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

**FORM 10-Q**

**Quarterly Report Pursuant to Section13 or 15(d) of the SecuritiesExchange Act of 1934**

**For the quarterly period ended March31, 2007**

**Commission File Number: 000-51444**

**KapStone Paper and PackagingCorporation******(Exact name of registrant as specified in its charter)
| **Delaware**                     |   | **20-2699372**       |
|----------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of |   | (I.R.S. Employer     |
| Incorporation or  Organization)  |   | Identification  No.) |

 

**KapStone Paper and PackagingCorporation, One Northfield Plaza, Suite 480Northfield, IL 60093**(Address of Principal Executive Offices including zip code)

**(847) 441-0929**(Registrant’s Telephone Number, Including Area Code)

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

Yes xNo o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of theExchange Act).
| Large Accelerated Filer o | Accelerated  Filer x | Non-Accelerated  Filer o |
|---------------------------|----------------------|--------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).Yes o No x

Therewere 24,960,000 shares of the Registrant’s Common Stock, $0.0001 par value, outstandingat May 1, 2007, excluding 40,000 shares held as treasury shares.

 

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** **

**KapStonePaper and Packaging Corporation Index to Form 10-Q**

**TABLE OFCONTENTS**
| PART I. — FINANCIAL INFORMATION                                                                                              |   |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                                                                                                                              |   |   |   |
| Item  1. — Condensed Consolidated Financial Statements (Unaudited) and Notes to  Condensed Consolidated Financial Statements |   | 1      |   |
|                                                                                                                              |   |   |   |
| Item 2. — Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |   | 11     |   |
|                                                                                                                              |   |   |   |
| Item 3. — Quantitative and Qualitative Disclosures  about Market Risk                                                        |   | 17     |   |
|                                                                                                                              |   |   |   |
| Item 4. — Controls and Procedures                                                                                            |   | 18     |   |
|                                                                                                                              |   |   |   |
| PART  II. — OTHER INFORMATION                                                                                                |   |   |   |
|                                                                                                                              |   |   |   |
| Item  1. — Legal Proceedings                                                                                                 |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item  1A. — Risk Factors                                                                                                     |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item 2. — Unregistered Sales of Equity Securities and  Use of Proceeds                                                       |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item 3. — Defaults Upon Senior Securities                                                                                    |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item 4. — Submission of Matters to a Vote of Security  Holders                                                               |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item  5. — Other Information                                                                                                 |   | 19     |   |
|                                                                                                                              |   |   |   |
| Item 6. — Exhibits                                                                                                           |   | 20     |   |
|                                                                                                                              |   |   |   |
| SIGNATURES                                                                                                                        |   | 21     |   |

 

i

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**Part1. Financial Information**

**Item 1. FinancialStatements**

**KapStonePaper and Packaging CorporationCondensed Consolidated Balance Sheets**

**(Inthousands, except share and per share amounts)**
| ** **                                                                                                                                                                                                                                                             | ** ** | ** **         | ** ** | ** **            | ** ** | ** ** | ** ** | **Predecessor  KPB**  | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | ** ** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                                                                                             | ** ** | **2007**           | ** ** | **2006**              | ** ** | ** ** | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                                                                                                                             | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** | ** ** | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                                                             |       |               |       |                  |       |       |       |                  |       |
| Current assets:                                                                                                                                                                                                                                                        |       |               |       |                  |       |       |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                             |       | $                  | 35,233     |                  | $          | —     |       |                  |       | $ | 1 |   |
| Restricted cash  and cash equivalents, held in trust                                                                                                                                                                                                                   |       | —             |       | 115,239               |       |       |       | —                |       |
| Accounts  receivable, less allowances of $1,022 at March 31, 2007                                                                                                                                                                                                      |       | 31,753             |       | —                |       |       |       | 25,824                |       |
| Inventories                                                                                                                                                                                                                                                            |       | 21,953             |       | —                |       |       |       | 24,087                |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                             |       | 1,920              |       | 120                   |       |       |       | 1,425                 |       |
| Total current assets                                                                                                                                                                                                                                                   |       | 90,859             |       | 115,359               |       |       |       | 51,337                |       |
|                                                                                                                                                                                                                                                                   |       |               |       |                  |       |       |       |                  |       |
| Plant, property and  equipment, net                                                                                                                                                                                                                                    |       | 110,267            |       | —                |       |       |       | 201,593               |       |
| Deferred income taxes                                                                                                                                                                                                                                                  |       | 1,491              |       | 689                   |       |       |       | —                |       |
| Deferred acquisition  costs                                                                                                                                                                                                                                            |       | 187                |       | 3,058                 |       |       |       | —                |       |
| Other assets                                                                                                                                                                                                                                                           |       | 3,326              |       | 151                   |       |       |       | 4,452                 |       |
| Goodwill                                                                                                                                                                                                                                                               |       | 936                |       | —                |       |       |       | —                |       |
| Total assets                                                                                                                                                                                                                                                           |       | $                  | 207,066    |                  | $          | 119,257    |       |                  |       | $ | 257,382 |   |
|                                                                                                                                                                                                                                                                   |       |               |       |                  |       |       |       |                  |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                                                                                                         |       |               |       |                  |       |       |       |                  |       |
| Current liabilities:                                                                                                                                                                                                                                                   |       |               |       |                  |       |       |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                                       |       | $                  | 10,243     |                  | $          | 196        |       |                  |       | $ | 7,931 |   |
| Accrued expenses                                                                                                                                                                                                                                                       |       | 2,096              |       | 2,562                 |       |       |       | 7,144                 |       |
| Accrued  compensation costs                                                                                                                                                                                                                                            |       | 4,893              |       | —                |       |       |       | —                |       |
| Accrued income  taxes                                                                                                                                                                                                                                                  |       | 2,976              |       | —                |       |       |       | —                |       |
| Accrued taxes  other than income                                                                                                                                                                                                                                       |       | 705                |       | 224                   |       |       |       | —                |       |
| Deferred income  taxes                                                                                                                                                                                                                                                 |       | 566                |       | —                |       |       |       | —                |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                     |       | 9,500              |       | —                |       |       |       | —                |       |
| Total current  liabilities                                                                                                                                                                                                                                             |       | 30,979             |       | 2,982                 |       |       |       | 15,075                |       |
|                                                                                                                                                                                                                                                                   |       |               |       |                  |       |       |       |                  |       |
| Other liabilities:                                                                                                                                                                                                                                                     |       |               |       |                  |       |       |       |                  |       |
| Long-term debt                                                                                                                                                                                                                                                         |       | 50,500             |       | —                |       |       |       | 22,357                |       |
| Asset retirement  obligations                                                                                                                                                                                                                                          |       | 268                |       | —                |       |       |       | 265                   |       |
| Pension and post  retirement benefits                                                                                                                                                                                                                                  |       | 3,397              |       | —                |       |       |       | —                |       |
| Total other liabilities                                                                                                                                                                                                                                                |       | 54,165             |       | —                |       |       |       | 22,622                |       |
| Common stock, subject  to redemption-40,000 shares at December 31, 2006                                                                                                                                                                                                |       | —             |       | 230                   |       |       |       | —                |       |
|                                                                                                                                                                                                                                                                   |       |               |       |                  |       |       |       |                  |       |
| Stockholders’ equity:                                                                                                                                                                                                                                             |       |               |       |                  |       |       |       |                  |       |
| Preferred stock  $.0001 par value; 1,000,000 shares authorized; no shares issued and  outstanding                                                                                                                                                                      |       | —             |       | —                |       |       |       | —                |       |
| Common stock  $.0001 par value, 175,000,000 shares authorized; 25,000,000 shares issued  less 40,000 treasury shares outstanding at March 31, 2007 and 25,000,000 at  December 31, 2006 (including 40,000 shares subject to possible redemption at  December 31, 2006) |       | 2                  |       | 3                     |       |       |       | —                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                            |       | 112,934            |       | 113,904               |       |       |       | —                |       |
| Divisional  control                                                                                                                                                                                                                                                    |       | —             |       | —                |       |       |       | 219,685               |       |
| Common stock  held in treasury                                                                                                                                                                                                                                         |       | (230               | )          | —                |       |       |       | —                |       |
| Retained  earnings                                                                                                                                                                                                                                                     |       | 9,216              |       | 2,138                 |       |       |       | —                |       |
| Total stockholders’  equity                                                                                                                                                                                                                                       |       | 121,922            |       | 116,275               |       |       |       | 219,685               |       |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                        |       | $                  | 207,066    |                  | $          | 119,257    |       |                  |       | $ | 257,382 |   |

 

See notes to condensed consolidated financialstatements.

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**KapStone Paper and Packaging CorporationCondensed Consolidated Statements of Operations(In thousands, except share and per share amounts)**

**(unaudited)**
| ** **                                                                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** **                       | ** ** | **Predecessor  KPB**         | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                                                               | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** | **Three Months Ended** | ** ** |
| ** **                                                                                               | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | ** **                       | ** ** | **March 31, 2006** | ** ** |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Net sales                                                                                                |       | $                                                    | 65,427     |       | $          | —                           |       |                         |       | $ | 64,012 |   |
| Cost of sales                                                                                            |       | 48,122                                               |       | —     |       |                             |       | 48,296                       |       |
| Depreciation and  amortization, excluding amortization of intangibles                                    |       | 2,173                                                |       | —     |       |                             |       | 4,731                        |       |
| Gross profit                                                                                             |       | 15,132                                               |       | —     |       |                             |       | 10,985                       |       |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Selling, general  and administrative expenses                                                            |       | 3,728                                                |       | 155        |       |                             |       | 3,094                        |       |
| Operating income  / (loss)                                                                               |       | 11,404                                               |       | (155       | )          |                             |       | 7,891                        |       |
| Other income /  (expense):                                                                               |       |                                                 |       |       |       |                             |       |                         |       |
| Other income                                                                                             |       | 461                                                  |       | —     |       |                             |       | —                       |       |
| Interest income                                                                                          |       | 397                                                  |       | 1,207      |       |                             |       | —                       |       |
| Interest expense                                                                                         |       | (1,156                                               | )          | —     |       |                             |       | (334                         | )          |
| Total other  income / (expense)                                                                          |       | (298                                                 | )          | 1,207      |       |                             |       | (334                         | )          |
| Income before  provision for income taxes                                                                |       | 11,106                                               |       | 1,052      |       |                             |       | 7,557                        |       |
| Provision for  income taxes                                                                              |       | 4,028                                                |       | 361        |       |                             |       | 2,920                        |       |
| Net income                                                                                               |       | 7,078                                                |       | 691        |       |                             |       | 4,637                        |       |
| Deferred  interest, net of taxes, attributable to common stock subject to possible  redemption           |       | —                                               |       | (156       | )          |                             |       | —                       |       |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Net income  allocable to holders of nonredeemable common stock                                           |       | $                                                    | 7,078      |       | $          | 535                              |       |                         |       | $ | 4,637 |   |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Weighted-average  number of shares outstanding:                                                          |       |                                                 |       |       |       |                             |       |                         |       |
| Basic                                                                                                    |       | 24,973,333                                           |       | 25,000,000 |       |                             |       | —                       |       |
| Diluted                                                                                                  |       | 33,868,933                                           |       | 28,768,116 |       |                             |       | —                       |       |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Net income per  share:                                                                                   |       |                                                 |       |       |       |                             |       |                         |       |
| Basic                                                                                                    |       | $                                                    | 0.28       |       | $          | 0.03                             |       |                         |       | $ | — |   |
| Diluted                                                                                                  |       | $                                                    | 0.21       |       | $          | 0.02                             |       |                         |       | $ | — |   |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Weighted-average  number of shares outstanding exclusive of shares subject to possible  redemption:      |       |                                                 |       |       |       |                             |       |                         |       |
| Basic                                                                                                    |       | 24,960,000                                           |       | 21,002,000 |       |                             |       | —                       |       |
| Diluted                                                                                                  |       | 33,855,600                                           |       | 24,770,116 |       |                             |       | —                       |       |
|                                                                                                     |       |                                                 |       |       |       |                             |       |                         |       |
| Net income per  share exclusive of shares and related deferred interest subject to possible  redemption: |       |                                                 |       |       |       |                             |       |                         |       |
| Basic                                                                                                    |       | $                                                    | 0.28       |       | $          | 0.03                             |       |                         |       | $ | — |   |
| Diluted                                                                                                  |       | $                                                    | 0.21       |       | $          | 0.02                             |       |                         |       | $ | — |   |

 

See notes to condensed consolidated financialstatements.

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**KapStone Paper and Packaging CorporationCondensed Consolidated Statements of Cash Flows(In thousands, except share and per share amounts)**

**(unaudited)**
| ** **                                              | ** ** | ** **                                           | ** ** | ** ** | ** ** | **Predecessor KPB**     | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|------------|------------|------------------------------|------------|
| ** **                                              | ** ** | **Three Months Ended March 31,** | ** ** | ** ** | ** ** | **Three Months  Ended** | ** ** |
| ** **                                              | ** ** | **2007**                                             | ** ** | **2006**   | ** ** | ** **                   | ** ** | **March 31, 2006** | ** ** |
| **Operating  activities**                               |       |                                                 |       |       |       |                         |       |   |   |
| Net income                                              |       | $                                                    | 7,078      |       | $          | 691                          |       |   |   | $ | 4,637 |   |
| Depreciation and amortization                           |       | 2,245                                                |       | —     |       |                         |       | 4,731 |   |
| Changes in operating  assets and liabilities:           |       |                                                 |       |       |       |                         |       |   |   |
| Accounts receivable, net                                |       | (5,929                                               | )          | —     |       |                         |       | (3,540 | ) |
| Inventories                                             |       | 3,660                                                |       | —     |       |                         |       | 1,387 |   |
| Prepaid expenses and other current assets               |       | (711                                                 | )          | 291        |       |                         |       | (282 | ) |
| Accounts payable                                        |       | 2,116                                                |       | —     |       |                         |       | 570 |   |
| Accrued expenses                                        |       | (2,920                                               | )          | 457        |       |                         |       | (55 | ) |
| Accrued compensation costs                              |       | 4,893                                                |       | —     |       |                         |       | — |   |
| Accrued taxes other than income                         |       | 481                                                  |       | —     |       |                         |       | — |   |
| Accrued income taxes                                    |       | 2,976                                                |       | —     |       |                         |       | — |   |
| Deferred income taxes                                   |       | 958                                                  |       | (134       | )          |                         |       | 63 |   |
|                                                    |       |                                                 |       |       |       |                         |       |   |   |
| Net cash  provided by operating activities              |       | 14,847                                               |       | 1,305      |       |                         |       | 7,511 |   |
|                                                    |       |                                                 |       |       |       |                         |       |   |   |
| **Investing  activities**                               |       |                                                 |       |       |       |                         |       |   |   |
| Acquisition  costs paid                                 |       | (187                                                 | )          | —     |       |                         |       | — |   |
| KPB acquisition,  net of cash acquired                  |       | (150,303                                             | )          | —     |       |                         |       | — |   |
| Capital  expenditures                                   |       | (2,078                                               | )          | —     |       |                         |       | (1,236 | ) |
| Restricted cash  and other                              |       | —                                               |       | —     |       |                         |       | 539 |   |
| Purchase of U.S.  government securities held in trust   |       | —                                               |       | (451,089   | )          |                         |       | — |   |
| Maturities of  U.S. government securities held in trust |       | —                                               |       | 450,241    |       |                         |       | — |   |
| Net cash used in  investing activities                  |       | (152,568                                             | )          | (848       | )          |                         |       | (697 | ) |
|                                                    |       |                                                 |       |       |       |                         |       |   |   |
| **Financing  activities**                               |       |                                                 |       |       |       |                         |       |   |   |
| Proceeds from  long-term debt                           |       | 60,000                                               |       | —     |       |                         |       | — |   |
| Debt issuance  costs paid                               |       | (855                                                 | )          | —     |       |                         |       | — |   |
| Receipt of funds  held in trust                         |       | 115,239                                              |       | —     |       |                         |       | — |   |
| Redemption of  shares                                   |       | (230                                                 | )          | —     |       |                         |       | — |   |
| Investment  banking fee paid                            |       | (1,200                                               | )          | —     |       |                         |       | — |   |
| Other                                                   |       | —                                               |       | —     |       |                         |       | (6,814 | ) |
| Net cash  provided by financing activities              |       | 172,954                                              |       | —     |       |                         |       | (6,814 | ) |
|                                                    |       |                                                 |       |       |       |                         |       |   |   |
| Net increase in  cash and cash equivalents              |       | 35,233                                               |       | 457        |       |                         |       | — |   |
| Cash and cash  equivalents-beginning of period          |       | —                                               |       | 2,157      |       |                         |       | 1 |   |
| Cash and cash  equivalents-end of period                |       | $                                                    | 35,233     |       | $          | 2,614                        |       |   |   | $ | 1 |   |

 

See notes to condensedconsolidated financial statements.

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**KAPSTONEPAPER AND PACKAGING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(In thousands, except share and per share amounts)**

**(UNAUDITED)**

# **1.****                                      FinancialStatements**

The accompanying unaudited condensed consolidatedfinancial statements of KapStone Paper and Packaging Corporation (the “Company,”“we,” “us,” “our” or “KapStone”) have been prepared in accordance with U.S.generally accepted accounting principles for interim financial information, theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements. In theopinion of management, all adjustments (consisting of a normal recurring nature)considered necessary for a fair presentation have been included. Operatingresults for the three months ended March 31, 2007 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2007. For further information, refer to the consolidatedfinancial statements and related footnotes included in our Annual Report onForm 10-K for the year ended December 31, 2006.

KapStone Paper and Packaging Corporation (formerlyStone Arcade Acquisition Corporation) or the “Company” was incorporated inDelaware on April 15, 2005.  On May 25,2006, the Company formed a wholly-owned subsidiary, KapStone Kraft PaperCorporation, or KapStone Kraft.  TheCompany was formed to serve as a vehicle for the acquisition through a merger, capitalstock exchange, asset acquisition, or other similar business combination (“BusinessCombination”) of an operating business in the paper, packaging, forest productsand related industries.

On January 2, 2007, the Company acquired substantiallyall of the assets and assumed certain liabilities of the Kraft Papers Business(KPB) from International Paper Company (IP). The accompanying condensed consolidatedfinancial statements include the results of KPB since this date. Prior to theacquisition of KPB, the Company had no operations and was considered adevelopment stage enterprise.  Forperiods prior to the acquisition, KPB is deemed to be the “Predecessor” to theCompany. As a result, for the period ended March 31, 2006, the statement ofoperations and statement of cash flows of KPB are presented for comparativepurposes.  The accompanying condensed consolidatedstatements of operations and cash flows present the results of operations andcash flows for i) the period preceding the acquisition of KPB, exclusive of KPBresults of operations and cash flows and ii) for the periods succeeding theacquisition our consolidated results of operations including KPB. The resultsof operations and cash flows on a consolidated basis subsequent to theacquisition of KPB is not comparative to the Predecessor KPB results ofoperations and cash flows as i) the basis of the acquired assets andliabilities from KPB have been adjusted to fair value pursuant to Statement ofFinancial Accounting Standards (SFAS) No. 141, Business Combinations and ii)KPB was a division of IP and not a stand alone business.

# **2.****                                      Summaryof Significant Accounting Policies**

***Use of Estimates***—Thepreparation of financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities atthe date of the condensed consolidated financial statements, and the reportedamounts of revenues and expenses during the reporting periods. Actual resultscould differ from these estimates.

***Revenue Recognition***—Revenueis recognized when the customer takes title and assumes the risks and rewardsof ownership. Sales with terms designated f.o.b. (free on board) shipping pointare recognized at the time of shipment. For sales transactions designatedf.o.b. destination, which generally include export sales, revenue is recordedwhen the product is delivered to the customer’s site and when title and risk ofloss are transferred. Sales on consignment are recognized in revenue at theearlier of the month that the goods are consumed or after a period of timesubsequent to receipt by the customer as specified by contract terms. Cash incentiverebates are netted against revenue on an accrual basis as qualifying purchasesare made by the customer to earn and thereby retain the rebate. Prepaid rebatesare recorded in prepaid expenses and other current assets in the accompanying condensedconsolidated balance sheets until earned. Discounts for prompt payments areaccrued at the time of sale and adjusted when qualifying payments are made bycustomers. Accrued discounts are netted against account receivables, net.

4

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***Cost of sales***— Costof sales includes the following: the cost of inventory sold during the period,warehousing costs which include distribution costs and distribution centeroccupancy costs and freight expenses to customers.

Freightcharged to customers is recognized in net sales.

***Annual Maintenance Costs***—TheCompany recognizes the cost of major maintenance activities in the period inwhich they occur under the direct expense method of FSP No. AUG AIR-1,Accounting for Planned Major Maintenance Activities. Previously, the Predecessoraccrued major planned maintenance ratably over the year for interimreporting.  Predecessor results have beenrestated to account for major maintenance activities under the direct expensemethod.  Cost of sales has been loweredby $1,158 while operating income has been increased by $1,158 for the periodended March 31, 2006.  As a result, netincome has been increased by $711 for the period ended March 31, 2006. Othermaintenance costs are expensed as incurred.

***Earningsper common share***—Basic income per share is based on theweighted average number of common shares outstanding during the period.  Diluted income per share reflects thepotential dilution assuming common shares were issued upon the exercise of outstandingin-the-money warrants and the proceeds thereof were used to purchase commonshares at the average market price during the period.

***Concentrations of Credit Risk***—Financialinstruments that potentially expose the Company to concentrations of credit risk,as defined by SFAS No. 105, *Disclosureof Information about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentrations of Credit Risk*, consistprimarily of trade accounts receivable. Trade accounts receivable balances (netof allowances for doubtful accounts) for net sales to unaffiliated customerswere approximately $31.8 million and $29.3 million at March 31, 2007and 2006, respectively.

TheCompany establishes its allowance for doubtful accounts based upon factorssurrounding the credit risks of specific customers, historical trends, andother information. The allowance for doubtful accounts was approximately $0.7 millionand $0.2 million at March 31, 2007 and 2006, respectively.

***Inventories***—Inventoriesare valued at the lower of cost or market and include all costs directlyassociated with manufacturing products: materials, labor, and manufacturingoverhead. These values are presented at the lower of cost or market. Costs ofraw materials, work-in-process, and finished goods are determined using thefirst-in, first-out method. Replacement parts and other supplies are statedusing the average cost method.

***Plant, Property, and Equipment, net***—Plantand equipment is stated at cost less accumulated depreciation. Plant  and equipment acquired in the KPB acquisitionis originally recorded at fair value (see note 4) and depreciated.

Depreciationis computed using the straight-line method over the assets’ estimated usefullives.  Estimated useful lives are asfollows: 

|                                 | ** ** | **Years**                                                      | ** ** |
|---------------------------------|------------|----------------------------------------------------------------|------------|
| Machinery and  equipment        |       | 10-20                                                          |       |
| Building                        |       | 20-40                                                          |       |
| Computer  hardware              |       | 3-6                                                            |       |
| Furniture and  office equipment |       | 3-10                                                           |       |
| Leasehold improvements          |       | Lesser of life of leasehold improvements or term of  the lease |       |

***Impairment of Long-Lived Assets***—Long-livedassets, excluding goodwill, are reviewed for impairment upon the occurrence ofevents or changes in circumstances that indicate that the carrying value of theassets or group of assets may not be recoverable, as measured by comparingtheir net book value to the undiscounted estimated future cash flows generatedby their use. In the event undiscounted estimated future cash flows is lessthan the net book value, an impairment charge is recorded to reflect theestimated fair value of the assets, determined principally using discountedcash flows.

5

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***Income Taxes***— TheCompany accounts for income taxes under the liability method in accordance withStatement of Financial Accounting Standards (SFAS) No. 109, *Accounting for Income Taxes*. Accordingly, deferred incometaxes are provided for the future tax consequences attributable to differencesbetween the carrying amounts of assets and liabilities for financial reportingand income tax purposes.  Deferred taxassets and liabilities are measured using tax rates in effect for the year inwhich those temporary differences are expected to be recovered or settled.  A valuation allowance is established whennecessary to reduce deferred tax assets to the amount expected to be realized.

***Employeebenefit plan***—The Company is in the process ofestablishing a defined benefit pension plan for its union employees in NorthCarolina and Arkansas in accordance with the purchase agreement.  The Company has estimated the current servicecosts which are being charged to operations as they accrue based on servicesrendered by employees during the year. An independent actuary is in the processof performing an actuarial valuation based on management’s best estimate forkey assumptions.

# **3.****                                      Reclassifications**

Certain prior period Predecessor balances have beenreclassified to conform to the current period presentation.

# **4.****                                      KPBAcquisition**

On January 2, 2007, the Company purchasedsubstantially all of the assets and assumed certain liabilities of the KraftPapers Business, or KPB, a division of IP, consisting of an unbleached kraftpaper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite®Converting, an inflatable dunnage bag manufacturer located in Fordyce,Arkansas, for a cash purchase price of $155.0 million and less certain postclosing adjustments of $7.8 million plus two contingent earn-out payments of upto $60.0 million (in aggregate), based on KPB’s annual earnings beforeinterest, income taxes, depreciation and amortization, or EBITDA, during thefive years immediately following the acquisition.  Any contingent earn-out payments will beaccounted for as additional purchase price consideration and be recorded asgoodwill. KPB was deemed an attractive acquisition candidate based on meetingthe objectives of being a North American based profitable operating company inthe paper and packaging industry.

The KPB acquisition was accounted for in accordancewith the provisions of SFAS No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets.*

The preliminary purchase price allocation includescash of $155.0 million less working capital adjustments of $7.8 million plustransaction costs of $3.1 million. The following table summarizes the estimatedfair value of the assets acquired and the liabilities assumed at the date ofthe acquisition. The Company is in the process of reviewing third partyvaluations of tangible and intangible assets acquired, thus the allocation ofthe purchase price is preliminary ($ 000):
| Accounts  receivable, net                  |   | $       | 25,824  |   |
|--------------------------------------------|--------|---------|---------|--------|
| Inventories                                |   | 25,613  |    |
| Prepaid expenses  and other current assets |   | 1,089   |    |
| Plant, property  and equipment             |   | 110,359 |    |
| Deferred income  taxes                     |   | 1,191   |    |
| Other assets                               |   | 1,672   |    |
| Goodwill                                   |   | 936     |    |
| Intangible  assets                         |   | 673     |    |
| Accounts payable                           |   | (7,931  | )       |
| Accrued expenses                           |   | (5,843  | )       |
| Other  liabilities                         |   | (3,280  | )       |
| Allocated  purchase price                  |   | $       | 150,303 |   |

 

The intangible assets represent the value of customerlists, $263 and trademarks, $410. Customer lists are amortized over 8 years.For the period ended March 31, 2007, amortization expense totaled $8 and isincluded in

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administrative expenses in the accompanying Condensed ConsolidatedStatements of Operations. Trademarks were appraised with an indefinite life andas a result are not being amortized, but are subject to an annual impairmentreview.

In accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*, goodwill is notamortized, but instead is tested for impairment annually, or more frequently ifcircumstances indicate a possible impairment may exist.  The impairment test will be conducted in the fourthquarter.  Goodwill has not yet beenallocated to operating segments. Goodwill will be deducted for federal incometax purposes over 15 years.

As part of the KPB acquisition, the Company assumedliabilities for retiree medical/life obligation for employees not eligible toretire at December 31, 2006, of $1.3 million. In addition, obligations for anincrease in the hourly pension benefit level totaling $1.7 million were assumedby the Company.  Employees no longeraccrue benefits under these plans.  TheCompany is in the process of establishing a defined benefit pension plan forits union employees and benefits will be retroactive to January 1, 2007.

Proforma financial information for the prior period hasnot been presented in this report as proforma results would not be materiallydifferent than the Predecessor results presented in the accompanying Condensed ConsolidatedStatements of Operations.

# **5.****                                      Underwriter’sFee**

The Company paid the underwriter $1.2 million in 2007for services performed relating to the company’s initial public offering. Thefee was payable upon a successful Business Combination. Accordingly, the feewas charged against Additional paid-in capital in the accompanying Condensed ConsolidatedBalance Sheets.

# **6.****                                      RedemptionStatus of Common Stock**

The registration statement for the Company’s initialpublic offering indicated that, after signing a definitive agreement for theacquisition of a target business, the Company would submit such transaction forstockholder approval.   Based on thevotes submitted on December 29, 2006, 40,000 shares voted against the proposedKPB Business Combination and sought to be redeemed for cash. As a result, $230of the net proceeds from the initial offering plus interest was classified ascommon stock subject to redemption at December 31, 2006. The stock redemptionoccurred in February 2007 and the redeemed shares were held in treasury atMarch 31, 2007.

# **7.****                                      2006Incentive Plan**

On December 29, 2006, stockholders of the Companyapproved the 2006 Incentive Plan (“Plan”).

The Plan is administered by a committee of not fewerthan two members of the board of directors (“Administrator”). To the extentnecessary to comply with Rule 16b-3 under the Securities Act of 1934, asamended and to the extent necessary to exclude Awards granted under the Planfrom the calculation of the income tax deduction limit under Section 162(m) ofthe Internal Revenue Code of 1986, each member of the committee shall be an “outsidedirector” within the meaning of Section 162(m) of the Code and TreasuryRegulations promulgated thereunder.

A maximum of 3,000,000 shares of our common stock,available for issuance pursuant to stock options, restricted stock awards orstock appreciation rights (collectively called “Awards”), may be granted underthe Plan. If any Award is forfeited or expires without being exercised, or ifrestricted stock is repurchased by the Company, the shares of stock subject tothe Award shall be available for additional grants under the Plan. The numberof shares

7

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available under the Plan is subject to adjustment inthe event of any stock split, stock dividend, recapitalization, spin-off orother similar action.

Awards may be granted to employees, officers anddirectors of, and consultants or advisors to, the Company and any subsidiarycorporations. Options intended to qualify, under the standards set forth incertain federal tax rules, as incentive stock options (“ISOs”) may be grantedonly to employees while actually employed by the Company. Non-employeedirectors, consultants and advisors are not entitled to receive ISOs.

Option Awards granted under the Plan are exercisablefor a period fixed by the Administrator, but not longer than 10 years from thedate of grant, at an exercise price which is not less than the fair marketvalue of the shares on the date of the grant.

No Awards have been granted under the Plan as of March31, 2007, and, as a result, no stock compensation expense was recognized.

In April 2007, the Company’s Compensation Committeeapproved the issuance of 174,020 shares of restricted stock and 512,000 stockoptions to directors, executive officers and employees of the Company. As aresult, the Company will apply the provisions of FAS 123 (R), *Share-based Payments*, beginning with the second quarter of2007.

# **8.****                                      Related-PartyTransactions**

From time to time, the Company retains the services ofWhite Oak Aviation (White Oak), an aviation services company solely owned bycertain Founding Stockholders.  The feescharged by White Oak to KapStone for these services are calculated using adiscounted rate from the fees White Oak typically charges to outside parties.For the periods ended March 31, 2007 and 2006, the amount paid to this entitywas $52 and $22, respectively.

# **9.****                                      CommonStock Reserved for Issuance**

At March 31, 2007 and December 31, 2006, 44,000,000shares of common stock were reserved for issuance upon exercise of warrants,stock options and the underwriter’s option.

# **10.****                               Long-termDebt and Credit Facility**

On January 2, 2007 in connection with the KPBacquisition, the Company obtained a senior secured credit facility,  which provides the Company the ability toborrow up to $95.0 million pursuant to a five year $35.0 million revolving loanand a five year $60.0 million term loan, due December 31, 2011.  Advances under the revolving line of creditare primarily based upon percentages of eligible accounts receivable andinventories.  At March 31, 2007, therewere no advances under the revolving loan. The credit facility expires onDecember 31, 2011.

Long-term debt at March 31, 2007 is summarized as follows($000s):

|                                         | ** ** | **March 31, 2007** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| Term loan                               |       | $                            | 60,000     |   |
|                                    |       |                         |       |
| Less Current  portion of long-term debt |       | 9,500                        |       |
|                                    |       |                         |       |
|                                    |       |                         |       |
| Long-term debt                          |       | $                            | 50,500     |   |

 

At March 31, 2007, the Company had one letter ofcredit outstanding totaling $300.

Borrowings under the term loan accrue interest, at ouroption, at either:  LIBOR plus 1.25% to2.00% depending on the Company’s total debt to EBITDA ratio (as defined in theagreement); or the Base Rate (prime rate) plus 0% to

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.50% depending on the Company’s total debt to EBITDAratio. The Base Rate margin and LIBOR margin, adjusts quarterly.

Financing fees paid for the above credit facilitytotaled $855 and are being amortized over five years using the effectiveinterest method. Amortization expense for the period ended March 31, 2007totaled $64 and is recorded in Interest expense in the accompanying Condensed ConsolidatedStatements of Operations.

# **11.****                               Inventories**

Inventoriesconsist of the following at March 31, 2007, and December 31, 2006, respectively($000’s):

|                                 | ** ** | **March 31, 2007** | ** ** | **Predecessor KPB**        | ** ** |
|---------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **(Unaudited)**              | ** ** | **December 31, 2006** | ** ** |
| Raw materials                   |       | $                            | 5,567      |                            | $          | 6,466 |   |
| Work in process                 |       | 410                          |       | 321                             |       |
| Finished goods                  |       | 12,239                       |       | 13,352                          |       |
| Replacement parts and  supplies |       | 3,737                        |       | 3,948                           |       |
|                            |       |                         |       |                            |       |
|                            |       |                         |       |                            |       |
| Inventories                     |       | $                            | 21,953     |                            | $          | 24,087 |   |

 

As part of the KPB acquisition, the Company revaluedfinished goods inventories in accordance with SFAS No.141, *BusinessCombinations,*accordingly, at January 2, 2007 finished goods inventorieswere revalued by $1.5 million to fair value. This amount was charged to cost ofsales in the accompanying Condensed Consolidated Statements of Operations forthe period ended March 31, 2007.

# **12.****                               Incometaxes**

The Company’s US federal statutory tax rate is 35% for2007 and 34% for 2006. Our effective tax rate for the three months endedMarch 31, 2007, was 36.3% compared with 34.0% for the same period in the prioryear. Differences between the effective tax rate and the federal statutory taxrate are due to the impact of state tax, net of federal benefit, the domesticmanufacturing deduction, and changes in statutory federal and state tax rates.

In July 2006, the FASB issued FIN No. 48, whichclarifies the application of SFAS No. 109. FIN No. 48 establishes a thresholdcondition that a tax position must meet for any part of the benefit of such aposition to be recognized in the financial statements. In addition, FIN No. 48provides guidance regarding measurement, de-recognition, classification, anddisclosure of tax positions. The Company adopted FIN No. 48 effective January1, 2007. The Company to date has no unrecognized tax benefit. In accordancewith FIN 48, paragraph 19, the Company classifies interest and penalties as acomponent of tax expense. We do not have any uncertain income tax positionsincluded in the accompanying condensed consolidated financial statements atMarch 31, 2007.

In the normal course of business, we are subject toexamination by taxing authorities. The Company’s open tax years are 2005 and2006.

# **13.****                               Pensionplan and post retirement benefits**

The Company is in the process of establishing adefined benefit plan to provide benefits for approximately 550 unionrepresented employees.  This plan is part of the collective bargainingagreement between Kapstone Kraft and the United Steel, Paper and Forestry,Rubber, Manufacturing, Energy, Allied-Industrial, Chemical and Service 

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Workers Union, AFL-CIO, CLC.  When the plan isestablished certain union employees will begin to accrue a benefit under theKapstone Kraft plan as of January 1, 2007.  The Company recorded anestimate of $382 as the probable pension expense related to period endedMarch 31, 2007, when the Plan is adopted.

The Company maintains defined contribution planscovering all eligible salaried employees. Company contributions to the 401(k)plan are based on matching of employee contributions, vest immediately forsalaried employees, while the Company’s Retirement Savings Plan, which providesfor contributions based on a salaried employee’s salary and age, vests 100%after three years. Company contributions to the 401(k) plan are based onmatching of employee contributions and vest after three years for union employees.For the period ended March 31, 2007, the expense of Company matching employeecontributions totaled $350.

# **14.****                               SegmentInformation**

The Company operates in one geographic segment, theUnited States. The Company operates in two operating segments: unbleached Kraftand dunnage bags. The unbleached Kraft segment produces  a variety of unbleached Kraft paper andlinerboard products. These products are sold to customers who convert the paperinto end-market finished products. The dunnage bags segment converts unbleachedKraft paper and film into inflatable dunnage products, which are used to securefreight to minimize movement and potential damage of goods and products duringtransport. The products are sold to distributors and on a direct basis for use bymanufacturers, less-than-trailer-load carriers and retail regional distributioncenters. Corporate represents expenses not charged to the operating segments.Corporate assets represent mainly cash and cash equivalents and goodwill (notyet allocated to the operating segments). 
| ** **                                                                         | ** ** | ** ** | ** ** | **Predecessor  KPB**                                   | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| **Industry Segment (in thousands of U.S. dollars):** | ** ** | ** ** | ** ** | **Three Months  Ended March 31,  2007** | ** ** | **Three Months  Ended March 31,  2006** | ** ** |
| Net Sales:                                                                         |       |       |       |                                                   |       |
| Unbleached kraft                                                                   |       | $          | 58,481     |                                                   | $          | 55,593 |   |
| Dunnage bags                                                                       |       | 7,768      |       | 9,034                                                  |       |
| Elimination of  intersegment sales from unbleached kraft                           |       | (822       | )          | (615                                                   | )          |
|                                                                               |       |       |       |                                                   |       |
| Total                                                                              |       | $          | 65,427     |                                                   | $          | 64,012 |   |
|                                                                               |       |       |       |                                                   |       |
| Operating income /  (loss):                                                        |       |       |       |                                                   |       |
| Unbleached kraft                                                                   |       | $          | 13,026     |                                                   | $          | 8,284 |   |
| Dunnage bags                                                                       |       | 1,522      |       | 1,809                                                  |       |
| Corporate                                                                          |       | (3,144     | )          | (2,202                                                 | )          |
|                                                                               |       |       |       |                                                   |       |
| Total                                                                              |       | $          | 11,404     |                                                   | $          | 7,891 |   |
|                                                                               |       |       |       |                                                   |       |
| Depreciation and  Amortization:                                                    |       |       |       |                                                   |       |
| Unbleached kraft                                                                   |       | $          | 2,133      |                                                   | $          | 4,651 |   |
| Dunnage bags                                                                       |       | 40         |       | 80                                                     |       |
| Corporate                                                                          |       | 72         |       | —                                                 |       |
|                                                                               |       |       |       |                                                   |       |
| Total                                                                              |       | $          | 2,245      |                                                   | $          | 4,731 |   |
|                                                                               |       |       |       |                                                   |       |
| Total assets (at March  31, 2007 and December 31, 2006):                           |       |       |       |                                                   |       |
| Unbleached kraft                                                                   |       | $          | 155,045    |                                                   | $          | 245,412 |   |
| Dunnage bags                                                                       |       | 11,394     |       | 11,970                                                 |       |
| Corporate                                                                          |       | 40,627     |       | —                                                 |       |
|                                                                               |       |       |       |                                                   |       |
| Total                                                                              |       | $          | 207,066    |                                                   | $          | 257,382 |   |
|                                                                               |       |       |       |                                                   |       |
|                                                                               |       |       |       |                                                   |       |
|                                                                                    |            |            |            |                                                        |            |  |  |  |  |

 

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| ** **                                                                          | ** ** | ** ** | ** ** | **Predecessor  KPB**                                   | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| **Operating Segment (in thousands of U.S. dollars):** | ** ** | ** ** | ** ** | **Three Months  Ended March 31,  2007** | ** ** | **Three Months  Ended March 31,  2006** | ** ** |
|                                                                                |       |       |       |                                                   |       |
| Capital Spending:                                                                   |       |       |       |                                                   |       |
| Unbleached kraft                                                                    |       | $          | 2,049      |                                                   | $          | 1,236 |   |
| Dunnage bags                                                                        |       | 29         |       | —                                                 |       |
| Corporate                                                                           |       | —     |       | —                                                 |       |
|                                                                                |       |       |       |                                                   |       |
| Total                                                                               |       | $          | 2,078      |                                                   | $          | 1,236 |   |
|                                                                                     |            |            |            |                                                        |            |  |  |  |  |

 

**Item 2.****           MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION**

**ANDRESULTS OF OPERATIONS**

This Quarterly Report on Form 10-Q includesforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. We have based these forward-looking statements on our currentexpectations and projections about future events. These forward-lookingstatements are subject to known and unknown risks, uncertainties andassumptions about us 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 suchforward-looking statements. In some cases, you can identify forward-lookingstatements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,”“anticipate,” “believe,” “estimate,” “continue,” or the negative of such termsor other similar expressions. Factors that might cause or contribute to such adiscrepancy include, but are not limited to, those described in our otherSecurities and Exchange Commission filings. The following discussion should beread in conjunction with our Financial Statements and related Notes theretoincluded elsewhere in this report.

**Overview**

We were formed on April 15, 2005 to serve as a vehicleto effect a merger, capital stock exchange, asset acquisition or other similarbusiness combination (“Business Combination”) with an operating business in thepaper, packaging, forest products and related industries.

On January 2, 2007, the Company purchasedsubstantially all of the assets and assumed certain liabilities of the Kraft Papers Business, or KPB, adivision of International Paper Company (IP), consisting of an unbleached kraftpaper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite®Converting, an inflatable dunnage bag manufacturer located in Fordyce,Arkansas, for a cash purchase price of $155 million and less certain postclosing adjustments of $7.8 million plus two contingent earn-out paymentsof up to $60 million (in aggregate), based on KPB’s annual earnings beforeinterest, income taxes, depreciation and amortization, or EBITDA, during thefive years immediately following the acquisition.  Any contingent earn-out payments will beaccounted for as additional purchase price consideration and recorded asgoodwill. The purchase price payable on the closing date was adjusted by $7.8million, or dollar-for-dollar, for IP’s working capital as of such date beingless than $42.6 million.

The accompanying management discussion and analysisinclude the results of KPB since January 2, 2007. Prior to the acquisition ofKPB, the Company had no operations nor generated operating revenues and wasconsidered a development stage enterprise. For periods prior to the acquisition, KPB is deemed to be the “Predecessor”to the Company. As a result, for the period ended March 31, 2006, the statementof operations and statement of cash flows of KPB are presented for comparativepurposes.  The accompanying consolidatedstatements of operations and cash flows present the results of our operationsand cash flows for i) the  period precedingthe acquisition of KPB, exclusive of KPB results of operations and cash flows andii) for the periods succeeding the acquisition our consolidated results ofoperations including KPB. Our results of operations and cash flows on aconsolidated basis subsequent to the acquisition of KPB is not comparative tothe Predecessor KPB results of operations and cash flows 

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as i) the basis of the acquired assets and liabilitiesfrom KPB have been adjusted to fair value pursuant to SFAS No. 141, *Business Combinations* and ii) KPB was a division of IP andnot a stand alone business.

**Results of Operations**

TheCompany’s management uses a variety of financial measurements to analyze itsperformance. These measurements include (1) Operating Income,(2) Productivity (3) Selling, General & Administrative (“SG&A”)expenses and (4) Average revenue per ton (for unbleached kraft) andaverage revenue per dunnage bag (for Ride Rite® Converting).

*Operating Income.*    Operatingincome is used by the Company’s management primarily as a measure of itssegments’ operating performance. The Company’s management defines operatingincome as net sales minus costs associated with these sales. Net sales includesales of unbleached kraft paper products, linerboard and dunnage bags net ofterm allowances and discounts. For purposes of calculating operating income, costsinclude the cost of raw materials, labor, maintenance, depreciation andamortization, distribution expenses and selling, general and administrativeexpenses.

*Selling, General and Administrative Expenses.*   SG&Aexpenses include selling, customer service and corporate employee salaries andbenefits, professional fees, and information technology expenses, includingfees paid to IP for transitional services support.

*AverageRevenue per Ton/Dunnage Bag.* Average revenue per ton/bag represents the revenue divided by the tonsof unbleached kraft paper and linerboard sold or the units of dunnage bagssold, as applicable.

All comments and variances in the following commentaryfor the period ended March 31, 2006 refer to the Predecessor, or KPB.

**Three Months Ended March 31, 2007 Compared withThree Months Ended March 31, 2006**

**KapStone Paper and Packaging Corporation comparedto Predecessor (KPB)**

***Net sales***
| ** **                                      | ** ** | **Three Months ended March 31,**           | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Net Sales in Thousands of Dollars** | ** ** | **Tons/Bags Sold** | ** ** |
| ** **                                      | ** ** | **2007**                                                       | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** | **%** | ** ** |
| Unbleached kraft                                |       | $                                                              | 58,481     |   | $ | 55,593 |   | $ | 2,888 |   | 5.2 | % | 108,953 |   | 110,294 |   | (1,341 | ) | (1.2 | )% |
| Dunnage bags                                    |       | 7,768                                                          |       | 9,034 |   | (1,266 | ) | (14.0 | )% | 2,044,000 |   | 2,255,000 |   | (211,000 | ) | (9.4 | )% |
| Intersegment elimination  from unbleached kraft |       | (822                                                           | )          | (615 | ) | (207 | ) | (33.7 | )% | (1,356 | ) | (1,026 | ) | (330 | ) | (32.2 | )% |
|                                            |       | $                                                              | 65,427     |   | $ | 64,012 |   | $ | 1,415 |   | 2.2 | % |   |   |   |   |   |   |   |   |
|                                            |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average revenue per ton                         |       | $                                                              | 536.75     |   | $ | 504.04 |   | $ | 32.71 |   | 6.5 | % |   |   |   |   |   |   |   |   |
| Average revenue per dunnage bag                 |       | $                                                              | 3.80       |   | $ | 4.01 |   | $ | (0.21 | ) | (5.2 | )% |   |   |   |   |   |   |   |   |

 

KapStone’s net salesincreased by $1.4 million, or 2.2%, to $65.4 million for the three months endedMarch 31, 2007 compared with $64.0 million for the three months ended March 31,2006.  Improved product pricing andfavorable mix for unbleached kraft paper were the major factors in theimprovement.

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Unbleached kraft segmentnet sales increased by $2.9 million, or 5.2%, to $58.5 million for the threemonths ended March 31, 2007 compared with $55.6 million for the three months endedMarch 31, 2006.  Average selling pricesfor the three months ended March 31, 2007 increased to $536.75 per ton, a$32.71 per ton increase or 6.5%, due to full realization of a $25 per ton priceincrease implemented in the first quarter of 2006 and a second price increaseimplemented during the second quarter of 2006 as compared to the prior yearperiod.  Favorable product mix alsopositively impacted revenues due to increased sales of lightweight linerboardversus lower priced grocery bag grades and heavier weight linerboard.  The benefits from these increases werepartially offset by a reduction in tons sold of 1.2% for the three months endedMarch 31, 2007 compared with the three months ended March 31, 2006.  The tonnage decrease was primarily due toincreased sales of lighter weight, higher margin linerboard resulting in anincrease in the average square footage sold per ton of 0.7% for the threemonths ended March 31, 2007 compared with the similar period in the prior year.

Net sales for the dunnagebag segment sold under the Ride Rite® Converting brand name decreased by $1.3million, or 14.0%, to $7.8 million for the three months ended March 31, 2007compared with $9.0 million for the three months ended March 31, 2006 mainly dueto a 9.4% drop in unit volume and unfavorable mix due to increased sales oflower priced two-ply bags.  Theunfavorable mix resulted in average revenue per bag of $3.80, a decrease of$0.21 or 5.2%, for the three months ended March 31, 2007 compared to thesimilar period last year.   Bag saleshave decreased due to reduced customer shipping activity.

***Cost of sales***
| ** **                                      | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase/(Decrease)** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------|------------|
| **$ 000’s**                           | ** ** | **2007**                                         | ** ** | **2006**                | ** ** | **Change** | ** ** | **%** | ** ** |
| Unbleached kraft                                |       | $                                                | 43,035     |                    | $          | 42,113 |   | $ | 922 |   | 2.2 | % |
| Dunnage bags                                    |       | 5,909                                            |       | 6,798                   |       | (889 | ) | (13.1 | )% |
| Intersegment  elimination from unbleached kraft |       | (822                                             | )          | (615                    | )          | (207 | ) | (33.7 | )% |
|                                            |       | $                                                | 48,122     |                    | $          | 48,296 |   | $ | (174 | ) | (0.4 | )% |

 

Cost of sales for the period ended March 31, 2007decreased by $174 compared to 2006 due to lower unit volume partially offset bya $1.5 million non-cash purchase accounting charge adjusting the finished goodsinventory to fair value and higher wood and utility costs.

Unbleached kraft segment cost of sales increased by$922 for the period ended March 31, 2007 to $43.0 million. The increase wasdriven by a $1.2 million non-cash purchase accounting charge adjusting thefinished goods inventory to fair value, higher wood costs (prices increased by8.1%), and utility costs (electricity rates increased 13.8% per MKWH) offset bylower caustic soda costs, productivity gains, and lower volume of $1.7 million.As a result, cost of sales as a percent of net sales was 73.6% for the periodended March 31, 2007 compared with 75.8% for the period ended March 31, 2006.

Dunnage bag segment cost of sales decreased by $889,or 13.1% from 2006 due to a 9.4% drop in bag sales volume partially offset by a$0.3 million non-cash purchase accounting charge adjusting the finished goodsinventory to fair value. As a result, cost of sales as a percent of net saleswas 76.1% for the period ended March 31, 2007 compared with 75.2% for theperiod ended March 31, 2006.

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***Depreciationand amortization***

Depreciation andamortization for the three months ended March 31, 2007, totaled $2,245 comparedto $4,731 for the three months ended March 31, 2006. The decrease of $2,486reflects the revaluation of depreciable assets to their respective fair valuesas of January 2, 2007. The fair value of assets acquired was approximately $91million less than the basis being used for depreciation in the 2006 period.

Depreciation andamortization for the period ended March 31, 2007 includes $64 for deferredfinancing fee amortization and $8 for intangibles amortization which isrecorded in Corporate.

***Operatingincome***

|                       | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase/(Decrease)** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|-------------------------|------------|
| **$ 000’s** | ** ** | **2007**                                         | ** ** | **2006**                | ** ** | **Change** | ** ** | **%** | ** ** |
| Unbleached kraft      |       | $                                                | 13,026     |                    | $          | 8,284 |   | $ | 4,742 |   | 57.2 | % |
| Dunnage bags          |       | 1,522                                            |       | 1,809                   |       | (287 | ) | (15.9 | )% |
| Corporate             |       | (3,144                                           | )          | (2,202                  | )          | (942 | ) | (42.8 | )% |
|                  |       | $                                                | 11,404     |                    | $          | 7,891 |   | $ | 3,513 |   | 44.5 | % |

 

Operating incomeincreased by $3.5 million, or 44.5%, to $11.4 million for the three monthsended March 31, 2007 compared with $7.9 million for the three months endedMarch 31, 2006.  Improved product pricingfor unbleached kraft paper, lower depreciation costs, and improved product mixwere the major factors in the improvement partially offset by a $1.5 million non-cashpurchase accounting charge adjusting the finished goods inventory to fair valueand higher corporate expenses.

Unbleached kraft segment operating income increased by$4.7 million, or 57.2%, to $13.0 million for the three months ended March 31,2007 compared with $8.3 million for the three months ended March 31, 2006.  Higher selling prices, lower depreciationcosts, productivity gains and improved mix were partially offset by a $1.2million non-cash purchase accounting charge adjusting the finished goodsinventory to fair value.

Dunnage bag segment operating income decreased by $0.3million, or 15.9%, to $1.5 million for the three months ended March 31, 2007compared with $1.8 million for the three months ended March 31, 2006 due to a$0.3 million non-cash purchase accounting charge adjusting the finished goodsinventory to fair value.

Corporate expenses for the three month period endedMarch 31, 2007 were $0.9 million, or 42.8% higher than the previous quarter andreflect expenses for the Company’s headquarters while the amount for the 2006period reflects an allocation of corporate expenses when KPB was owned by IP.

**KapStone Paper and Packaging Corporation comparedto Stone Arcade Acquisition Corporation**

Operating income for the Company forthe period ended March 31, 2007 was $11,404 compared to an operating loss of$155 for the similar period in 2006. The change in quarterly operating incomeis due to the KPB acquisition which was consummated on January 2, 2007.  Results for the 2006 period reflect theCompany as a development stage enterprise and as a result, the operating lossincludes expenses incurred to identify and acquire a business. Expenses for the2007 period reflect corporate expenses associated with an operating company.

**Liquidity and Capital Resources**

***KPBAcquisition***

On January 2, 2007, we consummated the purchase ofsubstantially all of the assets and assumed certain liabilities of KPB. Theassets consist of an unbleached kraft paper manufacturing facility in RoanokeRapids, North

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Carolina and Ride Rite® Converting, an inflatabledunnage bag manufacturer located in Fordyce, Arkansas. The liabilities assumedconsist of trade accounts payable, accrued expenses and certain long termliabilities. The purchase price for the acquisition was approximately $155.0million in cash less certain post-closing adjustments of $7.8 million, pluscontingent earn-out payments of up to $60.0 million (in aggregate) based onKPB’s annual earnings before interest, income taxes, depreciation andamortization (“EBITDA”) during the five year period immediately following theacquisition. The first contingent payment will be equal to 5.3 times KPB’saverage annual EBITDA for the five year period immediately following theacquisition, less $165.0 million and subject to a maximum of$35.0 million. The second contingent payment is an “all or nothing”payment and is payable if, and only if, KPB’s average annual EBITDA for thesame five year period equals or exceeds $49.2 million. Generally, bothpayments, if earned, will be due and paid at the end of the five year period.

If these contingent earn-out payments are made, theywill be accounted for as additional purchase price consideration.

Funding for the acquisition came from funds held intrust at December 31, 2006 totaling $115.2 million and the establishment of anew credit facility of $60.0 million.

***CreditFacility***

In connection with the acquisition, the Company’ssubsidiary, KapStone Kraft, obtained a senior secured credit facility whichprovides us with the ability to borrow up to $95.0 million pursuant to afive year $35.0 million revolving loan and a five year $60.0 millionterm loan.  Advances under the revolvingline of credit are primarily based upon percentages of eligible accountsreceivable and inventories.  The facilityexpires on December 31, 2011. At March 31, 2007, there were no advancesunder the revolving loan.

The term loan has scheduled principal paymentsof:  (a) $1.875 million on April 2,June 30, September 30 and December 31 of 2007;(b) $2.0 million on March 31, June 30, September 30and December 31 of 2008; (c) $2.125 million on March 31,June 30, September 30 and December 31 of 2009 and March 31,June 30, September 30 and December 31 of 2010;(d) $2.25 million on March 31, June 30 andSeptember 30 of 2011; and (e) $20.75 million onDecember 31, 2011.  We are alsorequired to make prepayments on the term loan under certain circumstances fromthe net cash proceeds of certain asset dispositions and issuances of securitiesor debt and, within 100 days after the end of December 31, 2007 and 2008,respectively, 50% of excess cash flow from such fiscal years.

Borrowings under the revolving loan accrue interest,at our option, at either:  LIBOR plus1.00% to 1.75% depending on KapStone Kraft’s total debt to EBITDA ratio; or theBase Rate (prime rate) plus 0% to .50% depending on KapStone Kraft’s total debtto EBITDA ratio.  Borrowings under theterm loan accrue interest, at our option, at either:  LIBOR plus 1.25% to 2.00% depending onKapStone Kraft’s total debt to EBITDA ratio; or the Base Rate (prime rate) plus0% to .50% depending on KapStone Kraft’s total debt to EBITDA ratio. The BaseRate margin and LIBOR margin shall adjust quarterly upon receipt of quarterlyfinancial statements.

The credit facility contains a number of significantcovenants that, among other things, restrict KapStone’s ability to dispose ofassets, incur additional indebtedness, prepay other indebtedness, paydividends, repurchase or redeem capital stock, enter into certain investments,make certain acquisitions, engage in mergers and consolidations, create liens,or engage in certain transactions with affiliates and otherwise restrictKapStone’s corporate and business activities. In addition, under the credit facility, KapStone Kraft is required tocomply with a minimum EBITDA, fixed charge coverage ratio and total debt toEBITDA ratio.  The credit facility alsorestricts the aggregate amount of capital expenditures incurred by KapStoneKraft.

Events of default under the senior secured creditfacility include, but are not limited to: (a) failure to pay principal or interest when due;(b) material breach of any representation or warranty; (c) covenantdefaults; (d) default with respect to any other debt with an outstandingprincipal amount in excess of $2.5 million if the effect thereof is toaccelerate or permit the acceleration of such debt; and (e) events ofbankruptcy.

The credit facility is secured by all of KapStoneKraft’s tangible and intangible assets and a pledge of the capital stock ofKapStone Kraft.

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***Cash flow***

Cash flow from all activities during the quarter endedMarch 31, 2007, increased by $35.2 million from December 31, 2006, reflectingthe receipt of funds held in trust at December 31, 2006 not used for the KPBacquisition of $23.7 million, and cash generated from operations of $14.8million, partially offset by capital expenditures of $2.1 million, and aninvestment banking fee paid of $1.2 million.

Net cash inflow from operating activities was $14.8million due to net income for the quarter and improved working capital.

Net cash outflow from investing activities was $152.6million and included payment for the KPB acquisition of $150.3 million andcapital expenditures of $2.1 million. Most capital expenditures are for theunbleached kraft segment and include equipment upgrades and replacements at thepaper mill in Roanoke Rapids, North Carolina.

Net cash inflow generated from financing activitiestotaled $173.0 million during the quarter ended March 31, 2007, and includesproceeds from the term loan of $60.0 million, and receipt of funds held intrust for the KPB acquisition of $115.2 million. In addition, during thequarter, the Company paid its investment banker a $1.2 million fee relating tothe IPO and a $0.9 million fee for its credit facility.

**Off-Balance Sheet Arrangements**

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

**New Accounting Pronouncements**

***Stock Based Compensation***

In December 2004, the Financial Accounting StandardsBoard (FASB) issued Statement of Financial Accounting Standards (SFAS) No.123(R) “Share-Based Payments”, which requires that the fair value of allshare-based payments to employees, including stock options, be recognized infinancial statements. SFAS No. 123(R) superceded Accounting Principles Board(APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” whichrequired that the intrinsic-value method be used in determining compensationexpense for share-based payments to employees. Under SFAS No. 123(R),employee-compensation expense is based on the grant-date fair value of awards,and will be recognized in the Statement of Operations over the period thatrecipients of awards are required to provide related service (normally thevesting period).

In April 2007, the Company’s Compensation Committeeapproved the issuance of 174,020 shares of restricted stock and 512,000 stockoptions to directors, executive officers and employees of the Company. As aresult, the Company will apply the provisions of FAS 123 (R) beginning with thesecond quarter of 2007. Previously, no stock based compensation had beenawarded by the Company.

**Fair Value Option for FinancialAssets**

In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities, including anamendment of SFAS No. 115”. This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. This statement is expected to expand the use offair value measurement, which is consistent with the FASB’s long-termmeasurement objectives for accounting for financial instruments. SFAS No. 159is effective for our fiscal year beginning January 1, 2008.

We are in the process of evaluating this statement,but do not expect that the adoption of SFAS No. 159 will have a material impacton our condensed consolidated financial statements.

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**Contractual Obligations**

We lease various facilities, warehouses and equipmentunder non-cancelable operating leases. In accordance with generally acceptedaccounting principles, some of these obligations are not recognized asliabilities in our condensed consolidated balance sheets.

The following table summarizes our contractual obligationsas of March 31, 2007 (in thousands):

 
| ** **                                 | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                | ** ** | **Less Than** | ** ** | **1-3** | ** ** | **3-5** | ** ** | **More than** | ** ** |
| **Contractual Obligations**           | ** ** | **Total**                                 | ** ** | **1 Year** | ** ** | **Years** | ** ** | **Years** | ** ** | **5 Years** | ** ** |
| Long-term debt  obligations(1)             |       | $                                         | 60,000     |   | $ | 9,500 |   | $ | 25,250 |   | $ | 25,250 |   | $ | — |   |
| Interest on long-term  debt obligations(2) |       | 14,578                                    |       | 5,019 |   | 8,334 |   | 1,225 |   | — |   |
| Operating lease  obligations(3)            |       | 1,084                                     |       | 337 |   | 622 |   | 96 |   | 29 |   |
| Purchase obligations(4)                    |       | 86                                        |       | 86 |   | — |   | — |   | — |   |
| Other liabilities(5)                       |       | 3,665                                     |       | — |   | 3,665 |   | — |   | — |   |
| Total                                      |       | $                                         | 79,413     |   | $ | 14,942 |   | $ | 37,871 |   | $ | 26,571 |   | $ | 29 |   |

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(1)             Theseobligations are reflected on our condensed consolidated balance sheets at March31, 2007 in Current portion of long-term debt and Long-term debt, asappropriate.

(2)             Assumesdebt is carried to full term. Debt bears interest at variable rates. Theamounts above assume future interest will be incurred at the bank’s LIBOR rateon March 31, 2007 (7.1%). These obligations are not reflected on our condensed consolidatedbalance sheets at March 31, 2007.

(3)             Theseobligations are not reflected on our condensed consolidated balance sheets atMarch 31, 2007.

(4)             Purchaseobligations are agreements to purchase goods or services that are enforceableand legally binding on us and that specify all significant terms, including:fixed or minimum quantities to be purchased These obligations are not reflectedon our condensed consolidated balance sheets at March 31, 2007.

(5)             Theseitems are reflected on our condensed consolidated balance sheets at March 31,2007 in other liabilities.

**Item 3.—    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

Market risk is the sensitivity of income to changes ininterest rates, commodity prices, equity prices, and other market-driven ratesor prices.

Under KapStone Kraft’s Credit Facility, we have a $60million term loan and a revolving loan of $35 million. At March 31, 2007, thebalance of the term loan was $60 million and there were no amounts drawn on therevolving loan. We had one letter of credit outstanding at March 31, 2007totaling $300. Advances under the revolving line of credit are primarily basedupon percentages of eligible accounts receivable and inventories.  The facility has a maturity date ofDecember 31, 2011.

Borrowings under the term loan accrue interest, at ouroption, at either:  LIBOR plus 1.25% to2.00% depending on KapStone Kraft’s total debt to EBITDA ratio (as defined inthe agreement); or the Base Rate (prime rate) plus 0% to .50% depending on KapStoneKraft’s total debt to EBITDA ratio. The Base Rate margin and LIBOR margin shalladjust quarterly upon receipt of quarterly financial statements.

Changes in market rates may impact the bank’s LIBOR rate.For instance, if the bank’s LIBOR rate were to increase or decrease by onepercentage point (1.0%), our annual interest expense would change byapproximately $550,000 based upon our expected future monthly loan balances perour existing repayment schedule.

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The principal market risk to which we are exposed iscommodity and energy price risk. We are exposed to price fluctuations ofcertain commodities used in production as well as fluctuations in the price ofits finished goods. Key raw materials and energy used in the production processinclude roundwood and woodchips, coal, electricity and caustic soda. Wepurchase these raw materials and energy at the market prices, and do not useforward contracts or other financial instruments to hedge its exposure to pricerisk related to these commodities. Prices for paper and related products aresubject to market conditions. We have no long-term contracts to purchase rawmaterials or energy at fixed prices.

Except as described above, there have been no othermaterial changes to our market risk exposure since December 31, 2006.

**Item 4.—    CONTROLS AND PROCEDURES**

As of the end of the period covered by this report,our Chief Executive Officer and our Chief Financial Officer carried out anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, as required by Rule 13a-15(b) under theSecurities Exchange Act of 1934. Based upon that evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that our disclosure controlsand procedures were designed, and were effective, to give reasonable assurancethat information required to be disclosed about us and our subsidiary isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the SEC and is accumulated and communicated tomanagement as appropriate to allow timely decisions regarding requireddisclosure in our filings under the Securities Exchange Act of 1934.

The following changes were made to the Company’sinternal control over financial reporting during the quarter endedMarch 31, 2007 that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

Upon the Company’s acquisition of KPB onJanuary 2, 2007 from International Paper, the Company’s existing financialreporting processes, which consisted of management of cash and investments,management of cash disbursements, management of period end closing andmanagement of external reporting, were all expanded and or modified.

Various functions, controls and financial reportingprocesses of KPB were combined to existing Company functions, controls andfinancial processes and the Company currently continues to depend on theinformation and reporting systems of International Paper to monitor theoperation of the KPB business.

The Company implemented significant businessprocesses, much of which were from KPB, addressing financial reporting,accounting close, revenue and receivables, purchasing and payables, plant, propertyand equipment, treasury and investment, inventory, payroll, employee benefits,non-recurring transactions and information technology.

In addition, in January 2007, an audit committee,compensation committee and nominating and governance committee of the boardwere formed, board committee charters were adopted and various corporategovernance policies were implemented.

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**PART II.— OTHER INFORMATION**

**Item 1.—    LEGAL PROCEEDINGS**

None.

**Item 1A. — RISK FACTORS**

Except as described below, there have been no materialchanges from the Risk Factors described in our Form 10-K for the year endedDecember 31, 2006 (“Form 10-K”). The first risk factor below is anaddition to our Risk Factors and the remainder are updates to existing riskfactors that supersede the corresponding Risk Factor in our Form 10-K. Each ofthe Risk Factors below should be read in conjunction with the Risk Factors andinformation disclosed in our Form 10-K.

**The market price for our common stock may behighly volatile.**

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

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

Any future issuance of equity securities, includingexercise of stock options, could dilute the interests of our existingstockholders and could substantially decrease the trading price of our commonstock.

**Item 2.—    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

None.

**Item 3.—    DEFAULTS UPON SENIOR SECURITIES**

None.

**Item 4.—    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

**Item 5.—    OTHER INFORMATION**

None.

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**Item 6.—    EXHIBITS**

(b)     Exhibits

| 10.12  |   | First Amendment to Credit Agreement dated as of May  1, 2007 by and among KapStone Kraft Paper Corporation and LaSalle National  Bank Association. (1)                                      |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                        |
| 31.1   |   | Certification of Chief Executive Officer Pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                        |
| 31.2   |   | Certification of Chief Financial Officer Pursuant to  Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002. |
|   |   |                                                                                                                                                                                        |
| 32.1   |   | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                              |
|   |   |                                                                                                                                                                                        |
| 32.2   |   | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                              |

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(1) Incorporated byreference to the Registrant’s Current Report on Form 8-K dated May 1, 2007.

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**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. 
|             | KAPSTONE PAPER AND PACKAGING CORPORATION |
|-------------|------------------------------------------|
|        |                                     |   |
| May 9, 2007 | By:                                      | /s/ Andrea K. Tarbox |
|        |                                     | Andrea K. Tarbox |
|        |                                     | Vice President and Chief Financial Officer |

 

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