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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, 2010o

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(State or other jurisdiction of
incorporation or organization)

20-2699372(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 $0.0001)

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 (Do not check if a
smaller reporting company)

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 38,901,244 shares of Common Stock held by non-affiliates of the registrant on June 30, 2010, was
$433,359,858. This calculation was made using a price per share of Common Stock of $11.14; the closing price of the Common Stock on the New York Stock Exchange on June 30, 2010 the last day of
the registrant's most recently completed second fiscal quarter of 2010. 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, 2011, the number of shares of Common Stock outstanding, excluding 40,000 treasury shares, was 46,097,979.

DOCUMENTS INCORPORATED BY REFERENCE:

The registrant's Definitive Proxy Statement for its 2011 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

14Item 2.

Properties

14Item 3.

Legal Proceedings

15Item 4.

Removed and Reserved

15Item 5.

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

16Item 6.

Selected Financial Data

17Item 7.

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

18Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

33Item 8.

Financial Statements and Supplementary Data

34Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

34Item 9A.

Controls and Procedures

34Item 9B.

Other Information

34Item 10.

Directors, Executive Officers and Corporate Governance

35Item 11.

Executive Compensation

35Item 12.

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

35Item 13.

Certain Relationships and Related Transactions and Director Independence

35Item 14.

Principal Accountant Fees and Services

35Item 15.

Exhibits and Financial Statement Schedule

36INDEX 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 ("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
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 $155.0 million less $7.8 million of working capital 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 $60.0 million if
certain EBITDA targets are achieved. The acquisition was financed by cash on hand and a $95.0 million senior secured credit facility from LaSalle Bank National Association.

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 $485.0 million (net of cash acquired of $10.6 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 receivable and inventories. The liabilities assumed consisted of trade accounts payable,
accrued expenses and certain long-term liabilities. The acquisition was financed by cash on hand and a senior secured credit facility of $515.0 million consisting of a
five-year term loan of $390.0 million, a seven-year term loan of $25.0 million and a $100.0 million revolving credit facility. In addition,
$40.0 million of seven-year 8.30 percent senior notes were issued. In connection with the transaction the Company paid off the remaining amount due under its prior credit
facility. There was no contingent earn-out for the CKD acquisition.

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On
March 31, 2009, we consummated the sale of our 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 $4.0 million contingent
earn-out payment to IP.

On
January 4, 2011, we negotiated the early settlement of our final contingent earn-out payment with IP relating to the KPB acquisition. We paid $49.7 million
to settle this liability in January 2011, approximately $5.3 million less than the maximum contractual amount which would have been settled in April 2012.

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 ("ASC") 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 19 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's ("AF&PA") estimate of the size of the U.S. kraft paper market is as follows:

(In millions)

2010

2009

2008Total U.S. sales

1.33 tons

1.28 tons

1.56 tonsU.S. production

1.36 tons

1.24 tons

1.49 tonsImports

0.17 tons

0.20 tons

0.25 tonsExports

0.21 tons

0.16 tons

0.18 tonsU.S. operating rates

84%

76%

93%


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 has a large variety of uses within coating and laminating applications that requires 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.

Over
the last two decades, unbleached kraft paper capacity has 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 increased 2.3 percent in 2007 and
4.6 percent in 2008 as the net impact of

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machines
shifting from other grades to kraft paper was realized. Capacity decreased 2.9 percent in 2009. According to AF&PA's annual survey kraft paper capacity was 1.6 million tons in
2010 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's estimate of the size of the U.S. linerboard market is as follows:

(In millions)

2010

2009

2008Total U.S. sales

21.1 tons

19.6 tons

21.3 tonsU.S. production

24.1 tons

22.4 tons

24.2 tonsImports

0.41 tons

0.37 tons

0.56 tonsExports

3.38 tons

3.17 tons

3.32 tonsU.S. operating rates

95%

85%

91%


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

Our
saturating kraft product, sold under the trade name Durasorb®, 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) that create decorative surfaces such as kitchen and bath countertops, home and
office furniture and
flooring. Originated 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 market share 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 500 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 percent of consolidated net sales in 2010 and 2009. Graphic Packaging accounted for 10.7 percent of consolidated net sales in 2008. 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.

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 21 percent of total unit sales for each of 2010 and 2009 and 43 percent for
2008.

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Linerboard
is sold to domestic and foreign converters in the corrugated box industry and to other converters for a variety of uses 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 in the open market. The Company's linerboard product line accounted for approximately 51 percent of total unit sales for each of 2010 and 2009 and 32 percent
for 2008.

Our
Durasorb® customer base is split among three geographic regions, the Americas, Europe and Asia. Approximately 78 percent of our sales are exports to customers in
Europe, Latin America and Asia where growth opportunities are favorable. KapStone, or its predecessor, has 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 in North America and is 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 processes and the demanding requirements of their products. The Company's Durasorb® product line accounted for
approximately 21 percent of total unit sales for each of 2010 and 2009 and 19 percent 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 7 percent of total unit sales for each of 2010 and 2009 and 6 percent 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 and on a direct export basis.

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.

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 pulp using up to five paper machines. Management monitors productivity on a real-time basis with 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.

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Transitional Support

In conjunction with each acquisition we entered into transitional services agreements to provide for certain services, including
information technology and centralized transaction processing, until we could convert the acquired operations to our own Enterprise Resource Planning ("ERP") systems. Our transitional support services
from IP for the KPB acquisition ended on April 1, 2008 after a term of 15 months at a cost of $3.2 million. Our transitional service agreement with MWV for the CKD acquisition
began on July 1, 2008 and ended on December 31, 2009 after 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 installing a new ERP system which included general ledger, order
entry and receivables management, purchasing and payment plus additional modules. 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
2010, approximately 22 percent 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 percent of our South Carolina fiber requirements with
prices tied to a market index. The balance of fiber is purchased through contracts and in the open market 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 two contracts to purchase coal at fixed prices with one expiring on
December 31, 2011 and the other on December 31, 2012. The contracts allow for a certain amount of coal to be purchased in the open market. 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 oil prices. Thus, if we cannot pass on the rise in energy or other costs to our customers, such increase
in costs will have an adverse effect on our gross profit margins and net income.

Competition

We are one of the leading manufacturers of 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 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 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.

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Based
on a report published by the AF&PA, the overall U.S. linerboard capacity is in excess of 25 million tons. As such, our market share 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 Kotkamills). 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 facilities 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 percent 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 Environmental Protection Agency ("EPA") 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 Maximum Achievable Control Technology ("MACT") standard will affect fuel
combustion sources at our facilities. Our North Carolina mill has received its draft air operating permit with state boiler MACT compliance requirements for comment and final review with expectation
of compliance in 2013. 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 Company's South Carolina paper mill does not have a state requirement for MACT compliance at this time

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 conduct business, may have a material effect on our operations in the United States. We expect that we

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will
not be disproportionately impacted by these measures relative to typical owners of comparable properties in the United States.

Employees

At December 31, 2010, KapStone had approximately 1,600 employees. Of these employees, approximately 1,000 employees are covered
by collective bargaining agreements with the United Steelworkers being the largest. Currently, there is a collective bargaining agreement in place with union employees in Roanoke Rapids, North
Carolina, through August 2013 and union employees in North Charleston, South Carolina through July 2012. We believe that we have a good relationship with our employees and union leadership.

International Sales

For the years ended December 31, 2010, 2009 and 2008, the Company had export shipments from the United States to customers in
foreign countries of $300 million, $239 million and $165 million, respectively. No foreign country accounted for more than 10 percent 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.

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.

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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 few years. 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, 2010, no customer accounted for more than 10 percent 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 of 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.

KapStone's indebtedness may adversely affect its financial health.

As of December 31, 2010, we had approximately $115 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.

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A 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 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 400 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 and North Charleston through August
2013 and July 2012, respectively. 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.

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Table of Contents

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 percent of our 2010 and 2009 revenues 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.

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 the carrying value for such assets may not be recoverable, 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.

SeeNote 2. "Significant Accounting PoliciesGoodwill and Intangible Assets"in the Notes to the Consolidated Financial
Statements for additional information related to testing for 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. However, 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

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Table of Contents

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 heightened 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 percent 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.

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. We have generated refund claims of $178.3 million since becoming registered as an alternative
fuel mixer. 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, 2010 we have recorded a $67.7 million liability for an unrecognized tax benefit relating to the taxability of alternative fuel mixture tax credits.

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.

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.

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Table of Contents

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 shares issued 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, 2010, our executive officers and directors owned 7.1 million shares of our common stock, or approximately
15.5 percent of our total 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.

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
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

12

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Table of Contents

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 economic, 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 input cost for the paper and packaging industry. Increases in energy prices can be expected to adversely impact
businesses. 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 the industry, often contributing to reduced margins and increased earnings volatility. 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.

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.

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Table of Contents

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.

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.

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, 2010:

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.

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Table of Contents

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 of 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.    Removed and 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 was traded on the NASDAQ Global Market from May 29, 2007 through January 3, 2010 under the
symbol "KPPC". Effective January 4, 2010, the Company's common stock began trading on the New York Stock Exchange ("NYSE") under the "KS" trading symbol. The following table sets forth the high
and low bid information for the Company's common stock from January 1, 2009 through December 31, 2010, as reported by the NYSE and NASDAQ Global Market. The quotations reflect
inter-dealer prices, are without retail markup, markdowns or commissions, and may not represent actual transactions.

2010

2009Quarter

Low

High

Low

High1st

$
8.08

$
12.35

$
1.05

$
3.072nd

$
10.00

$
13.40

$
2.14

$
5.013rd

$
10.25

$
13.13

$
4.50

$
8.804th

$
12.01

$
15.56

$
6.48

$
9.90


At
December 31, 2010, the closing share price on the NYSE was $15.30.

Number of Holders of Common Stock

The number of beneficial holders of record of our common stock on December 31, 2010 was 6,742.

Dividends

There were no cash dividends or other cash distributions made by us during the fiscal years 2010, 2009 or 2008. 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.

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, 2005-2010, assuming reinvestment of dividends.

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Table of Contents

Comparison of 5 Year Cumulative Total Return  Assumes Initial Investment of $100  December 2010

GRAPHIC

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, 2010, 2009, 2008, 2007 and 2006 as well as KPB Predecessor's audited financial statements as of, and for the year ended December 31, 2006.

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 consolidated financial statements included in Item 8.

Predecessor KPBYears Ended December 31,Year Ended
December 31,
2006In thousands, except per share amounts

2010

2009

2008

2007

2006Statement of Income Data:Net sales

$
782,676

$
632,478

$
524,549

$
256,795

$


$
246,161Operating income / (loss)

$
68,703

$
151,362

$
50,656

$
44,300

$
(1,976
)
$
33,951Net income

$
65,041

$
80,280

$
19,665

$
26,963

$
2,196

$
19,967Basic net income per share

$
1.42

$
2.32

$
0.74

$
1.08

$
0.09


n/aDiluted net income per share

$
1.38

$
2.29

$
0.57

$
0.75

$
0.07


n/aBalance Sheet Data:Cash and cash equivalents

$
67,358

$
2,440

$
4,165

$
56,635

$


$
1Total assets

$
719,727

$
669,123

$
727,190

$
225,450

$
119,257

$
257,382Long-term liabilities

$
185,539

$
213,637

$
419,545

$
37,668

$


$
22,622Total stockholders' equity

$
418,634

$
348,790

$
180,767

$
144,185

$
116,045

$
219,685


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

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Table of Contents

See
Note 3 to Notes to Consolidated Financial Statements for acquisition information and Note 4 for information on the sale of the dunnage bag business.

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

Executive Summary

We were formed 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.

We
have consummated two acquisitions since January 2007, as we drive towards our strategic objective of being a $2 billion revenue company by 2015. We continue to evaluate
additional acquisition opportunities.

Our
operations had a strong year in 2010 producing approximately 1.27 million tons of paper compared to 1.14 million tons in 2009. Our North Charleston mill successfully
completed its first cold mill outage
in three years while our Roanoke Rapids mill completed its annual outage in the fourth quarter. Our operating rate for the year increased to 98.5 percent up from 88.3 percent in 2009.
Market driven price increases, occurring as a result of higher demand in 2010, increased our average selling prices by $62 per ton to $586. During 2010, we implemented significant price increases in
linerboard and kraft paper. We expect our revenue to benefit in 2011 from the full year effect of 2010 price increases by approximately $40.0 to $45.0 million assuming normal sales volume and
product mix.

Our
operating results for 2010 and 2009 include $22.2 million and $164.0 million, respectively, of alternative fuel mixture tax credits which significantly improved
earnings. In addition, the cash generated from these credits was used to make over $313.1 million of repayments in the aggregate in 2010 and 2009 on our long-term debt and notes. At
December 31, 2010, we have recorded a liability of $67.7 million for uncertain tax benefits relating to alternative fuel mixture tax credits. Our position is that these tax credits are
not taxable for federal income purposes. However, the Internal Revenue Service ("IRS") has not issued any specific guidance. The alternative fuel mixture tax credit expired on December 31,
2009.

In
August 2010, the IRS approved the Company's registration as a producer of cellulosic biofuel for the tax year 2009. With this registration, the Company applied for a nonrefundable,
taxable income tax credit of $1.01 per gallon of qualified cellulosic biofuel for the black liquor burned in early 2009 when the Company did not claim the alternative fuel mixture tax credit. A
$21.0 million net tax benefit (net of U.S. federal and state taxes) related to cellulosic biofuel was reflected in the Company's income tax provision for the year ended December 31,
2010. The Company reported $33.9 million (gross tax credit) as a deferred tax asset as of December 31, 2010 in the Consolidated Balance Sheets which is available to offset taxable income
in future years and expires in 2015, if unutilized.

On
January 4, 2011, we negotiated the early settlement of our contingent earn-out with IP relating to the KPB acquisition. We paid $49.7 million to settle this
liability in January 2011, approximately $5.3 million less than the maximum contractual amount which would have been settled in April 2012. There is no contingent earn-out for our
CKD acquisition.

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Table of Contents

Results of Operations for the Years Ended December 31, 2010, 2009, and 2008

The following table compares results of operations for the years ended December 31, 2010 and 2009:

Year Ended
December 31,% of Net Sales%
Change($ in thousands)

2010

2009

2010

2009Net sales

$
782,676

$
632,478


23.7
%

100.0
%

100.0
%Cost of sales, excluding depreciation and amortization


565,185


355,088


59.2
%

72.2


56.1Freight and distribution expenses


73,406


57,395


27.9
%

9.4


9.1Selling, general and administrative expenses


31,129


31,377


(0.8
)%

4.0


5.0Depreciation and amortization


45,245


54,667


(17.2
)%

5.7


8.6Gain on sale of business





16,417


(100.0
)%




(2.6
)Other operating income


992


994


(0.2
)%

(0.1
)

(0.1
)Operating income


68,703


151,362


(54.6
)%

8.8


23.9Foreign exchange gain (loss)


(666
)

219


(404.1
)%

(0.1
)

Interest income


37


12


208.3
%




Interest expense


5,440


19,176


(71.6
)%

0.7


3.0Income before income taxes


62,634


132,417


(52.7
)%

8.0


20.9Provision (benefit) for income taxes


(2,407
)

52,137


(104.6
)%

(0.3
)

8.2Net income

$
65,041

$
80,280


(19.0
)%

8.3
%

12.7
%


Net
sales for the year ended December 31, 2010 were $782.7 million compared to $632.5 million for the year ended December 31, 2009, an increase of
23.7 percent. Net sales in 2010 were higher than in 2009 by $150.2 million, of which $60.8 million was due to higher average selling prices, $82.4 million was due to an
11.8 percent increase in volume due to increased demand from improving economic conditions, and $18.8 million was due to a more favorable product mix due to a lower percentage of export
linerboard sales. Partially offsetting the increase in net sales was a decrease of $6.9 million due to the sale of the dunnage bag business in March 2009. Exchange rates negatively impacted net
sales by $4.9 million.

Cost
of sales, excluding depreciation and amortization expense, for the year ended December 31, 2010 was $565.2 million compared to $355.1 million for the year ended
December 31, 2009, an increase of $210.1 million or 59.2 percent. The increase in cost of sales was mainly due to a $141.8 million decrease
in alternative fuel mixture tax credits (the tax credit expired December 31, 2009), $54.2 million due to volume and mix changes, $6.8 million related to the Charleston mill
tri-annual planned maintenance outage, a $5.9 increase in compensation and benefit costs as the Company reinstated certain benefits in January 2010 and $6.7 million due to inflation
on input costs. Partially offsetting the increase in cost of sales was $5.3 million of lower costs due to the sale of the dunnage bag business.

Freight
and distribution expenses for the year ended December 31, 2010 totaled $73.4 million, compared to $57.4 million for the year ended December 31, 2009,
an increase of $16.0 million. This increase was primarily due to $9.0 million reflecting an 11.8 percent increase in volume, $3.1 million due to inflation and
$4.3 million due to a lower percentage of export linerboard shipments in which freight costs are paid by the customer, partially offset by $0.4 million due to the sale of the dunnage bag
business.

Selling,
general and administrative expenses for the year ended December 31, 2010 totaled $31.1 million compared to $31.4 million in 2009. The decrease of
$0.3 million reflects savings of

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Table of Contents

$5.1 million
for the termination of transitional services provided by MeadWestvaco in the fourth quarter of 2009, $0.5 million of lower bad debts, $0.5 million of lower audit fees
and $0.3 million related to the sale of the dunnage bag business. Partially offsetting these decreases in selling, general and administrative expenses were $5.3 million of higher
compensation and benefit expenses as the Company reinstated certain benefits, including management incentives, in January 2010 that were previously suspended as a result of poor economic conditions in
early 2009, and $1.2 million of higher stock compensation expense. As a percentage of net sales, selling, general and administrative expenses dropped from 5.0 percent in 2009 to
4.0 percent in 2010.

Depreciation
and amortization for the year ended December 31, 2010 totaled $45.2 million compared to $54.7 million for the same period in 2009. The decrease of
$9.5 million was primarily due to $9.7 million of lower intangible asset amortization. The Company acquired a coal contract with below market prices in conjunction with the CKD
acquisition. The contract and related amortization expired on December 31, 2009.

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, 2010 and 2009 totaled $1.0 million. Other operating income includes commissions the Company receives from marketing
bleached paper produced and sold by IP to KapStone customers.

Foreign
exchange losses for the year ended December 31, 2010 were $0.7 million compared to a foreign exchange gain of $0.2 million for the year ended
December 31, 2009. The change reflects the strengthening of the U.S. dollar in 2010 compared to the Euro.

Interest
expense for the years ended December 31, 2010 and 2009 was $5.4 million and $19.2 million, respectively. Interest expense reflects interest on the Company's
senior credit agreement and amortization of debt issuance costs. Interest expense was $13.8 million lower in 2010 compared to 2009 due to lower term loan balances, the extinguishment of senior
notes and lower interest rates.

Provision
(benefit) for income taxes for the years ended December 31, 2010 and 2009 was $(2.4) million and $52.1 million, respectively, reflecting an effective tax rate of
(3.8) percent in 2010 compared to 39.4 percent 2009. The lower provision (benefit) for income taxes in 2010 mainly reflects the combined impact of the $21.0 million net benefit from the
cellulosic biofuel producer's tax credit and a $69.8 million reduction in pre-tax income.

20

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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):

2010

2009Consolidated net sales:Unbleached kraft

$
782,676

$
626,450Other





6,927Elimination of intersegment sales





(899
)Total

$
782,676

$
632,478Operating income / (loss):Unbleached kraft

$
89,521

$
155,904Other





748Gain on sale of business





16,417Corporate


(20,818
)

(21,707
)Total

$
68,703

$
151,362


Unbleached Kraft

Years Ended December 31,2010

2009

Change

%Net sales

$
782,676

$
626,450

$
156,226


24.9
%Operating income


89,521


155,904


(66,383
)

(42.6
)%Operating income % of net sales


11.4
%

24.9
%

(13.5
)%Average revenue per ton

$
586

$
524

$
62


11.8
%Tons of paper sold


1,285,145


1,149,595


135,550


11.8
%


For
the year ended December 31, 2010, unbleached kraft segment net sales increased by $156.2 million, or 24.9 percent, to $782.7 million compared to
$626.5 million for the year ended December 31, 2009. The increase in net sales was mainly due to $60.8 million of higher average selling prices, $82.4 million of higher
sales volume resulting from an 11.8 percent increase in tons of paper sold, and $18.8 million of a more favorable product mix due to a lower percentage of export linerboard sales.
Average revenue per ton for 2010 was $586 per ton, or $62 per ton higher than average revenue per ton in 2009 as market prices for kraft paper and linerboard increased throughout 2010 due to higher
overall industry demand. Exchange rates negatively impacted net sales by $4.9 million.

Unbleached
kraft segment operating income decreased by $66.4 million, or 42.6 percent, to $89.5 million for the year ended December 31, 2010, compared to
$155.9 million for the year ended December 31, 2009. Operating income decreased primarily due to $141.8 million from lower alternate fuel mixture tax credits (the tax credit
expired on December 31, 2009), $6.8 million related to the Charleston mill tri-annual planned maintenance outage, $9.8 million of inflation on input and freight costs
and $7.7 million of higher compensation and benefit expenses as the Company reinstated certain benefits in January 2010 that were previously suspended in early 2009 and $4.9 million due
to foreign exchange rates. The decrease in operating income was partially offset by $60.8 million of higher average selling prices, $19.9 million from higher sales volume,
$13.6 million of a more favorable product mix due to a lower percentage of export linerboard sales, $9.7 million of lower amortization expense related to an expired intangible asset and
$0.5 million of lower bad debts.

Operating
income for the years ended December 31, 2010, and 2009 includes $13.4 million and $6.0 million, respectively, of expenses relating to the Company's planned
maintenance outages.

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Operating
income as a percentage of net sales decreased to 11.4 percent mainly due to lower alternative fuel mixture tax credits, the reinstatement of certain employee benefits and the planned
maintenance outages partially offset by higher average selling prices.

Other

Other includes the Company's dunnage bag business which was sold on March 31, 2009 to Illinois Tool Works Inc.

Corporate

Corporate expenses for the year ended December 31, 2010, totaled $20.8 million compared to $21.7 million for the
year ended December 31, 2009. The decrease of $0.9 million reflects savings of $5.1 million for the termination of transitional services provided by MeadWestvaco in the fourth
quarter of 2009 and $0.5 million of lower audit fees partially offset by $3.5 million of higher compensation and benefit expenses as the Company reinstated the management incentive plan
and retirement benefits in 2010 that were temporarily suspended in 2009 as a result of poor economic conditions and $1.2 million of higher stock compensation expense.

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





100.0
%

(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 percent. 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.

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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 percent. 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 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 percent in 2008 to
5.0 percent 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.

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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.

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 long-term debt and notes repayments, 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 percent compared to 38.8 percent 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 percent, 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

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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 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 percent, 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 percent 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.

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 and 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 included 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

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following
the acquisition. The payments, if earned, were to be due and payable 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 up to $60.0 million to $55.0 million.

On
January 4, 2011, we negotiated the early settlement of our contingent earn-out with IP relating to the KPB acquisition. We paid $49.7 million to settle this
liability in January 2011, approximately $5.3 million less than the maximum contractual amount which would have been settled in April 2012. The payment 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.

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 $515.0 million in senior secured credit facilities (the "Senior Credit Facilities"), consisting of a $390.0 million term A loan facility, a $25.0 million
term B loan facility and a $100.0 million revolving credit facility (including a letter of credit sub facility). 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 percent of the capital stock
of our foreign subsidiaries.

The
term A loan facility has future consecutive quarterly repayments of $4.4 million from March 31, 2011 thru March 31, 2013, with a final payment of
$68.1 million on the maturity date. The term B loan is required to be repaid by KapStone in consecutive quarterly installments of $0.3 million March 31, 2011 to March 31,
2015 and $2.1 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 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; 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 percent. The undrawn portion of the revolving credit facility is subject to an
unused line fee calculated at an annual rate of 0.375 percent. Outstanding letters of credit are subject to an annual fee of 1.5 percent 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 percent 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 percent
or (2) the reserved adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.50 percent.

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 and debt and equity issuances, in each case subject to certain conditions. A
mandatory prepayment of

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excess
cash flow is also required for any fiscal year in which the year-ending total leverage ratio exceeds 2.0 to 1.0. No mandatory prepayment for excess cash flow was required for the
year ended December 31, 2010.

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
$11.8 million as of December 31, 2010. 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 2011 unless extended. As of December 31, 2010, there were no borrowings under the Revolving Credit Facility with total availability of $88.2 million.

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.

Voluntary and Mandatory Prepayments

For the year ended December 31, 2010, the Company made a $10.0 million voluntary prepayment and a $2.5 million
mandatory prepayment.

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 $40.0 million. The Senior Notes are guaranteed by the Company and the Company's other domestic subsidiaries and is 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 percent of the capital stock of the Company's foreign subsidiaries.

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

Other Borrowing

On January 5, 2010, the Company entered into a twelve month financing agreement of $2.6 million at an annual interest
rate of 1.62 percent for the Company's annual property insurance premium. The agreement required the Company to make consecutive monthly repayments of $0.2 million through the term of
the financing agreement ending on December 1, 2010. As of December 31, 2010, there was no balance outstanding under this agreement.

Effective
January 1, 2011, the Company negotiated a similar financing agreement for 2011 property insurance premiums.

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

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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, 2010, the maximum permitted leverage ratio was 3.00 to 1.00. On December 31, 2010, KapStone was in compliance with the Senior
Credit Agreement with a leverage ratio of 1.08 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, 2010, KapStone was in compliance with the Senior Credit Agreement with a fixed charge coverage ratio of 4.49 to 1.00.

As
of December 31, 2010, 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 $165.0 million. The Company received refunds in early 2010 of $14.3 million for amounts generated through December 31, 2009.

Based
on a U.S. Internal Revenue Service Advice Memorandum released on March 12, 2010, the Company was eligible to receive an additional $7.9 million tax credit related to
inorganic content burned in 2009. The inorganic content, which represented about 4% of the total gallons burned, was excluded from refunds submitted in 2009. The Company recorded this benefit in
pre-tax income for the year ended December 31, 2010. The Company received this refund in May 2010.

The
alternative fuel mixture tax credit ("AFTC") expired on December 31, 2009. As a result, no additional refunds are expected in 2011.

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 were 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 received the $2.5 million held in escrow on September 29, 2010.

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.

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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 years ended December 31, 2010 and 2009, the Company received $13.2 million and $11.3 million,
respectively, of federal income tax refunds. No additional federal income tax refunds are expected in 2011.

The
Company has recorded a $67.7 million tax contingency reserve at December 31, 2010 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.

Sources and Uses of Cash

Years ended December 31 (dollars in thousands)

2010

2009

2008Operating activities

$
136,076

$
201,235

$
47,352Investing activities


(35,180
)

256


(490,569
)Financing activities


(35,978
)

(203,216
)

390,747


2010

Cash and cash equivalents of $67.4 million at December 31, 2010 increased by $64.9 million from
December 31, 2009, reflecting cash provided by operations of $136.1 million offset by cash used in investing activities of $35.2 million, and cash used in financing activities of
$36.0 million.

Net
cash provided by operating activities was $136.1 million due to $65.0 million of net income and $27.9 million of non-cash charges. Changes in
operating assets and liabilities also provided $43.2 million. Net cash provided by operating activities decreased by $65.1 million during the year ended December 31, 2010 compared
to the year ended December 31, 2009 due to a $15.2 million reduction in net income, a $39.0 million decrease in non-cash charges primarily due to a
$43.5 million decrease in deferred income taxes primarily from the benefit of the cellulosic biofuel tax credit, and a $10.9 million decrease in operating assets and liabilities.

Net
cash used in investing activities was $35.2 million reflecting $38.3 million of capital expenditures offset by $2.5 million of proceeds from the sale of the
dunnage bag business that were released from escrow on September 29, 2010 and $0.6 million received from MeadWestvaco relating to the CKD acquisition. Capital expenditures included
$34.6 million for the equipment upgrades and replacements at the paper mills and $3.7 million for information systems projects. Net cash used in investing activities increased by
$35.4 million during the year ended December 31, 2010 compared to the year ended December 31, 2009 mainly due to $34.9 million of proceeds received from the sale of the
dunnage bag business in the first quarter of 2009.

Net
cash used in financing activities totaled $36.0 million reflecting $30.0 million of term loan repayments including a $12.5 million of prepayments and
$7.4 million of net repayments on the revolving credit facility partially offset by $1.3 million of proceeds from exercises of stock options. Net cash used in financing activities
decreased by $167.2 million during the year ended December 31, 2010 compared to the year ended December 31, 2009 due to a lower amount of debt repayments in 2010.

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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.

Net
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.

Net
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 information systems and migrating CKD to our systems.

Net
cash used in financing activities totaled $203.2 million reflecting $283.1 million of repayments on term loans, $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 provided by 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 used in 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 provided by 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 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 payments and paid
$12.6 million of debt issuance costs associated with its senior secured credit facility.

Future Cash Needs

We expect that cash on hand at December 31, 2010 and cash generated from operating activities in 2011 and, if needed, the
ability to draw from our revolving credit facility will be sufficient to meet anticipated cash needs, which primarily consist of $49.7 million for the earn-out payment to IP (paid
January 2011), $21.4 million of debt service and interest, approximately $41.0 million of expected

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capital
expenditures, $4.5 million of pension plan funding and any additional working capital needs. At December 31, 2010, the Company did not utilize any borrowings under the revolving
credit facility. The Company's remaining availability under the revolving credit facility was $88.2 million at December 31, 2010.

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 $99.8 million of debt service and interest which includes a $68.1 million final payment on our term A loan in June 2013, capital expenditures
of $40 to $45 million annually, annual defined benefit pension plan contributions and working capital needs.

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 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The Company recognizes revenue in accordance with Accounting Standards Codification ("ASC") 605,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 its 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 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.

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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 and accounts for these benefits in
accordance with ASC 715,CompensationRetirement Benefits. 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 that is more likely than not to be realized. The Company recognizes the benefit of tax
positions when it is more likely than not to be sustained on its technical merits.

Stock Based Compensation CostsThe Company accounts for stock compensation expense in accordance with ASC 718, CompensationStock Compensation. The compensation expense for stock 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, 2010, ($000s):

Payments Due by PeriodContractual Obligations

Total

1 Year

2 Years

3 Years

4 Years

5 Years

ThereafterLong-term debt(1)

$
114,895

$
18,835

$
18,835

$
73,707

$
1,135

$
2,383

$
Interest on long-term debt(2)


6,329


2,545


2,196


1,051


308


229


Operating lease obligations(3)


11,152


3,602


2,683


1,756


1,250


813


1,048Purchase obligations(4)


311,512


33,436


32,697


31,957


30,268


29,529


153,625Earn-out(5)


49,700


49,700














Minimum pension plan funding(6)


4,469


4,469














Total(7)

$
498,057

$
112,587

$
56,411

$
108,471

$
32,961

$
32,954

$
154,673


(1)These
obligations are reflected on our Consolidated Balance Sheets at December 31, 2010, in current portion of long-term debt and
long-term debt net of current portion, as appropriate. See Note 11 of Notes to Consolidated Financial Statements.


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(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, 2010. These obligations are not reflected on our Consolidated Balance Sheet at December 31, 2010.(3)These
obligations are not reflected on our Consolidated Balance Sheet at December 31, 2010. 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, 2010. See Notes 3 and 16 of Notes to Consolidated
Financial Statements regarding the Company's purchase obligation relating to the Long Term Fiber Supply with MWV.(5)The
KPB acquisition included future 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, were due and payable in April 2012. The Company paid a $49.7 million earn-out in January 2011. In 2009, the Company
paid a $4.0 million earn-out upon selling the dunnage bag business. As of December 31, 2010, there are no remaining earn-out obligations. See Notes 4 and
20 of Notes to Consolidated Financial Statements.(6)The
Company's pension and postretirement liabilities total $6.6 million as of December 31, 2010. This minimum pension plan funding represents
the Company's expected 2011 contributions and was determined in consultation with its actuary in accordance with IRS guidelines. See Note 12 of Notes to Consolidated Financial Statements.(7)Other
liabilities as included in the accompanying Consolidated Balance Sheets represent $67.7 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. See Note 13 of Notes to Consolidated Financial Statements.


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, 2010, we had outstanding variable based interest rate term
loans totaling $114.9 million. The facility has two maturity dates; June 12, 2013 for term A and June 12, 2015 for term B. Borrowings under the term loan accrue interest, at our
option, at either: Eurodollar plus 1.5 percent to 3.5 percent depending on KapStone's total debt to EBITDA ratio (as defined in the agreement); or the Base Rate (prime rate) plus
zero percent to 2.0 percent 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 $1.1 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

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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 with one expiring on December 31, 2011 and the other on December 31, 2012.

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 used foreign currency forward
contracts and foreign exchange forward contracts to manage some of the foreign currency exchange risks associated with foreign sales of its U.S. operations during 2010. Using such foreign currency
forward contracts, the Company received or paid the difference between the contracted forward rate and the exchange rate at the settlement date. These contracts were used to hedge the variability of
exchange rates on the Company's cash flows. No such contracts were outstanding at December 31, 2010 and 2009.

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, 2010 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.

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.There were no 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 15, 2011 with the Securities and Exchange Commission ("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 15, 2011 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 15, 2011 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 Table," "2010 Grants of Plan-Based Awards," "Outstanding Equity Awards at Fiscal Year End 2010," "Potential Payments upon
Termination or Change-in-Control," and "2010 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 15, 2011 under the captions "Securities Authorized for Issuance Under Equity Compensation Plan", "Security Ownership of Management" and "Security Ownership of Certain Beneficial
Stockholders" and is incorporated herein by this reference.

Item 13.    Certain Relationships and Related Persons Transactions and Director Independence

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 15, 2011 under the captions "Certain Relationships and Related Person Transactions," and "Governance Structure" 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 15, 2011 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 dated December 15, 2006 to Purchase Agreement, dated June 23, 2006, by and among International Paper Company, the Registrant, and KapStone Kraft Paper Corporation.(2)2.3

Letter Amendment dated January 4, 2011 to Purchase Agreement, dated June 23, 2006, by and among International Paper Company, the Registrant, and KapStone Kraft Paper Corporation.(13)2.4

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).(12)3.2

Amended and Restated By-laws.(4)4.1

Specimen Common Stock Certificate.(5)10.1

Form of Letter Agreement among the Registrant, Morgan Joseph & Co. Inc. and each of the Initial Stockholders.(5)10.2

Amended and Restated 2006 Incentive Plan.(11)10.3

Performance Incentive Plan of KapStone Paper and Packaging Corporation.(6)10.4

Form of Restricted Stock Unit Agreement.(6)10.5

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).(7)10.6

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.(14)


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Table of Contents

Exhibit
No.

Description10.7

First Amendment to Credit Agreement dated 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.(12)10.8

Second Amendment and Limited Waiver Agreement dated 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.(8)10.9

Third Amendment to Credit Agreement dated January 3, 2011 by and among the Company, certain of its subsidiaries, including Kapstone Kraft Paper Corporation ("Kapstone"), the lenders who are a party thereto, and
Bank of America, N.A., as Administrative Agent, amending the Company's Credit Agreement, as previously amended.(13)10.10

2009 Employee Stock Purchase Plan.(9)14.0

Code of Ethics.(12)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.(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 Current Report on Form 8-K filed on April 14, 2008.(7)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on July 2, 2008.(8)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 1, 2009.


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Table of Contents

(9)Incorporated
by reference to the Registrant's Form S-8 filed on December 11, 2009.(10)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on April 1, 2009.(11)Incorporated
by reference to Appendix B of the Registrant's Definitive Proxy Statement filed on April 15, 2010.(12)Incorporated
by reference to the Registrant's Annual Report on Form 10-K for the period ended December 31, 2009, filed on
March 10, 2010.(13)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on January 4, 2011.(14)Incorporated
by reference to the Registrant's Current Report on Form 8-K filed on June 12, 2008.


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Table of Contents

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 4, 2011

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 4, 2011

By:

/s/ ROGER W. STONE Roger W. Stone, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)March 4, 2011

By:

/s/ ANDREA K. TARBOX Andrea K. Tarbox, Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)March 4, 2011

By:

/s/ MATTHEW KAPLAN Matthew Kaplan, President, Secretary and DirectorMarch 4, 2011

By:

/s/ JOHN M. CHAPMAN John M. Chapman, DirectorMarch 4, 2011

By:

/s/ JONATHAN R. FURER Jonathan R. Furer, DirectorMarch 4, 2011

By:

/s/ BRIAN R. GAMACHE Brian R. Gamache, Director


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Table of Contents

March 4, 2011

By:

/s/ RONALD J. GIDWITZ Ronald J. Gidwitz, DirectorMarch 4, 2011

By:

/s/ MATTHEW H. PAULL Matthew H. Paull, DirectorMarch 4, 2011

By:

/s/ S. JAY STEWART S. Jay Stewart, DirectorMarch 4, 2011

By:

/s/ DAVID P. STORCH David P. Storch, Director


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Table of Contents

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 2010, 2009, and 2008


F-4Consolidated Balance Sheets as of December 31, 2010, and December 31, 2009


F-5Consolidated Statements of Income for the years ended December 31, 2010, 2009, and 2008


F-6Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2010, 2009
and 2008


F-7Consolidated Statements of Cash Flows for years ended December 31, 2010, 2009, and 2008


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, 2010. 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, 2010, 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, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010,
and our report dated March 4, 2011, expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Chicago,
IL
March 4, 2011

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, 2010 and 2009, 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, 2010. 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, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, 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, 2010, based on criteria establish inInternal ControlIntegrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2011 expressed an unqualified opinion thereon.

/s/
Ernst & Young LLP

Chicago,
IL
March 4, 2011

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 31,2010

2009AssetsCurrent assets:Cash and cash equivalents

$
67,358

$
2,440Trade accounts receivable, less allowance of $1,205 in 2010 and $1,217 in 2009


66,640


58,408Other receivables


2,780


16,487Inventories


73,324


61,377Refundable and prepaid income taxes


348


13,757Prepaid expenses and other current assets


2,403


1,690Restricted cash





2,500Deferred income taxes


9,394


5,604Total current assets


222,247


162,263Plant, property and equipment, net


466,019


470,278Other assets


3,996


4,935Intangible assets, net


22,654


26,198Goodwill


4,811


5,449Total assets

$
719,727

$
669,123Liabilities and Stockholders' EquityCurrent liabilities:Current portion of long-term debt

$
18,835

$
18,630Borrowings under revolving credit facility





7,400Accounts payable


55,504


52,147Accrued expenses


22,986


20,800Accrued compensation costs


18,229


7,719Total current liabilities


115,554


106,696Other liabilities:Long-term debt, net of current portion


92,857


121,031Pension and postretirement benefits


6,454


5,949Deferred income taxes


17,917


38,577Other liabilities


68,311


48,080Total other liabilities


185,539


213,637Commitments and contingenciesStockholders' equity:Preferred stock $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding





Common stock $0.0001 par value, 175,000,000 shares authorized; 46,081,712 shares issued and outstanding (40,000 treasury shares outstanding) at
December 31, 2010 and 45,418,074 issued and outstanding at December 31, 2009 (40,000 treasury shares outstanding)


5


5Additional paid-in capital


224,844


219,828Retained earnings


194,087


129,046Accumulated other comprehensive loss


(302
)

(89
)Total stockholders' equity


418,634


348,790Total liabilities and stockholders' equity

$
719,727

$
669,123


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 31,2010

2009

2008Net sales

$
782,676

$
632,478

$
524,549Cost of sales, excluding depreciation and amortization


565,185


355,088


362,462Freight and distribution expenses


73,406


57,395


50,154Selling, general and administrative expenses


31,129


31,377


30,411Depreciation and amortization


45,245


54,667


31,683Gain on sale of business





16,417


Other operating income


992


994


817Operating income


68,703


151,362


50,656Foreign exchange gains/(losses)


(666
)

219


(987
)Interest income


37


12


927Interest expense


5,440


19,176


18,449Income before provision (benefit) for income taxes


62,634


132,417


32,147Provision (benefit) for income taxes


(2,407
)

52,137


12,482Net income

$
65,041

$
80,280

$
19,665Weighted average number of shares outstanding:Basic


45,854,237


34,675,804


26,486,924Diluted


46,979,060


35,067,923


34,455,816Net income per share:Basic

$
1.42

$
2.32

$
0.74Diluted

$
1.38

$
2.29

$
0.57


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, 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
)
$
348,790Stock based compensation expense








3,592








3,592Payment of withholding taxes on vested restricted stock awards


122,433





(624
)







(624
)Exercise of purchase option


348,393














Exercise of stock options


186,171





1,282








1,282Excess tax benefit from stock based compensation








585








585Employee Stock Purchase Plan


6,641





70








70Other








111








111Comprehensive Income:Net income











65,041





65,041Pension and Postretirement Plans:Amortization of net actuarial gain and prior service cost, net of tax of $172














(323
)

(323
)Prior service adjustments, net of tax of $(298)














544


544Actuarial loss arising during the period, net of tax of $237














(434
)

(434
)Total Comprehensive Income

















64,828BalanceDecember 31, 2010


46,081,712

$
5

$
224,844

$
194,087

$
(302
)
$
418,634


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 31,2010

2009

2008Operating activitiesNet income

$
65,041

$
80,280

$
19,665Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


45,245


54,667


31,683Stock based compensation expense


3,592


2,377


1,754Amortization of debt issuance costs


2,237


5,980


2,007Loss on disposal of fixed assets


876


800


299Deferred income taxes


(24,062
)

19,459


16,644Gain on sale of business





(16,417
)

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


(8,232
)

10,288


(1,280
)Other receivables


13,707


(13,398
)

(4,827
)Inventories


(11,947
)

23,465


(14,172
)Refundable and prepaid income taxes


13,409


388


(14,145
)Prepaid expenses and other current assets


(713
)

58


(945
)Other assets


(624
)

(1,031
)

(42
)Accounts payable


3,357


10,641


1,570Accrued expenses and other liabilities


21,645


32,051


8,189Accrued compensation costs


10,510


(5,967
)

1,154Accrued pension and postretirement benefits


2,035


(2,406
)

1,275Accrued income taxes








(1,477
)Net cash provided by operating activities


136,076


201,235


47,352Investing activitiesCKD acquisition (net of cash acquired)


638


1,000


(467,399
)KPB acquisition





(3,977
)

Proceeds from sale of business





34,898


Capital expenditures


(38,318
)

(29,165
)

(23,170
)Restricted cash


2,500


(2,500
)

Net cash provided by (used in) investing activities


(35,180
)

256


(490,569
)Financing activitiesProceeds from revolving credit facility


76,700


80,000


78,500Repayments on revolving credit facility


(84,100
)

(85,000
)

(66,100
)Proceeds from long-term debt and notes








455,000Repayments of long-term debt and notes


(30,002
)

(283,093
)

(79,510
)Debt issuance costs paid





(370
)

(12,593
)Proceeds from other current borrowings


2,564





Repayments on other current borrowings


(2,564
)




Payment of withholding taxes on vested restricted stock awards


(624
)




Proceeds from exercises of warrants into common stock





85,217


15,450Proceeds from exercise of stock options


1,282


30


Excess tax benefits from stock based compensation


585





Other


181





Net cash provided by (used in) financing activities


(35,978
)

(203,216
)

390,747Net increase (decrease) in cash and cash equivalents


64,918


(1,725
)

(52,470
)Cash and cash equivalentsbeginning of year


2,440


4,165


56,635Cash and cash equivalentsend of year

$
67,358

$
2,440

$
4,165Cash paid (received) during the period:Income taxes including refunds

$
(13,207
)
$
(11,306
)
$
11,441Interest

$
3,318

$
19,952

$
9,132


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, 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.

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 3).

On
March 31, 2009, the Company consummated the sale of its dunnage bag business to Illinois Tool Works Inc. The accompanying consolidated financial statements include the
results of the dunnage bag business through the date of sale (see Note 4).

As
a result of these transactions, the accompanying 2010 consolidated financial statements are not comparative to 2009 and 2008.

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 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 presented in net sales. These sales are included in the
unbleached kraft segment.

Freight
charged to customers is recognized in net sales.

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)

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 2010, 2009 and 2008, cost of sales was reduced by $15.5 million, $11.5 million and $10.5 million, respectively, for by-product revenue.

Freight and distribution expensesFreight and distribution include shipping and handling costs for product sold to customers and is excluded from
cost
of sales.

Alternative Fuel Mixture Tax Credit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 the production process and is recognized on the consolidated 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, 2010 and December 31, 2009, totaled $0 and $14.3 million, respectively. A $0 and
$13.1 million receivable for the tax credit was recorded in other receivables in the consolidated balance sheets at December 31, 2010 and December 31, 2009, respectively. The tax
credit expired on December 31, 2009 (see Note 5).

Planned Maintenance Outage Costs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 tri-annual planned maintenance outage at its South Carolina unbleached kraft facility in the quarter ended March 31, 2010 and its annual
planned maintenance outage, at its North Carolina unbleached kraft facility, in the quarter ended December 31, 2010. Costs of approximately $13.4 million related to the outages are
included in cost of sales for the year ended December 31, 2010 and approximately $6.0 million for each of the years ended December 31, 2009 and 2008.

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.

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

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)

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.

No
customer accounted for more than 10 percent of consolidated net sales in 2010 and 2009. In 2008, one customer accounted for 10.7% of consolidated net sales.

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, 2010, and 2009 the allowance for doubtful accounts totaled $1.2 million. For the years ended December 31, 2010, 2009 and
2008, the Company had bad debt expenses of $0.1 million, $0.6 million and $2.4 million, respectively. For the years ended December 31, 2010 and December 31, 2009,
the Company wrote off zero and $1.7 million, respectively, 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.

Foreign Currency Forward ContractsThe Company accounts for its foreign currency forward contracts as cash flow hedges in accordance with ASC 815, Derivative and Hedging. The contracts are recorded at fair value with the effective portion of the gain or loss on the derivative recorded as a
component of accumulated other comprehensive income. Upon expiration of the forward contract, the gain or loss is reclassified into net sales.

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 and cash equivalents, trade accounts receivables and accounts payables are financial assets
and
liabilities with carrying values that approximate fair value. The Company's variable rate term loans are financial liabilities with fair values that approximate $95.2 million (see
Note 11).

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 Note 3). Depreciation is computed using the straight-line method over the assets' estimated useful lives. The range of estimated useful lives is as
follows:

YearsLand Improvements


10 - 25Buildings


15 - 40Machinery and equipment


3 - 30Furniture and office equipment


5 - 10Computer hardware and software


3 - 5


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 using 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 acquired in a business combination or asset purchase 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. If impaired, the intangible asset is written down to estimated fair market
value.

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)

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 that is more likely than not to be realized. The Company recognizes the benefit of tax
positions when it is more likely than not to be sustained on its technical merits. 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

In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU")
No. 2010-06, "Fair Value Measurements and Disclosures," which amends the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires
disclosure of transfers of assets and liabilities between Level 1 and Level 2 of the fair value measurement hierarchy, including the reasons and the timing of the transfers and
information on purchases, sales, issuance, and settlements on a gross basis in the reconciliation of the assets and liabilities measured under Level 3 of the fair value measurement hierarchy.
The guidance is effective for annual and interim reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual and
interim periods beginning after December 15, 2010. The implementation of this standard did not have a material impact on the consolidated financial statements.

In
December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),Business Combinations("SFAS
No. 141(R)"). This guidance is included in FASB ASC 805,Business Combinations. This guidance requires the Company to continue to follow the
guidance in SFAS No. 141 (also included in FASB ASC 805) for certain aspects of business combinations, and provides additional guidance defining the acquirer, recognizing and measuring the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, assets and liabilities arising from contingencies, defining a bargain purchase and recognizing and
measuring goodwill or a gain from a bargain purchase. This guidance also requires transaction costs to be charged to earnings and requires contingent consideration to be recorded at its fair value on
the acquisition date. In addition, under this guidance, adjustments associated with changes in tax contingencies that occur after the measurement period, not

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)

to
exceed one year, are recorded as adjustments to income. This guidance is effective for all business combinations for which the acquisition date is on or after the beginning of an entity's first
fiscal year that begins after December 15, 2008; however, the guidance regarding the treatment of income tax contingencies is retrospective to business combinations completed prior to 2009. No
business combinations occurred during the year ended December 31, 2010.

3. 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 $485.0 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 senior secured credit facility of $515.0 million consisting of a Eurodollar based five-year term loan of
$390.0 million, a Eurodollar based seven-year term loan of $25.0 million and a $100.0 million revolving credit facility. In addition, $40.0 million of
seven-year 8.30 percent 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. See
Note 16.

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)

3. 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 19 for additional discussion regarding the Company's segments. Goodwill is
being amortized 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:

Estimated Useful
Life In Years

Fair ValueTrademarks

8

$
27,700Coal supply contract with below market terms

1.5


14,080Engineering documents

12


2,220Customer lists

20


2,025Transportation lease

5


500Land lease

99


290Customer backlog

1


100Emission credits

1


60Equipment lease obligation with above market terms

3.5


(1,307
)Total 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)

3. CKD Acquisition (Continued)

The fair value of the intangible assets is amortized on a straight-line basis over the remaining useful lives. Amortization expense for the acquired CKD intangible assets
recorded for 2008, 2009, 2010 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


3,7522015


3,752Thereafter


4,097Total 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(Unaudited)Net sales

$
777,855Net income

$
6,997Net income per share basic

$
0.26Net income per share diluted

$
0.20


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.

4. 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 were 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 received back the full
$2.5 million held in escrow since there were no

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)

4. Sale of Dunnage Bag Business (Continued)

losses
or indemnity claims. 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


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.

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

5. 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 ("IRS") 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, 2009 and at its Roanoke Rapids mill
from February 14th through December 31, 2009. This amount, net of $14.3 million deferred in inventory at December 31, 2009, was reflected as a credit
to cost of sales in the Consolidated Statements of Income.

The
Company earned an additional $7.9 million alternative fuel mixture tax credit during 2009 based on a U.S. Internal Revenue Service Advice Memorandum released on
March 12, 2010 which indicated that the portion of inorganic content included in the fuel burned was eligible for a $0.50 per gallon refund. The Company had excluded this amount when submitting
refunds during 2009. Inorganic content represented about 4 percent of the total gallons burned in 2009. The Company received

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. Alternative Fuel Mixture Tax Credit (Continued)

$7.9 million
from the IRS related to the inorganic content in 2010. This amount plus $14.3 million deferred in inventory at December 31, 2009 was reflected as a credit to cost of
sales in the Consolidated Statements of Income for the year ended December 31, 2010.

A
summary of the alternative fuel mixture tax credit is as follows:

December 31,2010

2009Gallons of fuel burned (000's) (unaudited)





356,517Tax credit for each gallon burned




$
0.50Total alternative fuel mixture tax credit generated(1)

$


$
178,258Recognition of tax credit deferred in December 31, 2009 inventory


14,260


Tax credit related to inorganic content burned in 2009


7,935


Tax credit deferred in ending inventory at December 31





(14,260
)Total alternative fuel mixture tax credit included as a reduction to cost of sales for years ended December 31, 2010 and 2009

$
22,195

$
163,998


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


At
December 31, 2009 the Company included $14.3 million of AFTC as a reduction to the cost of inventory based on its FIFO accounting policy. At December 31, 2010 no
amount was deferred in inventory.

6. Inventories

Inventories consist of the following at December 31, 2010 and 2009, respectively:

December 31,2010

2009Raw materials

$
18,988

$
13,082Work in process


967


980Finished goods


33,056


27,475Replacement parts and supplies


20,313


19,840Total inventories

$
73,324

$
61,377


At
December 31, 2010 and 2009, finished goods inventory included inventory consigned to third parties totaling $5.3 million and $3.8 million, respectively.

7. Derivative Instruments and Hedging Activities

The Company used derivative instruments to manage a portion of its foreign currency exchange risks associated with Euro-denominated sales of its U.S. operations. Foreign
currency forward contracts

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)

7. Derivative Instruments and Hedging Activities (Continued)

were
used to hedge the variability of exchange rates on the Company's cash flows and foreign exchange forward contracts were used to offset the impact on earnings relating to the variability in
exchange rates on Euro-denominated sales. The derivative instruments were valued using Level 2 inputs which are significant observable inputs for similar assets and liabilities in
active markets. The Company does not acquire or issue derivative financial instruments for trading purposes.

The
foreign currency forward contracts were designated as cash flow hedges. The contracts were recorded in the consolidated balance, measured at fair value. The effective portion of the
gain or loss on the derivative is recorded as a component of accumulated other comprehensive loss ("AOCL") in the accompanying consolidated balance sheets and is reclassified into net
sales in the consolidated statements of income upon recognition of the hedged sales. The foreign currency forward contracts outstanding had monthly maturity dates through December 31, 2010. The
effectiveness of these forward contracts were assessed both at inception and on a quarterly basis to ensure that they were effective in offsetting changes in the cash flows attributable to the hedged
risk.

The
notional amount of these foreign currency forward contracts was $0 at December 31, 2010 and December 31, 2009. The estimated pre-tax gain or loss to be
recognized in earnings during the next twelve months upon settlement of the forward contracts is $0 since all contracts expired as of December 31, 2010.

The
Company's foreign exchange forward contracts, which were not designated as qualifying accounting hedges, were recorded at fair value with changes in the fair value of these contracts
recognized in earnings.

For
consolidated financial statement presentation, net cash flows from such hedges are classified in the categories of the consolidated statement of cash flows with the items being
hedged.

The
table below presents the pre-tax effect of derivative instruments and their location within the consolidated statement of income for the years ended December 31,
2010 and 2009:

Foreign currency
cash flow hedges

Foreign
exchange
derivatives
not
designated
as hedges2010

2009

2010

2009Gain (loss) recognized in other comprehensive loss (effective portion)

$


$


$


$
Gain (loss) reclassified to earnings from accumulated other comprehensive loss (effective portion)

$
(1,457
)
$


$


$
Gain (loss) recognized in earnings(1)


65





34


Total gain (loss) recognized in earnings

$
(1,392
)
$


$
34

$



(1)Represents
amounts excluded from effectiveness testing for foreign currency cash flow hedges and derivative instruments not designated as hedges.


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)




8. Plant, Property and Equipment, net

Plant, property and equipment, net consist of the following at December 31, 2010 and 2009, respectively:

December 31,2010

2009Land and land improvements

$
25,228

$
25,822Buildings and leasehold improvements


26,349


25,665Machinery and equipment


508,362


482,987Construction-in-progress


22,739


12,623582,678


547,097Less accumulated depreciation and amortization


116,659


76,819Plant, property and equipment, net

$
466,019

$
470,278


Depreciation
expense for the years ended December 31, 2010, 2009, and 2008, was $41.7 million, $41.3 million and $25.3 million, respectively.

At
December 31, 2010 and 2009, unamortized capitalized software costs totaled approximately $11.1 million and $8.0 million, respectively. Such amount is being
amortized over five years. Amortization expense for software development costs for the years ended December 31, 2010, 2009 and 2008, was $3.1 million, $1.7 million and
$1.0 million, respectively.

9. Goodwill and Other Intangible Assets

The following table shows changes in goodwill and intangible assets for the years ended December 31, 2010 and 2009:

Goodwill

Intangible
Assets, NetBalances at December 31, 2008

$
6,524

$
45,195Amortization expense





(13,400
)KPB earn-out resulting from sale of dunnage bag business


3,977


Sale of dunnage bag business


(5,040
)

(5,589
)CKD acquisition adjustment


(12
)

(8
)Balances at December 31, 2009

$
5,449

$
26,198Amortization expense





(3,544
)CKD acquisition adjustment


(638
)

Balances at December 31, 2010

$
4,811

$
22,654


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. Goodwill and Other Intangible Assets (Continued)

Intangible
assets other than goodwill include the following:

December 31, 2010

December 31, 2009Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
AmortizationDefinite-lived trademarks

$
27,700

$
(8,657
)
$
27,700

$
(5,194
)Customer lists and relationships


2,104


(294
)

2,104


(173
)Lease, contracts and other


15,943


(14,142
)

15,943


(14,182
)Total

$
45,747

$
(23,093
)
$
45,747

$
(19,549
)


Estimated
amortization expense for the next five years, beginning with 2011, is as follows: $3.6 million, $3.6 million, $3.8 million, $3.8 million, and
$3.8 million. At December 31, 2010, the weighted average remaining useful life for trademarks is 5 years; customer relationships is 17 years; other contractual agreements
is 24 years; and for intangible assets in total is 8 years.

10. Accrued expenses

Accrued expenses consist of the following at December 31, 2010 and 2009, respectively:

December 31,2010

2009Accrued taxes other than income

$
7,673

$
5,315Accrued energy costs


4,700


5,182Other accruals


10,613


10,303Total accrued expenses

$
22,986

$
20,800


11. Debt and Senior Credit Facility

Debt, net, at December 31, 2010 and 2009, are summarized as follows:

December 31,2010

2009Term A loan with interest payable monthly at LIBOR plus 1.5% at December 31, 2010 and 2009

$
107,974

$
136,168Term B loan with interest payable monthly at LIBOR plus 3.5%


6,921


8,729Revolving credit facility (3.25% at December 31, 2009)





7,400Sub-total


114,895


152,297Less current portion of debt


(18,835
)

(18,630
)Less current portion of revolving credit facility





(7,400
)Less unamortized debt issuance costs


(3,203
)

(5,236
)Total debt, net of current portion

$
92,857

$
121,031


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. Debt and Senior Credit Facility (Continued)

The principal portion of debt at December 31, 2010 becomes due as follows:

TotalFiscal year ending:2011

$
18,8352012


18,8352013


73,7072014


1,1352015


2,383Total

$
114,895


The
Company incurred approximately $12.6 million of debt issuance costs associated with the Senior Credit Agreement, which is being amortized over a five-year period
using the effective interest method. For the years ended December 31, 2010, 2009 and 2008, $2.2 million, $6.0 million and $2.0 million, respectively, of debt issuance costs
have been amortized and recognized within interest expense. Amortized debt issuance costs were 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 long-term debt and notes repayments.

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 $515.0 million in senior secured credit facilities (the "Senior Credit Facilities"), consisting of a
$390.0 million term A loan facility, a $25.0 million term B loan facility and a $100.0 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 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; 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 percent, or (2) the reserve adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.00 percent. Interest under the term A
loan facility, the revolving credit facility and the unused line fee for the revolving credit facility is 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 range from 0.0 percent to 1.5 percent for base rate loans and from 1.50 percent to
3.00 percent for Eurodollar loans, and the unused line fee for the revolving credit facility range from

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)

11. Debt and Senior Credit Facility (Continued)

0.375 percent
to 0.50 per cent. At December 31, 2010 and 2009, the term loan A was a Eurodollar loan with a 1.76 percent interest rate based on 1.50 percent margin
and 1.73 per cent interest rate based on 1.50 percent margin, respectively. At December 31, 2009, the interest rate on the revolving credit facility was 3.25 percent. The
unused line fee for the revolving credit facility was 0.375 percent at December 31, 2010 and 2009, 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 percent or
(2) the reserved adjusted one, two, three or six-month Eurodollar rate plus a margin of 3.50 percent. At December 31, 2010 and 2009, the term B loan was a Eurodollar
loan with a 3.76 percent and 3.73 percent 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 percentages of the net cash proceeds of certain asset dispositions, casualty events, exercise of outstanding warrants, and debt and equity issuances, in each case subject to certain
conditions. A mandatory prepayment of excess cash flow is also required for any fiscal year in which the year-ending total leverage ratio exceeds 2.0 to 1.0. No mandatory prepayment for
excess cash flow is required for the year ended December 31, 2010. During the years ended December 31, 2010 and 2009, $2.5 million and $120.5 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
$11.8 million as of December 31, 2010. 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 2011 unless extended.

Borrowings
under the revolving credit facility may be used for working capital and other general corporate purposes.

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 $40.0 million and interest rate of 8.30 percent. 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.

Other Borrowing

On January 5, 2010, the Company entered into a twelve month financing agreement of $2.6 million at an annual interest
rate of 1.62 percent for the Company's annual property insurance premium. The agreement requires the Company to make consecutive monthly repayments of $0.2 million through the term of
the financing agreement ending on December 1, 2010. As of December 31, 2010, there was no balance outstanding under this agreement.

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)

11. Debt and Senior Credit Facility (Continued)

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, 2010, the maximum permitted leverage ratio is 3.00 to 1.00 and continues throughout the remainder of the term. On December 31, 2010, the Company was in compliance with the
Senior Credit Agreement with a leverage ratio of 1.08 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 less than 1.15 to 1.00. On December 31, 2010, the Company was in compliance with the Senior Credit Agreement with a fixed charge coverage ratio of 4.49 to
1.00.

As
of December 31, 2010, the Company was in compliance with all other applicable covenants in the Senior Credit Agreement.

Fair Value of Debt

At December 31, 2010 the carrying amount and fair value of the Company's debt was $111.7 million and $95.2 million,
respectively. At December 31, 2009 the carrying amount and fair value of the Company's long term debt was $139.7 million and $113.4 million, respectively. The fair value of the
Company's long-term debt was estimated using an income approach based on current interest rates available to the Company for debt of similar terms and maturities. The debt was valued using
Level 3 inputs in the fair value hierarchy which are significant observable inputs for similar assets and liabilities in active markets.

12. Retirement Plans

Defined Benefit Plan

KapStone maintains a pension plan that provides retirement benefits to substantially all union employees. These employees are eligible
to participate in the plan upon completion of one year of service and attainment of age 21. The plan provides a defined benefit based on years of credited service and specified benefit rates. As a
result of the sale of the dunnage bag business on March 31,

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. Retirement Plans (Continued)

2009,
approximately 100 employees ceased earning benefits under the plan. As of December 31, 2010, there were approximately 1,000 union employees participating in the pension plan.

The
Company makes required minimum funding contributions to its qualified defined benefit pension plan to meet legal funding requirements and tax deductibility. The Company expects 2011
cash funding to be approximately $4.5 million.

Net Pension cost

Net pension cost recognized for the years ended December 31, 2010, 2009 and 2008, for the Company's Pension Plan is as follows:

Years Ended December 31,2010

2009

2008Service cost for benefits earned during the year

$
2,859

$
2,839

$
1,999Interest cost on projected benefit obligations


564


373


198Amortization of prior service cost


40





Expected return on plan assets


(514
)

(153
)

(26
)Net pension cost

$
2,949

$
3,059

$
2,171


The
components of other changes in pension plan assets and benefit obligations recognized in other comprehensive income (loss):

Years Ended
December 31,2010

2009Net actuarial loss (gain)

$
109

$
87Plan amendment(1)


1,043


60Net amortization


(40
)

Total loss recognized in other comprehensive income (loss)

$
1,112

$
147


(1)The
Plan amendment represents an increase of benefits approved in the Company's most recent union contracts.


Included
in accumulated other comprehensive income (loss) at December 31, 2010 is a $0.5 million unrecognized actuarial loss and a $1.1 million prior service cost.
Included in accumulated other comprehensive income (loss) at December 31, 2009 is a $0.4 million unrecognized actuarial loss and a $0.1 million prior service credit. The estimated
prior service cost that will be recognized in 2011 periodic pension cost is approximately $0.6 million.

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, 2010 and 2009 was 5.75 percent and 6.0 percent,

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)

12. Retirement Plans (Continued)

respectively.
The long-term expected rate of return on plan assets for the years ended December 31, 2010 and 2009 was 6.5 percent.

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, 2010 and 2009, the pension plan is under funded by $5.0 million and $3.2 million, respectively,
and has been included in the accompanying Consolidated Balance Sheets as a non-current liability.

Changes in Benefit Obligations and Plan Assets

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

Years Ended
December 31,2010

2009Projected benefit obligation at beginning of year

$
9,483

$
6,240Service cost for benefits earned during the year


2,859


2,839Interest cost on projected benefit obligations


564


373Plan amendment


1,043


60Benefits paid


(59
)

(260
)Actuarial loss


398


231Projected benefit obligation at end of year

$
14,288

$
9,483


The
accumulated benefit obligation at December 31, 2010 and 2009 was $14.3 million and $9.5 million, respectively.

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 31,2010

2009Fair value of plan assets at beginning of year

$
6,267

$
832Actual gain / (loss) on plan assets


803


296Benefits paid


(59
)

(260
)Employer contributions


2,244


5,399Fair value of plan assets at end of year

$
9,255

$
6,267


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)

12. Retirement Plans (Continued)

The
Company's pension plan weighted average asset allocations at December 31, 2010 and 2009, by asset category were as follows:

Years Ended
December 31,Target Allocation2010

2009Equity securities


20
%

27
%

21
%Debt securities


77
%

73
%

79
%Real estate


3
%


%


%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 percent and 80 percent 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.

Disclosures
concerning assets measured at fair value on a recurring basis at December 31, 2010, which have been categorized under the fair value hierarchy for the pension plan by
the Company, are as follows:

Fair Value Measurements at December 31, 2010Asset 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

$
1,465

$


$
1,465

$
U.S. mid-cap growth


193





193


U.S. small-cap


203





203


International funds


601





601


Debt securities:Corporate bonds


6,768





6,768


Mortgage backed securities


25





25


Total

$
9,255

$


$
9,255

$



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)

12. Retirement Plans (Continued)

Benefit Payments

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

2011

$
2502012


3502013


4602014


5802015


720Years 2016 - 2020


6,400


Other Postretirement Benefits

KapStone provides life insurance for all union retirees and medical benefits to certain retirees in the form of cost subsidies until
Medicare eligibility is reached. The Company funds these benefits on a current basis (with retirees paying a portion of the costs). Prior service and actuarial gains and losses subject to amortization
are amortized over the average remaining service, which is about 9 years for certain retirees.

Postretirement Costs

Net postretirement cost (benefit) recognized for the years ended December 31, 2010, 2009 and 2008 for the Company's retiree
medical and life insurance benefits is as follows:

Years Ended
December 31,2010

2009

2008Service cost for benefits earned during the year

$
111

$
112

$
66Interest cost on projected benefit obligations


160


167


100Expected return on plan assets








Amortization of net gain


(535
)

(58
)

(31
)Net postretirement cost (benefit)

$
(264
)
$
221

$
135


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.

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)

12. Retirement Plans (Continued)

The
components of other changes in postretirement plan assets and benefit obligations recognized in other comprehensive income (loss):

Years Ended
December 31,2010

2009Net actuarial loss (gain)

$
562

$
(412
)Plan amendment(1)


(1,885
)

Net amortization


535


58Total gain recognized in other comprehensive income (loss)

$
(788
)
$
(354
)


(1)The
Plan amendment represents the elimination of medical benefits for certain retirees after July 2, 2012 and an increase to the retiree life
insurance benefit which were approved in the Company's most recent union contract.


Included
in accumulated other comprehensive income (loss) at December 31, 2010 is a $0.8 million unrecognized actuarial loss and a $1.9 million prior service cost
credit. Included in accumulated other comprehensive income (loss) at December 31, 2009 is a $0.3 million unrecognized actuarial gain. The
estimated actuarial loss and prior service credit that will be recognized in 2011 periodic postretirement cost is approximately $0.1 million and $0.2 million, respectively.

Actuarial Assumptions

The Company annually evaluates and updates as necessary the assumptions used in the determination of postretirement benefit cost,
including the discount rate and health care trend rates. The discount rates were 5.75 and 6.0 percent as of December 31, 2010 and 2009, respectively.

Changes in Benefit Obligations

As of December 31, 2010 and 2009, the plan is under funded by $1.6 million and $2.7 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)

12. Retirement Plans (Continued)

The
following reconciles beginning and ending projected benefit obligations:

Years Ended
December 31,2010

2009Projected benefit obligation at beginning of the year

$
2,714

$
2,893Service cost for benefits earned during the year


111


112Interest cost on projected benefit obligations


160


167Actuarial (gain) loss


562


(412
)Plan amendment


(1,885
)

(46
)Benefits paid


(74
)

Projected benefit obligation at end of year

$
1,588

$
2,714


Benefit Payments

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

2011

$
2402012


2892013


2392014


1462015


85Years 2016 - 2020


231


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, non-bargained hourly and certain union employees and vest after three years for other union
employees. For the years ended December 31, 2010, 2009 and 2008, the Company recognized expense of $3.6 million, $2.1 million and $2.4 million, respectively, for matching
contributions. Effective March 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 and non-bargained hourly employees, provides for an annual contribution based on an
employee's salary and age. The Company contributions vest 100 percent after three years. For the years ended December 31, 2010, 2009 and 2008, the expense recognized by the Company for
contributions to the Retirement Savings Plan was $2.0 million, $1.9 million and $1.3 million, respectively. Effective February 1, 2009, the Company temporarily suspended
contributions to the Savings Plan due to economic conditions. The Company reinstated contributions to the Savings Plan in November 2009.

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)

13. Income taxes

The Company's U.S. federal statutory tax rate is 35.0 percent for each of 2010, 2009 and 2008. The Company's effective tax rate for the years ended December 31, 2010, 2009,
and 2008 was (3.8) percent, 39.4 percent and 38.8 percent, respectively. Substantially all income is earned in the United States.

The
Company's provision (benefit) for income taxes for the years ended December 31, 2010, 2009, and 2008 consists of the following:

Years Ended December 31,2010

2009

2008Current:Federal

$
18,879

$
27,367

$
(4,035
)State


2,776


5,311


(127
)Total current


21,655


32,678


(4,162
)Deferred:Federal

$
(24,950
)
$
15,945

$
14,585State


888


3,514


2,059Total deferred


(24,062
)

19,459


16,644Total provision (benefit) for income taxes

$
(2,407
)
$
52,137

$
12,482


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

Years Ended December 31,2010

2009

2008Statutory tax rate


35.0
%

35.0
%

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


2.9


4.0


3.9Manufacturing deduction


(1.8
)




Alternative fuel mixture tax credit


(4.4
)




Cellulosic biofuel tax credit


(33.0
)




Other


(2.5
)

0.4


(0.1
)Effective tax rate


(3.8
)%

39.4
%

38.8
%


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)

13. 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, 2010 and 2009, for the Company are
as follows:

December 31,2010

2009Deferred tax assets and liabilities resulting from:Trade accounts receivable

$
578

$
376Inventories


4,979


3,738Accrued compensation costs


5,226


1,499Acquisition transaction costs


1,304


1,441Pension and postretirement benefits


2,487


2,351Stock based compensation


2,410


1,729Tax credits


34,316


247Intangible assets


6,476


5,762Other


1,002


432Total deferred tax assets


58,778


17,575Prepaid expenses


(1,294
)

(500
)Tax depreciation in excess of book depreciation


(65,430
)

(49,501
)Intangible assets and other


(577
)

(547
)Total deferred tax liabilities


(67,301
)

(50,548
)Net deferred tax liabilities

$
(8,523
)
$
(32,973
)


At
December 31, 2010 and 2009, the Company had the following net deferred tax (liabilities) / assets on the Consolidated Balance Sheets:

December 31,2010

2009Current deferred tax assets, net

$
9,394

$
5,604Non current deferred tax (liabilities) / assets, net


(17,917
)

(38,577
)Total deferred tax (liabilities) / assets, net

$
(8,523
)
$
(32,973
)


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.

F-32

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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. Income taxes (Continued)

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

December 31,2010

2009Unrecognized tax benefits at beginning of year

$
62,509

$
Gross increasetax positions prior period





Gross decreasetax positions prior period


(528
)

Gross increasetax positions current period


4,977


62,509Settlement





Lapse of statute of limitations





Unrecognized tax benefits at end of year

$
66,958

$
62,509


Total
unrecognized tax benefits as of December 31, 2010 and December 31, 2009 were $67.0 million and $62.5 million, respectively. As of December 31,
2010, $67.7 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, 2010 and December 31, 2009, were approximately $0.7 million and $0.4 million, respectively. As of December 31, 2010 and
December 31, 2009, unrecognized tax benefits and related accrued interest of $67.7 million and $62.9 million, respectively, were included in other long term liabilities in the
accompanying Consolidated Balance Sheets.

In
August 2010, the Internal Revenue Service ("IRS") approved the Company's registration as a producer of cellulosic biofuel for the tax year 2009. With this registration, the Company
applied for a nonrefundable income tax credit of $1.01 per gallon of qualified cellulosic biofuel for the black liquor burned in early 2009 when the Company did not claim the alternative fuel mixture
tax credit. A $21.0 million net tax benefit (net of U.S. federal and state taxes) related to cellulosic biofuel was reflected in the Company's income tax provision as a discrete item for the
year ended December 31, 2010. The Company reported $33.9 million (gross tax credit) as a deferred tax asset as of December 31, 2010 in the Consolidated Balance Sheets which is
available to offset taxable income in future years and expires in 2015.

In
the normal course of business, the Company is subject to examination by taxing authorities. The Company's open tax years are 2006 through 2009. The Company's tax returns for 2007,
2008 and 2009 are currently under examination by the Internal Revenue Service.

14. 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 year ended December 31, 2009, 17.0 million common stock

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)

14. Stockholder's equity (Continued)

warrants
were exercised with proceeds totaling $85.2 million. On August 17, 2009, 19.5 million warrants expired.

Employee Stock Purchase Plan

In December 2009 the Company established 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. A
total of 6,641shares were issued under the ESPP for the year ended December 31, 2010.

Common Stock Reserved for Issuance

At December 31, 2010, approximately 2.8 million shares of common stock were reserved for issuance upon 2.3 million
shares for stock awards and 0.5 million shares for the ESPP.

Underwriter's Purchase Option

In connection with the Company's initial public offering on August 19, 2005, the Company 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. Each unit consisted of one share of the Company's common stock, $0.0001 par value, and two
warrants. The warrants expired on August 17, 2009, but were not exercised. In March 2010, the purchase option was exercised at a market price of $11.51 per share. The purchase option was
exercised on a cashless basis and therefore no cash proceeds were received by the Company. Accordingly, 348,393 shares of common stock were issued in March 2010.

15. Stock-Based Compensation

On May 27, 2010, stockholders approved the Amended and Restated 2006 Incentive Plan ("Incentive Plan") to increase the maximum shares of common stock available for issuance under
the 2006 Plan to 5.7 million shares. A maximum of 5.7 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.

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. Stock-Based Compensation (Continued)

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.

Total
non-cash stock-based compensation expense related to stock options and restricted stock for the years ended December 31, 2010, 2009 and 2008 is as follows:

Years Ended December 31,2010

2009

2008Stock option compensation expense

$
2,023

$
1,376

$
1,058Restricted stock compensation expense


1,569


1,001


696Total stock-based compensation expense

$
3,592

$
2,377

$
1,754


Total
unrecognized stock-based compensation cost related to the stock options and restricted stock as of December 31, 2010 and 2009 is as follows:

December 31,2010

2009Unrecognized stock option compensation cost

$
1,742

$
1,563Unrecognized restricted stock compensation cost


1,557


1,279Total unrecognized stock-based compensation cost

$
3,299

$
2,842


As
of December 31, 2010, total unrecognized compensation cost related to non-vested stock options and restricted stock units is expected to be recognized over a
weighted average period of 1.4 years and 1.3 years, respectively.

At
December 31, 2010, there were 2.3 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 previously required. The Company recognized excess tax benefits of $0.6 million for the year ended December 31, 2010. The Company did not recognize any excess tax benefits in
2009 and 2008.

Stock options

In 2010, 2009 and 2008 the Company's Compensation Committee granted stock options totaling 450,098, 829,702 and 748,428, respectively,
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 2010, 2009 and 2008 have a contractual term of ten 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

F-35

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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. Stock-Based Compensation (Continued)

options
is based on closing market price of our common stock on the date of grant. 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 at December 31, 2007


631,050

$
6.77Granted


748,428


6.96Exercised





Lapsed (forfeited or cancelled)


(33,131
)

6.98Outstanding at December 31, 2008


1,346,347


6.87Granted


829,702


3.70Exercised


(4,450
)

9.25Lapsed (forfeited or cancelled)


(9,522
)

6.85Outstanding at December 31, 2009


2,162,077


5.66Granted


450,098


11.36Exercised


(186,171
)

6.88Lapsed (forfeited or cancelled)


(5,528
)

4.91Outstanding at December 31, 2010


2,420,476

$
6.62


7.3

$
21,004Exercisable at December 31, 2010


785,493

$
6.82


5.0

$
6,657


The
weighted average fair value of the KapStone stock options granted in 2010, 2009 and 2008 was $4.90, $1.79 and $2.22, respectively. The fair value of awards granted in 2010, 2009 and
2008 was $2.2 million, $1.5 million and $1.6 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.

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)

15. Stock-Based Compensation (Continued)

The
assumptions utilized for determining the fair value of stock options awarded during the years 2010, 2009 and 2008 are as follows:

December 31,2010

2009

2008KapStone Stock Options Black-Scholes assumptions (weighted average):Expected volatility


41.5
%

47.0
%

24.4
%Expected term (years)


5.94


6.25


6.5Risk-free interest rate


2.4
%

2.3
%

3.4
%Expected dividend yield



%


%


%


Restricted Stock

In 2010, 2009 and 2008 the Company's Compensation Committee granted restricted stock units of 166,534, 219,864 and 194,903,
respectively, to executive officers and employees as compensation for service. Company directors received awards in 2010. 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.

The
following table summarizes restricted stock amounts and activity:

Shares/Units

Weighted
Average
Grant PriceOutstanding 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

$
5.68Granted


166,534


11.36Vested


(172,750
)

6.76Forfeited


(1,780
)

4.95Outstanding at December 31, 2010


577,673

$
7.00


F-37

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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. Commitments and Contingencies

Transition Service Agreements

In conjunction with the KPB and CKD acquisitions, the Company entered into transition service 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 new
production, order entry and receivables management applications. For the years ended December 31, 2009 and 2008, the Company incurred and expensed approximately $5.1 million and
$4.3 million, respectively for such services.

Commercial Commitments

KapStone's commercial commitments as of December 31, 2010 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 of
December 31, 2010, KapStone had $11.8 million of these commitments, with all expiring in 2011 if not renewed. No amounts have been drawn under these letters of credit.

Legal claims

We are party to two legal proceedings arising from an accident which occurred during our 2009 annual planned maintenance outage. 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 this matter,
based on our assessment of the facts and circumstances now known, we do not believe that this matter 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 31,2011

$
3,6022012


2,6832013


1,7562014


1,2502015


813Thereafter


1,048Total

$
11,152


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)

16. Commitments and Contingencies (Continued)

The
Company's rental expense under operating leases amounted to $4.7 million, $4.9 million and $3.9 million for the years ended December 31, 2010, 2009 and
2008, 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 percent of its pine pulpwood and 60 percent of its saw timber requirements for a period of 15 years and expiring in 2023. The purchases are based on
market prices and are accounted for as raw materials. The Company purchased approximately $41.7 million, $35.2 million and $17.1 million of materials in accordance with the
agreement for years ended December 31, 2010, 2009 and 2008, respectively.

17. Net income per share

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

Years Ended December 31,2010

2009

2008Net income as reported

$
65,041

$
80,280

$
19,665Weighted average number of common shares for basic net income per share


45,854,237


34,675,804


26,486,924Incremental effect of dilutive common stock equivalents:Common stock warrants








7,766,391Underwriter's purchase option


54,212


15,051


90,083Unexercised stock option awards


721,385


119,592


Unvested restricted stock awards


349,226


257,476


112,418Weighted average number of shares for diluted net income per share


46,979,060


35,067,923


34,455,816Net income per sharebasic

$
1.42

$
2.32

$
0.74Net income per sharediluted

$
1.38

$
2.29

$
0.57


In
August 2009, 17.0 million warrants were exercised and converted into common stock. The 19.4 million remaining warrants expired. Prior to this date in 2009, warrants were
not included in the computation of diluted net income per share because the warrants conversion price of $5.00 was below the market price of the Company's stock.

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

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. Performance Incentive Plan

In May 2008 shareholders approved the KapStone Paper and Packaging Performance Incentive 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 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. The PIP
was reinstated in early 2010. For the years ended December 31, 2010, 2009 and 2008, incentive compensation expense totaled $8.7 million, $0 and $1.5 million, respectively.

19. 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.

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

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. Segment Information (Continued)

current
presentation for all reporting periods. Corporate expenses that benefit the entire organization are not charged to the operating segments.

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

2010

2009

2008Net sales:Unbleached kraft

$
782,676

$
626,450

$
495,864Other





6,927


33,041Elimination of intersegment sales





(899
)

(4,356
)Total

$
782,676

$
632,478

$
524,549Net sales to external customers:Unbleached kraft

$
782,676

$
625,551

$
491,508Other





6,927


33,041Total

$
782,676

$
632,478

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

$
89,521

$
155,904

$
66,871Other





748


5,248Gain on sale of business





16,417


Corporate


(20,818
)

(21,707
)

(21,463
)Total

$
68,703

$
151,362

$
50,656Depreciation and amortization:Unbleached kraft

$
42,870

$
52,687

$
30,231Other





101


384Corporate


2,375


1,879


1,068Total

$
45,245

$
54,667

$
31,683Capital spending:Unbleached kraft

$
37,034

$
26,347

$
20,575Other








310Corporate


1,284


2,818


2,285Total

$
38,318

$
29,165

$
23,170Total assets (at December 31, 2010 and 2009):Unbleached kraft

$
632,891

$
638,050Corporate


86,836


31,073Total

$
719,727

$
669,123


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)

19. Segment Information (Continued)

Net
sales for the years ended December 31, 2010, 2009 and 2008, are as follows:

Years Ended December 31,2010

2009

2008Net sales:To customers located in the United States

$
482,459

$
393,133

$
359,113Export sales to foreign based customers


300,217


239,345


165,436Total

$
782,676

$
632,478

$
524,549


No
foreign country accounted for more than 10 percent of consolidated net sales in 2010, 2009 and 2008.

20. Subsequent Event (Unaudited)

On January 4, 2011, we negotiated the early settlement of our final contingent earn-out payment with IP relating to the KPB acquisition. We paid $49.7 million
to settle this liability in January 2011, approximately $5.3 million less than the maximum contractual amount which would have been settled in April 2012. The payment, representing additional
acquisition consideration, will be recorded as an addition to goodwill in 2011. In conjunction with the early settlement, the Company amended its Senior Credit Agreement to allow for the prepayment of
the earn-out and paid an amendment fee of $0.2 million.

21. Quarterly Financial Information (Unaudited)

The following tables set forth the historical unaudited quarterly financial data for fiscal 2010 and 2009. 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 2010 (In thousands):

March 31,
2010

June 30,
2010

September 30,
2010

December 31,
2010Net sales

$
176,499

$
199,119

$
207,493

$
199,565Gross profit(1)(2)

$
18,782

$
21,238

$
33,991

$
24,829Operating income

$
11,966

$
12,523

$
26,610

$
17,604Net income(3)

$
6,391

$
7,093

$
38,366

$
13,191Net income per share:Basic

$
0.14

$
0.15

$
0.83

$
0.29Diluted

$
0.14

$
0.15

$
0.82

$
0.28


(1)Gross
profit in the quarters ended March 31, 2010 and December 31, 2010, include annual planned maintenance outage costs of
$6.5 million and $6.6 million, respectively.


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)

21. Quarterly Financial Information (Unaudited) (Continued)

(2)Gross
profit in the quarter ended March 31, 2010 includes alternative fuel mixture tax credits of $22.2 million.(3)Net
income in the quarter ended September 30, 2010 includes a net cellulosic biofuel tax credit of $20.7 million.


Quarters EndedFiscal 2009 (In thousands):

March 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009Net sales

$
140,584

$
156,493

$
170,335

$
165,066Gross profit(1)(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)Gross
profit 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    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, 2010

$
1,217

$
124

$
(136
)
$


$
1,205December 31, 2009

$
2,421

$
594

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

$


$
2,360

$
61

$


$
2,421


(1)2010
includes recoveries of amounts previously written off. 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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