)	$	—	$	—	$	—	$	—	$	—		Materials, labor, and other operating expenses
Interest rate contracts	—			—		—			—		—		—		—		(422		)	Interest expense
Total	$	(1,355	)	$	—	$	(1,355	)	$	—	$	—	$	—	$	—	$	(422	)

____________


(a)	Based on September 30, 2011, pricing, the estimated pretax loss to be recognized in earnings during the next 12 months is $1.0 million.

Fair Value Measurements

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) establishes a fair value hierarchy, which prioritizes the inputs of valuation techniques used to measure fair value into three levels. The fair value hierarchy gives the highest priority to quoted market prices (Level 1) and the lowest priority to unobservable inputs (Level 3). Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value (Level 1). If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, we use quoted prices for similar assets and liabilities or inputs that are observable either directly or indirectly (Level 2). If quoted prices for identical or similar assets are not available or are unobservable, we may use internally developed valuation models, whose inputs include bid prices and third-party valuations utilizing underlying asset assumptions (Level 3). We enter into our hedges with large financial institutions, and we monitor credit ratings to consider the impact, if any, on the determination of fair value. No significant adjustments were made in any periods presented.

Fair Values of Derivative Instruments

At September 30, 2011, and December 31, 2010, the fair value of our financial instruments was determined based on applicable interest rates such as LIBOR, interest rate curves, and New York Mercantile Exchange (NYMEX) price quotations under the terms of the contracts, using current market information as of the reporting date. Interest rate contracts and energy derivatives were valued using third-party valuations based on quoted prices for similar assets and liabilities. Accordingly, all of our fair value measurements use Level 2 inputs.

The fair value of our derivative instruments as of September 30, 2011, and December 31, 2010, was as follows (dollars in thousands):



	Level 2: Significant Other Observable Inputs
	Assets				Liabilities
	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010
Natural gas contracts (a)
Cash flow hedges	$	—	$	—	$	1,355	$	—
Economic hedges	—		—		1,812		2,056
Total derivatives	$	—	$	—	$	3,167	$	2,056

____________


(a)	Recorded in "Accrued liabilities, Other" on our Consolidated Balance Sheets.

13. Retirement and Benefit Plans

The components of net periodic pension benefit costs are as follows (dollars in thousands):



	Three Months Ended September 30						Nine Months Ended September 30
	2011			2010			2011			2010
Service cost	$	746		$	1,174		$	3,224		$	3,874
Interest cost	6,385			6,312			19,196			18,967
Expected return on plan assets	(6,179		)	(5,786		)	(18,402		)	(17,455		)
Amortization of actuarial loss	1,405			439			4,189			1,334
Amortization of prior service costs and other	13			12			38			38
Plan settlement curtailment loss	—			345			—			345
Company-sponsored plans	2,370			2,496			8,245			7,103
Multiemployer plans	103			103			324			326
Net periodic benefit cost	$	2,473		$	2,599		$	8,569		$	7,429

Our funding practice for our pension plans is to contribute amounts sufficient to meet legal funding requirements, plus any additional amounts that we determine to be appropriate considering the funded status of the plan, tax deductibility, our cash flows from operations, and other factors. During the nine months ended September 30, 2011, we contributed $25.7 million to our plans, which exceeds our 2011 estimated pension contribution requirements.

14. Stockholders’ Equity and Capital

Stock Repurchase Programs. During 2011, we announced our intent to repurchase up to $150 million of our common stock through a variety of methods, including in the open market, privately negotiated transactions, or through structured share repurchases. As of September 30, 2011, we had repurchased 13.4 million common shares at an average price per share of $5.71. We recorded the share repurchases in "Treasury stock" on Boise Inc.'s Consolidated Balance Sheets and "Repurchases of common stock" on the Consolidated Statement of Cash Flows.

As part of our $150 million repurchase program, on September 14, 2011, we entered into an equity yield enhancement program that, upon maturity, could result in the repurchase of up to $25 million of our common stock. Under the program, we paid a financial institution $25 million in consideration for the financial institution's obligation to pay us cash or shares of our common stock, depending on the closing market price of our common stock when the agreement expires in December 2011. On that date, if the closing market price of our common stock is above a set strike price, we have the option to either receive our initial $25 million investment, plus a yield that is higher than the short-term money market yield available at the time we entered into the agreement or, net settle in a variable number of shares. If, however, the closing market price of our common stock at the maturity date is at or below a set strike price we will buy back our shares at a price which may be higher or lower than the closing market price of the stock at the contract maturity date. Therefore, at the program's maturity, we will either receive cash or shares from the financial institution. If the contract maturity date had been September 30, 2011, we would have repurchased approximately 4.2 million shares.

We accounted for the contract in equity because the overall transaction relates to our common stock, we can never be obligated to deliver cash to settle the contract because the contract provides us with a choice to net-cash settle or settle in shares, we achieve the same economic result by net settling in cash or shares, and all settlements resulting in an adjustment are commercially reasonable and none of them require cash payments that are not within our control.

Warrants. During 2011, Boise Inc. warrant holders exercised 40.3 million warrants, resulting in the issuance of 38.4 million additional common shares. During 2011, we received cash proceeds of approximately $284.8 million, which increased "Additional paid-in capital" on our Consolidated Balance Sheet at September 30, 2011, compared with December 31, 2010.

Special Dividend. On May 13, 2011, we paid a special cash dividend of $0.40 per share to Boise Inc. shareholders of record at the close of business on May 4, 2011. Total dividends paid were approximately $47.9 million.

Share-based Compensation

Under the Boise Inc. Incentive and Performance Plan (the Plan), the compensation committee of our board of directors has the ability to authorize the grant of restricted stock, restricted stock units, performance awards payable in stock upon the attainment of specified performance goals, stock options, and other stock- and cash-based awards. Awards granted under the Plan vest and expire in accordance with terms established at the time of grant. Shares issued pursuant to awards under the Plan are from our authorized but unissued shares.

Share-based compensation costs in BZ Intermediate’s financial statements represent expenses for restricted stock of Boise Inc., which have been pushed down to BZ Intermediate for accounting purposes.

Pursuant to the Plan, during 2011, we granted a combination of restricted stock, restricted stock units, stock options, and performance units to our directors and key employees as noted below.

Restricted Stock Awards. We granted approximately 140,000 shares of restricted stock and approximately 122,000 restricted stock units (collectively restricted stock), the majority of which are subject to an EBITDA (earnings before interest, taxes, and depreciation, amortization, and depletion) goal and all of which are subject to time-based vesting restrictions. For members of management, 50% of the awards primarily vest in 2013, and the remaining vest in 2014, subject to the provisions of the award agreements. We also granted to our directors approximately 99,000 shares of restricted stock, which will vest in 2012. The fair values of these awards were based on the closing market price of our common stock on the date of grant, and compensation expense is recorded over the awards' vesting periods. These awards are eligible to participate in dividend payments, if any, which we accrue to be paid upon the vesting of those awards.

Stock Option Awards. We granted approximately 363,000 nonqualified stock options to members of management, of which 50% of the option awards vest and become exercisable in 2013, and the remaining vest and become exercisable in 2014. The stock options have a contractual term of ten years. The exercise price of these stock options is between $6.90 and $8.55 per share, which was the closing market price of our common stock on the grant dates. We recognize the grant date fair value of stock options as compensation expense over the awards' vesting periods.

The fair value of the stock options granted during 2011, were between $3.19 and $4.21. We calculated the fair value using a Black-Scholes-Merton option-pricing model based on the market price of our common stock at the grant date and the assumptions specific to the underlying options. We based the expected volatility assumption on our historic stock performance and the volatility of related industry stocks. As this is our first issuance of stock options and our equity shares have been traded for a relatively short period of time, we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected life. Therefore, we used the "simplified method" defined in SEC Staff Accounting Bulletin (SAB) No. 107 to determine the expected life assumption for the options. We based the risk-free interest rate upon yields of U.S. Treasury issues with terms similar to the expected life of the options.

The following table presents the assumptions used to calculate the fair value of stock options:



Black-Scholes-Merton assumptions:
Expected volatility	47.50% - 47.85%
Expected life (years)	5.88 - 6.25
Risk-free interest rate	1.66% - 2.48%
Expected dividend yield	—

Performance Unit Awards. We granted members of management approximately 204,000 performance units, subject to adjustment based on the achievement of defined percentages of the two-year average return on net operating assets (RONOA). Because the RONOA component contains a performance condition, we record compensation expense, net of estimated forfeitures, over the requisite service period based on the most probable number of awards expected to vest. If the RONOA performance criteria are met, 50% of the performance units will

vest in 2013, and the remaining will vest in 2014. Any shares not vested on or before March 17, 2014, will be forfeited. We based the fair value of this award on the closing market price of our common stock on the grant date, and we record compensation expense over the awards’ vesting periods. These awards are eligible to participate in dividend payments, if any, which we accrue to be paid upon the vesting of those awards.

Special Equity Award in Lieu of Special Dividend. In 2010, we declared a special cash dividend payable on December 3, 2010, to shareholders of record on November 17, 2010. On the record date, the executive officers held unvested restricted stock that, pursuant to the terms of their award agreements, did not accrue dividends. In February 2011, we approved a special equity award to our executive officers to align management and shareholder interests regarding dividend strategy. We awarded approximately 67,000 shares of restricted stock and approximately 27,000 restricted stock units to our executive officers, equivalent in value to the dividends the officer would have received on his or her restricted stock held as of the record date. These awards will vest on March 15, 2012. We calculated the number of shares awarded to each officer by using the company’s share price on February 28, 2011 (for restricted stock vesting on that date) or March 15, 2011 (for remaining restricted stock). We based the fair value of this award on the closing market price of our common stock on the grant date, and we record compensation expense on a straight-line basis over the awards’ vesting periods.

Compensation expense. Total recognized share-based compensation expense related to restricted stock, performance units, and stock options, net of estimated forfeitures, for the three and nine months ended September 30, 2011 and 2010, is as follows (dollars in thousands):



	Three Months Ended September 30				Nine Months Ended September 30
	2011		2010		2011		2010
Restricted stock and performance units	$	794	$	940	$	2,409	$	2,774
Stock options	111		—		267		—
Total share-based compensation expense (a)	$	905	$	940	$	2,676	$	2,774

__________


(a)	Most of these costs were recorded in "General and administrative expenses" in our Consolidated Statements of Income.

The unrecognized compensation expense related to restricted stock and performance units was $3.9 million at September 30, 2011, and is expected to be recognized over a weighted average period of 1.6 years. The unrecognized compensation expense related to stock options was $1.1 million at September 30, 2011, and is expected to be recognized over a weighted average period of 2.4 years.

15. New and Recently Adopted Accounting Standards

In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-09, Compensation — Retirement Benefits — Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan. This ASU increases quantitative and qualitative disclosures an employer is required to provide about its participation in significant multiemployer plans that offer pension or other postretirement benefits. The objective is to enhance transparency about significant multiemployer plans in which an employer participates, the level of the employer's participation in those plans, the financial health of the plans, and the nature of the employer's commitments to the plans. This guidance is effective, and shall be applied retrospectively for all prior periods presented, for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. We are currently evaluating the impact of ASU 2011-09 on our consolidated financial statements and associated disclosures; however, we do not believe the adoption of this guidance will have a material impact on our financial position and results of operations.

In September 2011, the FASB issued ASU 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be needed. ASU No. 2011-08 will be effective for annual and interim goodwill impairment tests performed for fiscal

years beginning after December 15, 2011, with early adoption permitted. We do not believe the adoption of this update will have a material impact on our financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This ASU increases the prominence of other comprehensive income in financial statements. Under this ASU, we will have the option to present the components of net income and comprehensive income in either one or two consecutive financial statements. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of equity. This guidance is to be applied retrospectively and will be effective for interim and annual periods beginning after December 15, 2011. Early adoption is permitted. We will adopt the provisions of this guidance beginning in January 2012. The adoption of this guidance will result in a change to our current presentation of comprehensive income but will not have an impact on our financial position and results of operations.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). This ASU was issued to provide largely identical guidance about fair value measurement and disclosure requirements for entities that disclose the fair value of an asset, a liability, or an instrument classified in shareholders' equity in their consolidated financial statements as that provided in the International Accounting Standards Board's new IFRS 13, Fair Value Measurement. This ASU does not extend the use of fair value but, rather, provides guidance about how fair value should be applied where it already is required or permitted under U.S. generally accepted accounting principles (GAAP). This guidance is to be applied prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is not permitted. In the period of adoption, a reporting entity will be required to disclose a change, if any, in valuation technique and related inputs that results from applying the ASU to quantify the total effect, if practicable. We are currently evaluating the impact that ASU 2011-04 will have on our financial statement disclosures.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force). This ASU addresses diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The ASU states that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. In addition, the ASU expands the supplemental pro forma disclosures under FASB ASC 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. We adopted this guidance on January 1, 2011, and the adoption did not have a material impact on our financial position or results of operations. See Note 2, Acquisition of Tharco Packaging, Inc., for our pro forma disclosures.

There were no other accounting standards recently issued that had or are expected to have a material impact on our financial position or results of operations.

16. Comprehensive Income

Comprehensive income includes the following (dollars in thousands):



	Boise Inc.
	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011			2010
Net income	$	28,364		$	35,923	$	58,955		$	36,548
Other comprehensive income, net of tax:
Cash flow hedges	(832		)	294		(832		)	553
Unfunded accumulated benefit obligation	867			254		2,583			773
Unrealized gains (losses) on short-term investments	—			1		(1		)	6
Comprehensive income	$	28,399		$	36,472	$	60,705		$	37,880

	BZ Intermediate Holdings LLC
	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011			2010
Net income	$	28,364		$	35,956	$	58,955		$	37,422
Other comprehensive income, net of tax:
Cash flow hedges	(832		)	294		(832		)	553
Unfunded accumulated benefit obligation	867			254		2,583			773
Unrealized gains (losses) on short-term investments	—			1		(1		)	6
Comprehensive income	$	28,399		$	36,505	$	60,705		$	38,754

17. Segment Information

There are no differences in our basis of segmentation or in our basis of measurement of segment profit or loss from those disclosed in Note 18, Segment Information, of the Notes to Consolidated Financial Statements in "Part II, Item 8. Financial Statements and Supplementary Data" in our 2010 Form 10-K. As discussed in Note 2, Acquisition of Tharco Packaging, Inc., we acquired $257.5 million of assets as part of the Tharco Acquisition on March 1, 2011. Tharco is included in our Packaging segment. Segment operating results for Boise Inc. and BZ Intermediate are identical for all periods presented, except for insignificant differences in their income tax provisions. See below for a reconciliation of Boise Inc. and BZ Intermediate's net income to EBITDA.

An analysis of operations by segment is as follows (dollars in millions):



	Sales										Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)
Three Months Ended September 30, 2011	Trade		Related Parties		Inter- segment			Total			Income (Loss) Before Income Taxes			Depreciation, Amortization, and Depletion		EBITDA (c)

Paper	$	372.5	$	—	$	18.1		$	390.6		$	36.1		$	22.5	$	58.6
Packaging	238.2		12.3		1.0			251.6			32.0			13.0		45.1
Corporate and Other	8.6		—		9.2			17.8			(6.0		)	0.9		(5.2		)
	619.4		12.3		28.3			660.1			62.2			36.4		98.5
Intersegment eliminations	—		—		(28.3		)	(28.3		)	—			—		—
Interest expense	—		—		—			—			(15.7		)	—		—
Interest income	—		—		—			—			0.1			—		—
	$	619.4	$	12.3	$	—		$	631.7		$	46.5		$	36.4	$	98.5