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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009o

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


Commission File No.: 001-33494

KapStone Paper and Packaging Corporation(Exact Name of Registrant as Specified in its Charter)

Delaware

20-2699372(State or other jurisdiction of
Incorporation or organization)

(I.R.S. Employer
Identification No.)


KapStone Paper and Packaging Corporation
1101 Skokie Blvd. Suite 300
Northbrook, IL 60062(Address of Principal Executive Offices) (ZIP Code)

Registrant's
telephone number, including area code:(847) 239-8800

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Title of Each Class

Name of Exchange On Which RegisteredCommon Stock (Par Value $.0001)

New York Stock Exchange


SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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. Yes ý    No o

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 shorter period that
the registrant was required to submit and post such files). Yes o    No o

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

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 definition of the above in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o

Accelerated Filer ý

Non-Accelerated Filer o

Smaller Reporting Company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the 20,599,751 shares of Common Stock held by non-affiliates of the registrant on June 30, 2009, was $96,612,832.
This calculation was made using a price per share of Common Stock of $4.69; the closing price of the Common Stock on the NASDAQ on June 30, 2009 the last day of the registrant's most recently
completed second fiscal quarter of 2009. Solely for purposes of this calculation, all shares held by directors and executive officers of the registrant have been excluded. This exclusion should not be
deemed an admission that these individuals are affiliates of the registrant.

On
February 28, 2010, the number of shares of Common Stock outstanding, excluding 40,000 treasury shares, was 45,418,074.

DOCUMENTS INCORPORATED BY REFERENCE:

The registrant's Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders will be filed with the Securities and Exchange Commission no later than
120 days after the end of the fiscal year covered by this Form 10-K pursuant to General Instruction G(3) of the Form 10-K. Information from such
Definitive Proxy Statement will be incorporated by reference into Part III.



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TABLE OF CONTENTS



Item 1.

Business

1Item 1A.

Risk Factors

7Item 1B.

Unresolved Staff Comments

15Item 2.

Properties

15Item 3.

Legal Proceedings

15Item 4.

Reserved

15Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16Item 6.

Selected Financial Data

18Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

35Item 8.

Financial Statements and Supplementary Data

35Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

35Item 9A.

Controls and Procedures

35Item 9B.

Other Information

36Item 10.

Directors, Executive Officers and Corporate Governance

37Item 11.

Executive Compensation

37Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

37Item 13.

Certain Relationships and Related Transactions and Director Independence

37Item 14.

Principal Accountant Fees and Services

37Item 15.

Exhibits and Financial Statement Schedule

38INDEX TO FINANCIAL STATEMENTS

F-1


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Forward Looking Statements.

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us, including the risks set forth in Item 1A. Risk
Factors below, that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements
expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "estimate," "continue," or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited
to, those described in our other Securities and Exchange Commission filings. All subsequent written and oral forward-looking statements attributable to KapStone or persons acting on our behalf are
expressly qualified in their entirety by the cautionary statements in this paragraph. KapStone disclaims any intention or obligation to publicly announce the results of any revisions to any of the
forward-looking statements contained herein to reflect future events or developments.

PART I

Item 1.    Business

Overview

KapStone Paper and Packaging Corporation, formerly Stone Arcade Acquisition Corporation, ("KapStone" or the "Company") was formed in
Delaware as a special purpose acquisition corporation on April 15, 2005 for the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination
with an unidentified operating business in the paper, packaging, forest products and related industries.

On
August 19, 2005, we consummated our initial public offering of 20,000,000 units with each unit consisting of one share of our common stock and two warrants. Each warrant
entitled the holder to purchase one share of our common stock at an exercise price of $5.00 per share. The units sold in our initial public offering were sold at an offering price of $6.00 per unit,
generating gross proceeds of $120.0 million.

On
January 2, 2007, we consummated the purchase from International Paper Company ("IP") of substantially all of the assets, and the assumption of certain liabilities, of the Kraft
Papers Business ("KPB") for $155 million less $7.8 million of closing adjustments. The assets consisted of an unbleached kraft paper manufacturing facility in Roanoke Rapids, North
Carolina, and Ride Rite® Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas, trade accounts receivable and inventories. The liabilities assumed consisted of
trade accounts payable, accrued expenses and certain long-term liabilities. The purchase price included two contingent earn-out payments of up to $60 million if certain
EBITDA targets are achieved. We obtained a $95 million senior secured credit facility from LaSalle Bank National Association, which was used to fund a portion of the KPB purchase price.

On
July 1, 2008, we consummated the purchase from MeadWestvaco Corporation ("MWV") of substantially all of the assets and the assumption of certain liabilities of the Charleston
Kraft Division ("CKD"), for $485 million less $8.9 million of working capital adjustments. The assets consisted of an unbleached kraft paper manufacturing facility in North Charleston,
South Carolina, including a cogeneration facility, chip mills located in Elgin, Hampton, Andrews and Kinards, South Carolina and a lumber mill located in Summerville, South Carolina, trade accounts
receivables and inventories. The

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liabilities
assumed consisted of trade accounts payable, accrued expenses and certain long-term liabilities.

The
CKD acquisition was financed by cash on hand and by a new senior secured credit facility of $515 million consisting of a five-year term loan of
$390 million, a seven-year term loan of $25 million and a $100 million revolving credit facility. In addition, $40 million of seven-year 8.30%
senior notes were issued. In connection with the transaction the Company paid off the remaining amount due under its prior credit facility.

On
March 31, 2009, the Company consummated the sale of its dunnage bag business to Illinois Tool Works Inc. for $36.0 million less $1.1 million of working
capital adjustments. The Company considered the sale an opportunity to lower its debt and focus on its core business. The sale of the dunnage bag business accelerated a contingent earn-out
payment of $4.0 million. As a result, future contingent earn-out payments total $55.0 million if certain EBITDA targets are achieved.

Acquisitions

In an effort to diversify and/or grow our business we have been, and continue to be, engaged in evaluating a number of potential
acquisition opportunities. No assurance can be given that we will consummate additional transactions. The structuring and financing of any future acquisitions may be dependent on the terms and
availability of additional financing to us that either replaces or does not conflict with the Company's existing senior secured credit facility.

General

We produce and sell a variety of unbleached kraft paper, linerboard, saturating kraft and unbleached folding carton board.

In
2009, the Company determined, in accordance with Accounting Standards Codification 280, Segment Reporting, to make changes to its reportable segments. All segment disclosures in this
Report are presented in conformance with the new presentation. For additional information regarding the change in segments, and the results of our segments, see Note 20 of the Notes to
Consolidated Financial Statements.

Industry Overview

We view the unbleached kraft market as including kraft paper, linerboard, saturating kraft and unbleached folding carton board.

The
American Forest and Paper Association ("AF&PA") estimation of the size of the U.S. kraft paper market is as follows:

(In millions)

2009

2008

2007Total U.S. sales


1.29 tons


1.56 tons


1.55 tonsU.S. production


1.25 tons


1.49 tons


1.36 tonsImports


0.20 tons


0.25 tons


0.36 tonsExports


0.16 tons


0.18 tons


0.17 tonsU.S. operating rates


73%


93%


94%


The
kraft paper market is comprised of three general product types. Multiwall paper is used to produce bags for agricultural products, pet food, baking products, cement and chemicals.
Specialty converting paper is used for a large variety of end uses within coating and laminating applications that require a smooth surface. Specialty converting is also used to produce shingle wrap,
end caps, roll wrap and dunnage bags. Grocery bag and sack paper is converted into retail shopping bags, grocery sacks and lawn and leaf refuse bags.

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Over
the last two decades unbleached kraft paper capacity declined due to a shift in market demand from paper bags to plastic. The multiwall market has contracted due to conversion to
plastics in certain end-use markets primarily in the insulation, pet food and lawn and garden markets. After bottoming in 2006, capacity has increased 2.3% in 2007 and 4.6% in 2008 as the
net impact of machines shifting from other grades to kraft paper was realized. According to AF&PA's annual survey kraft paper capacity was 1.7 million tons in 2009 and is expected to hold
constant through 2011.

Linerboard
is primarily used to manufacture corrugated containers for packaging products. U.S. demand for corrugated boxes and linerboard tends to be driven by industrial production of
processed foods, nondurable goods and certain durable goods.

The
AF&PA estimation of the size of the U.S. linerboard market is as follows:

(In millions)

2009

2008

2007Total U.S. sales


19.8 tons


21.3 tons


22.6 tonsU.S. production


22.6 tons


24.2 tons


25.2 tonsImports


0.37 tons


0.56 tons


0.55 tonsExports


3.18 tons


3.32 tons


3.20 tonsU.S. operating rates


85%


91%


97%


We
target our linerboard for specialty independent corrugated and laminated products customers who focus on specialty niche packaging.

Our
saturating kraft product line is used in multiple industries including construction, electronics manufacturing and furniture manufacturing around the world. The major
end-use markets are in the thin high pressure laminates (HPL) creating decorative surfaces such as kitchen and bath countertops, home and office furniture and flooring. In Europe, there is
a growing and distinct
HPL segment that involves a much thicker product called compact laminates, which create surfacing products such as exterior cladding, partitions and doors. In Asia, there is significant use of our
products for the manufacturing of printed circuit boards (PCB) and copper clad laminates (CCL) and there is also a growing use for thin HPL in decorative surfaces. There is no published data reporting
the size of the market. Barriers to entry for producing high quality saturating kraft are high as it is a technically difficult grade of paper to produce.

Our
unbleached folding carton board product line, sold under the trade name Kraftpak®, is a unique, low density virgin fiber board. Kraftpak® applications are
widely spread throughout end uses in the general folding carton segment of paperboard packaging. KapStone believes that the best growth opportunities for Kraftpak® are in consumer brands
that are changing their images to promote environmental friendliness and sustainability, thus taking shares from coated recycled board, coated natural kraft board and solid bleached sulfate board
which are much larger markets. There is no published data reporting the size of the market.

Customers

The Company has over 400 customers, many of which are leading world class converters. In 2007, the Company had approximately 100
customers. Upon acquiring CKD in July of 2008, the Company's number of customers increased to approximately 400, of which approximately 100 were based in foreign countries. No customer accounted for
more than 10% of consolidated net sales in 2009. Graphic Packaging accounted for 10.7% of consolidated net sales in 2008. Altivity Packaging and Exopack, LLC, accounted for 17.1% and 10.4% of
consolidated net sales in 2007, respectively. In 2008, Graphic Packaging acquired Altivity Packaging. KapStone continues to build long-term relationships, most of which were established by
KPB and CKD before we acquired them. We believe that the risk of losing customers or business with customers is reduced due to the long-term relationships that have been established.

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Kraft
paper is sold to converters who produce multiwall bags for agricultural products, pet food, cement and chemicals, grocery bags and specialty conversion products such as wrapping
paper products, dunnage bags and roll wrap. The Company's kraft paper product line accounted for approximately 26% of total unit sales for 2009, 43% for 2008 and 79% for 2007.

Linerboard
is sold to domestic and foreign converters in the corrugated box industry and to other converters for a variety of end users including laminated tier sheets and wrapping
material, among
others. Our focus is on independent producers who do not have their own mill systems or producers who commonly purchase linerboard on the open market. The Company's linerboard product line accounted
for approximately 47% of total unit sales for 2009, 32% for 2008 and 21% for 2007.

Our
saturating kraft customer base is split among three geographic regions, the Americas, Europe and Asia. Approximately 70% of our sales are exports to customers in Europe, Latin
America and Asia where growth opportunities are favorable. KapStone, or its predecessor, have done business with many of these customers for well over 30 years. Some customers have consolidated
to form a greater presence in their markets. Customer consolidation is particularly evident for North America and in the early phase in Europe. In Asia, there are numerous players and it is a
highly fragmented market making entry difficult for some companies that do not have a presence in the region. KapStone has acquired a leadership position through knowledge of our markets and
understanding the technical needs of our customers' manufacturing process and the demanding requirements of their products. The Company's saturating kraft product line accounted for approximately 21%
of total unit sales for 2009 and 19% for 2008.

Our
Kraftpak® customer base consists primarily of integrated and independent converters in the folding carton industry. The Company's Kraftpak® product line
accounted for approximately 6% of total unit sales for 2009 and 6% for 2008.

Sales and Marketing

The sales and marketing team works directly with our technical, manufacturing and product development teams to offer solutions and meet
new customer demands and product requirements. We market and sell our products through a national sales force for our domestic sales. Our international sales are supported by sales teams based in
Europe and Asia. We sell export linerboard to unaffiliated resellers.

Manufacturing and Distribution

Our manufacturing facilities are based in Roanoke Rapids, North Carolina and North Charleston, South Carolina and include production
facilities consisting of integrated pulp and paper mills that produce kraft paper, linerboard, saturating kraft products sold under the DuraSorb® brand and folding carton board sold under
the Kraftpak® brand. Our Roanoke Rapids paper mill began operations in 1907 and the North Charleston paper mill began operations in 1937.

The
Company's paper mills' annual production capacity is approximately 1.3 million tons. Machinery and equipment is regularly inspected to maintain good working order through
planned maintenance outages.

Softwood
pulp used to make kraft paper, folding carton board and linerboard is produced from a combination of locally sourced roundwood and pine woodchips. After the wood is debarked and
chipped, the chips are loaded into digesters for cooking. Woodchips, chemicals and steam are mixed in the digester to produce softwood pulp. Hardwood pulp is produced in North Charleston in a similar
fashion for the production of DuraSorb® saturating kraft. The pulp is screened and washed through a series of washers, and then stored prior to the paper making process. The Company
processes softwood pulp using up to five paper machines. Management monitors productivity on a real-time basis with

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on-line
reporting tools that track production values versus targets. Overall equipment efficiency is also monitored daily through production reporting systems.

The
majority of our domestic sales are distributed directly to customers by a combination of third parties mainly by truck and rail. Export linerboard and saturating kraft are shipped to
customers via ocean vessel.

Transitional Support

We have entered into two transitional services agreements to provide for certain services, including information technology and
centralized transaction processing, until we could convert acquisitions to our own Enterprise Resource Planning ("ERP") systems. Our transitional support services from IP ended on April 1, 2008
after a term of 15 months at a cost of $3.2 million. Our transitional service agreement with MWV, which began on July 1, 2008, ended on December 31, 2009, resulting in a
term of 18 months at a cost of $8.7 million.

The
total cost of transferring services from IP to us was approximately $6.0 million, consisting primarily of the cost of installing a new ERP system which included general
ledger, order entry and receivables management, purchasing and payment plus additional modules. The system supports operations in North Carolina and South Carolina as well as the corporate
headquarters. We incurred approximately $5.8 million to migrate and upgrade the Charleston operations to our ERP system.

Suppliers

The raw materials needed to process unbleached kraft paper and related products consist primarily of round wood, woodchips and
chemicals. In addition, we purchase coal, fuel oil and natural gas to run boilers and our cogeneration facility in South Carolina. We believe that these raw materials are readily available and that
there are a number of suppliers from whom the materials can be bought in the open market.

In
2009, approximately 20% of our combined paper mills' fiber supply (round wood and woodchips) was delivered under a long-term supply agreement. Upon acquisition of the CKD
business from MWV, we entered into a 15 year fiber supply agreement whereby MWV provides us with up to 25% of our South Carolina fiber requirements with prices tied to a market index. The
balance of fiber is purchased from third parties in North Carolina, Virginia, Georgia and South Carolina.

The
primary chemical used in our pulp making process is caustic soda which we purchase at market prices. We have fixed-pricing contracts with two long-term suppliers for
coal. Fuel oil is purchased from third parties at market prices.

Typical
contracts for raw materials range from one to three years in length and are at fixed pricing, driven by market pricing, or tied to a documented moving index for each material. As
costs for raw materials, supplies and services increase, we implement price increases to recover these rising material costs from our customers, when possible. We currently do not use futures
contracts or enter into hedging arrangements to manage the risk of fluctuations in coal or fuel prices. Thus, if we cannot pass on the rise in energy or other costs to our customers, such rise in
costs will have an adverse effect on our gross profit margins.

Competition

We are one of the leading manufacturers of unbleached kraft paper in North America. Other key U.S. market suppliers are
Georgia-Pacific, Longview Fibre, Delta Natural, and Smurfit-Stone. A number of other competitors comprise the remainder of North American unbleached kraft paper production. We believe the key
parameters on which North American unbleached kraft suppliers compete are supply reliability, delivered price and product quality. We have longstanding relationships

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with
many of our customers and historically have entered into contracts with initial terms of at least two years. We believe our longstanding relationships are based on our ability to provide the best
value proposition to our customers through quality products, consistent and reliable service and technical innovation.

The
overall U.S. linerboard capacity is in excess of 25 million tons. As such, the combined market share between our two mills is just over two percent. International Paper is the
largest producer, followed by Smurfit-Stone, Georgia-Pacific and Temple-Inland Packaging. Our emphasis is on the independent producers of corrugated packaging and other users of linerboard.

In
the saturating kraft market, there are three major manufacturers (KapStone, International Paper and Stora Enso). The remainder is supplied by local producers of lower quality material
in various regions of the world.

Kraftpak®
competes primarily with uncoated recycled board which is produced by Newark, Rock-Tenn, Caraustar and Graphic Packaging, and a variety of smaller
producers.

Environmental Regulation

Our operations are subject to environmental regulation by federal, state, and local authorities in the United States, including
requirements that regulate discharge into the environment, waste management, and remediation of environmental contamination. Environmental permits are required for the operation of our businesses and
are subject to revocation, modification and renewal. Governmental authorities have the power to enforce compliance with environmental
requirements and violators are subject to injunctions, civil penalties and criminal fines. Third parties may also have the right to sue to enforce compliance with such regulations.

KapStone
is committed to maintaining high environmental quality standards which meet or exceed those established by all relevant environmental laws, regulations and other applicable
requirements including Sustainable Forestry Initiatives. KapStone's goal is 100% compliance with all environmental laws and regulations wherever we do business. This is achieved by identifying,
understanding and giving priority consideration to the environmental aspects and impacts of KapStone's activities, products and services while integrating continual environmental improvement,
pollution prevention and employee diligence into daily operations.

On
December 8, 2009, the EPA ("Environmental Protection Agency") announced that for the first time in nearly 40 years, it is proposing to strengthen the nation's sulfur
dioxide (SO2) air quality standard to protect public health. This standard and the impending Industrial Boiler MACT standard will affect fuel combustion sources at our facilities. Our
North Carolina mill has completed an application for a Boiler MACT permit under new state regulations with expectation of compliance in 2014. We continue to monitor the process the EPA is undertaking
to develop new standards for industrial boilers and process heaters so that we can determine our potential liability regarding any future related regulations.

The
EPA is continuing the development of new programs and standards, such as additional wastewater discharge allocations, water intake structure requirements and national ambient air
quality standards. We believe that our operations are in compliance in all material respects with all current environmental regulations and we are not aware of any pending regulatory agency compliance
actions.

The
U.S. Congress is actively considering legislation to reduce emissions of greenhouse gases. In addition, several states have already taken legal measures to require the reduction of
emissions of greenhouse gases by companies and public utilities, primarily through the planned development of greenhouse gas emission inventories and/or regional greenhouse gas cap and trade programs.
Passage of climate control legislation by Congress or various states of the U.S., or the adoption of regulations by the EPA or analogous state agencies that restrict emissions of greenhouse gases in
areas in which we

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conduct
business, may have a material effect on our operations in the United States. We expect that we will not be disproportionately impacted by these measures relative to typical owners of
comparable properties in the United States.

Employees

At December 31, 2009, KapStone had approximately 1,600 employees. Of these employees, approximately 1,000 employees were covered
by collective bargaining agreements with the United Steelworkers. Currently, there is a collective bargaining agreement in place with union employees in Roanoke Rapids, North Carolina, through
August 31, 2010. There are approximately 600 employees at the mill in North Charleston, South Carolina that are represented by one of four unions. Those employees are currently working without
a contract. Their respective union contract had expired on June 30, 2009. The union employees represented by three of the four unions have approved the Company's most recent contract offer. The
Company is in negotiations with the remaining union. There have not been any slow-downs or work stoppages since the contracts expired on June 30th of last year. We believe that we
have a good relationship with our employees and union leadership.

In
January 2007, upon consummation of the acquisition of KPB, we began hiring a corporate staff to manage our operations. This included a vice president and chief financial officer, a
vice president and general manager to manage KPB and other corporate staff employees. Additional hiring at the corporate headquarters occurred throughout 2007, 2008 and 2009 upon termination of
post-acquisition transitional services agreements with IP and MWV.

As
part of the CKD acquisition, we acquired 11 employees who are located in Europe and Asia. These employees perform sales and order entry activities in support of the Company's export
shipments to customers based in Europe and Asia.

International Sales

For the years ended December 31, 2009, 2008 and 2007, the Company had export shipments from the United States to customers in
foreign countries of $239 million, $165 million and $44 million, respectively. No foreign country accounted for more than 10% of our consolidated net sales for any year.

Website Access to Company Reports

The Company's annual reports on Form 10-K, including this Form 10-K, as well as the quarterly
reports on Form 10-Q and current
reports on Form 8-K, and all amendments to those reports are filed electronically with the Securities and Exchange Commission ("SEC") and are also available free of charge through
our website,www.kapstonepaper.com,as soon as reasonably practicable after such material is filed electronically with, or furnished to, the SEC. Also,
copies of our annual report will be made available, free of charge, upon written request.

Item 1A.    Risk Factors

You should carefully consider the following risk factors, together with the other information contained in this annual report on
Form 10-K, in evaluating us and our business before making an investment decision regarding our securities. If any of the events or circumstances described in the following risk
factors were to actually occur, our business, financial condition or results of operations could be materially and adversely affected. The risks listed below are not the only risks that we face.

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Risks associated with our business

Recent changes in U.S. and global economic conditions could have a continuing adverse effect on the profitability of some or all of our businesses.

Recent concerns over declining consumer and business confidence, the availability and cost of credit, reduced consumer spending and
business investment, the volatility and strength of the capital and credit markets, and inflation all affect the business and economic environment and, ultimately, the profitability of our business.
In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our products is
adversely affected. Adverse changes in the economy could negatively affect earnings and could have a material adverse effect on our business, results of operations, cash flows and financial position.
We cannot predict whether or when such
circumstances may occur, or what impact, if any such circumstances could have on our business, results of operations, cash flows and financial position.

Conditions in the global capital and credit markets and the economy generally may materially adversely affect our business, results of operations and financial position and
we do not expect these conditions to improve in the near future.

Our results of operations and financial position could be materially affected by adverse changes in the global capital and credit
markets and the economy generally, including recent declines in consumer and business confidence and spending, both in the U.S. and elsewhere around the world. The capital and credit markets have been
experiencing extreme volatility and disruption over the last year. In some cases, these markets have exerted downward pressure on availability of liquidity and credit and increased the costs of credit
when such credit is available. Conditions in the capital and credit markets and the effects of the declines in consumer and business confidence and spending may adversely impact the ability of our
lenders, suppliers and customers to conduct their business activities. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the
reduction, delay or cancellation of customer orders, delays in or the inability of customers to obtain financing to purchase our products, and bankruptcy of customers or other creditors. Moreover, the
current worldwide financial crisis has reduced the availability of liquidity and credit to fund or support the continuation and expansion of business operations worldwide as many lenders and
institutional investors have reduced and, in some cases, ceased to provide funding to borrowers.

While
we have procedures to monitor and limit exposure to credit risk, there can be no assurance such procedures will effectively limit our credit risk and avoid losses, which could have
a material adverse effect on our business, results of operations and cash flows and financial position.

We rely on key customers and a loss of one or more of our key customers could adversely affect our business, results of operations, cash flows and financial position.

During the year ended December 31, 2009, no customer accounted for more than 10% of consolidated net sales. However, losses of
key customers could significantly impact our business, results of operations, cash flows and financial position.

We are dependent upon key management executives the loss whom may adversely impact our business.

We depend on the expertise, experience and continued services of corporate and mill management. The loss of such management, or an
inability to attract or retain other key individuals, could materially adversely affect our business. There can be no assurance that our salaries and incentive compensation plans will allow us to
retain the services of these key management executives or hire new key employees.

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KapStone's indebtedness may adversely affect its financial health.

As of December 31, 2009, we had approximately $152 million of outstanding debt. As a result of the indebtedness, our
ability to obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes may be impaired in the future. The debt could make us vulnerable to
economic downturns and may hinder our ability to adjust to rapidly changing market conditions.

A
substantial portion of our cash flow from operations will be needed to meet the payment of principal and interest on our indebtedness. The business may not generate sufficient cash
flow from operations to enable it to repay our indebtedness and to fund other liquidity needs, including capital expenditure requirements. The indebtedness incurred by us under our senior secured
credit facility bears interest at variable rates, and therefore if interest rates increase, our debt service requirements would increase. In such case, we may need to refinance or restructure all or a
portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness, including the senior secured credit facility, on commercially reasonable terms, or at all.
If we cannot service or refinance our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, any of which could have
a material adverse effect on our operations and financial condition.

Our
senior secured credit facility contains restrictive covenants that limit our liquidity and corporate activities. Our credit facility imposes operating and financial restrictions that
limit our ability to:



In
addition, the credit facility also imposes other restrictions on us. Therefore, we would need to seek permission from the lenders in order to engage in certain corporate actions. The
lenders' interests may be different from ours, and no assurance can be given that we will be able to obtain the lenders' permission when needed. This may prevent us from taking actions that are in our
best interest.

The
credit facility requires us to maintain certain financial ratios. The failure to maintain the specified ratios could result in an event of default if not cured or waived.

In
the event of a default under our senior credit facility, the lenders generally would be able to declare all of such indebtedness, together with accrued interest, to be due and
payable. In addition, borrowings under the credit facility are secured by a first priority lien on all of our assets and, in the event of a default under that facility the lenders generally would be
entitled to seize the collateral. A default under any debt instrument, unless cured or waived, would likely have a material adverse effect on our business and financial condition.

If we fail to extend or renegotiate the collective bargaining agreements with the United Steelworkers Union as they expire from time to time, or if our unionized employees
were to engage in a strike or other work stoppage, our business and operating results could be materially harmed.

Most of our hourly paid employees are represented by trade unions. We are a party to collective bargaining contracts which apply to
approximately 600 employees at the North Charleston mill and

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385 employees
at the Roanoke Rapids mill. No assurance can be given that we will be able to successfully extend or renegotiate the collective bargaining agreements as they expire from time to
time. Currently, there is a collective bargaining agreement in effect with respect to Roanoke Rapids through August 31, 2010. There are approximately 600 union employees at the mill in North
Charleston, South Carolina that are represented by one of four unions. Those employees have been working without a contract since June 30, 2009. However, the employees represented by three of
the four unions have approved the Company's most recent contract offer. The Company remains in negotiations with the remaining union. If we are unable to extend or negotiate new agreements without
work stoppages, it could negatively impact our ability to manufacture our products and adversely affect results of operations.

Our operations are global in nature, and accordingly our business, results of operations, cash flows and financial position could be adversely affected by the political and
economic conditions of the countries in which we conduct business, by fluctuations in exchange rates and other factors related to our international operations.

Approximately 38% and 32% of our annual revenues in 2009 and 2008, respectively, were derived from export sales. As our international
operations and activities expand, we face increasing exposure to the risks of selling to customers in foreign countries. These factors include:



These
risks could affect the cost of selling our products, our pricing, sales volume, and ultimately our financial performance. The likelihood of such occurrences and their potential
effect on the company vary from country to country and are unpredictable.

If we fail to maintain effective systems for disclosure controls and internal control over financial reporting, we may be unable to comply with the requirements of
Section 404 of the Sarbanes Oxley Act of 2002 in a timely manner.

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test the effectiveness of our internal controls over
financial reporting in accordance with an established internal control framework and to report on management's conclusion as to the effectiveness of its internal controls. It also requires an
independent registered public accounting firm to test our internal controls over financial reporting and report on the effectiveness of such controls for our fiscal year ending December 31,
2009, and subsequent years. It may cost us more than we expect to comply with these controls and procedure related requirements. If we discover areas of our internal controls that need improvement, we
cannot be certain that any remedial measures taken will ensure that we implement and maintain adequate internal controls over financial processes and reporting in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations.

We may be required to record a charge to our earnings if our goodwill becomes impaired.

We test for impairment of goodwill annually at the beginning of the fourth quarter in accordance with generally accepted accounting
standards. When events or changes in circumstances indicate that

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the
carrying value for such assets may not be recoverable, however, we review goodwill for impairment on an interim basis. Factors that may be considered a change in circumstances requiring our
interim testing include a decline in stock price as compared to our book value per share, future cash flows and slower growth rates. In connection with future annual or interim tests, we may be
required to record a non-cash charge to earnings during the period in which any impairment of goodwill is determined, which would adversely impact our results of operations.

See Note 2. "Summary of Significant Accounting PoliciesGoodwill and Intangible Assets"in the Notes to the Consolidated Financial
Statements for additional information related to impairment of goodwill.

Our business depends on effective information management systems.

We rely on our enterprise resource planning (ERP) systems to support such critical business operations as processing sales orders and
invoicing, inventory control, purchasing and supply chain management, payroll and human resources, and financial reporting. We periodically implement upgrades to such systems or migrate one or more of
our affiliates, facilities or operations from one system to another. If we are unable to adequately maintain such systems to support our developing business requirements or effectively manage any
upgrade or migration, we could encounter difficulties that could have a material adverse impact on our business, internal controls over financial reporting, financial results, or our ability to timely
and accurately report such results.

We may incur business disruptions.

We take measures to minimize the risks of disruptions at our manufacturing facilities. The occurrence of a natural disaster, such as a
hurricane, tropical storm, earthquake, tornado, flood, fire or other unanticipated problems such as labor difficulties, equipment failure or unscheduled maintenance could cause operational disruptions
and could materially adversely
affect our earnings and cash flows. Any losses due to these events may not be covered by our existing insurance policies or may be subject to certain deductibles.

Environmental regulations could materially adversely affect our results of operations and financial position.

We are subject to environmental regulation by federal, state, and local authorities in the United States, including requirements that
regulate discharge into the environment, waste management, and remediation of environmental contamination. Maintaining compliance with existing and new environmental laws may require capital
expenditures for compliance.

Due
to past history of industrial operations at the Roanoke Rapids and North Charleston mills, the possibility of onsite and offsite environmental impact to the soil and groundwater may
present a heighted risk of contamination. If we are required to make significant expenditures for remediation, the costs of such efforts may have a significant negative impact on our results of
operations and financial condition.

MWV
retained responsibility for certain offsite environmental conditions resulting from the operations at the North Charleston mill existing prior to the closing of the CKD acquisition.
The overall indemnification by MWV for certain losses includes assumed environmental liabilities, subject to an $8.5 million threshold and a cap equal to 15% of the purchase price of
$485 million, MWV's obligation to indemnify us for any historical onsite liability or breach of certain environmental representations and warranties terminates on December 31, 2013.
MWV's indemnification for certain offsite historical liabilities survive indefinitely. Because we are unable to presently make a determination as to whether the environmental impact, if any, would be
widespread or significant, the negotiated cap and survival period may not be sufficient to cover future losses.

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We may be required to pay income taxes related to the Alternative Fuel Mixture Tax Credit.

On March 31, 2009, we received approval from the Internal Revenue Service for our registration as an alternative fuel mixer,
which provides for a refund of $0.50 per gallon of alternate fuel used in our pulp making process. For the year ended December 31, 2009, we received refunds of $165 million. We have
taken the position that the tax credit is similar to a federal excise tax
refund, and as a result, is not taxable. To date, the Internal Revenue Service has issued no guidance concerning this issue.

As
of December 31, 2009 we have recorded a $63 million liability for an unrecognized tax benefit relating to the taxability of alternative fuel mixture tax credits.

Risks Associated with KapStone's Common Stock

The market price for our common stock may be highly volatile.

The market price of our common stock may be volatile due to certain factors, including, but not limited to; quarterly fluctuations in
our financial and operating results; general conditions in the paper and packaging industries; or changes in earnings estimates.

Shares available for future issuance, conversion and exercise could have an adverse effect on the earnings per share and the market price of our common stock.

Any future issuance of equity securities, including upon exercise of outstanding stock options, could dilute the interests of our
existing stockholders and could substantially decrease the trading price of our common stock.

Our executive officers and directors control a substantial percentage of our common stock and thus may influence certain actions requiring a stockholder vote.

At December 31, 2009, our executive officers and directors owned 7.8 million shares of our common stock, or approximately
17.3% of our total issued and outstanding common stock. Accordingly, our executive officers and directors may have considerable influence over the outcome of all matters requiring approval by our
stockholders, including future acquisitions and the election of directors. In addition, our board of directors is divided into three classes, each of which will generally serve for a term of three
years with only one class of directors being elected in each year. At
the annual meeting, as a consequence of our "staggered" board of directors, only a minority of the board of directors will be considered for election and our officers and directors, because of their
ownership position, will have considerable influence regarding the outcome of the election.

Some of our executive officers and directors may in the future become affiliated with entities engaged in business activities similar to those intended to be conducted by us
and, accordingly, may have conflicts of interest in determining to which entity a particular business opportunity should be presented.

Some of our executive officers and directors have, or may in the future, become affiliated with entities, including "blank check"
companies, engaged in business activities similar to those conducted by us. Additionally, our executive officers and directors may become aware of business opportunities which may be appropriate for
presentation to us as well as the other entities to which they have an affiliation. Accordingly, they may have conflicts as to questions pertaining to which entity a particular business opportunity
should be presented.

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Risks associated with the paper, packaging, forest products and related industries

The paper, packaging, forest products and related industries are highly cyclical. Fluctuations in the prices of and the demand for products could result in smaller profit
margins and lower sales volumes.

Historically, economic and market shifts, fluctuations in capacity and changes in foreign currency exchange rates have created cyclical
changes in prices, sales volume and margins for products in the paper, packaging, forest products and related industries. The length and magnitude of industry cycles have varied over time and by
product, but generally reflect changes in macroeconomic conditions and levels of industry capacity. Most paper products and many wood products used in the packaging industry are commodities that are
widely available from many producers. Because commodity products have few distinguishing qualities from producer to producer,
competition for these products is based primarily on price, which is determined by supply relative to demand. The overall levels of demand for these commodity products reflect fluctuations in levels
of end-user demand, which depend in large part on general macroeconomic conditions in North America and regional economic conditions in our markets, as well as foreign currency exchange
rates. The foregoing factors could materially and adversely impact sales and profitability of our company.

Difficulty obtaining wood fiber at favorable prices, or at all, may negatively impact companies in the paper and packaging industry.

Wood fiber is the principal raw material in many parts of the paper and packaging industry. Wood fiber is a commodity, and prices
historically have been cyclical. Environmental litigation and regulatory developments have caused, and may cause in the future, significant reductions in the amount of timber available for commercial
harvest in the United States. These reductions have caused the closure of plywood and lumber operations in some of the geographic areas in which a target company might operate. In addition, future
domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health and the response to and prevention of
catastrophic wildfires could also affect timber supplies. Availability of harvested timber may further be limited by fire, insect infestation, disease, ice storms, wind storms, flooding and other
natural and manmade causes, thereby reducing supply and increasing prices.

Industry
supply of commodity paper and wood products is also subject to fluctuation, as changing industry conditions can influence producers to idle or permanently close individual
machines or entire mills. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash
loss, which could prolong weak pricing environments due to oversupply. Oversupply in these markets can also result from producers introducing new capacity in response to favorable
short-term pricing trends. Industry supply of commodity papers and wood products is also influenced by overseas production capacity, which has grown in recent years and is expected to
continue to grow. Wood fiber pricing is subject to regional market influences, and the cost of wood fiber may increase in particular regions due to market shifts in those regions. In addition, the
ability to obtain wood fiber from foreign countries may be impacted by legal and political conditions in those countries as well as transportation difficulties.

An increase in the cost of purchased energy and raw materials would lead to higher manufacturing costs, thereby reducing margins which would have an adverse effect on our
results of operations.

Energy is a significant raw material in the paper and packaging industry. Energy prices, particularly for electricity, coal and fuel
oil, have been volatile in recent years and currently coal and electricity exceed historical averages. These fluctuations have historically impacted manufacturing costs of companies in these
industries, often contributing to reduced margins and increased earnings volatility. Recent significant increases in energy prices can be expected to adversely impact businesses in these

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industries.
In addition, we could be materially adversely impacted by supply disruptions or the inability to pass on cost increases to our customers.

Paper and packaging companies face strong competition.

The paper and packaging industry is highly fragmented, and we face competition from numerous competitors, domestic as well as foreign.
Some of our competitors will be large, vertically integrated companies that have greater financial and other resources, greater manufacturing economies of scale, greater energy
self-sufficiency and/or lower operating costs.

Certain paper and wood products are vulnerable to long-term declines in demand due to competing technologies or materials.

Companies in the paper and packaging industry are subject to possible declines in demand for their products as the use of alternative
materials and technologies grows and the prices of such alternatives become more competitive. Any substantial shift in demand from wood and paper products to competing technologies or materials could
result in a material decrease in sales of our products and could adversely affect our results of operations. We cannot ensure that any efforts we might undertake to adapt our product offerings to such
changes would be successful or sufficient.

Paper and packaging companies are subject to significant environmental regulation and environmental compliance expenditures, as well as other potential environmental
liabilities.

Companies in the paper and packaging industry are subject to a wide range of general and industry-specific environmental laws and
regulations, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management, site remediation, forestry operations and endangered species habitats. We may
incur substantial expenditures to maintain compliance with applicable environmental laws and regulations, which could adversely affect our results of operations. Failure to comply with applicable
environmental laws and regulations could expose us to civil or criminal fines or penalties or enforcement actions, including orders limiting operations or requiring corrective measures, installation
of pollution control equipment or other remedial actions.

Risks Associated with Acquisitions

Future acquisitions of businesses by us would subject us to additional business, operating and industry risks, the impact of which cannot presently be evaluated, and could
adversely impact our capital structure.

We intend to pursue other acquisition opportunities in an effort to diversify our investments and/or grow our business. Any business
acquired by us may cause us to be affected by numerous risks inherent in the acquired business' operations. If we acquire a business in an industry characterized by a high level of risk, we may be
adversely affected by the currently unascertainable risks of that industry. We cannot ensure that we would be able to properly ascertain or assess all of the significant risk factors with any such
acquisitions.

In
addition, the financing of any acquisition completed by us could adversely impact our capital structure as any such financing would likely include the issuance of additional equity
securities and/or the borrowing of additional funds. The issuance of additional equity securities may significantly reduce the equity interest of our stockholders and/or adversely affect prevailing
market prices for our common stock. Increasing our indebtedness could increase the risk of a default that would entitle the holder to declare all of such indebtedness due and payable and/or to seize
any collateral securing the indebtedness. In addition, default under one debt instrument could in turn permit lenders under other debt instruments to declare borrowings outstanding under those other
instruments to be due and payable pursuant to cross default clauses. Accordingly, the financing of future acquisitions could adversely impact our capital structure and the value of your equity
interest in us.

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Except
as required by law or the rules of any securities exchange on which our securities might be listed at the time we seek to consummate a subsequent acquisition, stockholders will
not be asked to vote on any such proposed acquisition and no redemption rights in connection with any such acquisition will exist.

Our operations are dependent upon certain operating agreements for fiber.

We rely on certain supply arrangements to provide us roundwood and woodchips. If one of these suppliers suffered a setback, KapStone's
supply of roundwood and woodchips may not be adequate to cover customer needs.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

We believe that our properties are well-maintained, in good operating condition and adequate for our present needs. The
following table sets forth our principal properties, as of December 31, 2009:

Location

Segment

Owned/LeasedNorth Charleston, South Carolina

Unbleached kraft paper

OwnedRoanoke Rapids, North Carolina

Unbleached kraft paper

OwnedNorthbrook, Illinois

Corporate

Leased


The
lease for our corporate headquarters expires in 2015.

Item 3.    Legal Proceedings

We are party to various legal proceedings arising from our operations. We establish reserves for claims and proceedings when it is
probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of any these matters, based on our assessment of the facts and circumstances
now known, we do not believe that any these matters, individually or in the aggregate, are material. However, actual outcomes may be different from those expected and could have a material effect on
our results of operations or cash flows in a particular period.

Disclosure of Certain Tax Penalties

The Company has no tax penalties owing to the Internal Revenue Service.

Item 4.    Reserved

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Table of Contents

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company's common stock and warrants were traded on the NASDAQ Global Market from May 29, 2007 through January 3, 2010
under the symbols "KPPC" and "KPPCW," respectively. Effective January 4, 2010, the Company's common stock began trading on the New York Stock Exchange under the "KS" trading symbol. Previously,
KapStone's common stock and warrants were traded on the Over-the-Counter Bulletin Board under the symbols "SCDE" and "SCDEW," respectively, since September 14, 2005. The
following table sets forth the high and low bid information for the Company's securities from January 1, 2008 through December 31, 2009, as reported by the various exchanges where its
securities are traded. The quotations
reflect inter-dealer prices, are without retail markup, markdowns or commissions, and may not represent actual transactions.

2009

2008Quarter

Low

High

Low

HighCommon Stock

1st

$
1.05

$
3.07

$
6.31

$
6.982nd

$
2.14

$
5.01

$
6.41

$
7.183rd

$
4.50

$
8.80

$
6.10

$
7.974th

$
6.48

$
9.90

$
2.06

$
6.07Warrants

1st







$
1.45

$
2.002nd







$
1.46

$
2.173rd







$
1.31

$
2.874th







$
0.05

$
1.25


Effective
August 17, 2009, the Company's warrants expired. Prior to expiration, approximately 20.5 million warrants were exercised. Data for 2009 closing share prices for
warrants are not available.

Number of Holders of Common Stock

The number of beneficial holders of record of our common stock on December 31, 2009 was 3,686.

Dividends

There were no cash dividends or other cash distributions made by us during the fiscal years 2009, 2008 or 2007. The Company's senior
secured credit facility restricts the
declaration or payment of cash dividends. The Company does not expect to pay dividends in the foreseeable future.

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Table of Contents

Stock Performance Graph

The performance graph shall not be deemed to be "soliciting material" or to be "filed" with the commission or subject to
Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934 as amended.

The
following graph compares a $100 investment in Company stock on August 31, 2005 with a $100 investment in each of the S&P 500 and the S&P Paper and Packaging Index (the
Company's peer group) also made on August 31, 2005. The graph portrays total return, 2005-2009, assuming reinvestment of dividends.

Comparison of 4 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2009

GRAPHIC

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Table of Contents

Item 6.    Selected Financial Data

The following table sets forth KapStone's selected financial information derived from its audited consolidated financial statements as
of, and for the years ended, December 31, 2009, 2008, 2007 and 2006 as well as KPB Predecessor's audited financial statements as of, and for the years ended December 31, 2006, and 2005.

The
selected financial data presented below summarizes certain financial data which has been derived from and should be read in conjunction with Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and KapStone's audited financial statements included in Item 7.

Predecessor KPBYears Ended December 31,



Years Ended December 31,In thousands, except per share amounts

2009

2008

2007

2006



2006

2005Statement of Income Data:Net sales

$
632,478

$
524,549

$
256,795

$




$
246,161

$
221,972Operating income / (loss)

$
151,362

$
50,656

$
44,300

$
(1,976
)


$
33,951

$
9,478Net income

$
80,280

$
19,665

$
26,963

$
2,196



$
19,967

$
4,933Basic net income per share

$
2.32

$
0.74

$
1.08

$
0.09



$
n/a

$
n/aDiluted net income per share

$
2.29

$
0.57

$
0.75

$
0.07



$
n/a

$
n/aBalance Sheet Data:Cash and cash equivalents

$
2,440

$
4,165

$
56,635

$




$
1

$
1Total assets

$
669,123

$
727,190

$
225,450

$
119,257



$
257,382

$
269,328Long-term liabilities

$
213,637

$
419,545

$
37,668

$




$
22,622

$
24,064Total stockholders' equity

$
348,790

$
180,767

$
144,185

$
116,045



$
219,685

$
228,557


For
the year ended December 31, 2006, net income allocable to holders of nonredeemable common stock was $1.5 million.

See
Notes 4 and 5 to Notes to Consolidated Financial Statements for acquisition information.

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Table of Contents

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

We were a special purpose acquisition corporation formed on April 15, 2005 for the purpose of effecting a merger, capital stock
exchange, asset acquisition or other similar business combination with an unidentified operating business in the paper, packaging, forest products and related industries.

We
have consummated two acquisitions since January 2007, as we drive towards our five year strategic objective of being a $2 billion revenue company.

KapStone's
operating results in 2008 benefited from the July 1, 2008 acquisition of the CKD business from MeadWestvaco. We financed the acquisition with a new $515 million
senior secured credit facility, which includes up to a $100 million revolving credit line to provide flexibility during these uncertain economic times, and the issuance of $40 million of
seven year 8.3% senior notes and cash.

Our
operating results for 2008 reflect six months of operations for CKD. The acquisition accounted for $254.1 million of net sales and $16.3 million of operating income. In
addition, we successfully increased selling prices throughout 2008 to offset the tremendous amount of inflation experienced by our industry. We experienced double digit increases in fiber and certain
key chemical costs, energy and transportation. Overall, our operations had a strong 2008, producing approximately 830,000 tons of paper and related products with minimal unplanned outages.

In
January 2009, we announced compensation and benefit reductions for all salaried employees to reduce costs by approximately $1 million a month, effective February 1,
2009. These reductions included temporary salary reductions, and the suspension of management and sales force incentives and 401k matching contributions. On November 30, 2009, the Company
lifted certain curtailments and reimbursed employees for lost salaries and wages and accrued $1.9 million for certain retirement benefits. Effective January 1, 2010, the management and
sales incentives plans and Company 401k match benefits were reinstated.

On
March 31, 2009, the Company consummated the sale of its dunnage bag business for $36.0 million less certain working capital adjustments to Illinois Tool
Works Inc. ("ITW"). The results of operations for the dunnage bag business were included in the dunnage bags segment until the date of the sale. In conjunction with the sale, the Company signed
a long-term supply agreement with ITW, pursuant to which the Company sells kraft paper to ITW.

Our
operating results for 2009 include $164 million of alternative fuel mixture tax credits which significantly improved earnings. In addition, the cash generated from this tax
credit and other sources was used to make over $280 million of repayments on our long-term debt. At December 31, 2009, we have recorded a $63 million reserve relating
to alternative fuel mixture tax credits as it meets the requirements of Financial Interpretation No. 48,Accounting for Uncertainty in Income
Taxes(codified primarily in Accounting Standards Codification No. 740,Income Taxes). Our position is that these tax
credits are not taxable for federal income purposes. However, the Internal Revenue Service has not issued any specific guidance.

After
a sluggish start to 2009 following the economic decline that started in late 2008, the Company's operations returned to historical production and sales volumes. After falling as
low as 71% in early 2009, our operating rate reached approximately 97% by the end of the year. Overall, our operations had a strong year producing approximately 1.14 million tons of paper and
related products with minimal unplanned outages. Market driven price reductions, occurring as a result of lower demand in the first two quarters of 2009, reduced our average selling prices by $118 per
ton. To offset some of the volume loss, the Company sold a higher percentage of linerboard to export customers at a lower price. In December 2009, a $20 per ton price increase for kraft paper was
implemented followed by an

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additional
$20 per ton in January 2010. In January 2010, a $50 per ton price increase was announced for certain linerboard grades and is expected to be fully implemented by the end of the first
quarter of 2010.

In
August 2009, approximately 17 million of our common stock warrants were exercised, generating over $85 million of cash for the Company. In accordance with our Senior
Credit Agreement and Note Purchase Agreement, the warrant proceeds were used to make mandatory debt repayments. The exercises increased the number of common stock outstanding from approximately
28.4 million shares in early 2009 to 45.4 million shares at December 31, 2009.

We
continue to invest in our infrastructure. In 2009, we spent $8 million on a new and upgraded enterprise resource planning ("ERP") system, allowing us to migrate our CKD
operations from an ERP system hosted by MWV to our own ERP system, which will save us approximately $3 million, of pre-tax income annually. Our transition from the IP hosted ERP system occurred
in April 2008.

Results of Operations for the Years Ended December 31, 2009, 2008, and 2007

The following table compares results of operations for the years ended December 31, 2009 and 2008:

Year Ended December 31,



% of Net Sales%
Change($ in thousands)

2009

2008

2009

2008Net sales

$
632,478

$
524,549


20.6
%

100.0
%

100.0
%Cost of sales excluding depreciation and amortization


355,088


362,462


(2.0
)%

56.1


69.1Freight and distribution expenses


57,395


50,154


14.4
%

9.1


9.6Selling, general and administrative expenses


31,377


30,411


3.2
%

5.0


5.8Depreciation and amortization


54,667


31,683


72.5
%

8.6


6.0Gain on sale of business


16,417






%

(2.6
)

Other operating income


994


817


21.7
%

(0.1
)

(0.2
)Operating income


151,362


50,656


198.8
%

23.9


9.7Foreign exchange gain (loss)


219


(987
)

(122.2
)%




(0.2
)Interest income


12


927


(98.7
)%




0.1Interest expense


19,176


18,449


3.9
%

3.0


3.5Income before income taxes


132,417


32,147


311.9
%

20.9


6.1Provision for income taxes


52,137


12,482


(317.7
)%

8.2


2.4Net income

$
80,280

$
19,665


308.2
%

12.7
%

3.7
%


Net
sales for the year ended December 31, 2009 were $632.5 million compared to $524.5 million for the year ended December 31, 2008, an increase of 20.6%. The
full year of sales for CKD in 2009, compared to six months in 2008 (acquisition consummated on July 1, 2008), accounted for $188.2 million of the increase in net sales. Excluding the
additional six months of CKD's sales and $26.1 million of lower sales due to the sale of the dunnage bag business on March 31, 2009, net sales in 2009 were lower than in 2008 by
$54.1 million, of which $61.0 million was due to lower selling prices and $27.4 million was due to a less favorable product mix, as the Company had a higher percentage of
linerboard sales, which has a lower average selling price than other products. This was partially offset by $34.3 million of higher volume in the second half of 2009.

Cost
of sales for the year ended December 31, 2009 was $355.1 million compared to $362.5 million for the year ended December 31, 2008, a decrease of
$7.4 million or 2.0%. Excluding $130.7 million for the additional six months of CKD's results and $18.6 million of lower cost of sales due to the sale of

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Table of Contents

the
dunnage bag business on March 31, 2009, cost of sales decreased by $119.5 million, of which $129.8 million was due to alternative fuel mixture tax credits and
$9.3 million was due to deflation on energy and raw material costs. This was offset by $15.6 million of additional costs due to higher sales volume and $4.0 million of unplanned
downtime.

The
total amount of alternative fuel mixture tax credits recorded as a reduction in cost of sales for the year ended December 31, 2009 was $164.0 million, of which
$34.2 million was included in the additional six months of CKD's results.

Freight
and distribution expenses for the year ended December 31, 2009 totaled $57.4 million, compared to $50.2 million for the year ended December 31, 2008,
an increase of $7.2 million. Excluding $15.9 million for the additional six months of CKD's results less $1.4 million for the sale of the dunnage bag business, freight and
distribution expenses were $7.3 million lower in 2009 than in 2008. This decrease was due to a $5.6 million increase in customer-billed freight shipments and $6.6 million of lower
fuel oil surcharges and lower costs due to favorable freight contract negotiations, partially offset by $4.9 million due to higher sales volume.

Selling,
general and administrative expenses for the year ended December 31, 2009 totaled $31.4 million compared to $30.4 million for the same period in 2008. The
increase of $1.0 million reflects $4.2 million for the additional six months of CKD's results, $3.1 million of higher professional fees and information technology expenses and
$1.5 million of transitional services provided by MWV reflecting twelve months of charges in 2009 compared to only six months in 2008. These increases were partially offset by
$2.3 million of lower compensation and benefit expenses as the Company suspended the management incentive plan, sales incentive plan and 401k matching contributions as a result of economic
conditions, $2.4 million of lower start-up expenses related to the CKD acquisition, $1.8 million of lower bad debt expenses (three customer bankruptcies in 2008 compared to
one in 2009) and $1.3 million due to the sale of the dunnage bag business. As a percentage of net sales, selling, general and administrative expenses dropped from 5.8% in 2008 to 5.0% in 2009.

Depreciation
and amortization for the year ended December 31, 2009 totaled $54.7 million compared to $31.7 million for the same period in 2008. The increase of
$23.0 million was mainly due to the additional six months of CKD's results, which added $14.4 million of depreciation and $6.7 million of amortization of intangibles, including
$4.9 million of amortization for an intangible asset related to an acquired coal contract with below market prices at July 1, 2008. The acquired coal contract expired on
December 31, 2009, and therefore, the related intangible asset was fully amortized as of year-end. Excluding the additional six months of CKD results, depreciation and amortization
increased by $1.9 million primarily due to an upgrade to the Company's ERP system, the migration of the CKD acquisition to the Company's ERP system and other capital expenditures.

The
$16.4 million gain on sale of business reflects the sale of the dunnage bag business to Illinois Tool Works Inc. on March 31, 2009.

Other
operating income for the years ended December 31, 2009 and 2008 totaled $1.0 million and $0.8 million, respectively. Other operating income includes
commissions the Company receives from marketing bleached paper produced and sold by IP to KapStone customers.

Foreign
exchange gains for the year ended December 31, 2009 were $0.2 million compared to a foreign exchange loss of $1.0 million for the year ended
December 31, 2008. The change reflects the weakening of the U.S. dollar in 2009 compared to the euro. As a result of the CKD acquisition on July 1, 2008, the Company acquired certain
European customers who are invoiced in euros.

Interest
income for the year ended December 31, 2009 decreased by $0.9 million compared to the same period in 2008. Due to lower interest rates in 2009, the Company used
its excess cash to pay down principal balances on its long-term debt.

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Interest
expense for the years ended December 31, 2009 and 2008 was $19.2 million and $18.4 million, respectively. Interest expense reflects interest on the
Company's long-term debt and amortization of debt issuance costs. Interest expense was $0.8 million higher in the year ended December 31, 2009 due to $3.0 million of
accelerated amortization of debt issuance costs related to $283.1 million of mandatory and voluntary debt prepayments, partially offset by lower expenses due to lower debt balances and interest
rates. Amortization of debt issuance costs for the period ended December 31, 2009 was $6.0 million compared to $2.0 million for the same period in 2008.

Provision
for income taxes for the years ended December 31, 2009 and 2008 was $52.1 million and $12.5 million, respectively, reflecting an effective tax rate of
39.4% compared to 38.8% for the same period in 2008. The $39.6 million increase in provision for income taxes is a result of $100.3 million of higher pre-tax income and a
slightly higher effective tax rate due to a return to provision adjustment for state income taxes.

The
following table presents a reconciliation of consolidated net sales and operating income to amounts reported by operating segment:

Years Ended December 31,Operating Segment ($ 000s):

2009

2008Consolidated net sales:Unbleached kraft

$
626,450

$
495,864Other


6,927


33,041Elimination of intersegment sales


(899
)

(4,356
)Total

$
632,478

$
524,549Operating income / (loss):Unbleached kraft

$
155,904

$
66,871Other


748


5,248Gain on sale of business


16,417


Corporate


(21,707
)

(21,463
)Total

$
151,362

$
50,656


Unbleached Kraft

Years Ended December 31,2009

2008

Change

%Net sales

$
626,450

$
495,864

$
130,586


26.3
%Operating income


155,904


66,871


89,033


133.1
%Operating income % of net sales


24.9
%

13.5
%

11.4
%Average revenue per ton

$
524

$
603

$
(79
)

(13.1
)%Tons of paper sold


1,149,595


805,605


343,990


42.7
%


For
the year ended December 31, 2009, unbleached kraft segment net sales increased by $130.6 million, or 26.3%, to $626.5 million compared to $495.9 million
for the year ended December 31, 2008. The increase in net sales was due to a full year of sales in 2009 for CKD compared to six months for the same period in 2008, as the acquisition occurred
on July 1, 2008, which increased sales by $188.2 million. Excluding the additional six months of CKD's results, net sales were lower by $57.6 million in 2009 compared to the same
period in 2008, mainly due to $61.0 million of lower average revenue per ton and $27.4 million of a less favorable product mix, as the Company had a higher percentage of linerboard
sales. Average revenue per ton for 2009 was $524 per ton, or $79 per

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ton
lower than average revenue per ton in the same period of 2008 as market prices for paper were reduced in the first two quarters of 2009 due to lower overall industry demand.

Unbleached
kraft segment operating income increased by $89.0 million, or 133.1%, to $155.9 million for the year ended December 31, 2009, compared to
$66.9 million for the year ended December 31, 2008. Operating income increased by $16.3 million due to the additional six months of CKD's results, $129.8 million due to
alternative fuel mixture tax credits, $16.0 million of deflation on energy, raw materials and freight costs, $8.4 million of increased sales volume and $1.7 million due to lower
bad debts, partially offset by $61.0 million of lower average revenue per ton, $21.9 million of a less favorable product mix and $4.0 million due to unplanned outages. Included in
operating income for 2009 and 2008 is $9.7 million and $4.3 million, respectively, of amortization expense for an intangible asset, acquired as part of the CKD acquisition, consisting of
a coal contract with favorable prices. The coal contract expired on December 31, 2009 and was fully amortized by year-end.

The
total amount of the alternative fuel mixture tax credits recorded in operating income for 2009 was $164.0 million of which $34.2 million is included in the additional
six months of CKD's results.

Operating
income for the year ended December 31, 2008, was negatively impacted by non-cash purchase accounting charges of $0.7 million, adjusting acquired
finished goods inventories to fair value.

Operating
income for the years ended December 31, 2009, and 2008 includes $6.0 million of expenses relating to the Company's annual planned maintenance outage. Operating
income as a percentage of net sales increased to 24.9% mainly due to the alternative fuel mixture tax credits offset by lower prices and mix.

Other

Other includes the Company's dunnage bag business which was sold on March 31, 2009 to Illinois Tool Works, Inc. For the
year ended December 31, 2009, net sales of $6.9 million and operating income of $0.7 million decreased by $26.1 million and $4.5 million, respectively, due to the
sale of the business.

Corporate

Corporate expenses for the year ended December 31, 2009, totaled $21.7 million compared to $21.5 million for the
year ended December 31, 2008. The increase of $0.2 million is primarily due to a $1.5 million increase in transitional services provided by MWV for twelve months in 2009 compared
to six months in 2008, $2.3 million of higher professional services and other costs and $0.8 million of higher depreciation and amortization expenses relating to ERP investments
partially offset by $2.3 million of lower CKD acquisition start up costs, $2.1 million of lower compensation and benefit expenses as the Company temporarily suspended management and
sales incentive plans and the 401k match as a result of economic conditions.

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The
following table compares results of operations for the years ended December 31, 2008 and 2007:

Year Ended December 31,



% of Net Sales%
Change($ in thousands)

2008

2007

2008

2007Net sales

$
524,549

$
256,795


104.3
%

100.0
%

100.0
%Cost of sales excluding depreciation and amortization


362,462


162,429


123.2
%

69.1


63.3Freight and distribution expenses


50,154


23,581


112.7
%

9.6


9.2Selling, general and administrative expenses


30,411


16,482


84.5
%

5.8


6.4Depreciation and amortization


31,683


11,327


179.7
%

6.0


4.4Other operating income


817


1,324


(38.3
)%

(0.2
)

(0.6
)Operating income


50,656


44,300


14.3
%

9.7


17.3Foreign exchange gain / (loss)


(987
)




100.0
%

(0.2
)

Interest income


927


2,096


(55.8
)%

0.1


0.8Interest expense


18,449


4,295


329.5
%

3.5


1.7Income before income taxes


32,147


42,101


(23.6
)%

6.1


16.4Provision for income taxes


12,482


15,138


(17.5
)%

2.4


5.9Net income

$
19,665

$
26,963


(27.1
)%

3.7
%

10.5
%


Net
sales for the year ended December 31, 2008 were $524.5 million compared to $256.8 million for the year ended December 31, 2007, an increase of 104%. The
increase in net sales was driven primarily by the acquisition of CKD on July 1, 2008. The acquisition accounted for $254.1 million, or 95% of the increase. The balance of the increase in
net sales was driven by $18.8 million of higher prices, which was offset by lower volume of $5.2 million primarily in the unbleached kraft segment. The higher prices reflect increases
implemented in 2007 and 2008 to offset the inflationary impact on raw material and freight costs.

Cost
of sales for the year ended December 31, 2008 was $362.5 million compared to $162.4 million for the year ended December 31, 2007, an increase of 123%.
The increase in cost of sales was primarily driven by the acquisition of CKD on July 1, 2008. The acquisition accounted for $189.1 million, or 95% of the increase. The balance of the
increase in cost of sales was mainly due to inflation on fiber, caustic soda, coal and other costs of $14.8 million and a $1.4 million increase in the cost of the annual planned
maintenance outage due to higher inspection costs for a turbine generator, partially offset by lower sales volume. In addition, 2008 and 2007 results included $0.7 million and
$1.5 million, respectively, of non-cash purchase accounting charges to adjust acquired finished goods inventory to fair value as part of the CKD and KPB acquisitions.

Freight
and distribution expenses for the year ended December 31, 2008 totaled $50.2 million compared to $23.6 million for the year ended December 31, 2007.
The increase of $26.6 million mainly reflects the acquisition of CKD which accounted for $23.7 million of the increase. The balance of the increase in freight and distribution expenses
reflects $3.3 million in higher fuel oil surcharges and $0.6 million due to
a higher percentage of shipments by truck compared to rail, partially offset by lower sales volume of $1.0 million.

Selling,
general and administrative expenses for the year ended December 31, 2008 totaled $30.4 million compared to $16.5 million for the same period in 2007. The
increase of $13.9 million reflects CKD's direct selling and administrative expenses of $4.8 million, acquisition related start up expenses of $2.4 million, transitional services
provided by MWV of $3.6 million, higher stock compensation costs of $1.1 million, higher bad debt provisions of $2.1 million and other cost increases of $1.5 million,
offset by lower transitional support services from IP of $1.6 million as the Company

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terminated
its transitional services agreement with IP upon converting to its new ERP system in April 2008. As a percentage of net sales, selling, general and administrative expenses dropped from 6.4%
for the year ended December 31, 2007 to 5.8% for the year ended December 31, 2008.

Depreciation
and amortization for the year ended December 31, 2008 totaled $31.7 million compared to $11.3 million for the same period in 2007. The increase of
$20.4 million is primarily due to the CKD acquisition; which resulted in an additional $14.0 million of depreciation and $6.2 million of amortization of intangible assets,
including $4.3 million of amortization for the intangible asset related to an acquired coal contract with prices below market at July 1, 2008. The acquired coal contract expired on
December 31, 2009.

Other
operating income for the years ended December 31, 2008 and 2007 totaled $0.8 million and $1.3 million, respectively. Other operating income includes
commissions the Company receives from marketing bleached paper produced and sold by IP to KapStone customers.

Foreign
exchange losses of $1.0 million for the year ended December 31, 2008, reflect the impact of a stronger U.S. dollar of approximately 11 percent from
July 1, 2008 through December 31, 2008. As a result of the CKD acquisition on July 1, 2008, the Company acquired certain European customers which are invoiced in euros.

Interest
income for the years ended December 31, 2008 and 2007 was $0.9 million and $2.1 million, respectively. Interest income represents earnings on our cash and
cash equivalents. The decrease in interest income reflects our use of cash and cash equivalents to fund a portion of the CKD acquisition.

Interest
expense for the years ended December 31, 2008 and 2007 was $18.4 million and $4.3 million, respectively. Interest expense reflects interest on the Company's
long-term debt and amortization of debt issuance costs. Interest expense was $14.1 million higher in the year ended December 31, 2008, primarily due to obtaining a new
$515 million senior secured credit facility and
$40 million of senior notes issued to finance the CKD acquisition. Amortization of debt issuance costs for the years ended December 31, 2008 and 2007 was $2.0 million and
$0.3 million, respectively. The increase of $1.7 million is due to amortization of the $12.6 million paid in 2008 for the new senior secured credit facility. Prior to the CKD
acquisition, the Company had $37.4 million of outstanding debt.

Provision
for income taxes for the year ended December 31, 2008 decreased by $2.7 million due to lower pre-tax income offset by a higher effective tax rate. The
higher effective tax rate was driven by a lower benefit from the federal domestic manufacturing deduction. The effective tax rate was 38.8% for the year ended December 31, 2008 compared to
36.0% for the same period in 2007.

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Table of Contents

The following table presents a reconciliation of consolidated net sales and operating income to amounts reported by operating segment:

Years Ended December 31,Operating Segment ($ 000s):

2008

2007Consolidated net sales:Unbleached kraft

$
495,864

$
227,921Other


33,041


32,801Elimination of intersegment sales


(4,356
)

(3,927
)Total

$
524,549

$
256,795Operating income / (loss):Unbleached kraft

$
66,871

$
51,901Other


5,248


6,350Corporate


(21,463
)

(13,951
)Total

$
50,656

$
44,300


Unbleached Kraft

Years Ended December 31,2008

2007

Change

%Net sales

$
495,864

$
227,921

$
267,943


117.6
%Operating income


66,871


51,901


14,970


28.8
%Operating income % of net sales


13.5
%

22.8
%

(9.3
)%Average revenue per ton

$
603

$
547

$
56


10.2
%Tons of paper sold


805,605


416,501


389,104


93.4
%


For
the year ended December 31, 2008, unbleached kraft segment net sales increased by $267.9 million, or 117.6%, to $495.9 million compared to $227.9 million
for the year ended December 31, 2007. The acquisition of CKD on July 1, 2008 accounted for $254.1 million of the increase. Average revenue per ton increased $56 due to the full
realization of price increases implemented in 2007 and the partial realization of multiple price increases implemented throughout 2008, accounting for approximately $17.9 million of the sales
increase. Volume of paper sold increased by 389,104 tons, of which 396,262 tons was due to the CKD acquisition.

Unbleached
kraft segment operating income increased by $15.0 million, or 28.8%, to $66.9 million for the year ended December 31, 2008 compared to
$51.9 million for the year ended December 31, 2007. The acquisition of CKD on July 1, 2008 accounted for $16.3 million of the increase. The balance of the change in
operating income is due to higher average revenue per ton which contributed $17.9 million of additional operating income for the year ended December 31, 2008, but was offset by higher
fiber and caustic soda costs of $10.2 million, inflation on freight and fuel oil surcharges of $3.0 million, inflation on utilities of $1.9 million and other cost increases of
$3.0 million. In addition, the cost of the annual planned maintenance outage increased by $1.4 million due to higher inspection costs for a turbine generator and the segment incurred
approximately $2.0 million of bad debt provisions in 2008. Operating income in the year ended December 31, 2007 was negatively impacted by $1.0 million due to a
two-day unplanned outage caused by an electrical fire and other smaller unplanned outages during the fourth quarter.

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Operating
income for the years ended December 31, 2008 and 2007 was negatively impacted by non-cash purchase accounting charges of $0.7 million and
$1.2 million, respectively, adjusting acquired finished goods inventories to fair value.

Operating
income for the years ended December 31, 2008 and 2007 includes $6.0 million and $4.6 million, respectively, of expenses relating to our annual planned
maintenance outage. Operating income as a percentage of net sales declined to 13.5%.

Other

Other includes the Company's dunnage bag business. For the year ended December 31, 2008, net sales increased by
$0.2 million, or 0.7%, to $33.0 million compared to $32.8 million for the year ended December 31, 2007. The increase in net sales is mainly due to $0.9 million of
price increases implemented to offset higher raw material and freight costs, partially offset by a 1.5% volume decline.

Operating
income decreased by $1.2 million, or 18.8%, to $5.2 million for the year ended December 31, 2008, compared to $6.4 million for the year ended
December 31, 2007. The decrease in operating income is due to inflation on raw material and freight costs. Operating income as a percentage of net sales declined to 15.9%.

Corporate

Corporate expenses for the year ended December 31, 2008 totaled $21.5 million compared to $14.0 million for the
year ended December 31, 2007. The increase of $7.5 million is due to $2.4 million of CKD related acquisition start-up expenses, $3.6 million of transitional
services provided by MWV, $1.1 million of higher stock compensation costs, $1.1 million of additional depreciation and amortization for the Company's new ERP system which went live in
April 2008 and other cost increases of $0.9 million, partially offset by $1.6 million of lower transitional support services from IP as the Company terminated its transitional services
agreement with IP upon converting to its new ERP system in April 2008.

Liquidity and Capital Resources

Acquisitions

The Company has consummated two acquisitions totaling $625.5 million. The assets acquired consisted of unbleached kraft paper
mills in Roanoke Rapids, North Carolina and North Charleston, South Carolina, Ride Rite® Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas and a lumber mill
in Summerville, South Carolina. The KPB acquisition in 2007 includes contingent earn-out payments of up to $60.0 million based on KPB's annual earnings before interest, income
taxes, depreciation and amortization ("EBITDA") during the five year period immediately following the acquisition. The first contingent payment will be equal to 5.3 times KPB's average annual EBITDA
for the five year period immediately following the acquisition, less $165.0 million and subject to a maximum of $35.0 million. The second contingent payment is an "all or nothing"
payment and is payable if KPB's average annual EBITDA for the same five year period equals or exceeds $49.2 million. Both payments, if earned, will be due and paid at the end of the five year
period. Due to the sale of the dunnage bag business in March 2009, a $4.0 million earn-out payment was made in April 2009 and reduced the potential future contingent
earn-out payments from $60.0 million up to $55.0 million.

If
these contingent earn-out payments are made, they will be accounted for as additional purchase price consideration and recorded as goodwill. The purchase agreement for the
CKD acquisition has no provision for contingent earn-out payments.

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Table of Contents

Credit Facilities

Senior Credit Agreement

We are party to a Senior Credit Agreement, (the "Senior Credit Agreement"), dated as of June 12, 2008 and effective with the
consummation of the acquisition of CKD, among us, KapStone Kraft Paper Corporation, as borrower ("KapStone Kraft"), our other subsidiaries
named therein, as guarantors, the lenders named therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The Senior Credit Agreement provides for an aggregate of
up to $515 million in senior secured credit facilities (the "Senior Credit Facilities"), consisting of a $390 million term A loan facility, a $25 million term B loan facility and
a $100 million revolving credit facility (including a letter of credit subfacility). The Senior Credit Facilities are guaranteed by KapStone Kraft and our other domestic subsidiaries and are
secured by substantially all of our assets, including all of the capital stock of the borrower and guarantor subsidiaries and up to 66% of the capital stock of our foreign subsidiaries.

The
term A loan facility has future consecutive quarterly repayments of $3.9 million on March 31, 2010 and June 30, 2010 and then $4.9 million from
September 30, 2010 thru March 31, 2013, with a final payment of all outstanding principal and interest on the maturity date. The term B loan is required to be repaid by KapStone in
consecutive quarterly installments of $0.2 million on March 31, 2010 and June 30, 2010 and then $0.3 million from September 30, 2010 to March 31, 2015 and
$2.3 million on the maturity date. Borrowings under the revolving credit facility may be used for working capital and other general corporate purposes and are required to be repaid in full on
the maturity date. The maturity date is the earlier of: (a) June 12, 2013 with respect to the term A loan facility and the revolving credit facility, and June 12, 2015 with
respect to the term B loan facility, and (b) the date which is 90 days prior to the date on which any earn-out obligations to International Paper will become (or are
reasonably expected to become) due; provided that the maturity date will not be so accelerated if, among other things, the total leverage ratio at the end of the then most recent fiscal quarter is
less than 2.0 to 1.0.

Outstanding
principal under the term A loan facility and the revolving credit facility bears interest at a rate equal to, at our option, either (1) the base rate, or
(2) the reserve adjusted one, two, three or six-month Eurodollar rate plus a margin of 1.50%. The undrawn portion of the revolving credit facility is subject to an unused line fee
calculated at an annual rate of 0.3750%. Outstanding letters of credit are subject to an annual fee of 1.5% the plus a fronting fee on the undrawn amount thereof.

Outstanding
principal under the term B loan facility bears interest at a rate equal to, at our option, either (1) the base rate (which is the higher of the then current Federal
Funds rate plus 0.5% or the prime rate most recently announced by Bank of America, N.A., the administrative agent under the Senior Credit Facilities) plus a margin of 2.00% or (2) the reserved
adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.50%.

The
term loan facilities and the revolving credit facility may be prepaid at any time without premium. The Senior Credit Facilities are subject to mandatory prepayment with specified
percentages of the net cash proceeds of certain asset dispositions, casualty events, exercise of outstanding warrants, debt and equity issuances, and with excess cash flow, in each case subject to
certain conditions.

In
accordance with its debt agreements, the Company's availability under its Revolving Credit Facility has been reduced by the amount of standby letters of credit issued of
$13.0 million as of December 31, 2009. These letters of credit are used as security for certain contractual commitments and workers'
compensation obligations. These letters of credit expire at various dates through 2010 unless extended. In addition, $7.4 million was borrowed under the Revolving Credit Facility as of
December 31, 2009. The Company's total availability under the Revolving Credit Facility was $79.6 million at year-end.

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Table of Contents

The
Senior Credit Facilities contain covenants that restrict, among other things, our ability to create liens, incur indebtedness and guarantees, make certain investments or
acquisitions, merge or consolidate, dispose of assets, pay dividends, repurchase or redeem capital stock and subordinated indebtedness, change the nature of our business, enter into certain
transactions with affiliates, and make changes in accounting policies or practices except as required by generally accepted accounting principles. The Senior Credit Facilities also contain a total
leverage ratio covenant and a fixed charge coverage ratio. The Senior Credit Facilities contain events of default including, but not limited to, nonpayment of principal or interest, violation of
covenants, breaches of representations and warranties, cross-default to other indebtedness, bankruptcy and other insolvency events, material judgments, certain ERISA events, actual or asserted
invalidity of loan documentation and certain changes of control.

Note Purchase Agreement

Pursuant to the Note Purchase Agreement dated July 1, 2008, (the "Note Purchase Agreement") by and among us, KapStone Kraft and
the purchasers listed in the Purchaser Schedule attached to the Note Purchase Agreement (the "Purchasers"), the Purchasers purchased from KapStone Kraft senior secured promissory notes (the "Senior
Notes") with an aggregate principal amount of $40 million. The Senior Notes are guaranteed by the Company and the Company's other domestic subsidiaries and are secured by substantially all of
our assets, including all of the capital stock of KapStone Kraft and the other guarantor subsidiaries and up to 66% of the capital stock of the Company's foreign subsidiaries.

The
Senior Notes were extinguished in July 2009 using cash from operations.

Debt Covenants

Under the financial covenants of the Senior Credit Agreement, KapStone must comply on a quarterly basis with a maximum permitted
leverage ratio. The leverage ratio is calculated by dividing KapStone's debt by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable
adjustments. The maximum permitted leverage ratio declines over the life of the Senior Credit Agreement. On December 31, 2009, the maximum permitted leverage ratio was 3.00 to 1.00. On
December 31, 2009, KapStone was in compliance with the Senior Credit Agreement with a leverage ratio of 0.84 to 1.00.

The
Senior Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio. This ratio is calculated by dividing KapStone's twelve month total
earnings before interest expense, taxes, depreciation and amortization and allowable adjustments less cash payments for income taxes and capital expenditures by the sum of our cash interest and
required principal payments during the twelve month period. From the closing date of the Senior Credit Agreement through the quarter ending September 30, 2011 the fixed charge coverage ratio is
required to be at least 1.10 to 1.00. Starting with the quarter ending December 31, 2011 through the expiration of the Senior Credit Agreement, the fixed charge coverage ratio is required to be
not less than 1.15 to 1.00. On December 31, 2009, KapStone was in compliance with the Senior Credit Agreement with a fixed charge coverage ratio of 4.30 to 1.00.

As
of December 31, 2009, KapStone was in compliance with all applicable covenants in the Senior Credit Agreement.

Alternative Fuel Mixture Tax Credit

On March 31, 2009, the Company received approval from the Internal Revenue Service for its registration as an alternative fuel
mixer, which provides for a refund of $0.50 per gallon of alternate fuel used in the Company's pulp making process. As a result, for the year ended December 31, 2009, the Company received
refunds of $165 million. The Company received refunds in early 2010 of approximately $13 million for amounts generated through December 31, 2009.

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Table of Contents

The
alternative fuel mixture tax credit ("AFTC") expired on December 31, 2009.

Sale of Dunnage Bag Business

On March 31, 2009, the Company sold its dunnage bag business to Illinois Tool Works Inc. for $36.0 million less
certain working capital adjustments. Of the net cash proceeds, $32.8 million was required to pay down the Company's long-term debt and notes under the terms of the Senior Credit
Agreement. As a condition of sale, $2.5 million of the sale proceeds are being held in escrow until September 30, 2010 to be available to satisfy any losses or indemnity claims that may
arise against the Company in connection with the sale.

As
a result of the sale, the Company incurred an earn-out liability of $4.0 million in accordance with the asset purchase agreement dated June 23, 2006 with
International Paper Company. The terms of the asset purchase agreement include a contingent earn-out payment on the fifth anniversary of the acquisition; however, in the event of a sale of
the dunnage bag business prior to that date, a percentage of the earn-out became due and payable within 30 days following the sale provided certain criteria is met. The Company paid
the earn-out on April 30, 2009.

Since
the Company will continue to supply paper under a long term supply agreement with ITW, it represents a significant continuing involvement in the operations of the dunnage bag
business. Under accounting principles generally accepted in the United States, the operating results for the dunnage bag business have been included in operating income in the accompanying
Consolidated Statements of Income through the date of sale.

Income Taxes

For the year ended December 31, 2009, the Company received $11.3 million of federal and state income tax refunds.
Additional refunds for previously filed tax returns of $13.2 million are expected to be received in 2010 from the carryback of a 2009 tax operating loss.

The
Company has recorded a $63 million tax contingency reserve at December 31, 2009 for an unrecognized tax benefit relating to the taxability of alternative fuel mixture
tax credits. The Company has taken the position that the AFTC is similar to a federal excise tax and as a result is not taxable. To date, the Internal Revenue Service has issued no guidance concerning
this issue.

For
2010, the Company is evaluating two additional tax benefits for which we may qualify for directly or indirectly. The first is a tax credit under Section 40(b)(6) of $1.01 per
gallon for cellulosic biofuel producers. The second is a subsidy of up to $45 per dry ton under the Biomass Crop Assistance Program (BCAP) for suppliers of biomass who sell to approved facilities,
which will convert biomass to energy. Both of KapStone's mills are approved facilities, and the Company is researching how we can indirectly benefit from this subsidy in the form of lower raw material
costs.

Exercises of warrants to purchase common stock

In August 2009, the Company received $85.2 million from exercises of warrants to purchase common stock. The entire proceeds were
used to make mandatory prepayments on the Company's long-term loans in accordance with the Senior Credit Agreement. On August 17, 2009, the remaining unexercised balance of
approximately 19.5 million warrants expired.

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Table of Contents

Sources and Uses of Cash

Years ended December 31 (dollars in thousands)

2009

2008

2007Operating activities

$
201,235

$
47,352

$
52,235Investing activities


256


(490,569
)

(47,416
)Financing activities


(203,216
)

390,747


51,816


2009

Cash and cash equivalents of $2.4 million at December 31, 2009 decreased by $1.7 million from December 31,
2008, reflecting cash provided by operations of $201.2 million and cash provided by investing activities of $0.3 million, offset by cash used in financing activities of
$203.2 million.

Cash
provided by operating activities was $201.2 million due to $80.3 million of net income and $83.3 million of non-cash charges offset by the gain on
sale of the dunnage bag business of $16.4 million. Changes in operating assets and liabilities provided $54.0 million.

Cash
provided by investing activities was $0.3 million reflecting proceeds from the sale of the dunnage bag business of $34.9 million and $1.0 million received as a
working capital adjustment related to the
CKD acquisition offset by $29.2 million of capital expenditures, $4.0 million paid for the KPB earn-out related to the sale of the dunnage bag business and
$2.5 million of proceeds from the sale of the dunnage bag business held in escrow. Capital expenditures included $21.1 million for the unbleached kraft segment for equipment upgrades and
replacements at the paper mills. In addition, $8.1 million was spent on upgrading the Corporate ERP system and migrating CKD to our systems.

Cash
used in financing activities totaled $203.2 million reflecting $243.1 million of repayments on term loans, $40.0 million for extinguishment of the senior notes,
$85.0 million of payments on the revolving credit facility and $0.3 million of debt issuance costs, offset by borrowings under the revolving credit facility of $80.0 million and
$85.2 million of proceeds from exercised common stock warrants.

2008

Cash and cash equivalents of $4.2 million at December 31, 2008 decreased by $52.5 million during the year ended
December 31, 2008, reflecting net cash inflow from operating activities of $47.4 million, net cash outflow from investing activities of $490.6 million and net cash inflow from
financing activities of $390.7 million.

Net
cash inflow from operating activities was $47.4 million due to net income of $19.7 million, an increase in operating assets and liabilities of $24.7 million and
non-cash charges of $52.4 million. Operating assets and liabilities increased mainly due to a $14.2 million increase in inventories driven by higher levels of finished goods
at year end and $14.1 million for refundable and prepaid income taxes.

Net
cash outflow from investing activities was $490.6 million and included payment of $467.4 million for the CKD acquisition and capital expenditures of
$23.2 million. Capital expenditures of $20.3 million for the unbleached kraft segment include equipment upgrades and replacements at paper mills in Roanoke Rapids, North Carolina and
North Charleston, South Carolina. In addition, $2.3 million of capital expenditures at corporate reflect final costs to complete the Company's new ERP system. Capital expenditures for other
operating segments totaled $0.6 million.

Net
cash inflow from financing activities totaled $390.7 million during the year ended December 31, 2008 and included $415.0 million of proceeds from two term loans
as part of a new senior secured credit facility, $78.5 million of proceeds from borrowings under a revolving credit line, $40.0 million of proceeds from the issuance of Senior Notes and
$15.5 million exercised common stock warrants. In addition, during the year, the Company made $145.6 million of long-term debt principal

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payments
and paid $12.6 million of debt issuance costs associated with its new senior secured credit facility.

2007

Cash flow from all activities during the year ended December 31, 2007 increased by $56.6 million from December 31,
2006, reflecting the receipt of funds held in trust at December 31, 2006 and not used for the KPB acquisition of $28.3 million, and cash generated from operations of
$52.2 million, partially offset by capital expenditures of $11.9 million, repayment of long-term debt of $7.5 million, acquisition costs paid of $1.2 million
and an investment banking fee paid of $1.2 million.

Net
cash inflow from operating activities was $52.2 million due to net income for the period of $27.0 million, changes in operating assets and liabilities of
$12.8 million and non-cash charges of $12.4 million.

Net
cash outflow from investing activities was $47.4 million and included payment for the KPB acquisition of $149.6 million and capital expenditures of
$11.9 million. Capital expenditures of $6.1 million were for the unbleached kraft segment and included equipment upgrades and replacements at the paper mill in Roanoke Rapids, North
Carolina. In addition, $5.4 million of capital expenditures at corporate included $3.9 million paid for development of a new ERP system. Capital expenditures for the dunnage bags segment
totaled $0.4 million. These amounts were partially offset by receipt of funds held in trust for the KPB acquisition of $115.2 million.

Net
cash inflow from financing activities totaled $51.8 million during the year ended December 31, 2007 and included proceeds from the long-term loan of
$60.0 million and $1.6 million from the exercise of common stock warrants. In addition, during the year, the Company made long-term debt principal payments of
$7.5 million, paid its investment banker a $1.2 million fee relating to services performed for the Company's Initial Public Offering and paid a $0.9 million fee for its credit
facility.

Future Cash Needs

We expect that cash generated from operating activities in 2010 and, if needed, the ability to draw from our revolving credit facility
will be sufficient to meet anticipated cash needs, which primarily consist of $18.6 million of debt service, approximately $35.0 million of expected capital expenditures,
$4.1 million of pension plan funding and any additional working capital needs. At December 31, 2009, the Company utilized $7.4 million of borrowings under the revolving credit
facility. The Company's remaining availability under the revolving credit facility was $79.6 million at December 31, 2009.

On
a longer term basis, we expect that cash generated from operating activities and, if needed, the ability to draw from our revolving credit facility will be sufficient to meet long
term obligations, which primarily consist of $134.4 million of debt service and interest which includes a $75 million final payment on our term A loan in June 2013, capital expenditures,
working capital needs and any contingent earn-out associated with the KPB acquisition.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements and have not established any special purpose entities. We have
not guaranteed any debt or commitments of other non-related entities or entered into any options on non-financial assets.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported

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amounts
of expenses during the reporting period. Actual results could differ from those estimates. KapStone believes our critical accounting policies are those described below. For a detailed
discussion of these and other accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements.

Revenue RecognitionRevenue is recognized when the customer takes title and assumes the risks and rewards of ownership. Sales with terms designated
f.o.b. (free on board) shipping point are recognized at the time of shipment. For sales transactions with terms f.o.b. destination, revenue is recorded when the product is delivered to the customer's
site and when title and risk of loss are transferred. Sales on consignment are recognized in revenue at the earlier of the month that the goods are consumed or after a period of time subsequent to
receipt by the customer as specified by contract terms. Incentive rebates are typically paid in cash and are netted against revenue on an accrual basis as qualifying purchases are made by the customer
to earn and thereby retain the rebate.

The
Company recognizes revenue from the sale of shaft horsepower, generated by our cogeneration facility, on a gross basis and within net sales. These sales are included in the
unbleached kraft segment.

Freight
charged to customers is recognized in net sales.

Goodwill and Intangible AssetsGoodwill is the excess of cost over the fair value of the net assets of businesses acquired. On an annual basis and
in
accordance with Accounting Standards Codification ("ASC") 350,IntangiblesGoodwill and Other, the Company tests for goodwill impairment
using a two-step process, unless there is a triggering event, in which case a test would be performed at the time that such triggering event occurs. The first step is to identify a
potential impairment by comparing the fair value of a reporting unit with its carrying amount. For all periods presented, the Company's reporting units are consistent with its operating segments. The
estimates of fair value of a reporting unit are determined based on a market approach as well as
an income approach using a discounted cash flow analysis. A discounted cash flow analysis requires the Company to make various judgmental assumptions, including assumptions about future cash flows,
growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the forecast and long-term business plans of the Company's operating segment.
Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. If necessary, the second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination.

Pension and Postretirement BenefitsKapStone provides pension and postretirement benefits to certain employees. For financial reporting purposes,
long-term assumptions are developed through consultations with actuaries. Such assumptions include the expected long-term rate of return on plan assets, discount rates, health
care trend rates and mortality rates. The discount rate for the current year is based on long-term high quality bond rates.

Income TaxesThe Company accounts for income taxes under the liability method in accordance with ASC 740,Income
Taxes. Accordingly, deferred income taxes are provided for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered
or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

Stock Based Compensation CostsThe Company accounts for stock compensation expense in accordance with ASC 718, CompensationStock Compensation. The compensation expense for stock

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options
is recorded on an accelerated basis over the awards' vesting periods. The compensation expense for restricted stock is recorded on a straight-line basis over the awards' vesting
periods.

Recent Accounting Pronouncements

See Note 2 in the Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2009, ($000s):

Payments Due by PeriodContractual Obligations

Total

1 Year

2 Years

3 Years

4 Years

5 Years

ThereafterLong-term debt(1)

$
152,297

$
26,030

$
20,699

$
20,699

$
81,003

$
1,247

$
2,619Interest on long-term debt(2)


11,695


3,577


3,000


2,616


1,556


904


42Operating lease obligations(3)


13,989


3,760


3,333


2,645


1,644


1,162


1,445Purchase obligations(4)


338,217


33.748


32,397


31,721


31,045


29,483


179,823Minimum pension plan funding(5)


4,062


4,062














Total(6,7)

$
520,260

$
71,177

$
59,429

$
57,681

$
115,248

$
32,796

$
183,929


(1)These
obligations are reflected on our Consolidated Balance Sheets at December 31, 2009, in current portion of long-term debt and notes,
revolver and long-term debt and notes net of current portion, as appropriate.(2)Assumes
debt is carried to full term. Debt bears interest at variable rates and the amounts above assume future interest will be incurred at the rates in
effect on December 31, 2009. These obligations are not reflected on our Consolidated Balance Sheet at December 31, 2009.(3)These
obligations are not reflected on our Consolidated Balance Sheet at December 31, 2009. The Company has no capital lease obligations.(4)Purchase
obligations are agreements to purchase goods that are enforceable and legally binding on us and that specify all significant terms, including:
fixed or minimum quantities to be purchased. These obligations are not reflected on our Consolidated Balance Sheet at December 31, 2009. See Notes 4 and 17 of Notes to Consolidated
Financial Statements regarding the Company's purchase obligation relating to the Long Term Fiber Supply with MWV.(5)The
Company's pension and post retirement liabilities total $5.9 million as of December 31, 2009. This minimum pension plan funding represents
the Company's expected 2010 contributions and was determined in consultation with its actuary in accordance with IRS guidelines.(6)Other
liabilities as included in the accompanying Consolidated Balance Sheets represent $63 million of unrecognized tax benefits relating to
alternative fuel mixture tax credits. The year for which the unrecognized tax benefit will be settled is unknown and is not included in the contractual obligations table as all conditions for the
payment have not been met.(7)The
KPB acquisition includes remaining contingent earn-out payments of up to $55.0 million based on KPB's EBITDA during the five year
period immediately following the acquisition. The payments, if earned, will be due and payable in April 2012. The potential earn-out payments are not included in the contractual
obligations table as all conditions for the payments have not been met. In 2009, the Company paid a $4.0 million earn-out upon selling the dunnage bag business.


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Item 7A.    Quantitative and Qualitative Disclosures about Market Risk

Market risk is the sensitivity of income to changes in interest rates, commodity prices and foreign currency changes. The Company is
exposed to the following types of market risk: interest rates, commodity prices and foreign currency.

Interest rates

Under KapStone's Senior Secured Credit Facility, at December 31, 2009, we had outstanding variable based interest rate term
loans totaling $152.3 million. The facility has various maturity dates from June 12, 2013 through June 12, 2015. Borrowings under the term loan accrue interest, at our option, at
either: Eurodollar plus 1.5% to 3.5% depending on KapStone's total debt to EBITDA ratio (as defined in the agreement); or the Base Rate (prime rate) plus 0% to 2.0% depending on KapStone's total debt
to EBITDA ratio.

Changes
in market rates may impact the bank's Eurodollar rate. For instance, if the bank's Eurodollar rates were to increase or decrease by one percentage point (1.0%), our annual
interest expense would change by approximately $1.5 million based upon our expected future monthly loan balances per our existing repayment schedule.

Commodity prices

We are exposed to price fluctuations of certain commodities used in production. Key raw materials and energy used in the production
process include roundwood and woodchips, fuel oil, electricity and caustic soda. We purchase these raw materials and energy at market prices, and do not use forward contracts or other financial
instruments to hedge our exposure to price risk related to these commodities. We have two contracts to purchase coal at fixed prices that expire on December 31, 2010.

We
are exposed to price fluctuations in the price of our finished goods. The prices we charge for our products are primarily based on market conditions.

Foreign currency

We are exposed to currency fluctuations as we invoice certain European customers in euros. The Company did not use forward contracts to
reduce the impact of currency fluctuations in 2009. No such contracts were outstanding at December 31, 2009 and 2008.

Item 8.    Financial Statements and Supplementary Data

Financial statements are attached hereto beginning on Page F-1.

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Disclosure Controls and Procedures.

An evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2009 was made by our Chief
Executive Officer and Chief Financial Officer. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as
of the end of the period covered by this report.

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Internal Control over Financial Reporting.

Management Annual Report on Internal Control over Financial Reporting.Our management's report on internal control over financial
reporting is set
forth on page F-2 of this report.

Changes in Internal Control over Financial Reporting.Effective October 1, 2009, the Company's CKD operations, which constituted
67.4% of net
sales in 2009, migrated to a new ERP system. Management concluded this implementation has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting. There were no other changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

Item 9B.    Other Information

None.

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by this item is incorporated by reference from our definitive proxy statement to be filed on or about
April 26, 2010 with the SEC.

Additional
information required by this Item (i) with respect to members of our Board of Directors will be contained in the Company's Proxy Statement to be filed with the SEC on
or about April 26, 2010 under the caption "Election of Directors," (ii) with respect to our audit committee will be contained in the Company's Proxy Statement under the caption "Election
of DirectorsWhat Committees has the Board of Directors Established?," (iii) with respect to compliance under
Section 16(a) of the Securities Exchange Act of 1934 will be contained in Company's Proxy Statement under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," and
(iv) with respect to our code of ethics will be contained in the Company's Proxy Statement under the caption "Code of Ethics," and is incorporated herein by this reference.

Item 11.    Executive Compensation

The information required by this Item will be contained in the Company's Proxy Statement to be filed with the SEC on or about
April 26, 2010 under the captions "Executive Compensation," "Compensation Discussion and Analysis," "Report of the Compensation Committee of the Board of Directors," "Compensation Committee
Interlocks and Insider Participation," "Summary Compensation Information," "Grants of Plan-Based Awards Table," "Outstanding Equity Awards at December 31, 2009," "Potential Payments
upon Termination or Change-in-Control," and "2009 Director Compensation" and is incorporated herein by this reference.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item will be contained in the Company's Proxy Statement to be filed with the SEC on or about
April 26, 2010 under the captions "Securities Authorized for Issuance Under Equity Compensation Plan", "Stock Ownership of Directors and Executive Officers" and "Certain Beneficial
Stockholders" and is incorporated herein by this reference.

Item 13.    Certain Relationships and Related Transactions and Director Independence

The information required by this Item will be contained in the Company's Proxy Statement to filed with the SEC on or about
April 26, 2010 under the captions "Certain Relationships and Related Person Transactions," "Nominating and Governance Committee" and "Election of DirectorsWhat Committees has the
Board Established?" and is incorporated herein by this reference.

Item 14.    Principal Accountant Fees and Services

The information required by this Item will be contained in the Company's Proxy Statement to be filed with the SEC on or about
April 26, 2010 under the caption "Independent Registered Public Accounting Firm" and is incorporated herein by this reference.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a)(1)Financial Statements

An index to Consolidated Financial Statements appears on page F-1.

(a)(2) Financial Statement Schedule

Certain financial statement schedules have been omitted because they are not applicable or the required information is shown in the financial statements or the
notes thereto.

(b)Exhibits.

The following Exhibits are filed as part of this report:

Exhibit
No.

Description2.1

Purchase Agreement, dated June 23, 2006, by and among International Paper Company, the Registrant, and KapStone Kraft Paper Corporation.(1)2.2

Letter Amendment to Purchase Agreement, dated June 23, 2006, by and among International Paper Company, the Registrant, and KapStone Kraft Paper Corporation, dated December 15, 2006.(2)2.3

Asset Purchase Agreement dated April 4, 2008, among MeadWestvaco South Carolina LLC, MeadWestvaco Corporation, KapStone Paper and Packaging Corporation and Oak Acquisition, LLC.(3)3.1

Restated Certificate of Incorporation of KapStone Paper and Packaging Corporation (as amended through January 2, 2007).3.2

Certificate of Amendment of the Amended and Restated Certificate of Incorporation.(2)3.3

Amended and Restated By-laws.(4)4.1

Specimen Unit Certificate.(5)4.2

Specimen Common Stock Certificate.(5)4.3

Specimen Warrant Certificate.(5)4.4

Form of Unit Purchase Option to be granted to Representative.(2)4.5

Form of Warrant Agreement between Continental Stock Transfer & Trust Company and the Registrant.(5)4.6

Amended and Restated Warrant Clarification Agreement.(6)4.7

Amended and Restated Unit Purchase Clarification Agreement.(7)10.1

Form of Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and each of the Initial Stockholders.(5)10.2
+
Amendment to the KapStone Paper and Packaging Corporation 2006 Incentive Plan.(8)10.3
+
Performance Incentive Plan of KapStone Paper and Packaging Corporation.(8)10.4
+
Form of Restricted Stock Unit Agreement.(8)


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Exhibit
No.

Description10.5

Long-Term Fiber Supply Agreement, dated July 1, 2008, by and among MeadWestvaco Forestry LLC and KapStone Charleston Kraft LLC (with certain confidential information deleted there from).(9)10.6

Note Purchase Agreement, dated July 1, 2008, by and among KapStone Paper and Packaging Corporation, KapStone Kraft Paper Corporation and The Prudential Insurance Company of America.10.7

Credit Agreement, dated June 12, 2008, by and among KapStone Kraft Paper Corporation, as Borrower, KapStone Paper and Packaging Corporation, as Parent, the Subsidiaries of the Borrower identified therein, as
Guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, and the Other Lenders Party thereto.10.8

First Amendment to Credit Agreement dated as of August 25, 2008, by and among KapStone Kraft Paper Corporation, as Borrower, KapStone Paper and Packaging Corporation, as Parent, the Subsidiaries of the Borrower
identified therein, as Guarantors, Bank of America, N.A. , as Administrative Agent, Swing Line Lender and L/C Issuer, and the Other Lenders Party thereto.10.9

Second Amendment and Limited Waiver Agreement dated as of March 30, 2009, by and among KapStone Kraft Paper Corporation, as Borrower, KapStone Paper and Packaging Corporation, as Parent, the Subsidiaries of the
Borrower identified therein, as Guarantors, Bank of America, N.A. , as Administrative Agent, Swing Line Lender and L/C Issuer, and the Other Lenders Party thereto.(10)10.10

Intercreditor and Collateral Agency Agreement, dated July 1, 2008, by and among Bank of America N.A., as Collateral Agent, and Bank of America, N.A., as Administrative Agent Under the Credit Facility Agreement on
Behalf of the Secured Lender Parties and Certain Institutional Lenders.10.11

2009 Employee Stock Purchase Plan.(11)10.12

Form of Warrant Purchase Agreement among each of the Initial Stockholders and Morgan Joseph & Co. Inc.(5)10.13
+
2006 Incentive Plan.(12)14.0

Code of Ethics.21.1

Subsidiaries.23.1

Consent of Ernst & Young LLP.31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.31.2

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended.32.l

Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification of the Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


+Management
compensatory plan or arrangement.


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Table of Contents

(1)Incorporated
by reference to Annex A of the Registrant's Definitive Proxy Statement (DEFM 14A) filed on December 15, 2006.(2)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on January 4, 2007.(3)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 7, 2008.(4)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on October 5, 2009.(5)Incorporated
by reference to the Registrant's Registration Statement on Form S-1/A (File No. 333-124601) filed on
June 14, 2005.(6)Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q/A for the period ended June 30, 2006, filed on
December 12, 2006.(7)Incorporated
by reference to the Registrant's Quarterly Report on Form 10-Q/A for the period ended September 30, 2006, filed on
December 12, 2006.(8)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 14, 2008.(9)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on July 2, 2008.(10)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 1, 2009.(11)Incorporated
by reference to the Registrant's Form S-8 filed on December 11, 2009.(12)Incorporated
by reference to Annex C of the Definitive Proxy Statement (No. 000-51444), dated December 15, 2006.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant had duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

KAPSTONE PAPER AND PACKAGING CORPORATIONMarch 10, 2010

By: /s/ Roger W. Stone Roger W. Stone, Chairman of the Board,
Chief Executive Officer and Director


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.

March 10, 2010

By: /s/ Roger W. Stone Roger W. Stone, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)March 10, 2010

By: /s/ Andrea K. Tarbox Andrea K. Tarbox, Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)March 10, 2010

By: /s/ Matthew Kaplan Matthew Kaplan, President, Secretary and DirectorMarch 10, 2010

By: /s/ John M. Chapman John M. Chapman, DirectorMarch 10, 2010

By: /s/ James Doughan James Doughan, DirectorMarch 10, 2010

By: /s/ Jonathan R. Furer Jonathan R. Furer, DirectorMarch 10, 2010

By: /s/ Brian R. Gamache Brian R. Gamache, DirectorMarch 10, 2010

By: /s/ Ronald J. Gidwitz Ronald J. Gidwitz, DirectorMarch 10, 2010

By: /s/ Muhit U. Rahman Muhit U. Rahman, DirectorMarch 10, 2010

By: /s/ S. Jay Stewart S. Jay Stewart, DirectorMarch 10, 2010

By: /s/ David P. Storch David P. Storch, Director


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KapStone Paper and Packaging Corporation        (INDEX TO FINANCIAL STATEMENTS)



Financial Statements

PageManagement's Annual Report on Internal Control over Financial
Reporting

F-2Report of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting

F-3Report of Independent Registered Public Accounting Firm for 2009, 2008, and 2007

F-4Consolidated Balance Sheets as of December 31, 2009, and December 31, 2008

F-5Consolidated Statements of Income for the years ended December 31, 2009, 2008, and 2007

F-6Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2009, 2008 and
2007

F-7Consolidated Statements of Cash Flows for years ended December 31, 2009, 2008, and 2007

F-8Notes to Consolidated Financial Statements

F-9


F-1

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Table of Contents

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 3a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

Management
assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. Management based this assessment on the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in"Internal ControlIntegrated Framework."

Based
on this assessment, management concluded that, as of December 31, 2009, our internal control over financial reporting is effective.

Ernst &
Young LLP, independent registered public accounting firm, has audited the consolidated financial statements of the Company and the Company's internal control over
financial reporting and has included their reports herein.

F-2

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
KapStone Paper and Packaging Corporation

We
have audited KapStone Paper and Packaging Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). KapStone Paper and Packaging Corporation's management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, KapStone Paper and Packaging Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based
on the COSO criteria.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of KapStone Paper and Packaging Corporation as
of December 31, 2009 and 2008, and the related statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2009,
and our report dated March 10, 2010, expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Chicago,
IL
March 10, 2010

F-3

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Stockholders
KapStone Paper and Packaging Corporation

We
have audited the accompanying consolidated balance sheets of KapStone Paper and Packaging Corporation as of December 31, 2009 and 2008, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in
the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of KapStone Paper and Packaging
Corporation as of December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

We
have also audited, in accordance with the standards of the Public Company Oversight Board (United States), the effectiveness of KapStone Paper and Packaging Corporation's internal
controls over financial reporting as of December 31, 2009, based on criteria establish inInternal ControlIntegrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2010 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Chicago,
IL
March 10, 2010

F-4

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Table of Contents



KapStone Paper and Packaging Corporation        Consolidated Balance Sheets        (In thousands, except share and per share amounts)

December 31,2009

2008AssetsCurrent assets:Cash and cash equivalents

$
2,440

$
4,165Trade accounts receivable, less allowance of $1,217 in 2009 and $2,421 in 2008


58,408


71,489Other receivables


16,487


6,207Inventories


61,377


89,692Refundable and prepaid income taxes


13,757


14,145Prepaid expenses and other current assets


1,690


1,748Restricted cash


2,500


Deferred income taxes


5,604


3,363Total current assets


162,263


190,809Plant, property and equipment, net


470,278


483,780Other assets


4,935


882Intangible assets, net


26,198


45,195Goodwill


5,449


6,524Total assets

$
669,123

$
727,190Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long-term debt and notes

$
18,630

$
40,556Borrowings under revolving credit facility


7,400


Accounts payable


52,147


42,214Accrued expenses


20,800


30,462Accrued compensation costs


7,719


13,646Total current liabilities


106,696


126,878Other liabilities:Long-term debt and notes, net of current portion


121,031


389,374Pension and post-retirement benefits


5,949


8,355Deferred income taxes


38,577


15,951Other liabilities


48,080


5,865Total other liabilities


213,637


419,545Commitments and contingenciesStockholders' equity:Preferred stock $.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding





Common stock $.0001 par value, 175,000,000 shares authorized; 45,418,074 shares issued and outstanding (40,000 treasury shares outstanding) at
December 31, 2009 and 28,370,248 issued and outstanding at December 31, 2008 (40,000 treasury shares outstanding)


5


3Additional paid-in capital


219,828


132,206Retained earnings


129,046


48,766Accumulated other comprehensive loss


(89
)

(208
)Total stockholders' equity


348,790


180,767Total liabilities and stockholders' equity

$
669,123

$
727,190


See notes to consolidated financial statements.

F-5

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Table of Contents



KapStone Paper and Packaging Corporation        Consolidated Statements of Income        (In thousands, except share and per share amounts)

Years Ended December 31,2009

2008

2007Net sales

$
632,478

$
524,549

$
256,795Cost of sales, excluding depreciation and amortization


355,088


362,462


162,429Freight and distribution expenses


57,395


50,154


23,581Selling, general and administrative expenses


31,377


30,411


16,482Depreciation and amortization


54,667


31,683


11,327Gain on sale of business


16,417





Other operating income


994


817


1,324Operating income


151,362


50,656


44,300Foreign exchange gains/(losses)


219


(987
)

Interest income


12


927


2,096Interest expense


19,176


18,449


4,295Income before provision for income taxes


132,417


32,147


42,101Provision for income taxes


52,137


12,482


15,138Net income

$
80,280

$
19,665

$
26,963Weighted-average number of shares outstanding:Basic


34,675,804


26,486,924


25,010,057Diluted


35,067,923


34,455,816


36,134,488Net income per share:Basic

$
2.32

$
0.74

$
1.08Diluted

$
2.29

$
0.57

$
0.75


See
notes to consolidated financial statements.

F-6

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Table of Contents



KapStone Paper and Packaging Corporation        Consolidated Statements of Changes in Stockholders' Equity        (In thousands, except share amounts)

Common Stock, net
of Treasury StockAccumulated
Other
Comprehensive
Income/(Loss)Additional
Paid-In
Capital

Retained
Earnings

Total
Stockholders'
EquityShares

AmountBalanceDecember 31, 2006


25,000,000

$
3

$
113,904

$
2,138

$


$
116,045Purchase of redeemed common stock


(40,000
)













Exercises of warrants into common stock


320,197





1,601








1,601Stock based compensation expense








697








697Underwriter fee








(1,200
)







(1,200
)Comprehensive Income:Net income











26,963





26,963Actuarial gain on pension and postretirement plans (net of tax of $44)














79


79Total Comprehensive Income

















27,042BalanceDecember 31, 2007


25,280,197

$
3

$
115,002

$
29,101

$
79

$
144,185Stock based compensation expense








1,754








1,754Exercises of warrants into common stock


3,090,051





15,450








15,450Comprehensive Income:Net income











19,665





19,665Actuarial loss on pension and postretirement plans (net of tax of $174)














(287
)

(287
)Total Comprehensive Income

















19,378BalanceDecember 31, 2008


28,370,248

$
3

$
132,206

$
48,766

$
(208
)
$
180,767Stock based compensation expense








2,377








2,377Exercises of warrants into common stock


17,043,376


2


85,215








85,217Exercise of stock options


4,450





30








30Comprehensive Income:Net income











80,280





80,280Actuarial gain on pension and postretirement plans (net of tax of $80)














119


119Total Comprehensive Income

















80,399BalanceDecember 31, 2009


45,418,074

$
5

$
219,828

$
129,046

$
(89
)
$
348,790


See notes to consolidated financial statements.

F-7

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Table of Contents



KapStone Paper and Packaging Corporation        Consolidated Statements of Cash Flows        (In thousands)

Years Ended December 31,2009

2008

2007Operating activitiesNet income

$
80,280

$
19,665

$
26,963Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


54,667


31,683


11,327Stock based compensation expense


2,377


1,754


697Amortization of debt issuance costs


5,980


2,007


254Loss on disposal of fixed assets


800


299


463Deferred income taxes


19,459


16,644


(244
)Gain on sale of business


(16,417
)




Changes in operating assets and liabilities:Trade accounts receivable, net


10,288


(1,280
)

(3,710
)Other receivables


(13,398
)

(4,827
)

(521
)Inventories


23,465


(14,172
)

5,767Refundable and prepaid income taxes


388


(14,145
)

Prepaid expenses and other current assets


58


(945
)

995Other assets


(1,031
)

(42
)

Accounts payable


10,641


1,570


2.923Accrued expenses


32,051


8,189


(2,063
)Accrued compensation costs


(5,967
)

1,154


6,625Accrued pension and postretirement benefits


(2,406
)

1,275


1,282Accrued income taxes





(1,477
)

1,477Net cash provided by operating activities


201,235


47,352


52,235Investing activitiesCKD acquisition (net of cash acquired)


1,000


(467,399
)

(1,191
)KPB acquisition


(3,977
)




(149,603
)Proceeds from sale of business


34,898





Capital expenditures


(29,165
)

(23,170
)

(11,861
)Purchase of short-term investments








(35,000
)Maturity of short-term investments








35,000Restricted cash


(2,500
)




Restricted cash held in trust








115,239Net cash provided by (used in) investing activities


256


(490,569
)

(47,416
)Financing activitiesProceeds from revolving credit facility


80,000


78,500


Repayments on revolving credit facility


(85,000
)

(66,100
)

Proceeds from long-term debt and notes





455,000


60,000Repayments of long-term debt and notes


(283,093
)

(79,510
)

(7,500
)Debt issuance costs paid


(370
)

(12,593
)

(855
)Redemption of shares








(230
)Investment banking fee paid








(1,200
)Proceeds from exercises of warrants into common stock


85,217


15,450


1,601Proceeds from exercise of stock options


30





Net cash provided by (used in) financing activities


(203,216
)

390,747


51,816Net increase (decrease) in cash and cash equivalents


(1,725
)

(52,470
)

56,635Cash and cash equivalents-beginning of year


4,165


56,635


Cash and cash equivalents-end of year

$
2,440

$
4,165

$
56,635Cash paid (received) during the period:Income taxes

$
(11,306
)
$
11,441

$
13,812Interest

$
19,952

$
9,132

$
3,976


See notes to consolidated financial statements.

F-8

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Table of Contents



KAPSTONE PAPER AND PACKAGING CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        (In thousands, except share and per share amounts)

1. Formation, Basis of Presentation and Description of Business

KapStone Paper and Packaging Corporation (formerly Stone Arcade Acquisition Corporation), or the "Company", produces and sells a variety of unbleached kraft, linerboard, saturating kraft
and unbleached folding carton board in the United States and globally. The Company was incorporated on April 15, 2005 in Delaware.

In
connection with the Company's initial public offering, on August 19, 2005, the Company sold 20,000,000 units ("Units") for a gross price of $6.00 per Unit.

On
January 2, 2007, the Company acquired substantially all of the assets and assumed certain liabilities of the Kraft Papers Business ("KPB") from International Paper Company
("IP"). The accompanying consolidated financial statements include the results of KPB since the date of acquisition. Prior to the acquisition of KPB, the Company had no operations and was considered a
development stage enterprise (see Note 5).

On
July 1, 2008, the Company acquired substantially all of the assets and assumed certain liabilities of MeadWestvaco Corporation's ("MWV") Charleston Kraft Division ("CKD"). The
accompanying consolidated financial statements include the results of CKD since the date of acquisition (see Note 4).

On
March 31, 2009, the Company consummated the sale of its dunnage bag business to Illinois Tool Works. The accompanying consolidated financial statements include the results of
the dunnage bag business through the date of sale (see Note 6).

As
a result of these transactions, the accompanying 2009 consolidated financial statements are not comparative to 2008 and 2007.

2. Significant Accounting Policies

The consolidated statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America
("U.S. GAAP"). The significant accounting policies are summarized below:

Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Use of EstimatesThe preparation of financial statements and related disclosures requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management's best
knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates.

Revenue RecognitionRevenue is recognized when the customer takes title and assumes the risks and rewards of ownership. Sales with terms f.o.b.
(free
on board) shipping point are recognized at the time of shipment. For sales transactions with terms f.o.b. destination, revenue is recorded when the product is delivered to the customer's site and when
title and risk of loss are transferred. Sales on consignment are recognized in revenue at the earlier of the month that the goods are consumed or after a period of time subsequent to receipt by the
customer as specified by contract terms, provided all other revenue recognition criteria is met. Incentive rebates are typically paid in cash and are netted

F-9

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

2. Significant Accounting Policies (Continued)

against
revenue on an accrual basis as qualifying purchases are made by the customer to earn and thereby retain the rebate. Prepaid rebates are recorded in prepaid expenses until earned.

The
Company recognizes revenue from the sale of shaft horsepower, generated by our cogeneration facility, on a gross basis presented in net sales. These sales are included in the
unbleached kraft segment.

Freight
charged to customers is recognized in net sales.

Cost of SalesCost of sales is determined on a first-in first-out basis and includes the following: the cost of inventory sold
during the period, maintenance, property taxes related to manufacturing facilities, but excludes depreciation and amortization. Proceeds received from the sale of by-products generated
from the paper manufacturing process are reflected as a reduction to cost of sales. By-product revenue is derived primarily from the sale of tall oil, hardwood and turpentine to third
parties. During 2009, 2008 and 2007, cost of sales was reduced by $11.5 million, $10.5 million and $5.9 million, respectively, for by-product revenue.

Alternative fuel mixtures tax creditsThe Company has elected to take the alternative fuel mixture tax credit as an excise tax credit and not as a
reduction of federal income taxes payable; and
accordingly, credits earned are reflected in operating income versus income tax expense. The amount of alternative fuel mixture tax credit earned is based on the volume of black liquor burned in the
Company's production process. Black liquor is a raw material used in our production process and is recognized on the Company's balance sheet within inventory. The Company's accounting policy for
alternative fuel mixture tax credits earned was determined by the fuel tax credits' direct link to the manufacturing process. Accordingly, credits earned during the reporting period are reflected as a
reduction of the cost basis of inventory and therefore capitalized at the end of the period for inventory on hand. As products are sold, the credits are included in the income statement as a reduction
to cost of goods sold. The amount of tax credit associated with ending inventory at December 31, 2009, totaled $14.3 million. A $13.1 million receivable for the tax credit was
recorded in other receivables in the consolidated balance sheet at December 31, 2009. The tax credit expired on December 31, 2009 (see Note 7).

Annual Maintenance CostThe Company recognizes the cost of major maintenance activities in the period in which they occur under the direct expense
method in accordance with ASC 360,Property, Plant and Equipment. Other maintenance costs are expensed as incurred.

The
Company completed its annual planned maintenance outage, at its North Carolina unbleached kraft facility, in the quarter ended December 31, 2009. Costs of approximately
$6.0 million related to the outage are included in cost of sales for the years ended December 31, 2009 and 2008 and $4.6 million in 2007.

Net Income per Common ShareBasic net income per share is based on the weighted average number of common shares outstanding during the period.
Diluted
income per share reflects the potential dilution assuming common shares were issued for the exercise of outstanding in-the-money warrants and stock options and unvested
restricted stock awards and assuming the proceeds thereof were used to purchase common shares at the average market price during the period such awards were outstanding and inclusion of such shares is
dilutive to net income per share.

F-10

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

2. Significant Accounting Policies (Continued)

Concentrations of RiskFinancial instruments that potentially expose the Company to concentrations of credit and market risk consist primarily of
cash
and cash equivalents and trade
accounts receivable from sales of product to third parties. When excess cash and cash equivalents are invested they are placed in investment grade commercial paper.

A
summary of net sales to major customers who exceeded 10% of consolidated net sales is as follows:

Years ended
December 31,2009

2008Net sales to major customers

$


$
56,091


Sales
to the above major customer are reflected in the unbleached kraft operating segment. Trade accounts receivables from these customers that potentially expose the Company to
concentrations of credit risk totaled $7.5 million at December 31, 2008.

The
Company establishes its allowance for doubtful accounts based upon factors mainly surrounding the credit risks of specific customers and other related information. Once an account is
deemed uncollectible, it is written off. At December 31, 2009, and 2008 the allowance for doubtful accounts totaled $1.2 million and $2.4 million, respectively. For the years
ended December 31, 2009 and 2008, the Company had bad debt expenses of $0.6 million and $2.4 million, respectively. For the year ended December 31, 2009, the Company wrote
off $1.7 million of uncollectible accounts.

Foreign Currency TransactionsThe Company invoices certain European customers in euros. Balance sheet accounts for such transactions are
translated
into U.S. dollars at the year-end rate of exchange and statements of income items are translated at the weighted average exchange rates for the period. Gains and losses arising from these
transactions are included in income.

Cash and Cash EquivalentsCash equivalents include all highly liquid investments with maturities of three months or less when purchased.

Fair value of Financial InstrumentsThe Company's cash, including restricted cash, and cash equivalents are financial assets with carrying values
that
approximate fair value. The Company's variable rate term loans are financial liabilities with fair values that approximate $120 million.

InventoriesInventories are valued at the lower of cost or market; whereby, cost includes all direct and indirect materials, labor, and
manufacturing
overhead, less by-product recoveries and alternative fuel mixture tax credits. Costs of raw materials, work-in-process, and finished goods are determined using the
first-in, first-out method. Replacement parts and other supplies are stated using the average cost method.

Plant, Property, and Equipment, netPlant and equipment is stated at cost less accumulated depreciation. Property, plant and equipment acquired in
acquisitions were recorded at fair value on the

F-11

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

2. Significant Accounting Policies (Continued)

dates
of acquisition (see Notes 4 and 5). Depreciation is computed using the straight-line method over the assets' estimated useful lives. The range of estimated useful lives is as
follows:

YearsMachinery and equipment

3 - 30Buildings

15 - 40Computer hardware and software

3 - 5Furniture and office equipment

5 - 10Land improvements

10 - 25Leasehold improvements

Lesser of life of leasehold
improvements or term of the lease


The
Company accounts for costs incurred for the development of software for internal use in accordance with the ASC 350IntangiblesGoodwill
and Other. This standard requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software.

Goodwill and Intangible AssetsGoodwill is the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual
basis and in accordance with ASC 350,IntangiblesGoodwill and Other, the Company tests for goodwill impairment using a
two-step process, unless there is a triggering event, in which case a test would be performed at the time that such triggering event occurs. The first step is to identify a potential
impairment by comparing the fair value of a reporting unit with its carrying amount. For all periods presented, the Company's reporting units are consistent with its operating segments. The Company
estimates the fair value of a reporting unit principally based on a discounted cash flow analysis. A discounted cash flow analysis requires the Company to make various judgmental assumptions,
including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on the forecast and long-term business
plans of each operating segment. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. These assumptions would be
considered Level 3 inputs in the fair value hierarchy defined in ASC 820"Fair Value Measurements and Discounts". Management also
considers market multiple information to corroborate the fair value conclusions reached through the discounted cash flow analysis. If necessary, the second step of the goodwill impairment test
compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination. The Company's goodwill impairment analysis
is performed annually at the beginning of the fourth quarter and did not result in an impairment charge.

Intangible
assets are initially valued at the fair market value using generally accepted valuation methods appropriate for the type of the intangible asset. Definite-lived intangible
assets are amortized over their estimated useful lives and are reviewed for impairment if indicators of impairment arise. The evaluation of the impairment is based upon a comparison of the carrying
amount of the intangible asset to the estimated future undiscounted cash flows expected to be generated by the asset. If the estimated undiscounted future cash flows are less than the carrying amount
of the assets, the asset is considered to be impaired.

Indefinite-lived
intangibles consisting of the Ride Rite® Converting trademark, are reviewed for impairment annually and upon the occurrence of events or changes in
circumstances that indicate that

F-12

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

2. Significant Accounting Policies (Continued)

the
carrying value of the assets or group of assets may not be recoverable. The impairment test consists of a comparison of the fair value of the trademark with its carrying amount and if the carrying
amount exceeds its fair value, an impairment loss is recognized as an amount equal to that excess.

Income TaxesThe Company accounts for income taxes under the liability method in accordance with ASC 740,Income
Taxes. Accordingly, deferred income taxes are provided for the future tax consequences attributable to differences between the carrying amounts of assets and liabilities for
financial reporting and income tax purposes. Deferred tax assets and liabilities are measured using tax rates in effect for the year in which those temporary differences are expected to be recovered
or settled. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company records interest on unrecognized tax benefits in the
provision for income taxes.

Amortization of Debt Issuance CostsThe Company capitalizes costs incurred in connection with borrowings or establishment of credit facilities.
These
costs are amortized over the life of the borrowing or life of the credit facility using the effective interest method.

Stock Based Compensation ExpenseThe Company accounts for employee stock and stock based compensation in accordance with ASC 718,
CompensationStock Compensation.Accordingly, compensation expense for the fair value of stock options, as determined on the date of grant, is recorded on an accelerated basis over the awards' vesting periods. The compensation
expense for the fair value of restricted stock units, as determined on the date of grant, is recorded on a straight-line basis over the awards' vesting periods.

Recent Accounting Pronouncements

The Accounting Standards Codification ("ASC") has become the source of authoritative U.S. generally accepted accounting principles
("U.S. GAAP"). The ASC only changes the referencing of financial accounting standards and does not change or alter existing U.S. GAAP.

The
Company adopted a new accounting standard included in ASC 855, "Subsequent Events" which establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This statement became effective for interim and annual periods ending after
June 15, 2009.

The
Company adopted ASC 820, "Fair Value Measurements and Disclosures" which provide additional guidance for estimating fair value
when the volume and level of activity for the asset or liability have significantly decreased. This standard also includes guidance on identifying circumstances that indicate a transaction is not
orderly. This standard emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used,
the objective of a fair value measurement remains the same. Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction (that is, not
a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This standard became effective for interim and annual reporting periods
ending after June 15, 2009, and is applied prospectively. The adoption of this standard did not have an effect on the consolidated financial statements.

F-13

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

2. Significant Accounting Policies (Continued)

The
Company adopted a new accounting standard included in ASC 825, "Financial Instruments" requiring disclosures about fair value
of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This standard became effective for interim and annual reporting periods
ending after June 15, 2009. The adoption of this standard did not have an effect on the consolidated financial statements.

3. Reclassification

Receivables from sales of shaft horsepower of $2.9 million and other receivables of $6.2 million as of December 31, 2008 have been reclassified from prepaid and
other current assets to trade account receivables and other receivables, respectively, to conform to the current period presentation.

4. CKD Acquisition

On July 1, 2008, the Company consummated the purchase of substantially all of the assets and assumed certain liabilities of MeadWestvaco Corporation's (MWV) Charleston Kraft
Division (CKD), for $485 million, subject to certain adjustments pursuant to an asset purchase agreement with MWV. CKD consists of an unbleached kraft paper manufacturing facility in North
Charleston, South Carolina, including a cogeneration facility, chip mills located in Elgin, Hampton, Andrews and Kinards, South Carolina and a lumber business located in Summerville, South Carolina.

The
acquisition was financed by cash on hand and by a new senior secured credit facility of $515 million consisting of a Eurodollar based five-year term loan of
$390 million, a Eurodollar based seven-year term loan of $25 million and a $100 million revolving credit facility. In
addition, $40 million of seven-year 8.30% senior notes were issued. A portion of the proceeds were used to redeem the Company's prior credit facility.

The
CKD business was deemed an attractive acquisition candidate based upon meeting the Company's objectives of being a North American-based, profitable company in the paper and packaging
industry and for its synergies with the Company's existing operations.

In
connection with the CKD acquisition, the Company entered into the Long Term Fiber Supply Agreement ("Supply Agreement") with MWV. Pursuant to the Supply Agreement, the Company will
purchase, on a take or pay basis, certain amounts of pine pulpwood and saw timber at market prices for a period of 15 years. The purchases are accounted for as raw materials.

The
CKD acquisition was accounted for in accordance with the provisions of ASC 805,Business Combinationsand the accompanying
consolidated financial statements include the results of CKD in the unbleached kraft segment.

The
excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The following table summarizes the acquisition consideration:

Purchase price (net of cash acquired of $10,572)

$
474,428Working capital adjustments


(8,918
)Transaction costs


5,497Total acquisition consideration

$
471,007


F-14

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

4. CKD Acquisition (Continued)

The
following table summarizes the allocation of acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition:

Trade accounts receivable

$
36,912Inventories


55,674Prepaid expenses and other current assets


4,431Plant, property and equipment


382,368Deferred income taxes


2,435Other assets


3,521Intangible assets


45,668Goodwill


5,449Accounts payable


(29,594
)Accrued expenses


(17,593
)Accrued compensation costs


(5,867
)Other liabilities


(9,024
)Pension and postretirement benefits


(3,373
)Allocation of acquisition consideration

$
471,007


The
goodwill resulting from this transaction was allocated to the unbleached kraft segment. See Note 20 for additional discussion regarding the Company's segments. Goodwill is
being deducted for tax purposes.

The
following table summarizes the acquired intangible assets and their respective fair value and estimated useful life at the date of acquisition:

Fair Value

Average Remaining
Useful Life In YearsTrademarks

$
27,700


8Coal supply contract with below-market terms


14,080


1.5Engineering documents


2,220


12Customer lists


2,025


20Transportation lease


500


5Land lease


290


99Customer backlog


100


1Emission credits


60


1Equipment lease obligation with above-market terms


(1,307
)

3.5Total fair value of intangible assets

$
45,668


F-15

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

4. CKD Acquisition (Continued)

The
fair value of the intangible assets are amortized on a straight-line basis over the remaining useful lives. Amortization expense for the acquired CKD intangible assets
recorded for 2008, 2009 and the estimated amortization expense for the next five years is as follows:

2008 (third and fourth quarter only)

$
6,1782009


13,3462010


3,5342011


3,5682012


3,6392013


3,8022014


3,752Thereafter


7,849Total amortization

$
45,668


The
following unaudited pro forma consolidated results of operations assume that the acquisition of CKD occurred as of the beginning of the periods presented. This pro forma data is
based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations.

December 31,2008

2007(Unaudited)Net sales

$
777,855

$
765,286Net income

$
6,997

$
16,744Net income per share basic

$
0.26

$
0.67Net income per share diluted

$
0.20

$
0.46


Certain
corporate services were performed and allocated or charged by MWV to the historical CKD business. For the years ended December 31, 2008 and 2007, amounts allocated or
charged by MWV to CKD were $14.8 million and $23.2 million, respectively, and are included in pro forma net income and pro forma per share amounts above.

5. KPB Acquisition

On January 2, 2007, the Company purchased substantially all of the assets and assumed certain liabilities
of the Kraft Papers Business, or KPB, a division of IP, consisting of an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite® Converting, an
inflatable dunnage bag manufacturer located in Fordyce, Arkansas, trade accounts receivables, and inventories for a cash purchase price of $155.0 million less certain post-closing
adjustments of $7.8 million and excluding transaction costs and two contingent earn-out payments of up to $60.0 million (in aggregate), which payments are based on KPB's
annual earnings before interest, income taxes and depreciation and amortization, or EBITDA, during the five years immediately following the acquisition. Any contingent earn-out payments
will be accounted for as additional purchase price consideration and will be recorded as goodwill if such performance targets are achieved. KPB was deemed an attractive acquisition candidate based on
meeting the objectives of being a North American based profitable operating company in the paper and packaging industry.

F-16

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

5. KPB Acquisition (Continued)

In
March 2009 the Company sold its dunnage bag business (see Note 6) for approximately $36 million. As a result of the sale, an approximately $4.0 million
earn-out payment was made and recorded as goodwill. The total future remaining unrecorded contingent earn-out payments total up to $55.0 million at December 31,
2009.

The
KPB acquisition was accounted for in accordance with the provisions of ASC 805,Business Combinations.

The
Company used a portion of restricted cash held in trust at December 31, 2006, of $115.2 million, combined with the net long-term loan proceeds of
$59.1 million ($60.0 million less $0.9 million of financing costs) to fund the acquisition.

The
excess of the purchase price over the aggregate estimated fair value of net assets acquired was allocated to goodwill. The following table summarizes the purchase price:

Purchase price

$
155,000Post closing adjustments


(7,765
)Transaction costs


3,268Total acquisition consideration (excluding contingent purchase price)

$
150,503


The
following table summarizes the allocation of the acquisition consideration to the fair value of the assets acquired and the liabilities assumed at the date of the acquisition.

Trade accounts receivable

$
26,498Inventories


25,613Prepaid expenses and other current assets


1,089Plant, property and equipment


104,820Other assets


1,103Goodwill


1,063Intangible assets


6,058Deferred income taxes, net


556Accounts payable


(7,931
)Accrued expenses


(5,843
)Pension and post-retirement benefits


(2,258
)Other liabilities


(265
)Allocation of acquisition consideration

$
150,503


The
following table summarizes the acquired intangible assets and their fair value:

Fair Value

Average Remaining
Useful Life In YearsBuilding lease with below market terms

$
3,100


19Trademark


2,800


Customer lists


158


8Total fair value of intangible assets

$
6,058


F-17

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

5. KPB Acquisition (Continued)

For
each of the years ended December 31, 2009, 2008 and 2007, amortization expense totaled $0.2 million. The trademark was appraised with an indefinite life and as a result
is not being amortized, but is subject to an annual impairment review.

At
December 31, 2008, goodwill of $1.1 million was allocated to the dunnage bag business. Goodwill is not deductible for tax purposes.

The
following unaudited pro forma consolidated results of operations for the year ended December 31, 2006, assume that the KPB acquisition occurred on January 1, 2006:

UnauditedNet sales

$
246,161Net income

$
21,490Net income per share basic

$
0.86Net income per share diluted

$
0.73


6. Sale of Dunnage Bag Business

On March 31, 2009, the Company consummated the sale of its dunnage bag business to Illinois Tool Works Inc. ("ITW") for $36.0 million less $1.1 million of
working capital adjustments. The Company considered the sale an opportunity to lower its debt and focus on its core business. As a condition of sale, $2.5 million of the sale proceeds are being
held in escrow until September 30, 2010 to be available to satisfy any losses or indemnity claims that may arise against the Company in connection with the sale. The Company realized a gain on
the sale of the dunnage bag business as follows:

Sale price

$
36,000Working capital adjustments


(1,102
)34,898Transaction costs


(89
)Net assets of dunnage bag business


(18,392
)Gain on sale of business

$
16,417


F-18

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

6. Sale of Dunnage Bag Business (Continued)

The following table shows the major categories of net assets of the dunnage bag business as of December 31, 2008:

December 31,
2008Trade accounts receivable, net

$
2,742Inventories


5,281Plant, property and equipment


2,318Intangible assets


5,633Goodwill


1,063Other assets


95Accounts payable and accrued expenses


(2,522
)Total net assets

$
14,610


The
terms of the dunnage bag sale agreement include a contingency for certain slow-moving inventory items, which were excluded from the working capital adjustment calculated
at closing. The Company incurred approximately $0.3 million for working capital adjustments related to this contingency.

Since
the Company will continue to supply paper under a long term supply agreement with ITW, it represents a significant continuing involvement in the operations of the dunnage bag
business. Under accounting principles generally accepted in the United States, the operating results for the dunnage bag business have been included in operating income in the accompanying
Consolidated Statements of Income through the date of sale.

For
segment reporting purposes, the dunnage bag business is included in other.

7. Alternative Fuel Mixture Tax Credit

The federal government implemented an incentive program through the U.S. Internal Revenue Code that provides payments under certain circumstances for the use of alternative fuels and
alternative fuel mixtures in lieu of fossil-based fuels. The credit is based on the amount of alternative fuel contained in the mixture. The Company qualifies for the alternative fuel mixture tax
credit because it uses a bio-fuel known as black liquor, which is a byproduct of its wood pulping process, to power its mills.

In
March 2009, the Internal Revenue Service approved the Company's registration as an alternative fuel mixer. The Company generated refund claims totaling $178.3 million for the
year ended December 31, 2009 covering fuel used at its Charleston mill from January 29th through December 31,

F-19

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

7. Alternative Fuel Mixture Tax Credit (Continued)

2009
and at its Roanoke Rapids mill from February 14th through December 31, 2009. A summary of the alternative fuel mixture tax credits is as follows:

2009Total gallons of fuel burned (000's) (unaudited)


356,517Tax credit for each gallon burned (unaudited)

$
0.50Total alternative fuel mixture tax credit generated

$
178,258Less tax credit included in inventory at December 31, 2009 based on FIFO


14,260Total alternative fuel mixture tax credits included as a reduction to cost of sales for the year ending December 31, 2009

$
163,998


The
alternate fuel mixture tax credit expired on December 31, 2009.

8. Inventories

Inventories consist of the following at December 31, 2009 and 2008, respectively:

December 31,2009

2008Raw materials

$
13,082

$
19,877Work in process


980


2,070Finished goods


27,475


49,804Replacement parts and supplies


19,840


17,941Total inventories

$
61,377

$
89,692


At
December 31, 2009 and 2008, finished goods inventory included inventory consigned to third parties which totaled $3.8 million and $0.6 million, respectively.

9. Plant, Property and Equipment, net

Plant, property and equipment, net consist of the following at December 31, 2009 and 2008, respectively:

December 31,2009

2008Land and land improvements

$
25,822

$
23,950Buildings and leasehold improvements


25,665


25,235Machinery and equipment


482,987


448,161Construction-in-progress


12,623


22,819547,097


520,165Less accumulated depreciation and amortization


76,819


36,385Plant, property and equipment, net

$
470,278

$
483,780


F-20

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

9. Plant, Property and Equipment, net (Continued)

Depreciation
expense for the years ended December 31, 2009, 2008, and 2007, was $41.3 million, $25.3 million and $11.1 million, respectively.

At
December 31, 2009 and 2008, unamortized capitalized software costs totaled approximately $8.0 million and $5.0 million, respectively. Such amount is being
amortized over five years. Amortization expense for the years ended December 31, 2009 and 2008, for software development costs were $1.7 million and $1.0 million, respectively.

10. Goodwill and Other Intangible Assets

The following table shows changes in goodwill for the years ended December 31, 2009 and 2008, by operating segment:

Unbleached
kraft

Other

TotalGoodwill at December 31, 2007

$
1,064

$
1,231

$
2,295CKD acquisition


5,461





5,461KPB acquisition adjustment


(1,064
)

(168
)

(1,232
)Goodwill at December 31, 2008

$
5,461

$
1,063

$
6,524KPB earn-out





3,977


3.977Sale of business





(5,040
)

(5,040
)CKD acquisition adjustment


(12
)




(12
)Goodwill at December 31, 2009

$
5,449

$


$
5,449


Intangible
assets other than goodwill include the following:

Indefinite-lived
trademarks

Definite-lived
trademarks

Customer
lists

Leases,
contracts and
other

TotalOther intangibles at December 31, 2007

$
2,800

$


$
138

$
2,937

$
5,875CKD acquisition





27,700


2,029


15,947


45,676Amortization expense





(1,731
)

(71
)

(4,554
)

(6,356
)Other intangibles at December 31, 2008

$
2,800

$
25,969

$
2,096

$
14,330

$
45,195CKD acquisition








(4
)

(4
)

(8
)Sale of business


(2,800
)




(57
)

(2,732
)

(5,589
)Amortization expense





(3,463
)

(104
)

(9,833
)

(13,400
)Other intangibles at December 31, 2009

$


$
22,506

$
1,931

$
1,761

$
26,198


Estimated
amortization expense for the next five years, beginning with 2010, is as follows: $3.5 million, $3.6 million, $3.6 million, $3.8 million, and
$3.8 million. At December 31, 2009, the weighted average remaining useful life for trademarks is 8 years; customer relationships is 20 years; other contractual agreements
is 28 years; and for intangible assets in total is 10 years. As of December 31, 2009, the estimated remaining useful lives are as follows: definite-lived trademarks
6 years, customer lists 18 years and leases, contracts and other 1 to 97 years.

F-21

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

11. Accrued expenses

Accrued expenses consist of the following at December 31, 2009 and 2008, respectively:

December 31,2009

2008Accrued interest

$
170

$
7,024Accrued taxes other than income


5,315


6,896Accrued energy costs


5,182


5,453Other accruals


10,133


11,089Total accrued expenses

$
20,800

$
30,462


12. Long-term Debt and Senior Credit Facility

Long-term debt and notes, net, at December 31, 2009 and 2008, are summarized as follows:

December 31,2009

2008Term A loan with interest payable monthly at LIBOR plus 1.5% at December 31, 2009 and 3.0% at December 31, 2008

$
136,168

$
364,616Term B loan with interest payable monthly at LIBOR plus 3.5%


8,729


23,373Senior Notes with interest payable quarterly at 8.3%





40,000Revolving credit facility (3.25% at December 31, 2009 and 4.75% at December 31, 2008)


7,400


12,400Sub-total


152,297


440,389Less current portion of long-term debt and notes


(18,630
)

(40,556
)Less current portion of revolving credit facility


(7,400
)

Less unamortized debt issuance costs


(5,236
)

(10,460
)Total long-term debt and notes, net of current portion

$
121,031

$
389,374


The
principal portion of long-term debt and outstanding amounts on the revolving credit facility at December 31, 2009 becomes due as follows:

TotalFiscal year ending:2010

$
26,0302011


20,6992012


20,6992013


81,0032014


1,2472015 and thereafter


2,619Total

$
152,297


F-22

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

12. Long-term Debt and Senior Credit Facility (Continued)

The
Company incurred approximately $12.6 million of debt issuance costs associated with the new Senior Credit Agreement, which is being amortized over a five-year
period using the effective interest method. For the years ended December 31, 2009, 2008 and 2007, $6.0 million, $2.0 million and $0.3 million, respectively, of debt
issuance costs have been amortized and recognized within interest expense.

Senior Credit Agreement

On June 12, 2008, the Company entered into a Senior Credit Agreement (the "Senior Credit Agreement"), effective with the
consummation of the acquisition of CKD, which provides for an aggregate of up to $515 million in senior secured credit facilities (the "Senior Credit Facilities"), consisting of a
$390 million term A loan facility, a $25 million term B loan facility and a $100 million revolving credit facility (including a letter of credit sub-facility). The
Senior Credit Agreement replaces the prior senior secured credit facility due on December 31, 2011. The Senior Credit Facilities are guaranteed by the Company and its domestic subsidiaries and
are secured by substantially all of the Company's assets.

The
Senior Credit Facilities are required to be repaid in consecutive quarterly installments with final payments of all outstanding principal and interest on the maturity date. The
maturity date is the earlier of: (a) June 12, 2013 with respect to the term A loan facility and the revolving credit facility, and June 12, 2015 with respect to the term B loan
facility, and (b) the date which is 90 days prior to the date on which the earn-out obligations to International Paper Company will become (or are reasonably expected to
become) due (January 2, 2012); provided that the maturity date will not be so accelerated if, among other things, the total leverage ratio as of the end of the then most recent fiscal quarter
is less than 2.0 to 1.0.

Outstanding
principal under the term A loan facility and the revolving credit facility initially bears interest at a rate equal to, at the Company's option, either (1) the base
rate plus a margin of 1.50%, or (2) the reserve adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.00%. Commencing six months after the closing of the Senior
Credit Facilities, pricing under the term A loan facility, the revolving credit facility and the unused line fee for the revolving credit facility will be determined by reference to a pricing grid
based on our total leverage ratio. Under the pricing grid, the applicable margins for the term A loan facility and the revolving credit facility will range from 0.0% to 1.5% for base rate loans and
from 1.50% to 3.00% for Eurodollar loans, and the unused line fee for the revolving credit facility will range from 0.375% to 0.50%. At December 31, 2009 and 2008, the term loan A was a
Eurodollar loan with a 1.7309% interest rate based on 1.50% margin and 6.1225% interest rate based on a 3.0% margin, respectively. At December 31, 2009 and 2008, the interest rate on the
revolving credit facility was 3.25% and 4.75%, respectively. The unused line fee for the revolving credit facility was 0.375% and 0.50% at December 31, 2009 and 2008, respectively.

Outstanding
principal under the term B loan facility bears interest at a rate equal to, at the Company's option, either (1) the base rate plus a margin of 2.00% or (2) the
reserved adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.50%. At December 31, 2009 and 2008, the term B loan was a Eurodollar loan with a 3.7309% and
6.6225% rate, respectively.

The
term loan facilities and the revolving credit facility may be prepaid at any time without premium penalties. The Senior Credit Facilities are subject to mandatory prepayment with
specified

F-23

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

12. Long-term Debt and Senior Credit Facility (Continued)

percentages
of the net cash proceeds of certain asset dispositions, casualty events, exercise of outstanding warrants, debt and equity issuances, and with excess cash flow, in each case subject to
certain conditions. During the years ended December 31, 2009 and 2008, $120.5 million and $13.5 million, respectively, of mandatory prepayments were made.

In
accordance with its debt agreements, the Company's availability under its Revolving Credit Facility has been reduced by the amount of standby letters of credit issued of
$13.0 million as of December 31, 2009. These letters of credit are used as security for certain contractual commitments and workers' compensation obligations. These letters of credit
expire at various dates through 2010 unless extended.

Borrowings
under the revolving credit facility may be used for working capital and other general corporate purposes. At December 31, 2009, borrowings under the revolving credit
facility totaled $7.4 million and are included as current liabilities in the accompanying consolidated balance sheets as its management's intention to repay this debt in the next twelve months.

Note Purchase Agreement

Pursuant to the Note Purchase Agreement dated July 1, 2008, (the "Note Purchase Agreement") the Company issued senior secured
promissory notes (the "Senior Notes") with an aggregate principal amount of $40 million and interest rate of 8.30%. The Senior Notes are guaranteed by the Company and secured by substantially
all of the Company's assets.

The
Senior Notes were extinguished in July 2009 using cash from operations.

Debt Covenants

The Company's Senior Credit Agreement contains, among other provisions, covenants with which we must comply while they are in force.
The covenants limit our ability to, among other things, incur indebtedness, create additional liens on its assets, make investments, engage in mergers and acquisitions, pay dividends and sell any
assets outside the normal course of business.

Under
the financial covenants of the Senior Credit Agreement, we must comply on a quarterly basis with a maximum permitted leverage ratio. The leverage ratio is calculated by dividing
our debt by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments as defined in the Senior Credit Agreement. On
December 31, 2009, the maximum permitted leverage ratio is 3.00 to 1.00 and continues throughout the remainder of the term. On December 31, 2009, the Company was in compliance with the
Senior Credit Agreement with a leverage ratio of 0.84 to 1.00.

The
Senior Credit Agreement also includes a financial covenant requiring a minimum fixed charge coverage ratio. This ratio is calculated by dividing our twelve month total earnings
before interest expense, taxes, depreciation and amortization and allowable adjustments, as defined by the Senior Credit Agreement, less cash payments for income taxes and capital expenditures by the
sum of our cash interest and required principal payments during the twelve month period. From the closing date of the Senior Credit Agreement through the quarter ending September 30, 2011, the
fixed charge coverage ratio is required to be at least 1.10 to 1.00. Starting with the quarter ending December 31, 2011, through the end of the Senior Credit Agreement, the fixed charge
coverage ratio is required to be not

F-24

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

12. Long-term Debt and Senior Credit Facility (Continued)

less
than 1.15 to 1.00. On December 31, 2009, the Company was in compliance with the Senior Credit Agreement with a fixed charge coverage ratio of 4.30 to 1.00.

As
of December 31, 2009, the Company was in compliance with all other applicable covenants in the Senior Credit Agreement.

13. Retirement Plans

Defined Benefit Plan

As part of the KPB acquisition, the Company established the KapStone Paper and Packaging Corporation Defined Benefit Plan ("Plan") to
provide benefits for union employees. This Plan is part of the collective bargaining agreement between KapStone and the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy,
Allied-Industrial, Chemical and Service Workers Union, AFL-CIO, CLC. The assumed liability for the retroactive benefits provided for prior service was $1.4 million at
January 2, 2007, and employees accrue benefits under the Plan as of January 1, 2007.

As
part of the CKD acquisition approximately 615 union employees were added to the Company's Plan. In addition, the Company assumed a liability for certain benefits for prior service of
$1.6 million at July 1, 2008.

As
a result of the sale of the dunnage bag business on March 31, 2009, approximately 100 employees ceased earning benefits under the Plan.

As
of December 31, 2009, there were approximately 1,000 union employees participating in the Plan.

The
annual measurement date for the Plan is December 31.

Net Pension cost

Net pension cost recognized for the years ended December 31, 2009, 2008 and 2007, for the Company's pension plan is as follows:

Years Ended December 31,2009

2008

2007Service cost for benefits earned during the year

$
2,839

$
1,999

$
1,154Interest cost on projected benefit obligations


373


198


84Return on plan assets


(153
)

(26
)

(1
)Net pension cost

$
3,059

$
2,171

$
1,237


Actuarial assumptions

The Company annually evaluates and updates as necessary the assumptions used in the determination of net pension cost, including the
discount rate and the expected return on plan assets. The discount rate for the years ended December 31, 2009 and 2008 was 6.0%. The long-term expected rate of return on plan assets
for the years ended December 31, 2009 and 2008 was 6.5% and 7.5%, respectively.

F-25

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

13. Retirement Plans (Continued)

For
the expected return on plan assets assumption, the Company, based on recommendations from its actuary, used historical and future expected returns of multiple asset classes to
develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation
component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the
Plan.

Funded status of Plan

As of December 31, 2009 and 2008, the Plan is under funded by $3.2 million and $5.4 million, respectively, and has
been included in the accompanying Consolidated Balance Sheets as a non-current liability. The Company will fund its pension plan according to IRS funding limitations. Based on those
limitations, KapStone expects to contribute $4.1 million to its pension plan in 2010.

Changes in Benefit Obligations and Plan Assets

The following reconciles beginning and ending projected benefit obligation for the Company.

Years Ended December 31,2009

2008Projected benefit obligation at beginning of year

$
6,240

$
2,639Projected benefit obligation assumed for CKD acquisition





1,368Benefit increase for dunnage bag business employees


60


Service cost for benefits earned during the year


2,839


1,999Interest cost on projected benefit obligations


373


198Benefits paid


(260
)

(2
)Actuarial loss


231


38Projected benefit obligation at end of year

$
9,483

$
6,240


The
accumulated benefit obligation at December 31, 2009 and 2008 was $9.5 million and $6.2 million, respectively.

F-26

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

13. Retirement Plans (Continued)

Assets in the plan consist primarily of debt and equity securities. The following reconciles beginning and ending fair value of the Company's plan assets:

Years Ended December 31,2009

2008Fair value of plan assets at beginning of year

$
832

$
4Actual gain / (loss) on plan assets


296


(218
)Benefits paid


(260
)

(2
)Employer contributions


5,399


1,048Fair value of plan assets at end of year

$
6,267

$
832


The
Company's pension plan weighted average asset allocations at December 31, 2009 and 2008, by asset category were as follows:

Years Ended
December 31,Target
Allocation2009

2008Equity securities


20
%

21
%

20
%Debt securities


77
%

79
%

76
%Real estate


3
%


%

4
%Total assets


100
%

100
%

100
%


The
investment objectives for the pension plan assets are to generate returns that will enable the plans to meet their future obligations. The strategies balance the requirement to
generate returns through investments such as equity securities, with the need to control risk through less volatile assets such as debt securities. The Plan assets are managed in two separate
portfolios, an equity portfolio and a bond portfolio. The strategy is to invest 20% and 80% of the plan assets in equity securities and debt securities, respectively. The total return is tracked to
the relevant market index, within specified tolerances, for each of the funds in which the assets are invested.

F-27

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

13. Retirement Plans (Continued)

Disclosures
concerning assets measured at fair value on a recurring basis at December 31, 2009, which have been categorized under the fair value hierarchy for the Plan by the
Company, are as follows:

KapStone Paper and Packaging Defined Benefit PlanFair Value Measurements at December 31, 2009Asset Category

Total

Quoted Prices in Active
Markets for Identical Assets
(Level 1)

Significant
Observable Inputs
(Level 2)

Significant
Observable Inputs
(Level 3)Equity Securities:U.S. large-cap

$
883

$


$
883

$
U.S. mid-cap growth


78





78


U.S. small-cap


77





77


International funds


254





254


Debt securities:Corporate bonds


2,943





2,943


Mortgage-backed securities


2,011





2,011


Real estate


21








21Total

$
6,267

$


$
6,246

$
21


Benefit Payments

The following benefit payments are expected to be paid over the next 10 fiscal years ending December 31:

2010

$
1602011


2402012


3302013


4402014


540Years 2015-2019

$
4,900


Other Post-retirement Benefits

As part of the KPB acquisition, the Company assumed $0.9 million of liabilities for retiree medical/life obligation for the
prior service of hourly employees not eligible to retire at December 31, 2006.

As
part of the CKD acquisition, the Company assumed $1.8 million of liabilities for retiree medical/life obligation for the prior service of hourly employees.

The
annual measurement date for the plan is December 31.

F-28

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

13. Retirement Plans (Continued)

Post Retirement Costs

Net post-retirement cost recognized for the years ended December 31, 2009, 2008 and 2007 for the Company's retiree
medical and life insurance benefits is as follows:

Years Ended December 31,2009

2008

2007Service cost for benefits earned during the year

$
112

$
66

$
27Interest cost on projected benefit obligations


167


100


48Expected return on plan assets








Amortization of net gain


(58
)

(31
)

Net post-retirement cost

$
221

$
135

$
75


The
effect of a one percentage point increase or decrease in the assumed health care cost trend rates is not material to total service and interest costs and the postretirement benefit
obligation.

Included
in accumulated other comprehensive income at December 31, 2009 and 2008, is an immaterial unrecognized actuarial gain. The estimated actuarial gain that will be
recognized in 2010 periodic post-retirement cost is $0.5 million.

Actuarial Assumptions

The Company annually evaluates and updates as necessary the assumptions used in the determination of post-retirement
benefit cost, including the discount rate and health care trend rates. The discount rates as of December 31, 2009 and 2008 were 6.0%.

Changes in Benefit Obligations

As of December 31, 2009 and 2008, the plan is under funded by $2.7 million and $2.9 million, respectively, which
has been included in the accompanying Consolidated Balance Sheets. The plan is only funded in an amount equal to benefits paid. The Company does not fund these benefits prior to payment of claims.

F-29

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

13. Retirement Plans (Continued)

The
following reconciles beginning and ending projected benefit obligations:

Years Ended
December 31,2009

2008Projected benefit obligation at beginning of the year

$
2,893

$
761Projected benefit obligation assumed for CKD acquisition





1,819Service cost for benefits earned during the year


112


66Interest cost on projected benefit obligations


167


100Actuarial (gain) loss


(412
)

147Plan modification due to sale of dunnage bag business


(46
)

Benefits paid





Projected benefit obligation at end of year

$
2,714

$
2,893


Benefit Payments

The following benefit payments are expected to be paid over the next 10 fiscal years ending December 31:

2010

$
1072011


1962012


2682013


2942014


295Years 2015-2019


1,390


Defined Contribution Plans

In January 2007 the Company established a defined contribution plan covering all eligible employees. Company contributions to the
401(k) plan are based on matching of employee contributions, vest immediately for salaried employees and vest after three years for union employees. For the years ended December 31, 2009, 2008
and 2007, the Company recognized expense of $2.1 million, $2.4 million and $1.0 million, respectively, for matching contributions. Effective February 1,
2009, matching contributions for salaried employees were temporarily suspended due to economic conditions. The matching contributions were reinstated effective January 1, 2010.

The
Company's Retirement Savings Plan, which covers all eligible salaried employees, provides for contributions based on an employee's salary and age. The Company contributions vest 100%
after three years. For the years ended December 31, 2009, 2008 and 2007, the expense recognized by the Company for contributions to the Retirement Savings Plan was $1.9 million,
$1.3 million and $0.6 million, respectively.

F-30

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

14. Income taxes

The Company's U.S. federal statutory tax rate is 35.0% for each of 2009, 2008 and 2007. The Company's effective tax rate for the years ended December 31, 2009, 2008, and 2007 was
39.4%, 38.8% and 36.0%, respectively. Substantially all income is earned in the United States.

The
Company's provision for income taxes for the years ended December 31, 2009, 2008, and 2007 consists of the following:

Years Ended December 31,2009

2008

2007Current:Federal

$
27,367

$
(4,035
)
$
13,298State


5,311


(127
)

2,084Total current


32,678


(4,162
)

15,382Deferred:Federal

$
15,945

$
14,585

$
(152
)State


3,514


2,059


(92
)Total deferred


19,459


16,644


(244
)Total provision for income taxes

$
52,137

$
12,482

$
15,138


The
Company's effective tax rate differs from the statutory federal income tax rate as follows:

Years Ended December 31,2009

2008

2007Statutory tax rate


35.0
%

35.0
%

35.0
%State income taxes, net of federal income tax benefit


4.0


3.9


3.2Manufacturing deduction








(2.0
)Other


0.4


(0.1
)

(0.2
)Effective tax rate


39.4
%

38.8
%

36.0
%


The
effective tax rate for the year ended December 31, 2007 includes a 2.0% benefit, provided to U.S. manufacturers' under the American Jobs Creation Act of 2004.

F-31

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

14. Income taxes (Continued)

The
tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2009 and 2008, for the Company are
as follows:

December 31,2009

2008Deferred tax assets and liabilities resulting from:Trade accounts receivable

$
376

$
775Inventories


3,738


2,923Accrued compensation costs


1,499


1,083Acquisition transaction costs


1,441


1,745Pension and post-retirement benefits


2,351


218Stock based compensation


1,729


943Tax credits


247


1,016Intangible assets


5,762


687Other


432


541Total deferred tax assets


17,575


9,931Prepaid expenses


(500
)

(1,294
)Tax depreciation in excess of book depreciation


(49,501
)

(20,239
)Intangible assets and other


(547
)

(986
)Total deferred tax liabilities


(50,548
)

(22,519
)Net deferred tax (liabilities) / assets, net

$
(32,973
)
$
(12,588
)


At
December 31, 2009 and 2008, the Company had the following net deferred tax (liabilities) / assets on the Consolidated Balance Sheets:

December 31,2009

2008Current deferred tax assets, net

$
5,604

$
3,363Non current deferred tax (liabilities) / assets, net


(38,577
)

(15,951
)Total deferred tax (liabilities) / assets, net

$
(32,973
)
$
(12,588
)


The
Company accounts for income taxes in accordance with ASC 740,Income Taxes,which provides that a tax benefit from an uncertain
tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits.

Additionally,
for uncertain tax positions, a threshold condition must be met for any part of the benefit of such a position to be recognized in the financial statements.

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

14. Income taxes (Continued)

The
following is a reconciliation of the total amount of unrecognized tax benefits:

2009Unrecognized tax benefitsJanuary 1, 2009

$
Gross increasetax positions prior period


Gross decreasetax positions prior period


Gross increasetax positions current period


62,943Settlement


Lapse of statute of limitations


Unrecognized tax benefitsDecember 31, 2009

$
62,943


Total
unrecognized tax benefits as of December 31, 2009 were $62.9 million, of which $62.9 million would impact the effective tax rate if recognized. The Company
classifies interest and penalties as component of the provision for income taxes. Total accrued interest and penalties as of December 31, 2009, were approximately $0.4 million.
Unrecognized tax benefits of $62.9 million are included in other long term liabilities in the accompanying Consolidated Balance Sheets.

In
the normal course of business, the Company is subject to examination by taxing authorities. The Company's open tax years are 2005 through 2009. The Company's tax returns for 2007 and
2008 are currently under examination by the Internal Revenue Service.

15. Stockholder's equity

Common Stock Warrants

In connection with the Company's initial public offering, on August 19, 2005, the Company sold 20,000,000 units ("Units") for a
gross price of $6.00 per Unit. Each Unit consisted of one share of the Company's common stock, $0.0001 par value, and two warrants. Each warrant entitled the holder to purchase from the Company one
share of common stock at an exercise price of $5.00 with an expiration date of August 17, 2009. For the years ended December 31, 2009 and 2008, 17.0 million and 3.1 million
of common stock warrants were exercised with proceeds totaling $85.2 million and $15.5 million, respectively. On August 17, 2009, 19.5 million warrants expired.

Employee Stock Purchase Plan

In December 2009 the Company established, subject to shareholder approval, the KapStone Paper and Packaging Corporation Employee Stock
Purchase Plan ("ESPP"), effective January 1, 2010. The Plan allows for employees to purchase shares of company stock at a five percent discount from market price. A total of 500,000 shares are
reserved for future awards. No shares were issued for the year ended December 31, 2009.

Common Stock Reserved for Issuance

At December 31, 2009, approximately 1.7 million shares of common stock were reserved for issuance upon 0.2 million
shares for stock awards, 1.0 million shares for the underwriter's purchase option and 0.5 million shares for the ESPP.

F-33

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

15. Stockholder's equity (Continued)

Underwriter's Fee

In connection with the Company's initial public offering on August 19, 2005, the Company agreed to pay the underwriter
$1.2 million relating to the Company's initial public offering payable upon a successful business combination. Upon the consummation of KPB acquisition in January 2007, the fee was paid and
charged against additional paid in capital.

Underwriter's Purchase Option

In connection with the Company's initial public offering, the Company paid the underwriters an underwriting discount of five percent of
the gross proceeds of the offering. The Company also issued for $100 an option to the representative of the underwriters to purchase up to a total of 1,000,000 units at a price of $7.50 per unit. The
units issuable upon the exercise of this option are identical to those offered in the public offering, except that the exercise price of the warrants included in the underwriter's purchase option is
$6.25. This option is exercisable commencing on the later of the consummation of a Business Combination or one year from the date of the public offering, expires five years from the date of the public
offering, and may be exercised on a cashless basis. However, the option may be transferred to any underwriter or selected dealer participating in the public offering and their bona fide officers or
partners.

The
underwriters' purchase option and the Warrants (including the warrants underlying the underwriters' option) will be exercisable only if at the time of exercise a current registration
statement covering the underlying securities is effective or, in the opinion of counsel, not required, and if the
securities are qualified for sale or exempt from qualification under the applicable state securities laws of the exercising holder. The Company is obligated to use its best efforts to maintain an
effective registration statement during the term of the option and the Warrants; however, it may be unable to do so. Holders of the option and the Warrants are not entitled to receive a net cash
settlement or other settlement in lieu of physical settlement if the common stock underlying the Warrants, or securities underlying the option, as applicable, are not covered by an effective
registration statement. Accordingly, the Warrants, which do not have a cashless exercise provision, may expire unexercised and worthless if a current registration statement covering the common stock
is not effective.

The
holders of the option have demand and piggy-back registration rights under the Securities Act for periods of five and seven years, respectively, from the date of the
prospectus with respect to registration of the securities directly and indirectly issuable upon exercise of the option. The exercise price and number of units issuable upon exercise of the option may
be adjusted in certain circumstances, including issuances of a stock dividend, recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances at a
price below its exercise price.

The
Company has estimated, based upon a Black Scholes model, that the fair value of the purchase option on the date of sale was approximately $980,000, using an expected life of four
years, volatility of 23.9 percent, and a risk-free interest rate of 3.93 percent. However, because the Units did not have a trading history, the volatility assumption was
based on information available to management. The volatility estimate was derived using five-year historical stock prices for the nine companies in the Standard and Poor's Supercomposite
Paper Packaging Index. The Company believes the volatility estimate calculated from this index is a reasonable benchmark to use in estimating the expected

F-34

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

15. Stockholder's equity (Continued)

volatility
of the Units; however, the use of an index to estimate volatility may not necessarily be representative of the volatility of the underlying securities.

The
Company accounted for this purchase option, inclusive of the receipt of the $100 cash payment, as an expense of the public offering resulting in a charge directly to stockholders'
equity. Accordingly there was no impact in the Company's financial position or results of operations except for the recording of the $100 proceeds from the sale.

Redemption of Common Stock

The registration statement for the Company's initial public offering indicated that, after signing a definitive agreement for the
acquisition of a target business, the Company would submit such transaction for stockholder approval. Based on the votes submitted on
December 29, 2006, 40,000 shares voted against the proposed KPB business combination and sought to be redeemed for cash. The stock redemption occurred in February 2007 and the redeemed shares
have been held in treasury since the redemption.

16. Stock-Based Compensation

On December 29, 2006, stockholders approved the 2006 Incentive Plan ("Incentive Plan"). A maximum of 3.0 million shares of our common stock, available for issuance pursuant
to stock options, restricted stock awards or stock appreciation rights (collectively called "Awards"), may be granted under the Incentive Plan. If any Award is forfeited or expires without being
exercised, or if restricted stock is repurchased by the Company, the shares of stock subject to the Award shall be available for additional grants under the Incentive Plan. The number of shares
available under the Incentive Plan is subject to adjustment in the event of any stock split, stock dividend, recapitalization, spin-off or other similar action. Awards may be granted to
employees, officers and directors of, and consultants or advisors to, the Company and any subsidiary corporations. Options intended to qualify, under the standards set forth in certain federal tax
rules, as incentive stock options ("ISOs") may be granted only to employees while actually employed by the Company. Non-employee directors, consultants and advisors are not entitled to
receive ISOs. Option Awards granted under the Incentive Plan are exercisable for a period fixed by the Administrator, but no longer than 10 years from the date of grant, at an exercise price
which is not less than the fair market value of the shares on the date of the grant.

The
Company's Compensation Committee approves all stock awards. The Company accounts for stock awards in accordance with ASC 718, CompensationStock Compensation, which requires that the cost
resulting from all share-based payment transactions be recognized as
compensation cost over the vesting period based on the fair value of the instrument on the date of grant. As a result, the Company recognized $2.4 million, $1.8 million and
$0.7 million of compensation expense for the years ended December 31, 2009, 2008 and 2007, respectively.

At
December 31, 2009, there were 0.2 million shares of common stock reserved for future stock awards.

ASC 718
requires that cash flows relating to the benefits of tax deductions in excess of recognized compensation cost be reported as financing cash flow, rather than as an
operating cash flow, as

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

16. Stock-Based Compensation (Continued)

previously
required. The Company did not recognize any excess tax benefits for the years ended December 31, 2009, 2008 and 2007.

Stock options

In 2009, 2008 and 2007 the Company's Compensation Committee granted 829,702, 748,428 and 631,050, respectively, stock option grants to
executive officers, directors and employees as compensation for service. The Company's outstanding stock options vest as follows: 50% after two years and the remaining 50% after three years. Stock
options granted in 2009 and 2008 have a contractual term of ten years. Stock options granted in 2007 have a contractual term of seven years. The stock options are subject to forfeiture should these
employees terminate their employment with the Company for certain reasons prior to vesting in their awards, or the occurrence of certain other events such as termination with cause. The exercise price
of these stock options is based on closing market price of our common stock on the date of grant and compensation expense is recorded on an accelerated basis over the awards' vesting periods.

A
summary of information related to stock options is as follows:

Options

Weighted
Average
Exercise Price

Weighted
Average
Remaining
Life (Years)

Intrinsic
ValueOutstanding January 1, 2007




$





$
Granted


631,050


6.77


6.3


Exercised











Lapsed











Outstanding at December 31, 2007


631,050

$
6.77


6.3

$
147Granted


748,428


6.96Exercised





Lapsed (forfeited or cancelled)


(33,131
)

(6.98
)Outstanding at December 31, 2008


1,346,347


6.87


7.7

$
(6,045
)Granted


829,702


3.70


9.4


5,086Exercised


(4,450
)

9.25Lapsed (forfeited or cancelled)


(9,522
)

6.85Outstanding at December 31, 2009


2,162,077

$
5.66


7.6

$
9,029Exercisable at December 31, 2009


306,300

$
6.76


4.3

$
940


Total
stock-based compensation recorded in the Consolidated Statements of Income related to stock option grants was $1.4 million, $1.1 million and $0.4 million for
the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, there was $1.6 million of unrecognized compensation expense related to
non-vested stock options that will be recognized over the remaining vesting period of approximately two years.

The
weighted average fair value of the KapStone stock options granted in 2009, 2008 and 2007 was $1.79, $2.22 and $2.30, respectively. The fair value cost of awards granted in 2009, 2008
and 2007 was

F-36

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

16. Stock-Based Compensation (Continued)

$1.5 million,
$1.6 million and $1.5 million, respectively. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date
and the weighted average assumptions specific to the underlying options. The expected volatility assumption is based on volatility of related industry stocks. The Company uses the "simplified method",
defined in SEC Staff Accounting Bulletin ("SAB") No. 107, to determine the expected term assumption for all of its options. The Company uses the "simplified method", as permitted by SAB
No. 110, as it does not have historical exercise data to provide a reasonable basis upon which to estimate expected life due to the limited time its equity shares have been publicly traded. The
risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term similar to the expected term of the stock options.

The
assumptions utilized for determining the fair value of stock options awarded during the period 2009, 2008 and 2007 are as follows:

December 31,2009

2008

2007KapStone Stock Options Black-Scholes-Merton assumptions
(weighted average):Expected volatility


47.0
%

24.4
%

28.6
%Expected term (years)


6.25


6.5


5.0Risk-free interest rate


2.3
%

3.4
%

4.6
%Expected dividend yield



%


%


%


Restricted Stock

In 2009, 2008 and 2007 the Company's Compensation Committee granted 219,864, 194,903 and 174,000 respectively, restricted stock units
to executive officers and employees as compensation for service. These are restricted as to transferability until they vest three years from the grant date. These restricted shares are subject to
forfeiture should these employees terminate their employment with the Company for certain reasons prior to vesting in their awards, or the occurrence of certain other events. The value of these
restricted shares is based on the closing market price of our common stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards' vesting
periods.

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

16. Stock-Based Compensation (Continued)

The following table summarizes restricted stock amounts and activity:

Shares/Units

Weighted
Average
Grant PriceOutstanding at January 1, 2007




$
Granted


174,000


6.76Vested





Forfeited





Outstanding at December 31, 2007


174,000

$
6.76Granted


194,903


6.98Vested





Forfeited





Outstanding at December 31, 2008


368,903

$
6.88Granted


219,864


3.70Vested





Forfeited


(3,098
)

6.84Outstanding at December 31, 2009


585,669

$
5.68


Total
stock-based compensation expense recorded in the Consolidated Statements of Income related to the restricted stock awards was $1.0 million, $0.7 million and
$0.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, 2008 and 2007, there was $1.3 million, $1.5 million and
$0.8 million, respectively, of total unrecognized compensation expense related to restricted stock that will be recognized over the remaining vesting period of approximately two years.

17. Commitments and Contingencies

Transition Services Agreements

In conjunction with the KPB and CKD acquisitions, the Company entered into transition services agreements with IP and MWV for certain
transitional support services. The Company terminated its transitional services agreement with IP upon converting to its new ERP system in April 2008. The Company terminated a portion of services
being provided by MWV upon migrating CKD to the Company's ERP on October 1, 2009. The balance of MWV services were terminated effective December 31, 2009 when CKD migrated to a new
production, order entry and receivables management application. For the years ended December 31, 2009, 2008 and 2007, the Company incurred and expensed approximately $5.1 million,
$4.3 million and $2.4 million, respectively for such services.

Commercial Commitments

KapStone's commercial commitments as of December 31, 2009 represent commitments not recorded on the balance sheet, but
potentially triggered by future events, primarily consist of letters of credit to provide security for certain transactions and operating leases as requested by third parties. As

F-38

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

17. Commitments and Contingencies (Continued)

of
December 31, 2009, KapStone had $13.0 million of these commitments, with a majority expiring in 2010 if not renewed. No amounts have been drawn under these letters of credit.

Legal claims

We are party to various legal proceedings arising from our operations. We establish reserves for claims and proceedings when it is
probable that liabilities exist and where reasonable estimates can be made. While it is not possible to predict the outcome of any these matters, based on our assessment of the facts and circumstances
now known, we do not believe that any these matters, individually or in the aggregate, will have a material adverse effect on our financial position. However, actual outcomes may be different from
those expected and could have a material effect on our results of operations or cash flows in a particular period.

Operating Leases

Future minimum rentals under non-cancellable leases

The following represents the Company's future minimum rental payments due under non-cancellable operating leases that have initial or
remaining lease terms in excess of one year as of the following years:

Years Ending December 31,2010

$
3,7602011


3,3332012


2,6452013


1,6442014


1,162Thereafter


1,445Total

$
13,989


The
Company's rental expense under operating leases amounted to $4.9 million, $3.9 million and $1.1 million for the years ended December 31, 2009, 2008, and
2007, respectively.

Purchase Obligation

In conjunction with the CKD acquisition, the Company entered into a long-term fiber supply agreement with MWV. Pursuant to
the agreement, the Company will purchase approximately 25% of its pine pulpwood and 60% of its saw timber requirements for a period of 15 years. The purchases are based on market prices and are
accounted for as raw materials. The Company purchased approximately $35.2 million and $17.1 million of materials in accordance with the agreement for years ended December 31, 2009
and 2008, respectively.

F-39

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

18. Net income per share

The Company's basic and diluted net income per share is calculated as follows:

Years Ended December 31,2009

2008

2007Net income as reported

$
80,280

$
19,665

$
26,963Weighted-average number of common shares for basic net income per share


34,675,804


26,486,924


25,010,057Incremental effect of dilutive common stock equivalents:Common stock warrants





7,766,391


10,994,018Underwriter's purchase option


15,051


90,083


111,536Unexercised stock option awards


119,592





Unvested restricted stock awards


257,476


112,418


18,877Weighted-average number of shares for diluted net income per share


35,067,923


34,455,816


36,134,488Net income per sharebasic

$
2.32

$
0.74

$
1.08Net income per sharediluted

$
2.29

$
0.57

$
0.75


In
August 2009, 17.0 million warrants were exercised and converted into common stock. The 19.4 million remaining warrants expired.

Stock
option awards of 1.3 million shares and 0.6 million shares were outstanding at December 31, 2008 and 2007, respectively, but were not included in the
computation of diluted net income per share because the options were not-in-the money.

19. Performance Improvement Plan

In May 2008 shareholders approved the KapStone Paper and Packaging Performance Improvement Plan ("PIP"). The PIP, effective January 1, 2009, provides for annual incentive awards
to executive officers and other participating employees. The PIP is to promote the interests of the Company and its
stockholders by providing an incentive for participating employees to meet specified performance goals. The PIP rewards outstanding performance by those individuals whose decisions and actions affect
the sustainable growth, profitability and efficient operation of the Company. The performance criteria set forth in the PIP are intended to align the interests of participating employees with the
interests of stockholders.

The
PIP is administered by the Compensation Committee ("Committee"), at least two members of which are "outside directors" under Section 162(m) of the Code. The Committee selects
participants, sets the performance criteria and targets, and makes all decisions with respect to employees. The Compensation Committee selects eligible participants no later than 90 days after
the beginning of the year.

No
later than 90 days after the beginning of the year, the Committee determines the target award for each participant or category of participant. This is typically specified as a
percentage of salary. In addition, the Committee will choose one or more performance criteria to be applied and set the

F-40

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

19. Performance Improvement Plan (Continued)

performance
goals for each of the criteria. When the Committee sets the performance goals, the Committee may take into account any extraordinary or one-time or other
non-recurring items or any events, transactions or other circumstances that the Committee deems relevant in light of the nature of the performance goals set or the assumptions made by the
Committee regarding such goals.

Due
to economic conditions in early 2009, the Company temporarily suspended the PIP and no incentive compensation was paid or accrued for the year ended December 31, 2009. For the
years ended December 31, 2008 and 2007, incentive compensation expense totaled $1.5 million and $1.7 million, respectively.

20. Segment Information

The Company has one reportable segment, unbleached kraft. The unbleached kraft segment consists of the Company's paper mills in Roanoke Rapids, North Carolina and North Charleston, South
Carolina, which produce unbleached kraft paper, linerboard, saturating kraft and unbleached folding carton board. These products are sold to customers who convert our products into end-market finished
products. In the table below, Other represents the Company's dunnage bag business, which was sold on March 31, 2009, to Illinois Tool Works Inc.

The
Company's reportable and operating segment is based on financial information regularly evaluated by the chief operating decision maker in determining resource allocation and
assessing performance, in accordance with ASC 805, "Segment Reporting." In the third quarter 2009, the Company revised its reporting structure. Segment
disclosures have been revised to conform to the current presentation for all reporting periods.

F-41

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

20. Segment Information (Continued)

Corporate
expenses that benefit the entire organization are not charged to the operating segments.

Years Ended December 31,Operating Segment (In thousands):

2009

2008

2007Net sales:Unbleached kraft

$
626,450

$
495,864

$
227,921Other


6,927


33,041


32.801Elimination of intersegment sales


(899
)

(4,356
)

(3,927
)Total

$
632,478

$
524,549

$
256,795Net sales to external customers:Unbleached kraft

$
625,551

$
491,508

$
223,994Other


6,927


33,041


32,801Total

$
632,478

$
524,549

$
256,795Operating income/(loss):Unbleached kraft

$
155,904

$
66,871

$
51,901Other


748


5,248


6,350Gain on sale of business


16,417





Corporate


(21,707
)

(21,463
)

(13,951
)Total

$
151,362

$
50,656

$
44,300Depreciation and amortization:Unbleached kraft

$
52,687

$
30,231

$
10,966Other


101


384


349Corporate


1,879


1,068


12Total

$
54,667

$
31,683

$
11,327Capital spending:Unbleached kraft

$
26,347

$
20,575

$
6,095Other





310


359Corporate


2,818


2,285


5,407Total

$
29,165

$
23,170

$
11,861Total assets (at December 31, 2009 and 2008):Unbleached kraft

$
638,050

$
679,606Other





17,132Corporate


31,073


30,452Total

$
669,123

$
727,190


F-42

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

20. Segment Information (Continued)

Net
sales for the years ended December 31, 2009, 2008 and 2007, are as follows:

Years Ended December 31,2009

2008

2007Net sales:To customers located in the United States

$
393,133

$
359,113

$
211,962Export sales to foreign based customers


239,345


165,436


44,833Total

$
632,478

$
524,549

$
256,795


No
foreign country accounted for more than 10% of consolidated net sales in 2009, 2008 and 2007.

21. Quarterly Financial Information (Unaudited)

The following tables set forth the historical unaudited quarterly financial data for fiscal 2009 and 2008. The information for each of these periods has been prepared on the same basis
as the audited consolidated financial statements and, in our opinion, reflects all adjustments consisting only of normal recurring adjustments necessary to present fairly our financial results.
Operating results for previous periods do not necessarily indicate results that may be achieved in any future period.

Quarters EndedFiscal 2009 (In thousands):

March 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009(1)Net sales

$
140,584

$
156,493

$
170,335

$
165,066Gross profit(2)

$
17,163

$
41,486

$
53,597

$
53,082Operating income(3)

$
26,237

$
33,368

$
46,499

$
45,258Net income

$
11,112

$
18,112

$
25,672

$
25,384Net income per share:Basic

$
0.39

$
0.64

$
0.70

$
0.56Diluted

$
0.39

$
0.63

$
0.69

$
0.55


(1)Operating
income in the quarter ended December 31, 2009, includes annual planned maintenance outage costs of $6.0 million.(2)Gross
profit in each of the 2009 quarters includes alternative fuel mixture tax credits of $5.4 million, $48.6 million, $53.5 million
and $56.5 million, respectively. The tax credit expired on December 31, 2009.(3)Operating
income in the quarter ended March 31, 2009, includes $17.4 million for the gain on the sale of the dunnage bag business.


F-43

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(In thousands, except share and per share amounts)

21. Quarterly Financial Information (Unaudited) (Continued)

Quarters EndedFiscal 2008 (In thousands):

March 31,
2008

June 30,
2008

September 30,
2008(1)

December 31,
2008Net sales

$
67,129

$
68,162

$
207,671

$
181,587Gross profit

$
16,391

$
17,603

$
23,685

$
22,571Operating income

$
11,645

$
13,226

$
14,146

$
11,639Net income

$
7,230

$
8,251

$
2,305

$
1,879Net income per share:Basic

$
0.29

$
0.32

$
0.09

$
0.07Diluted

$
0.21

$
0.22

$
0.06

$
0.07


(1)Operating
income in the quarter ended September 30, 2008, includes annual planned maintenance outage costs of $6.0 million.


F-44

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Table of Contents

KAPSTONE PAPER AND PACKAGING CORPORATION        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS

Allowance for doubtful accounts (In thousands):

AdditionsYear ended:

Balance at
beginning
of year

Charged to
Expense

Other(1)

Deductions(2)

Balance
at end
of yearDecember 31, 2009

$
2,421

$
594

$
(102
)
$
(1,696
)
$
1,217December 31, 2008

$


$
2,360

$
61

$


$
2,421December 31, 2007

$


$


$


$


$



(1)2009-reflects
allowance associated with dunnage bag business which was sold. 2008-reflects allowance for doubtful accounts assumed
as part of the CKD acquisition.(2)2009-customer
accounts reserved in 2008 and deemed worthless in 2009 and written off.


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