**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 20-F**

 

**(Mark One)**

 

| **o**                                | **REGISTRATION  STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                                                                           |
|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                 |
| **OR**                               |
|                                 |
| **ý**                           | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934.**                                                                                                                                                                                                                               |
|                                 | **For the fiscal year ended December 31, 2002**                                                                                                                                                                                                                                                                                |
|                                 |                                                                                                                                                                                                                                                                                                                           |
| **OR**                               |
|                                 |
| **o**                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                  |
|                                 | **For the transition period from                           to                         ** |
|                                 |                                                                                                                                                                                                                                                                                                                           |
| **Commission File number 333-11044** |

 

**KAPPA HOLDING B.V.**

(Exact Name of Registrant as specified in itscharter)

 

**THE NETHERLANDS**

(Jurisdiction of incorporation ororganization)

 

**DR. HOLTROPLAAN 5, NL-5652 XR EINDHOVEN, THENETHERLANDS**

(Address of principal executive offices)

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

**None**

 

Securitiesregistered or to be registered to Section 12(g) of the Act.

**None**

 

Securities forwhich there is a reporting obligation pursuant to Section 15(d) of the Act.

 

**€370,000,000 105****/8%Senior Subordinated Notes due 2009$100,000,000 105****/8% Senior Subordinated Notesdue 2009€145,000,000 121⁄2% Senior Subordinated Discount Notes due 2009**

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

Not Applicable

 

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

 

| ý  YES |   | o  NO |
|-----------------------|--------|-----------------|

Indicate by check mark which financialstatement item the registrant has elected to follow.

 

| o  ITEM 17 |   | ý  ITEM 18 |
|----------------------|--------|---------------------------|

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURINGTHE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documentsand reports required to be filed by Section 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securitiesunder a plan confirmed by a court.

 

Not Applicable

 

 

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**TABLEOF CONTENTS**

 
| Certain Definitions and Presentation of  Financial and Other Information                     |
|----------------------------------------------------------------------------------------------|
| Glossary of Certain Industry Terms and Unit  Conversions                                     |
| Cautionary Note Regarding Forward-Looking  Statements                                        |
| PART I                                                                                       |
| Item  1.  Identity of Directors, Senior  Management and Advisers                        |
| Item  2.  Offer Statistics and Expected  Timetable                                      |
| Item  3.  Key Information                                                               |
| Item 4.   Information on the Company                                                    |
| Item 5.   Operating and Financial Review and Prospects                                  |
| Item  6.  Directors, Senior Management and  Employees                                   |
| Item 7.  Major Shareholders and Related Party  Transactions                             |
| Item  8.  Financial Information                                                         |
| Item  9.  The Offer and Listing                                                         |
| Item 10.   Additional Information                                                       |
| Item 11.   Quantitative and Qualitative Disclosures About Market Risk                   |
| Item 12.   Description of Securities Other than Equity Securities                       |
| PART  II                                                                                     |
| Item 13.   Defaults, Dividend Arrearages and Delinquencies                              |
| Item 14.  Material Modifications to the Rights of Security Holders and Use  of Proceeds |
| Item 15.   Controls and Procedures                                                      |
| Item 16.   [Reserved]                                                                   |
| PART III                                                                                     |
| Item 17.  Financial Statements                                                          |
| Item 18.  Financial Statements                                                          |
| Item 19.   Exhibits                                                                     |

 

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**Certain Definitions and Presentation ofFinancial and Other Information**

 

References inthis annual report to the “Company” are to Kappa Holding B.V.  (“Kappa Holding”) and references to “theGroup,” “the Kappa Packaging Group,” “Kappa Packaging,” “we,” “our,” “ours” and“us” are to the Company and its consolidated subsidiaries.  Where such business and operations at anytime prior to May 31, 1998 are being described, these expressions shallmean the paper and board production and converting businesses conducted by N.V.Koninklijke KNP BT (“KNP BT”), the previous owner of our operatingsubsidiaries, and its subsidiaries at that time. References to “Benelux” are tothe region comprised of Belgium, The Netherlands and Luxembourg. References to“Senior Subordinated Notes” are to the notes issued by Kappa Beheer B.V.  (“Kappa Beheer”) (which, depending on theclass of the note, are guaranteed either by the Company and Kappa Beheer’ssubsidiary, Kappa Packaging B.V. (“Kappa Packaging”) or solely by KappaPackaging). References to the “Senior Credit Agreement” are to the Amendmentand Restatement Agreement dated May 17, 2001 relating to a Facility Agreementdated July 23, 1998, between Kappa Packaging B.V.  and certain companies within the Kappa Group, Barclays Capitaland Deutsche Bank AG London, as Senior Joint Mandated Lead Arrangers, andBarclays Bank Plc as Senior Facility Agent and Security Agent. References to“Alpha” are to the containerboard and corrugated packaging businesses ofAssiDomän AB that we acquired in May 2001. References to “Cinven” are to CinvenLimited and to investment funds managed or advised by Cinven Limited andreferences to “CVC” are to CVC Capital Partners Limited and to investment fundsmanaged or advised by CVC Capital Partners Limited.

 

Market dataused in this annual report were obtained from our internal surveys and industrysurveys and publications.  Industrysurveys and publications generally state that the information contained in themhas been obtained from sources believed to be reliable.  Neither Kappa Packaging nor the managershave independently verified such market data. We take responsibility for compiling and extracting market data obtainedfrom industry surveys and publications, but we cannot assure you of theaccuracy and completeness of such information and take no furtherresponsibility for such data. Similarly, while we believe our internal surveys to be reliable, theyhave not been verified by any independent sources and we cannot assure you asto their accuracy.

 

In thisreport, unless otherwise indicated, all references to:

 

“Britishpounds” or “GBP” are to the lawful currency of the United Kingdom;

 

“Czech koruna”or “CZK” are to the lawful currency of the Czech Republic;

 

“Danish krone”or “DKK” are to the lawful currency of Denmark;

 

“Dutchguilders” or “NLG” are to the former lawful currency of The Netherlands;

 

“EU” is to TheEuropean Union;

 

“euro” or “€”are to the lawful currency of certain countries belonging to The EuropeanUnion, including The

Netherlands;

 

“Norwegiankroner” or “NOK” are to the lawful currency of Norway;

 

“Polishzlotys” or “PLN” are to the lawful currency of Poland;

 

“Slovakkoruna” or “SKK” are to the lawful currency of Slovak Republic;

 

“South Africanrand” or “ZAR” are to the lawful currency of South Africa;

 

“Swedishkronor” or “SEK” are to the lawful currency of the Kingdom of Sweden;

 

“UnitedKingdom” or the “UK” are to the United Kingdom of Great Britain and NorthernIreland;

 

“UnitedStates” or the “US” are to the United States of America; and

 

“US dollars,”“US$” and “$” are to the lawful currency of the United States.

 

1

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Except asotherwise stated in this annual report, we have translated Dutch guilderamounts into euros at a fixed rate of €1.00=NLG 2.20371 and rounded to twodecimal places.

 

We publish ourfinancial statements in euro.  Financialstatement amounts included in this annual report are presented in accordancewith generally accepted accounting principles in The Netherlands, or DutchGAAP, which differ in significant respects from generally accepted accountingprinciples in The United States, or US GAAP.

 

Except asotherwise stated in this report, conversions of euro to dollars have been givenfor convenience only and at the assumed rates stated below.  These conversions should not be consideredas representations that the euro amounts actually represent the dollar amountsor could be converted into dollars at the rates indicated or at any otherrates.

 

The euro wasintroduced on January 1, 1999 at a fixed rate of €1.00 = NLG2.20371.  As of July 3, 2003, the noonbuying rate in the City of New York as announced by the Federal Reserve Bank ofNew York for customs purposes (the “Noon Buying Rates”) for cable transfers ineuro was approximately €1 = $1.1503.

 

The followingtable sets out, for the periods and dates indicated, certain informationconcerning the Dutch guilder exchange rate, set forth in NLG per $1.  The average rate is based on the average ofNoon Buying Rates on the last day of each month during the relevant period.

 
|                         |   | **NLG per $1  Average** |   |
|------------------------------|--------|-------------------------|--------|
| Year ended December 31, 1998 |   | 1.9832                  |   |

 

The following table sets out, for the periodsand dates indicated, certain information concerning the euro exchange rate, setforth in euro per dollar.  The averagerate is based on the average of Noon Buying Rates on the last day of each monthduring the relevant period.

 
| **Year**                     |   | **Average** |       |    |       |
|------------------------------|--------|-------------|------------|---------|------------|
|                         |   |        |       |    |       |
| Year ended December 31, 1999 |   | 0.9444      |       |    |       |
| Year ended December 31, 2000 |   | 1.0861      |       |    |       |
| Year ended December 31, 2001 |   | 1.1225      |       |    |       |
| Year ended December 31, 2002 |   | 0.9454      | ** ** |    | ** ** |
|                         |   |        | ** ** |    | ** ** |
| **Month**                    |   | **High**    |       | **Low** |       |
| December 2002                |   | 1.0485      |       | 0.9927  |       |
| January 2003                 |   | 1.0861      |       | 1.0361  |       |
| February 2003                |   | 1.0875      |       | 1.0708  |       |
| March 2003                   |   | 1.1062      |       | 1.0545  |       |
| April 2003                   |   | 1.1180      |       | 1.0621  |       |
| May 2003                     |   | 1.1853      |       | 1.1200  |       |
| June 2003                    |   | 1.1870      |       | 1.1423  |       |

 

We make norepresentation that the amounts referred to above could have been or could beconverted into the foregoing currencies at any particular rate or at all.

 

2

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**Glossary of Certain Industry Terms and UnitConversions**

 
| “Alpha”                 |   | term used to indicate the acquired containerboard and corrugated  packaging businesses from AssiDomän AB                                                                                                                                                               |
|-----------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |   |                                                                                                                                                                                                                                                                        |
| “containerboard”        |   | the general term for *linerboard* and *fluting* (which are the  paper and board materials used in the production of *corrugated board*);  synonymous with corrugated case material (or CCM)                                                                                 |
|                              |   |                                                                                                                                                                                                                                                                        |
| “corrugated board”      |   | board manufactured by gluing together a corrugated layer of *fluting*between  two flat *linerboards*(or multiple layers thereof)                                                                                                                                            |
|                              |   |                                                                                                                                                                                                                                                                        |
| “fresh fiber”           |   | fiber derived directly from wood pulp                                                                                                                                                                                                                                       |
|                              |   |                                                                                                                                                                                                                                                                        |
| “fluting”               |   | paper used for the middle layer of *corrugated board*                                                                                                                                                                                                                       |
|                              |   |                                                                                                                                                                                                                                                                        |
| “graphic board”         |   | *solid board*produced  for applications with high graphic specifications such as book covers,  binders and board games                                                                                                                                                      |
|                              |   |                                                                                                                                                                                                                                                                        |
| “kraftliner”            |   | *linerboard*which  is manufactured mainly from *fresh fiber-*based**pulp                                                                                                                                                                                                    |
|                              |   |                                                                                                                                                                                                                                                                        |
| “linerboard”            |   | fiber-based material used for the outer layers of *corrugated  board*which falls into two categories:  *kraftliner*and *testliner*                                                                                                                                     |
|                              |   |                                                                                                                                                                                                                                                                        |
| “mixed waste paper”     |   | waste paper from households containing various grades                                                                                                                                                                                                                       |
|                              |   |                                                                                                                                                                                                                                                                        |
| “recovered paper”       |   | the industry terminology for used paper items which are collected for  recycling                                                                                                                                                                                            |
|                              |   |                                                                                                                                                                                                                                                                        |
| “recycled fiber”        |   | fiber derived from old corrugated containers (or OCC) and other  recovered paper                                                                                                                                                                                            |
|                              |   |                                                                                                                                                                                                                                                                        |
| “semi-chemical fluting” |   | *fluting*  manufactured mainly from *fresh fiber-*based pulp                                                                                                                                                                                                                |
|                              |   |                                                                                                                                                                                                                                                                        |
| “sheet-feeder”          |   | a specialized production unit, equipped on corrugating machines only,  that produces corrugated sheets. These sheets are made according to thickness  and format specifications and are supplied on short notice to sheet plants that  convert them into packaging products |
|                              |   |                                                                                                                                                                                                                                                                        |
| “sheet plant”           |   | a small, highly flexible, market orientated unit that procures sheets  of corrugated board and converts these into packaging products. Sheet plants  are less dependant on large production runs                                                                            |
|                              |   |                                                                                                                                                                                                                                                                        |
| “solid board”           |   | board manufactured primarily from *recycled fiber* and used for a range of  packaging and *specialty board*and *graphic board*applications                                                                                                                                  |
|                              |   |                                                                                                                                                                                                                                                                        |
| “specialty board”       |   | *solid board*produced  for applications such as luxury gift boxes, game boxes and special stationery                                                                                                                                                                        |
|                              |   |                                                                                                                                                                                                                                                                        |
| “testliner”             |   | *linerboard*which  is manufactured from *recycled fiber*                                                                                                                                                                                                                    |
|                              |   |                                                                                                                                                                                                                                                                        |
| “wellenstoff”           |   | *fiber-*based  *fluting*                                                                                                                                                                                                                                                    |
|                              |   |                                                                                                                                                                                                                                                                        |
| “white surfaced”        |   | *white-top,**white-mottled*,  and fully bleached *kraftliner*                                                                                                                                                                                                               |

 

3

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| “white-top kraftliner”     |   | linerboard with surface layer of bleached sulphate (kraft) pulp which  improves printability |
|--------------------------------------|--------|----------------------------------------------------------------------------------------------|
|                                 |   |                                                                                         |
| “white-mottled kraftliner” |   | unbleached softwood kraft pulp with bleached pulp in top layer                               |

 

**Unit Conversions**

 
| 1 Ton (metric) | = | 2,204.6224 Pounds   | 1 Kilometer | = | 0.6214 Miles |
|----------------|---|---------------------|-------------|---|--------------|
| 1 Ton (metric) | = | 1.1023 Tons (short) | 1 Kiloton   | = | 1,000 Tons   |
| 1 Meter        | = | 3.2808 Feet         | M2     | = | square meter |

 

4

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**Cautionary Note Regarding Forward-LookingStatements**

 

This annualreport includes forward-looking statements (as such term is defined in the USPrivate Securities Litigation Reform Act of 1995) that reflect our intentions,beliefs or current expectations and projections about our future results ofoperations, financial condition, liquidity, performance, prospects, growth,strategies, opportunities as well as the industry in which we operate.  Forward-looking statements include allmatters that are not historical facts.

 

Theseforward-looking statements can be identified by the use of forward-lookingterminology, including the terms “may,” “will,” “should,” “expect,” “intend,”“estimate,” “anticipate,” “project,” “believe,” “plan,” “seek” and “continue”or other variations or comparable terminology or, in each case, theirnegative.  Forward-looking statementsmay be found throughout this annual report and, in particular, in the sectionsentitled “Item 3.D. Risk Factors,” “Item 4.B. Business Overview” and “Item 5.  Operating and Financial Review andProspects.”

 

Theseforward-looking statements are subject to a number of risks, uncertainties,assumptions and other factors that could cause our actual results ofoperations, financial condition, liquidity, performance, prospects oropportunities, as well as those of the markets we serve or intend to serve, todiffer materially from those expressed in, or suggested by, theseforward-looking statements.  Importantfactors that could cause those differences include, but are not limited to:

 

•                       ourfinancial position;

 

•                       our abilityto develop, balance and expand our business;

 

•                       our abilityto implement our long-term growth strategy (including through organic growthand acquisitions);

 

•                       our abilityto make improvements to our capital structure;

 

•                       industryand market trends and volumes;

 

•                       fluctuationsin prices of our raw materials or in our sales prices;

 

•                       the effectsof regulation (including employment, environmental and tax regulations);

 

•                       our abilityto improve the efficiency of our operations and to reduce expenses in ouroperating companies and their facilities;

 

•                       competitionand changes in the competitive environment in which we operate; or

 

•                       litigation.

 

In light ofthese risks, uncertainties, assumptions or other factors, the forward-lookingstatements described in this annual report may not be representative of futureevents.  Additional risks that we maycurrently deem immaterial or that are not presently known to us could alsocause the forward-looking statements discussed in this annual report not to berepresentative of future events.  Weundertake no obligation to update publicly or revise publicly anyforward-looking statements, whether as a result of new information, futureevents, changed circumstances or any other reason after the date of this annualreport.

 

5

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**PART I.**

 

**1.1**                               **Item 1****.  Identity ofDirectors, Senior Management and Advisers**

 

Not applicable.

 

**1.2**                               **Item 2****.  OfferStatistics and Expected Timetable**

 

Not applicable.

 

**1.3**                               **Item 3****.  KeyInformation**

 

**A.**                                                **Selected Financial Data**

 

The following tables present summary historical combined andconsolidated financial data for the predecessor of Kappa Holding, the companiesconducting the paper and board production and converting businesses of N.V.Koninklijke KNP BT (“Predecessor”) as of and for the five-month period endedMay 31, 1998, and for Kappa Holding and its subsidiaries (“Successor”), asof and for the seven-month period ended December 31, 1998 and for theyears ended December 31, 1999, 2000, 2001 and 2002.  The Predecessor and Successor arecollectively considered to be part of the “Kappa Packaging Group.”

 

We have derived the summary historical financial data for the KappaPackaging Group for the five month period ended May 31, 1998, the sevenmonth period ended December 31, 1998 and the year ended December 31,1999 and as at December 31, 1998 and 1999 from the Financial Statementspresented in our previous Annual Reports on Form 20-F.  We have derived the summary historicalfinancial data for the Kappa Packaging Group for each of the years endedDecember 31, 2000, 2001 and 2002 and as at December 31, 2000, 2001and 2002, from the Consolidated Financial Statements included in this documentin “Item 18. Financial Statements.”

 

We have prepared our financial information in accordance with DutchGAAP, which differs in certain significant respects from US GAAP as describedin Note 28 to the Consolidated Financial Statements, included in thisdocument in “Item 18.  FinancialStatements.”

 

You should read these tables in conjunction with “Item 5. Operating andFinancial Review and Prospects” and the Consolidated Financial Statementscontained in “Item 18. Financial Statements” and the related notes, of theKappa Packaging Group.

 

6

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|                                      |   | **Predecessor  (€ in millions)** |   | **Successor  (€ in millions)**          |   |
|-------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------|--------|
|                                      |   | **Five  months  ended May  31, 1998** |   | **Seven  months  ended  December  31, 1998** |   | **Year ended  December  31, 1999** |   | **Year  ended  December  31, 2000** |   | **Year ended  December  31, 2001** |   | **Year  ended  December  31, 2002** |   |
| **Income Statement Data**                 |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with Dutch GAAP*   |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Net sales (1)                             |   | 551.6                                 |   | 743.0                                        |   | 1,314.9 |   | 1,672.4 |   | 2,472.3 |   | 2,937.6 |   |
| Operating income (2)                      |   | 46.1                                  |   | 70.8                                         |   | 130.6 |   | 140.0 |   | 246.1 |   | 222.5 |   |
| Net income/(loss)                         |   | 21.1                                  |   | 3.7                                          |   | 5.2 |   | (15.7 | ) | 11.2 |   | (9.9 | ) |
|                                      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with US GAAP*      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Operating income (2)(3)                   |   | 32.8                                  |   | 60.5                                         |   | 118.1 |   | 125.3 |   | 170.8 |   | 228.4 |   |
| Net income/(loss)                         |   | 13.8                                  |   | (3.1                                         | )      | (5.9 | ) | (22.3 | ) | (39.0 | ) | (2.3 | ) |
|                                      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| **Balance Sheet Data (at end of period)** |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with Dutch GAAP*   |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                 |   |                                  |   | 80.0                                         |   | 112.1 |   | 76.7 |   | 217.6 |   | 233.6 |   |
| Net working capital (4)                   |   |                                  |   | 104.4                                        |   | 84.3 |   | 105.5 |   | 311.9 |   | 272.2 |   |
| Tangible fixed assets                     |   |                                  |   | 842.5                                        |   | 826.9 |   | 875.0 |   | 1,671.3 |   | 1,654.7 |   |
| Total assets                              |   |                                  |   | 1,976.6                                      |   | 2,031.9 |   | 2,114.3 |   | 3,709.2 |   | 3,643.3 |   |
| Total long-term liabilities               |   |                                  |   | 1,146.8                                      |   | 1,112.3 |   | 1,153.6 |   | 2,083.1 |   | 2,001.8 |   |
| Shareholders’ loans (5)              |   |                                  |   | 207.7                                        |   | 226.7 |   | 247.4 |   | 581.8 |   | 628.0 |   |
| Shareholders’ equity                 |   |                                  |   | 152.2                                        |   | 158.1 |   | 141.3 |   | 143.7 |   | 124.0 |   |
|                                      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with US GAAP*      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Total assets                              |   |                                  |   | 1,921.4                                      |   | 1,985.2 |   | 2,067.6 |   | 3,632.0 |   | 3,551.2 |   |
| Shareholders’ equity                 |   |                                  |   | 140.2                                        |   | 140.9 |   | 116.4 |   | 69.1 |   | 22.8 |   |
|                                      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
|                                      |   | **Predecessor  (€ in millions)** |   | **Successor  (€ in millions)**          |   |
|                                      |   | **Five  months  ended May  31, 1998** |   | **Seven  months  ended  December  31, 1998** |   | **Year ended  December  31, 1999** |   | **Year  ended  December  31, 2000** |   | **Year  ended  December  31, 2001** |   | **Year  ended  December  31, 2002** |   |
| **Other Financial Data**                  |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with Dutch GAAP*   |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Cash flow from operations                 |   | 3.8                                   |   | 128.4                                        |   | 165.8 |   | 127.7 |   | 235.9 |   | 273.5 |   |
| Cash flow from financing                  |   | 33.4                                  |   | 1,220.3                                      |   | (50.2 | ) | 21.0 |   | 1,218.4 |   | (99.7 | ) |
| Cash flow from investing                  |   | (18.0                                 | )      | (1,267.6                                     | )      | (80.5 | ) | (189.9 | ) | (1,361.9 | ) | (161.8 | ) |
| EBITDA (6)                                |   | 89.5                                  |   | 142.3                                        |   | 249.0 |   | 269.9 |   | 422.1 |   | 441.0 |   |
| Depreciation                              |   | 42.9                                  |   | 60.4                                         |   | 100.1 |   | 111.2 |   | 152.4 |   | 167.8 |   |
| Depreciation and impairment charges       |   | 42.9                                  |   | 60.4                                         |   | 100.1 |   | 111.2 |   | 152.4 |   | 187.8 |   |
| Amortization of intangible fixed assets   |   | 0.5                                   |   | 11.1                                         |   | 18.3 |   | 18.7 |   | 23.6 |   | 30.7 |   |
| Management charges (net of tax)           |   | 2.0                                   |   | —                                       |   | — |   | — |   | — |   | — |   |
| Capital expenditures                      |   | 20.4                                  |   | 47.3                                         |   | 80.5 |   | 102.5 |   | 154.6 |   | 162.1 |   |
|                                      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| *Amounts in accordance with US GAAP*      |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Amortization of goodwill                  |   | 0.8                                   |   | 10.2                                         |   | 16.9 |   | 17.8 |   | 20.4 |   | — |   |

 

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(1)                                  Netof change in work in progress and finished goods.

 

(2)                                  Operating incomeexcludes extraordinary items but includes amortization in accordance with DutchGAAP.

 

7

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(3)                                  In order to complywith US GAAP, certain adjustments have been made as described in Note 28 to theConsolidated Financial Statements as included in this document in “Item18.  Financial Statements,” which can bespecified as follows:

 
|                                            |   | **(€ in  millions)**          |   |
|-------------------------------------------------|--------|------------------------------------|--------|
|                                            |   | **Year ended  December  31, 2000** |   | **Year ended  December  31, 2001** |   | **Year ended  December  31, 2002** |   |
|                                            |   |                               |   |   |   |   |   |
| Operating income in accordance with Dutch  GAAP |   | 140.0                              |   | 246.1 |   | 222.5 |   |
| US GAAP reclassifications:                      |   |                               |   |   |   |   |   |
| Extraordinary items, before tax                 |   | (5.2                               | )      | (20.1 | ) | — |   |
|                                            |   | 134.8                              |   | 226.0 |   | 222.5 |   |
|                                            |   |                               |   |   |   |   |   |
| US GAAP adjustments:                            |   |                               |   |   |   |   |   |
| Fair value adjustment Alpha acquisition         |   | —                             |   | — |   | 2.6 |   |
| Impairment long-lived assets                    |   | —                             |   | — |   | (5.7 | ) |
| Restructuring costs                             |   | (19.2                              | )      | (46.7 | ) | (10.6 | ) |
| Amortization of goodwill                        |   | 1.0                                |   | 1.7 |   | 24.7 |   |
| Other intangible assets                         |   | 1.2                                |   | (0.5 | ) | 0.1 |   |
| Insurance loss provision                        |   | (3.5                               | )      | (4.9 | ) | (5.2 | ) |
| Gain recorded on insurance proceeds             |   | 14.1                               |   | — |   | — |   |
| Financial instruments                           |   | 1.3                                |   | (2.0 | ) | 2.3 |   |
| Pension costs                                   |   | (3.7                               | )      | (2.8 | ) | (2.3 | ) |
| Acquisition Kappa SCAO                          |   | (0.7                               | )      | — |   | — |   |
|                                            |   |                               |   |   |   |   |   |
| Operating income in accordance with US GAAP     |   | 125.3                              |   | 170.8 |   | 228.4 |   |

 

(4)                                  Net working capitalequals non-cash current assets, net of non-debt related current liabilities(excluding short-term debt, bank overdrafts, and current portion of long-termdebt).

 

(5)                                  The Shareholders’loans are junior subordinated loans from CVC, Cinven and Stichting SeniorManagement Kappa. See “Item 7. Major Shareholders and Related PartyTransactions – Related party transactions.”

 

(6)                                  EBITDA representsearnings from operations before income taxes, net interest expense,depreciation, amortization, income from participations and minorityinterests.  EBITDA is a widely acceptedfinancial indicator to investors of a company’s ability to incur and servicedebt.  It is not, however, a measurerecognized by generally accepted accounting principles in the Netherlands andthe United States of America and should not be considered as a substitute foroperating income, as an indicator of liquidity or as a substitute for net cashprovided by operating activities.  Thismethod may not be comparable to the EBITDA calculations of other entities.EBITDA for the year 2002 includes exceptional restructuring costs of €12.0million in relation to a restructuring provision set up in 2002 due tomanagement’s decision to reduce the total number of employees during 2003 byapproximately 400.

 

The followingtable gives a reconciliation of net income and operating income to EBITDA:

 
|                                               |   | **Predecessor  (€ in millions)** |   | **Successor  (€ in millions)**          |   |
|----------------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------|--------|
|                                               |   | **Five  months  ended May  31, 1998** |   | **Seven  months  ended  December  31, 1998** |   | **Year ended  December  31, 1999** |   | **Year ended  December  31, 2000** |   | **Year ended  December  31, 2001** |   | **Year ended  December  31, 2002** |   |
|                                               |   |                                  |   |                                         |   |   |   |   |   |   |   |   |   |
| Net income                                         |   | 21.1                                  |   | 3.7                                          |   | 5.2 |   | (15.7 | ) | 11.2 |   | (9.9 | ) |
| Extraordinary items, net of taxation               |   | 2.0                                   |   | —                                       |   | (9.7 | ) | 3.4 |   | 13.1 |   | — |   |
| Income from participations and minority  interests |   | (0.3                                  | )      | (0.2                                         | )      | (0.6 | ) | (0.7 | ) | — |   | (0.4 | ) |
| Income taxes                                       |   | 11.9                                  |   | 9.7                                          |   | 8.8 |   | 13.8 |   | 19.1 |   | (5.4 | ) |
| Interest expense                                   |   | 11.4                                  |   | 57.6                                         |   | 126.9 |   | 139.2 |   | 202.7 |   | 238.2 |   |
| Operating income                                   |   | 46.1                                  |   | 70.8                                         |   | 130.6 |   | 140.0 |   | 246.1 |   | 222.5 |   |
| Depreciation, amortization and impairment  charges |   | 43.4                                  |   | 71.5                                         |   | 118.4 |   | 129.9 |   | 176.0 |   | 218.5 |   |
| EBITDA                                             |   | 89.5                                  |   | 142.3                                        |   | 249.0 |   | 269.9 |   | 442.1 |   | 441.0 |   |

 

8

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**B.**                                    **Capitalizationand Indebtedness**

 

Notapplicable.

 

**C.**                                    **Reason forthe Offer and Use of Proceeds**

 

Notapplicable.

 

**D.**                                    **Risk Factors**

 

*Below is a discussion of certain risksrelating to the business of the Kappa Packaging Group and the outstandingSenior Subordinated Notes. Additional risks not presently known to us or thatwe currently deem immaterial, may also impair our business operations. Ourbusiness, future prospects, financial condition or results of operations couldbe materially adversely affected by any of these risks.  You should read this section in light of andin conjunction with the other information set forth in this Annual Report.*

* *

**Risks Associated With our Industry**

 

***Changes in supplyand demand within our industry could adversely impact our financial results.***

 

Containerboardand solid board prices are vulnerable to changes in industry supply and demandgiven their commodity nature.

 

Changes in containerboardand solid board supply result from capacity additions or reductions, as well aschanges in inventory levels. Several projects have been announced which, ifcompleted, would increase the total European industry supply of containerboard,and we can make no assurances that other similar projects will not becompleted.

 

Containerboardand solid board demand is largely dependent on demand for corrugated and solidboard packaging, which in turn closely corresponds to changes in generalindustrial production and export activity. The capital intensive and high fixed cost nature of the industry inwhich we operate tends to result in continued production (especially bysmaller, privately held competitors) in periods of lower demand so long asprices are sufficient to meet marginal costs. Partly as a result of this continued production, a small change indemand can cause a relatively large change in price, contributing tosubstantial price competition and volatility.

 

As anintegrated producer, fluctuations in the margins of our Paper & Boardsegment are often offset by fluctuations in the margins of our Packagingsegment. However, there are periodic margin and cash flow implications due todelays or difficulties in our ability to adjust prices in our Paper & Boardand Packaging segments to perfectly match changes in input costs.

 

***We operate in ahighly competitive industry.***

 

The marketsfor containerboard and solid board and packaging products are highlycompetitive with many participants. The containerboard and corrugated packagingsectors in particular are among the more fragmented sectors within the paperand board industry in Europe. Competition in our markets is based principallyon quality, product specifications and overall product performance, service andprice. Containerboard products are largely a commodity and subject tosubstantial price competition, which can lead to lower prices.

 

Although ourprimary competition in containerboard production and packaging operations comesfrom other large integrated pan-European businesses like ourselves, we alsocompete with many smaller, local producers. The highly competitive nature ofour industry, combined with the factors discussed above under “Changes insupply and demand within our industry could adversely impact our financialresults” means that these smaller, privately held competitors may not react tomarket conditions in the same way as larger companies, thereby having apotentially greater impact on the market than is reflective of their size. In addition,competitors can add new capacity across all of our business segments by eitherconstructing new machines, converting existing machines or operating additionalproduction shifts.

 

9

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A recent trendtowards consolidation in the markets in which we operate has led to thecreation of larger companies.  Some ofthese large competitors may be less leveraged, have greater financial and otherresources and may benefit from greater economies of scale than us, allowingthem to withstand better the adverse nature of the business cycle and to takebetter advantage of industry developments.

 

In addition,we have historically faced significant competition in kraftliner from NorthAmerican exports, although these have decreased by approximately 50% sincepeaking in mid-1997, primarily due to the permanent closure of some of NorthAmerica’s containerboard capacity (including over 2.5 million tons since thebeginning of 2000).

 

In addition tocompetition from other manufacturers of fiber-based packaging, we also facecompetition from producers of alternative packaging materials, such as plastic,glass and metal.  If the use of suchalternative materials increases for certain applications at the expense offiber-based products, or if we are unable to compete successfully withproducers of these competitive products, our financial position and results ofoperations would be adversely affected.

 

***An unexpectedincrease in the cost of recovered paper or wood or lack of continued access torecovered paper or wood would increase our costs and make us less competitive.***

 

Currently, ourcontainerboard and solid board production is approximately 74% recycledfiber-based and approximately 26% fresh fiber-based.  Historically, the prices of recovered paper and wood havefluctuated significantly, particularly that of recovered paper.  While in the past we have generally beenable to pass along increased recovered paper costs in our containerboard andsolid board and packaging prices, there are periodic margin and cash flowimplications due to delays or difficulties in our ability to raise prices toperfectly match increased recovered paper prices.  Any future increase in the cost of recovered paper or wood couldhave a material adverse effect on our financial position and results ofoperations.

 

While webelieve that our recovered paper business, which satisfies a portion of ourrecovered paper requirements, provides some protection against any shortage ofsupply, there can be no assurances that we will be able to secure all of ourrecovered paper requirements.  Ourcontainerboard facilities acquired as part of the Alpha acquisition areprimarily fresh fiber-based, and thus require a supply of wood.  While we believe that our wood and wood chipsupply contract that we entered into with the forestry division of AssiDomän(now owned by Sveaskog) provides some protection against any shortage ofsupply, there can be no assurances that we will be able to secure all of ourfresh fiber requirements.  Any failureby us to secure our recovered paper and wood supply may result in loss ofproduction at our plants, which could have a material adverse effect on ourfinancial position and results of operations.

 

***Environmental lawswill require us to incur capital costs to maintain compliance and could imposeliability to remedy the effects of hazardous substance contamination.***

 

Compliancewith environmental requirements is a significant factor in our operations, andat times we may be required to commit substantial resources to maintainingenvironmental compliance and managing environmental risk.  We are subject to, and must comply with, avariety of environmental laws, particularly those relating to air and water quality,waste minimization, energy consumption and waste disposal and the clean-up ofcontaminated soil and ground water. Because environmental regulations are constantly evolving andenvironmental standards are becoming more stringent, we have incurred, and willcontinue to incur, significant costs to maintain compliance with those laws.

 

We areinvolved in the assessment and remediation of a number of our sites.  We cannot assure you that our pastactivities on other sites will not also expose us to contamination andremediation liabilities in the future. While we maintain certain reserves for environmental remediationliability, and we currently believe those reserves are adequate, we could,particularly in light of the retroactive nature of some environmental laws,incur unanticipated environmental liabilities in the future and thoseliabilities could be material.  As aresult, we cannot assure you that our reserves will be adequate to cover futureremediation liability.

 

In addition,if we violate these environmental laws and regulations, we may be preventedfrom conducting our business.  Forexample, this would occur in the event that a permit or an exemption to conducta certain activity was repealed with the consequence that the exempted activitywould have to be temporarily suspended.

 

10

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In addition,the relevant authorities can enforce environmental laws by using sanctions suchas performance notes.  The amount of anyfuture performance notes cannot be predicted, as any amount would be determinedon a case-by-case basis.

 

Please see the section “Item 5.  Operating and Financial Review and Prospects– Environmental Regulation.”

 

***National andEuropean regulation influence our business and may influence demand for ourproducts.***

 

Our businessis influenced by national and European Union legislation, includingenvironmental regulation and regulation intended to reduce the amount ofmaterial used in packaging. Changes to legislation and/or regulation couldreduce the level of demand for packaging products or otherwise impact ourproducts and may have a material adverse effect on our financial position andthe result of our operations.

 

**Risks Associated Withour Business and our Securities**

 

***We cannot be certainthat we will be successful in identifying, acquiring or integrating additionalbusinesses into ours, or that we will realize the benefits we anticipate fromany acquisition.***

 

We willcontinue to consider strategic acquisitions and investments that involveprimarily containerboard and solid board and fiber-based packaging companieslocated in Europe, but we may not be successful in identifying and consummatingany such acquisitions. Acquisitions present numerous integration challenges,including maintaining good relationships with employees, customers, suppliersand vendors as we simultaneously attempt to reorganize and optimize theacquired operations.  We may have tooperate companies in countries where we have no experience. In addition, suchacquisitions and investments could divert our resources and management time.While we have successfully integrated acquisitions in the past, we cannotassure you that, with respect to future acquisitions, we will realize anyanticipated benefits, successfully integrate the businesses with ouroperations, or manage such integration without adversely affecting our existingoperations. Additionally, we may incur substantial additional indebtedness inconnection with the consummation of an acquisition, thereby increasing ourleverage. Conversely, we may be unable to raise the capital necessary tocomplete or attempt acquisitions.

 

***Our business may beadversely impacted as a result of our substantial leverage, which requires theuse of a substantial portion of our cashflow and may limit access to additionalcapital.***

 

We incurredsignificant indebtedness in connection with our leveraged buy-out in 1998 andwith the acquisition of Alpha in 2001. Our substantial indebtedness could have important consequences for oursecurity holders.

 

For example,it is likely to:

 

•                      make it moredifficult to satisfy our obligations under the Senior Subordinated Notes;

 

•                      require usto dedicate a substantial portion of our cash flow from operations to paymentson indebtedness, thereby reducing the availability of our cash flow to fund workingcapital, capital expenditures, research and development efforts and othergeneral corporate purposes;

 

•                      increase ourvulnerability to general adverse economic and industry conditions;

 

•                      limit ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate;

 

•                      limit ourability to make strategic acquisitions or take other corporation action;

 

•                      place us ata competitive disadvantage compared to our competitors that have lessindebtedness; and

 

•                       limit ourability to borrow additional funds and increase the cost of any such borrowingsparticularly because of the financial and other restrictive covenants containedin the agreements governing our indebtedness.

 

11

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Certain of theinstruments governing our indebtedness, in particular our Senior CreditAgreement and senior subordinated note indentures impose restrictions on ourability, among other things, to:

 

•                      borrowmoney;

 

•                      makeinvestments;

 

•                      pay dividendsand repurchase our stock;

 

•                      use assetsas security on other transactions;

 

•                      sell certainassets or merge with or into other companies; and,

 

•                      engage incertain transactions with affiliates.

 

In addition,we must maintain minimum debt service and certain interest cover and maximumleverage ratios under the Senior Credit Agreement. A failure to comply with therestrictions contained in the Senior Credit Agreement and the SeniorSubordinated Notes could lead to an event of default under such agreements, whichcould result in acceleration of such indebtedness as well as other of ourindebtedness that contain cross-default or cross-acceleration provisions.  In such event we may not be able to repaysuch indebtedness. Our inability to comply with the foregoing restrictivecovenants could have a material adverse effect on our financial position andresults of operations and adversely affect the trading price of our SeniorSubordinated Notes.

 

At December31, 2002, our combined total indebtedness was €2,738.6 million.  As of December 31, 2002, our combined totalindebtedness, excluding €632.3 million of the loans made to Kappa Beheer B.V.by Kappa Holding B.V., would have been €2,106.3 million.

 

At December31, 2002, the aggregate of all our senior indebtedness and all seniorindebtedness of our subsidiaries was €1,425.2 million.  We must pay this indebtedness before makingany payments of principal on the Senior Subordinated Notes.  We may enter into certain currency hedgingtransactions with respect to the Senior Subordinated Notes denominated in USdollars.  Any net exposures under suchhedging transactions will constitute senior indebtedness of Kappa Beheer B.V.

 

***Despite our currentlevels of indebtedness, we and our subsidiaries may still be able to incursubstantially more debt.  This couldfurther intensify the risks described above.***

 

We and oursubsidiaries may be able to incur substantial additional indebtedness in thefuture.  The terms of our outstandingSenior Subordinated Notes do not fully prohibit us or our subsidiaries fromdoing so.  As at March 31, 2003, theSenior Credit Agreement permitted additional borrowings of up to €223million.  If new debt is added to ourand our subsidiaries’ current debt levels through our Senior Credit Agreementor through other borrowings, the related risks that we now face as describedabove could intensify.

 

***We are subject tocurrency-related risks.***

 

Fluctuationsin the value of the euro against other currencies have had in the past, and mayhave in the future, a material effect on the results of our operations.  Our operations are conducted in severalnon-euro countries.  The results ofthese operations are reported in the relevant foreign currencies and thentranslated into euros at the applicable exchange rates for inclusion in ourConsolidated Financial Statements. We also face translation risk with respectto earnings in non-euro currencies, principally British pounds, Swedish kronor,Slovakian koruna and Czech koruna.  Inaddition, we are exposed to currency risk on export sales in currencies otherthan the euro.

 

We facecompetition from some manufacturers whose costs are incurred primarily incurrencies other than the euro.  Anyappreciation in the value of the euro against those currencies could benefitthose competitors to our disadvantage, which could in turn have a materialadverse effect on our financial position or results of operations.

 

12

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To the extentthat we incur operating expenses in a currency other than that in which we haveobtained financing, we will encounter currency exchange risk. Although we haveentered into a swap agreement to hedge some of the risk of exchange ratefluctuations related to debt service and corporate expenses, we cannot assureyou that this hedging transaction or any other hedging transaction we mightenter into will be successful and that shifts in the currency exchange rateswill not have a material adverse effect on us.

 

***A loss of keypersonnel could have a material adverse effect on our business.***

 

Our success islargely dependent on the skills, experience, business contacts and efforts ofour senior management, particularly our President, Frits Beurskens and our keysenior management:  Han Wagter, TorbjörnPettersson and Berry Wiersum.  The lossof services of one or more of these members of our senior management team couldhave a material adverse effect on our ability to operate our business andimplement our strategies effectively. We have employment contracts with the officers named above which are foran indefinite period of time, except for Mr. Pettersson, who is on a contractthat expires March 1, 2006.  Please see “Item 6.  Directors, Senior Management and Employees.”

 

All contracts are subject to our ability to terminate the contract withsix months’ notice and the officer’s ability to terminate the contract withthree months’ notice, except for Mr. Pettersson, which contract is subject toour ability to terminate the contract with twelve months’ notice and theofficer’s ability to terminate the contract with six months’ notice.  Please see “Item 6.  Directors, Senior Management and Employees.”

 

***It is critical toour financial results of operations that the Piteå kraftliner mill operatessmoothly and without interruptions.***

 

Our kraftlinermill in Piteå, Sweden, is responsible for a substantial amount of our net salesand all of our kraftliner production. It is, therefore, a critical part of our business.  If operations at the Piteå mill wereinterrupted for any significant length of time, either because of naturaldisaster (such as flooding), man-made disruptions (such as labor strikes),failure to obtain raw materials, or any other reason, it would adversely affectour financial position and results of operations.

 

***Tomake payments on our outstanding notes and service our other indebtedness, wewill require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.***

 

Our ability to make payments on and to refinance our indebtedness,including our outstanding Senior Subordinated Notes, fund planned capitalexpenditures and product development efforts, make acquisitions and carry outour day-to-day business will depend on our ability to generate cash in thefuture.

 

Based on our current level of operations and anticipated cost savingsand operating improvements, we believe our cash flow from operations, availablecash and available borrowings under the Senior Credit Agreement will beadequate to meet our liquidity needs for the foreseeable future.

 

We cannot assure you, however, that our business will generatesufficient cash flow from operations, that currently anticipated cost savingsand operating improvements will be realized on schedule or at all or thatfuture borrowings will be available to us under the Senior Credit Agreement inamounts sufficient to enable us to repay our indebtedness, including the SeniorSubordinated Notes, or to fund our other liquidity needs.

 

***Aconflict may arise between the interests of holders of our outstanding debtsecurities and those of Cinven and CVC.***

 

Cinven and CVCultimately control the voting stock of all the companies that together conductour business.  Together, they have thepower to elect a majority of the Supervisory Board of Kappa Holding and, amongother things, to change our and our subsidiaries’ management, to approve anychanges to our and our subsidiaries’ constitutional documents and to approveany mergers.  As a result, Cinven’s andCVC’s actions can affect our legal and capital structure and our day-to-dayoperations.  We cannot assure you thatCinven’s or CVC’s interests will be aligned with those of the holders of ouroutstanding debt securities.  Please see“Item 7.  Major Shareholders and RelatedParty Transactions.”

 

13

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***Theright of holders of our outstanding Senior Subordinated Notes to receive cashpayments on the notes and the note guarantees is effectively junior to allother indebtedness of the Kappa Packaging Group other than certain limitedindebtedness of Kappa Beheer and the guarantors.***

 

The issuer and guarantors of our outstanding Senior Subordinated Notesare holding companies and conduct all operations through subsidiaries and jointventures.  Consequently, these companieshold no significant assets other than their investments in and advances totheir subsidiaries and affiliated joint ventures.  These companies depend upon the receipt of sufficient funds fromtheir subsidiaries and affiliated joint ventures to meet theirobligations.  We cannot assure you thatthese funds will always be available. Generally, claims of creditors of a subsidiary company will havepriority in a distribution on winding up of the company over the claims of thecreditors of its parent company. Accordingly, upon any distribution to any of our subsidiaries’ creditorsin a bankruptcy, liquidation or reorganization or similar proceeding relatingto them or their property, their creditors will be entitled to be paid in fullbefore any payment may be made to holders of the notes or under the noteguarantees.  In addition, Kappa Holdinghas filed a declaration under Article 2:403 of the Dutch Civil Code in respectof all of its wholly owned Dutch subsidiaries. The effect of this declarationis that Kappa Holding will be jointly and severally liable for any liabilitiesarising from legal acts (“*rechtshandelingen*”) of these subsidiaries.

 

Kappa Beheer’s outstanding Senior Subordinated Notes are, therefore,effectively subordinated to all existing and future claims of creditors of anysubsidiaries, including creditors under the Senior Credit Agreement and tradecreditors.  As of December 31, 2002,excluding the Senior Subordinated Notes issued in 1999 (€585.5 million),mezzanine notes issued in 2001 (€100.0 million) and excluding provisions(€272.3 million), our subsidiaries had approximately €512.6 million ofliabilities in addition to their obligations under the Senior Credit Agreement.

 

Upon any distribution to creditors of the issuer or the guarantors ofthe Senior Subordinated Notes in a bankruptcy, liquidation or reorganization orsimilar proceeding relating to such companies or their property, the holders ofall the senior indebtedness will be entitled to be paid in full before anypayment may be made to holders of the Senior Subordinated Notes or under thenote guarantees.  This is because theSenior Subordinated Notes and the note guarantees are subordinated in right ofpayment to the prior payment of all present and future amounts due from suchcompanies, except amounts due under any present or future indebtedness thatexpressly provides that it ranks equal with, or is subordinated in right ofpayment to, the Senior Subordinated Notes or the note guarantees.  In particular, the Senior Subordinated Notesand the note guarantees will be subordinated to amounts due under and to theguarantees of all amounts due in respect of bank indebtedness and to allhedging obligations relating to such bank indebtedness, as such terms aredefined in the indentures governing the Senior Subordinated Notes.

 

Such indentures and the intercreditor agreement entered into by thetrustee for the Senior Subordinated Notes on behalf of itself and the holdersof the Senior Subordinated Notes provide for the subordination of payments onthe Senior Subordinated Notes and the note guarantees, and the intercreditoragreement restricts the ability of Kappa Beheer and the guarantors to makepayments on the Senior Subordinated Notes and the note guarantees. All paymentson the Senior Subordinated Notes and the note guarantees will be blocked in theevent of a payment default under the Senior Credit Agreement and certain othersenior indebtedness and may be blocked for up to 179 days of a consecutive360-day period in the event of non-payment defaults upon notice by the lendersof that indebtedness.

 

The intercreditor agreement permits us to pay, in the absence of adefault under the Senior Credit Agreement and, subject to restrictions in theintercreditor agreement, cash interest, certain fees, costs, and taxes inrespect of the notes.  But, for so longas any bank indebtedness and any related hedging obligations remainoutstanding, Kappa Beheer may not prepay, purchase or repay the notes otherthan at maturity or with the prior consent of the lenders and the hedging banksunder the Senior Credit Agreement.

 

The intercreditor agreement also imposes restrictions on the ability ofthe holders of the Senior Subordinated Notes to petition for bankruptcy againstKappa Beheer or the guarantors or to bring other enforcement proceedings inconnection with the Senior Subordinated Notes or the note guarantees.

 

The Senior Credit Agreement and the intercreditor agreement limit thepayment of dividends, interest and other distributions and the repayment ofloans by the issuer to the amount equal to its cash interest paymentobligations under, and certain fees, costs, and taxes in respect of, the SeniorSubordinated Notes.

 

14

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The only significant assets that Kappa Beheer or the guarantors own arethe shares of their respective subsidiaries Substantially all of these shareshave been pledged as collateral under the Senior Credit Agreement. Therefore,if Kappa Beheer or the guarantors are unable to pay the principal or intereston the notes, the ability of the holders of the Senior Subordinated Notes toproceed against those shares to satisfy obligations owed to them would besubject to the prior satisfaction in full of all amounts due under the SeniorCredit Agreement.  If the holders of thenotes take any action to proceed against those shares, the lenders under theSenior Credit Agreement would be entitled to declare all amounts under theSenior Credit Agreement to be immediately due and payable.  In addition, as secured creditors, thelenders under the Senior Credit Agreement would control the disposition andsale of the shares after an event of default under the Senior Credit Agreementand would not be legally required to take into account the interests ofunsecured creditors (including the holders of the Senior Subordinated Notes)with respect to any such disposition or sale. We can give no assurance that ourassets, or those of the guarantors, would be sufficient to satisfy any amountsthat we may owe on the notes.

 

***Theright of holders of our outstanding Senior Subordinated Notes to receivepayments on such notes could be adversely affected if any of our non-guarantorsubsidiaries declares bankruptcy, liquidates or reorganizes.***

 

Kappa Holding and Kappa Packaging guarantee the outstanding SeniorSubordinated Notes issued by Kappa Beheer. None of our other subsidiariesguarantee such notes. In the event of a bankruptcy, liquidation orreorganization of any of the non-guarantor subsidiaries, holders of theirindebtedness and their trade creditors will generally be entitled to payment oftheir claims from the assets of those subsidiaries before any assets are madeavailable for distribution to their shareholders and thus will not be availableto the issuer or the guarantors. The non-guarantor subsidiaries generated allof our consolidated net sales in the year ended December 31, 2002 and heldalmost all of our consolidated assets as at December 31, 2002.  Please see note 29 to “Item 18 FinancialStatements.”

 

***Wemay not have the ability to raise the funds necessary to finance the change ofcontrol offer required by our outstanding Senior Subordinated Notes.***

 

                Upon the occurrence of certain specific kindsof change of control events, Kappa Beheer must offer to repurchase all of itsoutstanding Senior Subordinated Notes at a price equal to 101% of the principalamount thereof or the accreted value thereof, plus, in each case, accrued andunpaid interest, if any, to the repurchase date.  However, it is possible that we will not have sufficient funds atthe time of the change of control to make the required repurchase of notes andto repay obligations under the Senior Credit Agreement or that restrictions inthe Senior Credit Agreement will prevent us from making thisrepurchase.  In addition, theintercreditor agreement does not permit the prepayment or repurchase of theSenior Subordinated Notes without the consent of the lenders and hedging banksunder the Senior Credit Agreement and there is no assurance that such consentwould be given to permit these prepayments. If we do not obtain this consent ordo not have sufficient funds to make the required repurchase of SeniorSubordinated Notes, we will not be able to repurchase such notes, which wouldconstitute an event of default under the indentures relating to the notes. Thiswould in turn constitute an event of default under the Senior Credit Agreement.If an event of default has occurred, a holder of Senior Subordinated Notes willhave the right to take the actions described in the indentures, subject to thesubordination terms described therein. Such holder may have the right to accelerate payment on the SeniorSubordinated Notes. However, to the extent we have not been able to purchasethe Senior Subordinated Notes pursuant to a change of control offer, we may nothave funds available to make payments on such notes upon any acceleration.

 

***Thenote guarantee from Kappa Packaging is subject to standstill terms and bothnote guarantees may, in certain circumstances, be released.***

 

The terms of the note guarantee provide that, for so long as any amountdue under the Senior Credit Agreement and the related hedging obligations areoutstanding, payment under the note guarantee of Kappa Packaging will notbecome due and holder of the notes will not be permitted to make any demand orotherwise take any action against Kappa Packaging, until the earlier of:

 

(1) a payment default under the Senior Subordinated Notes has occurredand is continuing and a period of not less than 120 days has elapsed; or

 

                (2) subject as provided below (a) the debtdue under the Senior Credit Agreement has been accelerated or (b)an insolvency event in respect of Kappa Packaging has occurred.

 

15

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                Even if these events have occurred and thesecurity agent or any receiver or equivalent person under the Senior CreditAgreement serves notice on the trustee for the Senior Subordinated Notes thatit is enforcing or taking formal steps to enforce security over the pledgedshares of Kappa Packaging or any holding company parent of KappaPackaging by selling those shares or any assets of that company, payment underthe note guarantee of Kappa Packaging will not become due and holders of theSenior Subordinated Notes will not be permitted to make any demand on, orotherwise take any action against, Kappa Packaging until a separate 120-dayperiod has elapsed from the occurrence of an event in clause 2(a) or 2(b) abovebut in no event shall that period exceed the 120-day standstill commencing onthe payment default in clause (1) above. Kappa Beheer’s €632.3 millionborrowings (as at December 31, 2002) from its shareholders have terms similarto the rights under the Senior Credit Agreement described above.

 

                Furthermore, the terms of the Kappa Packagingguarantee provide that, if all the shares of Kappa Packaging are sold to athird party pursuant to the exercise of rights given by the security for thedebt due under the Senior Credit Agreement, Kappa Packaging shall immediatelyupon that sale be automatically released from its guarantee.

 

As a result of these restrictions and release provisions, we cannotassure you that the holders of our Senior Subordinated Notes will be able to:

 

•                       prove a claim in any distribution of Kappa Packaging’s assets during thestandstill period;

 

•                       make claims against Kappa Packaging if it is sold on enforcement of theshare pledge; or

 

•                       make claims against Kappa Holding if it is no longer a guarantor ofdesignated senior indebtedness (as defined).

 

***Insolvencyand administrative laws in The Netherlands could negatively affect the rightour holders of our outstanding Senior Subordinated Notes to enforce such notesand the note guarantees.***

 

                If we or one of our subsidiaries enter intoinsolvency or suspension of payments there is a risk that the holdersof our outstanding Senior Subordinated Notes will not be able to enforce theirrights under such notes and the note guarantees will not be enforced.

 

The issuer and guarantors of theSenior Subordinated Notes are all companies incorporated under the laws of TheNetherlands.  Accordingly, insolvencyproceedings with respect to such companies would be likely to proceed under,and be governed by the insolvency laws of The Netherlands.

 

Bankruptcy as well as suspension of payments is dealt with in the DutchBankruptcy Code.  Under Dutch insolvencylaw, as soon as a company enters into bankruptcy, all unencumbered assets andliabilities are placed under an attachment and a liquidator will be appointedto protect the ordinary creditors’ interests. Suspension creates a stay of the rights for the unsecured creditorsonly.  The holders of our SeniorSubordinated Notes would rank as unsecured or unpreferred creditors of theissuer and the guarantors in bankruptcy or suspension. All unsecured creditors’rights in a company in bankruptcy or suspension rank *pari passu* with all claims of other unsecured andunpreferred creditors, unless the law provides otherwise.

 

***Itmay not be possible for holders of our outstanding Senior Subordinated Notes toserve process on or enforce judgment against our officers and directors.***

 

                Both the issuer and the guarantors of ourSenior Subordinated Notes are private limited liability companies incorporatedunder the laws of The Netherlands and substantially all their respective assetsare located outside the United States. In addition, all of the members of our Supervisory Board and all of themembers of our Management Board are residents of, and most of our and theirassets are located in, jurisdictions outside the United States.  As a result, it may not be possible forinvestors to effect service of process within the United States upon us orthese persons, or to enforce against us or these persons, judgments in UScourts whether or not predicated upon the civil liability provisions of USsecurities laws.  We have been advisedby our counsel in The Netherlands, Allen & Overy, that uncertainty existsas to whether a Dutch court would impose civil liability on us, our officers ormembers of our Management Board or our Supervisory Board in an original actionbased solely upon US federal securities laws brought in a court of competentjurisdiction in The Netherlands.  Dutchlaw, furthermore, does not recognize a security holder’s right to bring a derivativeaction on behalf of a corporation. Allen & Overy has further advised us that because there is no treatyon the reciprocal recognition and enforcement of judgments in civil andcommercial matters between the United States and The Netherlands, courts in TheNetherlands will not automatically enforce a judgment rendered by a UScourt.  In order to obtain a judgmentenforceable in The Netherlands, claimants must bring the claim before a courtin The Netherlands of competent jurisdiction.

 

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***Wemust pay additional amounts to holders of the outstanding notes if we arerequired by certain laws to withhold amounts from payments on the SeniorSubordinated Notes. Payments of those additional amounts could adversely affectus.***

 

## **Under current law, we are not obliged to withhold Dutch taxwith respect to payments of interest on the Senior Subordinated Notes. If weare required to withhold amounts in respect of payments on the SeniorSubordinated Notes, under certain circumstances, we must pay additional amountsto holders of Senior Subordinated Notes in respect of the amounts withheld. Wemay not have sufficient cash to pay those additional amounts, the terms of theSenior Subordinated Notes may prohibit us from incurring additional debt tofund those amounts, and applicable laws and contractual restrictions may limitthe ability of our subsidiaries to make payments to us to fund those amounts.Consequently, any obligation to pay those additional amounts could have amaterial adverse effect on our financial condition, results of operations, orliquidity.**

 

## **On 3rd June, 2003, the European Council of Economics andFinance Ministers agreed on proposals under which Member States will berequired to provide to the tax authorities of another Member State details ofpayments of interest (or similar income) paid by a person within itsjurisdiction to an individual resident in that other Member State, except that,for a transitional period, Belgium, Luxembourg and Austria will instead berequired to operate a withholding system in relation to such payments (theending of such transitional period being dependent upon the conclusion ofcertain other agreements relating to information exchange with certain othercountries).  The proposals areanticipated to take effect from 1st January, 2005.  There will be a paying agent for the Senior Subordinated Notes inLuxembourg.**

## ** **

## **The proposals may be conditional onthe adoption of equivalent measures in non-member stated with significantfinancial center and in dependent or associated territories of certain memberstates. The proposals contemplate the establishment of arrangements to sharerevenues from withholding taxes so imposed between the member state of thepaying agent and the member state of the residence of the interest payee. It ispossible that these revenue sharing agreements may also be established withnon-member states. We will not be obliged to pay any additional amounts if awithholding is required pursuant to the proposals or any law implementing thesame.**

 

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## **Item 4.  Information on the Company**

 

# **A.**                                    Historyand Development of the Company

 

Kappa HoldingB.V. was incorporated under Dutch law in The Netherlands on June 26, 1998 as aprivate company with limited liability (*besloten vennootschap*).  The shares of Kappa Holding are primarilyheld by funds managed or advised by CVC Capital Partners and funds managed oradvised by Cinven Limited.  Please see“Item 7.  Major Shareholders and RelatedParty Transactions.”

 

Our predecessorwas formed in 1993 out of a merger between the paper and packaging divisions ofBührmann-Tetterode and KNP (Koninklijke Nederlandse Papierfabrieken).  Both of these companies built theirpackaging activities in the 1970s as an addition to their core activities ofpaper sales, retail printing and coated-paper production.  When these groups merged and became KNP BTin 1993, their combined paper and packaging sector companies had a significantmarket share in the Benelux, Germany and the United Kingdom.  On May 11, 1998, with effect from May 31,1998, we became an independent group of companies when the management of thepackaging division of KNP BT purchased the packaging sector companies from KNPBT with the help of two institutional investors, Cinven and CVC.  The Company and its group companiescommenced trading under the name “Kappa Packaging” as from June 1, 1998.

 

Since ourfounding in 1993, we have grown to become a leading pan-European containerboardand solid board and packaging producer as a result of our acquisitions ofadditional businesses in Western and Eastern Europe and organic growth.  Consequently, we have expanded our annualcontainerboard and solid board production capacity from 1,500 kilotons in 1993to 3,435 kilotons in 2002.  In the sameperiod, we have expanded our annual volume of corrugated packaging fromapproximately 750 million m2 to 3,800 million m2.

 

Our 1994acquisition of Expac in Poland marked our entry into the attractive and rapidlygrowing Eastern European market for corrugated packaging.  During 1996, we further expanded ourcorrugated packaging operations in Eastern Europe with the acquisitions ofDrezdenko in Poland and Karton Morava in the Czech Republic. After we implementedour post-acquisition integration and capacity extension programs for these twoacquisitions, our capacity in Eastern Europe increased to 310 million m2from only 145 million m2 when they were acquired.

 

We have alsosuccessfully completed a number of acquisitions in Western Europe, beginning in1994 with the acquisition of a corrugated packaging facility from our thenjoint venture with AssiDomän.  In 1996,we acquired Karton Morava, a Czech producer of corrugated packaging andrecycled paper.  Also in 1996, we builta new, state of the art, recycled paper machine with a capacity of 275kilotons.  In 1997, we acquiredHolfelder, a German manufacturer of corrugated packaging and testliner owned byAmcor.  Through our restructuringprogram, we transformed Holfelder’s loss-making Wiesloch operations into aprofitable and efficient business within a year of the acquisition.  In 1997, we also acquired Van Mierlo-Proost,a Belgian producer of high quality litho-laminated containerboard and foldingcarton.

 

In March 2000,we acquired Société Cartonries de l’Atlantique en Ondulé (SCAO/MaineEmballages), a French corrugated packaging producer.  As a result of our integration program, SCAO’s sales volumes roseby approximately 20% in its first full year under our ownership.

 

In May 2001,we acquired Alpha, our largest acquisition to date.  Through this acquisition, we greatly enhanced our pan-Europeanmarket coverage, diversified our containerboard product offering to includefresh fiber-based products (thereby improving our level of integration) andincreased our containerboard capacity by almost 90% and our corrugatedpackaging capacity by 120%.  Subsequentto our acquisition of Alpha, we identified a number of cost saving and otherinitiatives to be achieved by the end of 2003, including operating efficiencies,internal sharing of best practices, capitalizing on integration and networkingopportunities and volume increases leading to economies of scale.

 

For adescription of the company’s principal capital expenditures, please see “Item5.  Operating Review and FinancialProspects.”

 

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Our registeredoffice and principal executive office is located at:

 

Dr.  Holtroplaan 55652 XR EindhovenThe NetherlandsTelephone:                                    +31(0)40-214-0777

 

Our registered agent in the United States is:

 

CT Corporation System1633 BroadwayNew York, New York 10019Telephone:                                    +1(212) 894-8600

 

**B.**                                    **Business Overview**

 

We are one ofthe largest producers by volume of containerboard, solid board, corrugatedpackaging and solid board packaging in Europe, with net sales of €2,937.6million and operating income of €222.5 million in 2002.  We currently operate 16 containerboard andsolid board mills in Sweden, The Netherlands, Germany, The Slovak Republic, theUnited Kingdom, the Czech Republic and Italy and 101 packaging convertingplants throughout Europe. We had output during 2002 amounting to 3,150 kilotonsof containerboard and solid board, 3,800 million m2 of corrugatedpackaging and 405 kilotons of solid board packaging.

 

We are thelargest producer in the European containerboard and solid board market and thesecond largest producer in the European corrugated and solid board packagingmarket. Within the European containerboard market, we are the largest producerof fresh fiber-based containerboard. We also benefit from leading positions ina number of corrugated packaging markets, including number one market positionsin Benelux (with a 37% market share by volume, based on our estimates), TheCzech Republic and Slovak Republic (combined 36% share), Poland (18%) andGermany (12%), and a number two market position in Denmark (29%) and Sweden(28%). We achieved these leading positions partly through our acquisition ofAlpha, the containerboard and corrugated packaging business of AssiDomän, inMay 2001. At the time of acquisition, Alpha was the largest producer of freshfiber-based containerboard in Europe.

 

We operate intwo business segments:  (1) the paperand board business (“Paper & Board”), including our recovered paperbusiness, and (2) the corrugated and solid board packaging business(“Packaging”). As an integrated producer, we believe that we enhance earningsstability through combining recovered paper collection, containerboard andsolid board production and packaging operations.

 

Our businessis not materially seasonal, as far as sales and production volumes areconcerned.  Volumes show a regularpattern through the quarters, although sales are approximately 5% higher duringthe March-September period as a result of higher sales to the agriculturesegment in that time period.

 

Approximately74% of our sales in 2002 were in The Netherlands, Germany, the United Kingdom,Italy, Spain, France and Belgium, with the remainder primarily in Nordic andCentral Europe. Please see also Note 27 to “Item 18.  Financial Statements” for segmental information by reportablesegment and geography.

 

**Operationsand Products**

 

Our Paper& Board segment produces various qualities of containerboard and solidboard, using recycled and fresh fibers, which we sell both to our ownconverting plants and externally for use in the production of corrugated andsolid board packaging.  We also producegraphic board that is used in a variety of products, such as puzzles andhardback book covers, and specialty board that is used in consumer packagingfor premium products, such as jewelry, cosmetics and wine and spirits. OurPackaging segment converts containerboard and solid board for packaging intocorrugated and solid board packaging products designed to meet our customers’requirements for the protection, transportation, storage, display and marketingof their products.  In addition, as

 

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part of our Paper & Boardsegment, we operate a recovered paper sourcing and trading business primarilyto provide our recycled containerboard and solid board mills with a reliablesource of raw material.  In 2002, 42% ofour containerboard and solid board production was used by our Packagingsegment.  All intercompany sales fromour Paper & Board segment to our Packaging segment are made on anarms-length basis and are eliminated for consolidated reporting purposes.  In addition, the Packaging segment purchasedapproximately one-third of its containerboard and solid board from third-partysources.

 

The diagrambelow illustrates the material flows in our business.

 

 

**Paper& Board Segment**

 

Our Paper& Board segment produces a range of containerboard and solid board gradesfrom fresh and recycled fiber for a variety of customer applications. This segmentencompasses two primary business areas: containerboard production, in which we are one of the three largestEuropean producers by volume, and solid board production, in which we are theleading European producer by volume. We own 17 and currently operate 16containerboard and solid board mills in seven countries.  Of the 16 mills in operation, seven producelinerboard and fluting for conversion into corrugated packaging, eight producesolid board, and one produces both fluting and solid board. Our Mennecy Papercontainerboard mill in France is currently not in operation. In June 2003,discussions with the local works council have largely been concluded regardingthe closure of Kappa Mennecy Paper (Mennecy, France). The mill will not bestarted-up again after the shut down in April 2003, as a result of whichapproximately 100 employees become redundant.

 

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We alsooperate a recovered paper sourcing and trading business within this segment. In2002, we sold approximately 3,130 kilotons of containerboard and solid boardproducts, generating total sales of €1,295.2 million, of which €665.2 millionwere to third parties.

 

***Containerboard***

 

We are thethird largest producer of containerboard in Europe, with an overall marketshare of 10%, based on 2002 production, according to our estimates.  We own nine and currently operate eightmills that produce containerboard located in Sweden, The Netherlands, Germany,The Slovak Republic, the United Kingdom, the Czech Republic and Italy.  Our mills provide a complete containerboardproduct portfolio resulting in European market shares of 15% in kraftliner, 9%in semi-chemical fluting and 9% in testliner and recycled fluting combined,according to our estimates.  In 2002, wesold approximately 2.2 million tons of containerboard, generating total salesof €825.8 million, of which €379.1 million were to third parties.  Reflecting the level of demand, and tosupport European containerboard prices, in 2002 we took no downtime (2001:  3% of the 2001 containerboard production)and exported to Asia approximately 4.6% of our 2002 containerboard production.

 

We sell ourcontainerboard products to our own corrugated packaging plants and to externalcustomers, including both small individual packaging plants and the largeintegrated packaging companies that are our primary competitors.  In 2002, approximately 42% of ourcontainerboard production was supplied to our own corrugated packaging plants,while the remainder was sold externally.

 

We believethat we are one of the most cost-efficient containerboard producers in Europe.We have realized this position through our focus on energy efficiency, optimalrecipe composition, efficient water management and waste disposal and ourmanagement expertise. All nine of our containerboard mills are ISO 9000certified. Six of our containerboard mills are ISO 14001 certified, and one isexpected to be certified by the end of 2003.

 

Details of ourcontainerboard mills are set forth below:

 
| **Containerboard Mill, Country**   |   | **Number  of Machines** |       | **Range of  Paper Grades** |       | **2002  Production  (in kilotons)** |       | **Annual  Capacity  (in kilotons)** |       |
|------------------------------------|--------|-------------------------|------------|----------------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
|                               |   |                    |       |                       |       |                                |       |                                |       |
| ***Recovered  Paper***             |   |                    | ** ** |                       | ** ** |                                | ** ** |                                | ** ** |
| Roermond, The Netherlands          |   | 3                       |       | L/F                        |       | 468                                 |       | 480                                 |       |
| Zülpich, Germany              |   | 2                       |       | L/F                        |       | 407                                 |       | 430                                 |       |
| Birmingham, the United Kingdom     |   | 1                       |       | L/F                        |       | 180                                 |       | 190                                 |       |
| Wiesloch,  Germany                 |   | 1                       |       | L                          |       | 69                                  |       | 95                                  |       |
| Zimrovice, Czech Republic          |   | 1                       |       | L/F                        |       | 51                                  |       | 55                                  |       |
| Ania, Italy                        |   | 2                       |       | L/F                        |       | 147                                 |       | 195                                 |       |
| Mennecy, France                    |   | 1                       |       | L/F                        |       | 52                                  |       |                                | (1)        |
| Sub-total                          |   | 11                      |       |                       |       | 1,374                               |       | 1,445                               |       |
|                               |   |                    |       |                       |       |                                |       |                                |       |
| ***Fresh  Paper***                 |   |                    | ** ** |                       | ** ** |                                | ** ** |                                | ** ** |
| Piteå, Sweden                 |   | 2                       |       | L                          |       | 610                                 |       | 700                                 |       |
| Štúrovo, Slovak Republic |   | 1                       |       | F                          |       | 176                                 |       | 180                                 | (2)        |
| **TOTAL**                          |   | 14                      |       |                       |       | 2,160                               |       | 2,325                               |       |

 

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L = Linerboard

F = Fluting

(1) In June 2003, discussions with the local works council have largelybeen concluded regarding the closure of this mill. The mill will not bestarted-up again after the shut down in April 2003, as a result of whichapproximately 100 employees became redundant.

(2)Represents containerboard production only.  This mill also produces solid board (2002solid board production of 33 kilotons and solid board annual capacity of 80kilotons).

 

Details for our three largest mills are provided below:

 

•                                          *Piteå*isthe largest kraftliner mill in Europe, with a current annual productioncapacity of 700 kilotons and a current market share of about 16%. This mill isparticularly well positioned in the production of white-top kraftliner, whichaccounted for approximately 44% of its total output in 2002.  Annual capacity of the mill has grown 17%since 1998.

 

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•                                          *Roermond*isthe third largest recycled containerboard mill in Europe, with an annualproduction capacity of approximately 480 kilotons. In 2002, this mill produced(approximately) 473 kilotons of containerboard on three machines.

 

•                                          *Zülpich*is one of the largest recycled containerboard mills in Europe, with an annualproduction capacity of approximately 430 kilotons.  In 2002, this mill produced 412 kilotons of containerboard on twomachines.  In 1996, we built a new papermachine with a current capacity of 275 kilotons.  Total annual capacity of the mill has grown approximately 250%since 1995.

 

Recoveredpaper, wood chips and wood are the principal raw materials used incontainerboard production.  We source aportion of our recovered paper requirements through our recovered paperbusiness and obtain the remainder of our recovered paper, and all of our woodchip and wood requirements for our fresh fiber-based operations, from externalsuppliers.  We source these materialslocally, although we seek to avoid dependence on any single supplier.  We usually enter into general purchasingagreements with suppliers on an annual basis, with prices set in accordancewith prevailing market rates.

 

In connectionwith our acquisition of Alpha, we entered into a wood supply agreement with theforestry division of AssiDomän (now owned by Sveaskog) pursuant to which itwill continue as a key supplier of wood and wood chips to our Piteå mill.  Under this agreement, the Piteå mill will besupplied with raw materials at market prices until the later of December 31,2008 or December 31 of the year five years after notice of termination is givenby either party, subject to a re-negotiation of contract terms, includingvolume and price, that occurs annually and whenever there is a change ofcapacity.  At our two fresh fiber-basedfacilities (Piteå and Štúrovo), we have integrated pulp mills that convert thepurchased wood chips and wood into pulp. These operations satisfy all of ourunbleached fresh fiber-based pulp requirements and substantially all of ourbleached pulp requirements.  All of ourother containerboard facilities are recycled fiber-based.

 

Ourcontainerboard mills generally distribute their product throughout Europe bytruck with the exception of Piteå, which is located near a deep water port,where kraftliner is shipped by sea, rail and truck. Individual mills do not ownoutside warehousing facilities, although we use several third-party warehouses.

 

***Solid Board***

 

We are thelargest producer of solid board in Europe, with a market share of over 50%,based on 2002 production, according to our estimates.  We own and operate nine mills located in The Netherlands, Germanyand The Slovak Republic that produce various grades of solid board principallyfrom recovered paper.  We categorizesolid board production into three products: solid board for packaging, graphic board and specialty board.  We are the leading European producer of bothsolid board for packaging and specialty board and the leading global producerof graphic board.  In 2002, we soldapproximately 977 kilotons of solid board, generating total sales of €454.7million, of which €264.6 million were to third parties.  The 977 kilotons that we sold in 2002 wascomprised of 596 kilotons (61%) of solid board for packaging, 273 kilotons(28%) of graphic board and 108 kilotons (11%) of specialty board.

 

We soldapproximately 70% of our solid board production for packaging, representingapproximately 43% of our total solid board production, to our Packaging segmentin 2002.  We sell the remainder of oursolid board for packaging to external converting plants, which are primarilysmaller, independent solid board converters. We sell all of our production of graphic board and specialty board tothird party customers.  We sell graphicboard primarily to manufacturers of hardback book covers, ring binders, jigsawpuzzles and board games in Europe, North America and Asia.  We sell our specialty board primarily toEuropean manufacturers of packaging for premium products, such as jewelry,cosmetics, wine and spirits.

 

We believethat we are the most cost-efficient and innovative solid board producer inEurope.  Our mills include the largestsolid board production facilities in Europe. We are one of the few solid board producers in Europe with in-linelaminating capabilities, which we believe reduces our production cost oflaminated solid board as compared to our competitors.

 

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Details of oursolid board mills are set forth below:

 
| **Solid Board Mill, Country**              |   | **Number  of Machines** |   | **Range of  Paper Grades** |   | **2002  Production  (in kilotons)** |   | **Annual  Capacity  (in kilotons)** |   |
|--------------------------------------------|--------|-------------------------|--------|----------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|
|                                       |   |                    |   |                       |   |                                |   |                                |   |
| Graphic Board, The Netherlands (two mills) |   | 6                       | (1)    | GB                         |   | 270                                 |   | 300                                 |   |
| Triton, The Netherlands (two mills)        |   | 3                       |   | SBP                        |   | 237                                 |   | 250                                 |   |
| Herzberger  Papierfabrik, Germany          |   | 2                       |   | SBP                        |   | 218                                 |   | 225                                 |   |
| Attica, The Netherlands (two mills)        |   | 2                       |   | SB                         |   | 108                                 |   | 120                                 |   |
| Badenkarton, Germany                       |   | 1                       |   | SBP                        |   | 124                                 |   | 135                                 |   |
| Štúrovo, Slovak Republic         |   | 2                       |   | SB                         |   | 33                                  |   | 80                                  | (2)    |
|                                       |   |                    |   |                       |   |                                |   |                                |   |
| Total                                      |   | 16                      |   |                       |   | 990                                 |   | 1,110                               |   |

 

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GB                                =                                         GraphicBoard

SBP                          =                                         SolidBoard for Packaging

SB                                 =                                         SpecialtyBoard

(1)                                  Represents4 solid board machines and 2 machines producing laminating paper, which isprimarily consumed internally.

(2)                                  Representssolid board production only.  This millalso produces containerboard (2002 containerboard production of 176 kilotonsand containerboard annual capacity of 180 kilotons).

 

Recoveredpaper is the principal raw material for the production of solid board.  We source a portion of our recovered paperrequirements for our solid board production operations through our recoveredpaper operations.  We source theremainder of our recovered paper requirements locally for each mill, althoughwe seek to avoid dependence on any single supplier.

 

Our solidboard mills generally distribute their product throughout Europe by truck.  We export a significant amount of graphicboard, which is distributed by ship.

 

***Recovered Paper***

 

Through ourfive depots in The Benelux, Germany and the United Kingdom, we own and operatea business that sources, sorts and sells recovered paper.  We operate this business on a stand-alonebasis and sell recovered paper both to our own containerboard and solid boardmills on an arm’s length basis and externally. In 2002, we sold 781 kilotons of recovered paper, generating total salesof €68.0 million, of which €21.6 million were to third parties.  The total volume of our recovered paperbusiness represented approximately 35% of our total recovered paper needs forcontainerboard and solid board production in 2002.

 

We obtain oursupply of recovered paper primarily from direct contracts with large retailersand municipalities, spot purchases in the recovered paper market and contractswith brokers and waste collection agencies. We have a 50% joint venture called“AVR Rietveld” with Afval Verwerking Rijnmond, one of the largest wasteprocessors in The Netherlands, which we entered into to increase our supply ofrecovered paper from municipalities. We also own a 33% interest in EuroWaste,located in the Czech Republic, and a 14.3% interest in ReturPapper, located inSweden.

 

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**PackagingSegment**

 

Our Packaging segment produces a range of corrugated board and solidboard packaging products to meet the protection, transportation, storage,display and marketing needs of customers throughout Europe. This segment hastwo business areas:  corrugatedpackaging, in which we are the third largest European producers by volume, andsolid board packaging, in which we are the leading European producer by volume.We own and operate a pan-European network of 101 corrugated and solid boardoperating units in 17 European countries. In 2002, we sold approximately 3,800million m2 of corrugated packaging products and 405 kilotons ofsolid board packaging, generating sales of €2,258.4 million.

 

***Corrugated Packaging***

 

We are thethird largest producer of corrugated packaging in Europe, with a market shareof 12%, based on 2002 production, according to our estimates. We own and operate91 corrugated packaging plants in 16 countries throughout Western and EasternEurope. As well as operating a network of plants across Europe, we benefit fromstrong regional positions within specific corrugated packaging markets.  We believe we are the market leader inBenelux, the Czech Republic and Slovak Republic, Poland and Germany, and numbertwo market positions in Denmark and Sweden. We are also the market leader overall in Eastern Europe.  In 2002, we sold approximately 3,800 millionm2 of corrugated packaging products, generating total sales of€1,980 million.

 

Our corrugatedpackaging plants provide packaging designed to satisfy the protection,transportation, storage, display and marketing requirements of our customers inan economic and environmentally friendly manner. We place an emphasis onproducing value-added and performance-based packaging as they generate higherand more stable margins than basic packaging. Performance-based packaging optimizes the design of each corrugatedpackage, such that it most efficiently meets the customer’s strengthrequirements while minimizing raw material inputs. This reduces end prices forthe customer and improves our margins. In addition, a growing portion of ourbusiness is related to producing higher value-added packaging solutions, suchas industrial, agricultural and high quality print packaging.

 

We serve abroad customer base, including food and beverage packers and manufacturers ofconsumer and industrial goods. Packaging for food, beverages and agricultural products accounted forapproximately 48% of our total corrugated packaging sales in 2002.  We believe that this helps to stabilize ourproduction volumes since demand for food, beverages and agricultural productsis generally less cyclical than for other consumer goods.  Our plants serve customers ranging fromlocal businesses to large pan-European accounts, such as PepsiCo, MasterFoods,Proctor & Gamble, Heineken and Unilever. In 2002, our top ten corrugated packaging customers accounted for approximately9% of our total corrugated packaging sales, and no single customer accountedfor more than 2% of our total corrugated packaging sales.

 

Due to thehigh relative cost of transportation, corrugated packaging plants generally canonly serve a limited geographic area in a cost effective manner, typicallywithin a distance of up to 300 kilometers. However, higher value-added products may be economically transportedover greater distances.  The density ofour plant network, particularly in the Benelux, allows us to concentrateproduction of particular product lines into individual plants.  This results in higher capacity utilization,fewer product changeovers and, consequently, greater cost efficiency.  We believe that the size of our network alsoaffords our customers greater flexibility and security of supply.

 

We believethat we are one of the most innovative and flexible corrugated packagingproducers in Europe.  In total, ourannual production of corrugated packaging has risen from approximately 750million m2 in 1993 to 3,800 million m2 in 2002.  This reflects the investment made by bothKappa Packaging and Alpha to build their European packaging operations bothorganically and through acquisitions. Of our 91 corrugated packaging plants, 55 are integrated plants, 4 aresheet feeder plants and 32 are sheet plants. Integrated plants combine the production of corrugated board sheets withtheir conversion into corrugated packaging. Sheet feeder and sheet plants are dedicated exclusively to corrugatingand conversion activities, respectively. The production of our converting plants can be increased to meetcustomer demand by operating additional production shifts.

 

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Details of ourcorrugated packaging plants by region are set forth below:

 
| **Corrugated Packaging Plants** |   | **Number  of Plants** |   | **2002  Volume  (in million****m2)** |   |
|---------------------------------|--------|-----------------------|--------|--------------------------------------|--------|
| Benelux                         |   | 13                    |   | 800                                  |   |
| Germany and Switzerland         |   | 16                    |   | 885                                  |   |
| France                          |   | 11                    |   | 405                                  |   |
| Central Europe                  |   | 11                    |   | 505                                  |   |
| Nordic                          |   | 23                    |   | 425                                  |   |
| United Kingdom                  |   | 6                     |   | 255                                  |   |
| Spain                           |   | 7                     |   | 245                                  |   |
| Italy                           |   | 4                     |   | 280                                  |   |
| Total                           |   | 91                    |   | 3,800                                |   |

 

In 2002, ourtotal corrugated packaging production used 1.4 million tonsofrecycled containerboard and 0.7 million tonsof freshcontainerboard.  Our corrugatedpackaging operations source a portion of their raw material requirementsinternally and the remainder externally from a diverse supplier base.

 

***Solid BoardPackaging***

 

We are thelargest manufacturer of solid board packaging in Europe, with a market share of40% based on 2002 production according to our estimates.  We own and operate ten solid board packagingplants of which eight convert solid board into solid board packaging and twoare sales offices.  One of theconverting plants is fully integrated with our solid board mill atHerzberger.  In 2002, we sold 405kilotons of solid board packaging products, generating total sales of €319.0million.

 

Our solidboard packaging plants produce solid board for transportation and displaypurposes.  Solid board can offersuperior characteristics in terms of moisture resistance, efficiency oftransport and handling and printability in comparison to other fiber-basedpackaging products.  The moistureresistance makes it particularly well suited for packaging flowers, fruit,vegetables, fresh fish, meat and dairy products.  The printability makes solid board packaging ideal forvalue-added products where aesthetics are important.  Our solid board packaging plants provide value-added solutionssuitable for each of these sectors, and we are constantly developing newapplications for solid board packaging. For example, we have developed a packaging solution that significantlyextends the transit life of fresh produce by controlling the atmosphere withinthe container.

 

As part of ourtotal solutions philosophy, we also design and manufacture packaging systems inthree centers of excellence in the United Kingdom, Sweden and Germany. We serveapproximately 750 agricultural tray erectors that are primarily owned by us,and approximately 600 machines for manufacturing applications that areprimarily owned by third parties.  Webelieve these systems further solidify our customer relations.

 

We serve alarge number of customers that primarily operate in the perishable agriculturalsector and range from local businesses to large regional accounts. In 2002, ourtop two solid board packaging customers accounted for approximately 9.1% and4.4% of our total solid board packaging sales.

 

We believethat we are one of the most innovative, cost efficient and service-orientedsolid board packaging producers in Europe.

 

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Details of our solid board packaging plants by country are set forthbelow:

 
| **Solid Board Packaging Plants** |   | **Number of  Plants** |   | **2002  Production (in  kilotons)** |   |
|----------------------------------|--------|-----------------------|--------|-------------------------------------|--------|
|                             |   |                  |   |                                |   |
| Germany                          |   | 3                     |   | 170(                                | 1)     |
| Benelux                          |   | 3                     |   | 185                                 |   |
| Norway                           |   | 1                     |   | 20                                  |   |
| United Kingdom                   |   | 1                     |   | 30                                  |   |
| France                           |   | 2                     |   | —                              |   |
| Total                            |   | 10                    |   | 405                                 |   |

 

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(1)  Includesproduction of fully integrated solid board packaging plant at Herzberger.

 

Due to thesuperior cost position and production capabilities of our own solid boardmills, we fulfill substantially all of our solid board sourcing requirementsinternally.

 

**Salesand Marketing**

 

Our solidboard mills and converting plants are responsible for generating their ownsales based on defined product/market combinations and each of the facilitieshas a specialized sales force, which is responsible for sales and maintainingcustomer relations in that specific segment. Our containerboard operations havea centralized sales organization, with sales offices in The Netherlands,Germany, France, Spain, Italy, Switzerland and the United Kingdom.  In addition, we have a pan-European salesorganization for our Packaging sector. In 2002, approximately 15% of our sales were handled by the pan-Europeansales organization.

 

A key elementof our sales strategy is to work closely with customers to understand theirsupply chain needs.  This enables us todevelop products that make the supply chain more efficient.  We believe that by appreciating how ourproducts relate to the protection, transportation, storage, display andmarketing needs of our customers, we are better able to provide value-addedpackaging solutions and retain customer loyalty.

 

**ProductDevelopment**

 

We have strongproduct development capabilities that permit us to develop innovative solutionsto meet the packaging needs of our customers. The sales staff at each of ourfacilities and the staff of our specialized product development centers work inpartnership with our customers to provide more efficient and customer-focusedsolutions.

 

One of themain objectives of our product development efforts is to produce corrugated andsolid board packaging products that meet the performance demands of ourcustomers while minimizing the total raw material input.  In addition, we design our packaging toreduce the total cost in the supply chain for our customers from the point ofcustomer purchase of packaging from us through to the take-up of product by ourcustomer’s end consumers.  Our recentproduct development efforts have led to advancements in compression strength,ease of use, appearance and printability of our products.  We have developed a number of innovativesolutions to meet the packaging needs of our customers, such as high-speedsolid board packaging systems that can be installed on-site at customerlocations.  We believe that our productdevelopment capabilities give us a significant competitive advantage.  Othervalue-enhancing products we have developed in partnership with our customersinclude solid board packaging solutions particularly suited to the transport offresh fish and a packaging solution that significantly extends the transit lifeof fresh produce by controlling the atmosphere within the container.  Examples of value added corrugated packaginginclude sophisticated, printed,heavy duty and industrial packaging and point-of-sale displays.

 

**RawMaterials**

 

The principalinputs for our paper and board products are recovered paper and energy.  Raw material costs and energy costsrepresented approximately 43.6% and 9.7%**,** respectively, of the total operatingcosts (before amortization) of the Paper & Board segment in 2002. For ourpackaging plants, the principal raw material cost is either corrugated casematerial or solid board.  Raw materialcosts represented approximately 56.8% of total operating costs (beforeamortization) of

 

26

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the Packaging segment in2002.  Each paper and board mill andpackaging plant is responsible for obtaining its own raw materials, which aresourced both from the Kappa Packaging Group and externally.

 

**Competition**

 

The marketsfor containerboard and packaging products are highly competitive with manyparticipants. Competition in our markets is based principally on quality,product performance and specifications, service and price. In particular,containerboard products are largely a commodity and subject to substantialprice competition.

 

Thecontainerboard and corrugated packaging sectors are among the more fragmentedsectors in the European paper industry. The top five containerboard andcorrugated packaging producers in the European market have only approximately48% and 44%, respectively, of the total market share, based on 2002 salesvolume according to our estimates.  Ourprimary competition in containerboard and corrugated packaging production comesfrom the other two large integrated businesses, SCA and Jefferson SmurfitGroup.

 

Themanufacture of containerboard and solid board products is capital intensivewith high barriers to entry, particularly in fresh fiber-based production. Webelieve that capacity in the range of 600 kilotons is necessary in order tocost effectively operate a new kraftliner production mill in Europe. We estimatethat such a mill would require capital expenditures of at least €700 million tobuild and a period of two years for planning and construction.  In general, new capacity can be addedthrough conversion of other paper machines to containerboard or solid boardproduction, although this happens infrequently.

 

In contrast tocontainerboard and solid board, the corrugated and solid board packagingsectors have relatively low financial barriers to entry. Competition incorrugated and solid board packaging is primarily regional.  Proximity to the customer is an importantcompetitive factor in order to minimize shipping costs and to ensure on-timedelivery and efficient service.  Ourprincipal competition in the corrugated packaging sector consists of the otherlarge integrated businesses, SCA and Jefferson Smurfit Group. Our maincompetition in the solid board packaging sector consists of Jefferson SmurfitGroup, VPK Oudegem and other smaller enterprises.

 

**Customers**

 

We believethat****webenefit from the stability of the end use markets of our products, with the food,beverage and agricultural sectors accounting for 48% of our packaging revenuesin 2002, compared to an industry average in Europe of approximately 42%. Ourbroad customer base, of over 44,000 customers of our Packaging segment andapproximately 500 customers of our Paper & Board segment, also enables usto minimize our dependence on any one customer. Our top ten Packaging segmentcustomers accounted for only approximately 10% of that segment’s total sales in2002, with no one customer representing more than 2.0%. Our top ten Paper &Board customers accounted for only 21% of that segment’s total volume in 2002,with no one customer representing more than 4%. In addition, we believe that webenefit from strong customer loyalty, which is evidenced by the fact that ourcurrent top ten customer relationships in terms of volume have spanned over tenyears on average in the Packaging segment.

 

**Intellectual Property**

 

We currentlyhold various national and European Union patents and will continue to pursuepatent protection for our innovations. Kappa Packaging makes use of trademarks, including Kappa, Kappa Colours,Kappa Eskaboard and Quama and, by license from AssiDomän, the trademark Royal.

 

**EnvironmentalRegulation**

 

Our mills andplants are affected by a wide range of laws and regulations relating toenvironmental issues in each jurisdiction in which we are located and by EUenvironmental regulations. These regulations are enforced by local and nationalbodies in the relevant jurisdiction. Our different operations are affected by such laws to different degreesaccording to the jurisdiction involved. By their nature, our containerboard and solid board production and, to alesser extent, our recovered paper and packaging operations give rise to anumber of environmental issues.

 

27

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We requireeach of our mills and operational plants to comply with all applicableenvironmental laws and regulations appropriate to the jurisdiction in whichthey carry out their business.  Webelieve that our operations are substantially in compliance with all applicableenvironmental laws and regulations where failure to comply would materially andadversely affect our business.

 

Environmentalregulations in the EU Member States are standardized or in the process of beingstandardized by a series of stringent directives concerning theenvironment.  In countries outside theEU (Switzerland, Poland, The Czech Republic, The Slovak Republic, Lithuania andRussia) our operations are not subject to EU environmental laws but are subjectto national environmental laws.

 

***Operation ofProduction Facilities***

 

Environmentallegislation and regulations commonly require businesses whose operations mayhave an impact on the environment to obtain permits and authorizations forthose operations.  The manufacture ofpulp and paper generally requires a permit which stipulates, for example,production conditions, limits on air emissions and wastewater discharges, noisecontrol and waste management requirements. Breaches of this operational permit or of other environmental laws andregulations may result in criminal sanctions, such as fines, orders to ceaseoperations and/or requirements to clean-up pollution.  Environmental permits are also subject to modification andrevocation and must be periodically updated.

 

The EUDirective 96/61/EC on Integrated Pollution Prevention and Control (“IPPC”) willrequire our operations in the European Union that impact significantly on theenvironment to be authorized under a national regime.  We will need to demonstrate to the relevant national regulatorthat we utilize best available techniques to minimize pollution and maximizeenergy efficiency.  All of our existingoperations in EU Member States are likely to require authorization under theIPPC by 2007, which is the European Union wide deadline.  However, enabling legislation is apre-condition to the IPPC becoming effective in each Member State, and this mayoccur after 2007. This directive will result in increased regulation of aspectsof our production processes.  Inparticular, in certain jurisdictions in which we operate, a baselinecontamination report will need to be submitted to the relevant regulator withan application for the new permit.

 

***Waste Management***

 

All of ouroperations in EU Member States are subject to the Waste Framework Directive75/442/EEC as amended by 91/156/EC and our board production operations aresubject to the Hazardous Waste Directive 91/689/EC. These directives seek toimpose a uniform system of waste management across the European Union.  All our operations generate and hold wasteprior to removal elsewhere, and the directives, where nationally implemented,require that we manage waste in a way that does not involve the use ofprocesses likely to harm the environment or cause harm to human health. Permitsare required for keeping, treating, depositing or disposing of waste, subjectto certain exemptions.  Failure tofulfill these requirements may lead to both criminal and civil liability, withsanctions including fines, orders to cease breaches and clean-up orders.

 

***Packaging***

 

All of ourpackaging operations in EU Member States fall under the Packaging and PackagingWaste Directive 94/62/EC.  We mustcomply with the appropriate national targets to re-use, recover or recyclematerials and products that become waste. Failure to comply could lead to the operation being fined and thepackaging produced being barred from the EU market.  We currently achieve compliance with these regulations by membershipin approved compliance schemes.

 

***Wastewater and OtherReleases***

 

We are understatutory duties in most jurisdictions in which we operate to controldischarges into watercourses and sewer systems and to maintain effluenttreatment plants where appropriate.  Weare also subject to regulations, which impose liability for fines and otherpenalties and, in certain jurisdictions in which we operate, clean-up costs, inthe event of accidental spills and pollution by releases of hazardoussubstances into the environment.

 

28

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***Contamination***

 

Environmentallaws and regulations may also impose obligations to investigate, remediate orpay for the investigation or remediation of contaminated land and groundwaterand to compensate private third parties for related damages.

 

From time totime we dispose of closed plants.  Inmost jurisdictions in which we operate, plant closure programs requirebusinesses to take steps to make safe, from an environmental perspective, siteoperations and clean-up any soil and/or groundwater contamination.

 

***SustainabilityRequirements***

 

Forest andenvironmental protection legislation in Sweden places an emphasis onsustainable commercial utilization of forests and is intended to preserve naturalbiodiversity.

 

***EnvironmentalManagement***

 

We have workedand continue to work towards compliance with international best practicestandard ISO 14001.  Ten out of our 17containerboard and solid board mills and certain of our packaging operationshave implemented ISO 14001 certified environmental management systems.  The aim of this standard is to reduce anorganization’s environmental impact and ensure continuously improvedenvironmental performance and compliance through internal auditing, target settingand training.

 

29

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# **C.**                                    OrganizationalStructure

 

The following shows our corporate structure:

 

Kappa Holding B.V. holds 100% of the share capital of Kappa BeheerB.V.  Kappa Beheer B.V. holds 100% of theshare capital of Kappa Packaging B.V. Kappa Packaging holds shareholdings in other holding companies of theKappa Packaging Group and indirectly in the operating companies.  None of Kappa Holding B.V., Kappa BeheerB.V. or Kappa Packaging B.V. conducts directly any operational activities.

 

For anoverview of main subsidiaries of Kappa Holding reference is made to Note 32 tothe Consolidated Financial Statements, included in this document in“Item 18. Financial Statements.”

 

**D.**                                    **Property,Plants and Equipment**

 

We ownsubstantially all of our production facilities.  All of the mills and plants referred to in the sections above areowned by us or one of our direct or indirect wholly owned subsidiaries.

 

30

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**Item 5. Operating and Financial Review and Prospects**

 

The followingdiscussion addresses the financial conditions and results of operations of theKappa Packaging Group for the years ended December 31, 2000, 2001 and2002.  This discussion should be read inconjunction with our audited Consolidated Financial Statements, the notesthereto and the other financial information included elsewhere in thisdocument.  Our Consolidated FinancialStatements are prepared in accordance with Dutch generally accepted accountingprinciples (“Dutch GAAP”), which differ from US generally accepted accountingprinciples (“US GAAP”) with respect to certain items.  These differences mainly relate to the treatment of goodwill,restructuring charges, acquisition adjustments, business process reengineeringcosts, valuation of swaptions, treatment of insurance proceeds, insuranceprovisions, financial instruments and pensions.  For a discussion of how our application of Dutch GAAP differsfrom US GAAP and a reconciliation of our net income and shareholders’ equityfrom Dutch GAAP to US GAAP, see Note 28 to our audited Consolidated FinancialStatements included in “Item 18. Financial Statements.”  Thefollowing discussion contains forward-looking statements which involve risksand uncertainties.  In the future, ouractual results may differ significantly from the results discussed in theforward-looking statements.  Factorsthat might cause such differences include, but are not limited to, thosediscussed in “Item 3.D. - Risk Factors” and “Cautionary Note RegardingForward-Looking Statements.”

 

**Overview**

 

We are one ofthe largest producers by volume of containerboard, solid board and corrugatedpackaging and solid board packaging in Europe. We currently operate 16 containerboard and solid board mills in Sweden,The Netherlands, Germany, The Slovak Republic, the United Kingdom, the CzechRepublic, France and Italy and 101 packaging converting plants throughoutWestern and Eastern Europe.

 

We operate twobusiness segments:  Paper & Board andPackaging. Our Paper & Board segment produces various qualities ofcontainerboard and solid board using a mix of recycled and fresh fibers, whichwe sell both to our own converting plants and externally for use in theproduction of corrugated and solid board packaging.  We also produce graphic board that is used in a variety ofproducts, such as puzzles and hardback book covers, and specialty board that isused in consumer packaging for premium products, such as jewelry, cosmetics andwine and spirits. Our Packaging segment converts containerboard and solid boardfor packaging into corrugated and solid board packaging products designed tomeet our customers’ requirements for the protection, transportation, storage,display and marketing of their products.  In addition, as part of our Paper & Board segment, we operatea recovered paper sourcing and trading business primarily to provide ourcontainerboard and solid board mills with a reliable source of raw material.

 

In 2002, 40%of our containerboard and solid board production was used by our Packagingsegment. All intercompany sales from our Paper & Board segment to ourPackaging segment are made on an arms-length basis and are eliminated forconsolidated reporting purposes.  Inaddition, the Packaging segment purchased 53% of its containerboard and solidboard from third-party sources.

 

Containerboardprices are sensitive to imbalances in supply and demand mainly due tocontainerboard’s commodity characteristics. As containerboard demand is derived from the relatively stable demandfor corrugated packaging, prices are particularly vulnerable to arbitrarychanges in industry capacity.  In thepast, the capital intensive and high fixed cost nature of the industry led tosignificant price declines during periods of reduced demand as production hastended to continue so long as prices were sufficient to meet marginal costs.

 

Additionally,prices for containerboard and solid board are closely related to movements inthe costs of the underlying raw materials such as recovered paper andwood.  Prices for these raw materials,particularly mixed waste paper have been volatile and, as a result, it isdifficult for us to forecast future price trends.  For example, the price per ton of mixed waste paper reached apeak of €110 per ton in May 2000, in comparison to the six-year low point of €3per ton in January 1997. Recovered paper prices then decreased in the periodfrom August 2000, then subsequently increased to approximately €135 per ton forold corrugated containers (OCC) in June 2002 and then decreased toapproximately €65 per ton for mixed waste paper and €75 per ton for OCC(current level).  In contrast, woodprices have tended to be relatively stable.

 

31

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In general,corrugated packaging prices vary with the underlying price of the principal rawmaterial:  containerboard.  As such, corrugated packaging manufacturersseek to adjust their sales prices to maintain their margins as the price ofcontainerboard varies.  Theseadjustments generally reflect containerboard price changes after an initial lagof up to six months.  Similar tocorrugated packaging, solid board packaging prices vary with the underlyingprice of its raw material, solid board.

 

Recycledfiber, which is derived from recovered paper stock, is our most significant rawmaterial.  Recovered paper is acommodity that is traded on world markets. There is on average a six-month lag between supply increasing to matchdemand.  In addition, Europe currentlyexports recovered paper to Asia, which can further drive imbalances betweensupply and demand.  We believe thatwaste paper-related legislation is gradually increasing the long-term supply ofrecovered paper.

 

In 2002,energy costs amounted to 4.77% of our sales (2001:  4.75%). We have energy contracts of a limited duration in orderto maintain the flexibility to benefit from the continuing liberalization ofthe European energy market.

 

We tend not tohave significant order backlogs at any time.

 

**Strategic Drivers**

 

***IndustryConsolidation***

 

Theacquisition in 2001 of the containerboard and corrugated packaging businessesof AssiDomän doubled the size of the Group, both in terms of annual sales andreach.  However, the corrugatedpackaging industry is still fragmented in Europe.  Accordingly, we believe that there are additional opportunitiesfor further consolidation within the industry and we expect that this trendwill help to drive our growth going forward. We plan to continue ouracquisition strategy by purchasing to both increase market share and to fill ingeographic gaps.

 

***Global SalesStrategy***

 

A predominantdriver of the consolidation trend within the worldwide office products industryis a movement toward the globalization of customers.  As corporations become increasingly global, they are looking totheir suppliers for centralized international purchasing solutions that providedistribution and fulfillment on a local level. To reduce operating expenses, customers want to make purchasingdecisions from one central location for their global business, but need theinventory management, day-to-day purchasing needs, and delivery of products andservices to be fulfilled in local markets.

 

We believethat we now have the geographic spread and operational scale to grow profitablyby capturing increased market share.  Wealso believe that we have the ability to add low cost capacity at a number ofour plants to take advantage of future market opportunities.

 

***Customers Seeking aSingle-Source Supplier***

 

Many customerslook for a logistics chain solution. Many of our larger customers require a packaging solution that has ahigh degree of integration in the logistic chain from manufacturing throughpackaging, warehousing, distribution and transport to reduce operating expenses.  We believe that this increasing trend fitsinto the specific knowledge which we have developed in order to successfullygrow our business.

 

**Acquisitions**

 

We have madeselective acquisitions over the past several years that have increased our productioncapacity and expanded our business.  Wehave integrated 14 businesses into Kappa since 1994, including the followingprincipal acquisitions during the last three years:

 

•                      In May 2001,we acquired Alpha, the containerboard and corrugated packaging business ofAssiDomän for €1,120.9 million.  Theacquisition resulted in goodwill of €218.8 million, after the application ofadjustments to the fair market value of €13.5 million in 2002, as a result ofwhich the fair market value increased from €387.7 million to €401.2 million.

 

32

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•                      In March2000, we acquired the SCAO Group for €83.8 million.  The acquisition resulted in goodwill of €18.6 million.

 

Our acquisition of Alpha in May 2001 added four containerboard andsolid board mills and 64 packaging converting plants located in four and tencountries, respectively. This acquisition increased our containerboard capacityby almost 90% and our corrugated packaging capacity by 120%. The results ofAlpha are included in our Consolidated Financial Statements from May 17, 2001,the date of closing of the acquisition. As part of the integration of Alphainto our operations, we decided in the third quarter 2001 to close down two ofour corrugated packaging converting plants, one in Hilden, Germany and one inNeufahrn, Germany.  The closure of bothplants was finalized in the fourth quarter of 2001. Sales and production ofboth companies were transferred to our other production facilities. As anotherpart of our Alpha integration, we rebuilt the corrugated production plant KappaEmpee (Eindhoven, The Netherlands) from a fully integrated plant into a majorsheetfeeder operation. We finalized this rebuilding during 2002.

 

In March 2000,we acquired Société Cartonries de l’Atlantique en Ondulé (SCAO), a Frenchcorrugated packaging producer.  Theresults of SCAO are included in our Consolidated Financial Statements fromJanuary 1, 2000.

 

**Post balance sheetevents**

 

In March 2003,the Kappa Packaging Group agreed to acquire Grenland Papp AS, a small Norwegiancorrugated board manufacturer for €1.1 million, and to increase its interest inOrko Pak B.V. a small corrugated converting plant in The Netherlands, from 50%to 100% for €0.5 million.

 

In May 2003,the Kappa Packaging Group issued Senior Subordinated Notes of €95.0 millionthat resulted in net proceeds of €100.7 million. On June 23, 2003 the proceedsof this note issuance were used to redeem the euro-denominated mezzanine notesof €100.0 million issued on May 18, 2001 by Kappa Beheer B.V.  The total redemption of the mezzanine notesamounted to €107.5 million including accumulated interest and an earlyrepayment charge. The warrants issued together with the mezzanine notes werecancelled.  The interest rate on the newSenior Subordinated Notes has been set at 105/8% and ispayable semi-annually on January 15 and July 15 of each year commencing on July15, 2003.

 

In June 2003,discussions with the local works council have largely been concluded regardingthe closure of Kappa Mennecy Paper (Mennecy, France). The mill will not bestarted-up again after the shut down in April 2003, as a result of whichapproximately 100 employees become redundant.

 

33

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**Operating Results**

 

The tablebelow sets forth our operating results in millions of euro and as a percentageof our sales for the periods indicated. 

 
|                                                                   |   | **Year ended  December 31,**              |   |
|------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                   |   | **2000**                                  |   | **2001** |   | **2002** |   |
|                                                                   |   | **€**                                |   | **%** |   | **€** |   | **%** |   | **€** |   | **%** |   |
|                                                                   |   | **(€  millions except percentages)** |   |
| **Income Statement Data**                                              |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                                  |   | 1,657.4                                   |   | 100.0 |   | 2,471.3 |   | 100.0 |   | 2,923.8 |   | 100.0 |   |
| Net change in work in progress and finished  goods                     |   | 15.0                                      |   | 0.9 |   | 1.0 |   | — |   | 13.8 |   | 0.5 |   |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net sales including net change in work in  progress and finished goods |   | 1,672.4                                   |   | 100.9 |   | 2,472.3 |   | 100.0 |   | 2,937.6 |   | 100.5 |   |
| Operating expenses:                                                    |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Raw material costs                                                     |   | (692.9                                    | )      | (41.8 | ) | (917.7 | ) | (37.1 | ) | (1,077.6 | ) | (36.9 | ) |
| External services(1)                                                   |   | (267.3                                    | )      | (16.1 | ) | (434.7 | ) | (17.6 | ) | (523.3 | ) | (17.9 | ) |
| Labor costs                                                            |   | (359.3                                    | )      | (21.7 | ) | (561.9 | ) | (22.7 | ) | (697.9 | ) | (23.9 | ) |
| Other operating costs                                                  |   | (83.0                                     | )      | (5.0 | ) | (135.9 | ) | (5.5 | ) | (197.8 | ) | (6.8 | ) |
| Depreciation                                                           |   | (111.2                                    | )      | (6.7 | ) | (152.4 | ) | (6.2 | ) | (167.8 | ) | (5.7 | ) |
| Total operating expenses before  amortization and impairment charges   |   | (1,513.7                                  | )      | (91.3 | ) | (2,202.6 | ) | (89.1 | ) | (2,664.4 | ) | (91.2 | ) |
| Operating income before amortization and  impairment charges(2)        |   | 158.7                                     |   | 9.6 |   | 269.7 |   | 10.9 |   | 273.2 |   | 9.3 |   |
| Amortization and impairment charges                                    |   | (18.7                                     | )      | (1.1 | ) | (23.6 | ) | (0.9 | ) | (50.7 | ) | (1.7 | ) |
| Operating income                                                       |   | 140.0                                     |   | 8.5 |   | 246.1 |   | 10.0 |   | 222.5 |   | 7.6 |   |
| Interest expense, net                                                  |   | (118.5                                    | )      | (7.2 | ) | (167.8 | ) | (6.8 | ) | (192.0 | ) | (6.5 | ) |
| Interest expense on Shareholders’ loans                           |   | (20.7                                     | )      | (1.2 | ) | (34.9 | ) | (1.4 | ) | (46.2 | ) | (1.6 | ) |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Result before income taxes                                             |   | 0.8                                       |   | 0.1 |   | 43.4 |   | 1.8 |   | (15.7 | ) | (0.5 | ) |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Income taxes                                                           |   | (13.8                                     | )      | (0.8 | ) | (19.1 | ) | (0.8 | ) | 5.4 |   | 0.2 |   |
| Income from participations                                             |   | 0.7                                       |   | — |   | 0.2 |   | — |   | 0.6 |   | — |   |
| Minority interests                                                     |   | —                                    |   | — |   | (0.2 | ) | — |   | (0.2 | ) | — |   |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Income/(loss) before extraordinary items                               |   | (12.3                                     | )      | (0.7 | ) | 24.3 |   | 1.0 |   | (9.9 | ) | (0.3 | ) |
| Extraordinary items, net of tax                                        |   | (3.4                                      | )      | (0.2 | ) | (13.1 | ) | (0.5 | ) | — |   | — |   |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| Net income/(loss)                                                      |   | (15.7                                     | )      | (0.9 | ) | 11.2 |   | 0.5 |   | (9.9 | ) | (0.3 | ) |
|                                                                   |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data**                                               |   |                                      |   |   |   |   |   |   |   |   |   |   |   |
| EBITDA(3)                                                              |   | 269.9                                     |   | 16.3 |   | 422.1 |   | 17.1 |   | 441.0 |   | 15.1 |   |
| Total assets(4)                                                        |   | 2,114.3                                   |   |   |   | 3,709.2 |   |   |   | 3,643.4 |   |   |   |
| Assets(5)                                                              |   | 1,405.5                                   |   |   |   | 2,785.2 |   |   |   | 2,753.3 |   |   |   |
| Net capital expenditure(6)                                             |   | 102.5                                     |   |   |   | 154.6 |   |   |   | 162.1 |   |   |   |

 

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(1) External services relate to freight charges, energy costs and maintenancecosts from third parties.

(2) Operating income before amortization and impairment charges is nota measure recognized by generally accepted accounting principles and should notbe considered as a substitute for operating income, as an indicator of liquidityor as a substitute for net cash provided. We view this measure as a relevantsupplementary measure of performance in our industry.

(3) EBITDA equals earnings from operations before income taxes, netinterest expense, depreciation, amortization, income from participations andminority interests. EBITDA is a widely accepted financial indicator toinvestors of a company’s ability to incur and service debt.  It is not, however, a measure recognized bygenerally accepted accounting principles in The Netherlands and the UnitedStates of America and should not be considered as a substitute for operatingincome, as an indicator of liquidity or as a substitute for net cash provided.This method may not be comparable to the EBITDA calculations of other entities.EBITDA for the year 2002 includes exceptional restructuring expenses of €12.0million, incurred in the Paper & Board segment (€0.4 million) and thePackaging segment (€11.6 million). The restructuring expenses relate to arestructuring provision set up due to management’s decision to reduce the totalnumber of employees during 2003 by approximately 400.

(4) Total assets include goodwill (2002:  €874.2 million, 2001: €913.2 million and 2000:  €702.8million) and (deferred) income taxes (2002: €15.9 million, 2001:  €10.8million and 2000:  €6.0 million).

(5) Assets exclude goodwill and (deferred) income taxes, in accordancewith Dutch GAAP.

(6) Shown net of disposals of capital assets including obsoleteequipment and real estate not used in operations, none of which was material.

 

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The tablebelow sets forth certain segment information for the period indicated.

 
|                                                            |   | **Year ended  December 31,** |   |
|-----------------------------------------------------------------|--------|------------------------------|--------|
|                                                            |   | **2000**                     |   | **2001** |   | **2002** |   |
|                                                            |   | **(€  millions)**       |   |
| Sales                                                           |   |                         |   |   |   |   |   |
| Paper & Board                                               |   | 860.6                        |   | 1,086.5 |   | 1,295.2 |   |
| Packaging                                                       |   | 1,105.5                      |   | 1,881.5 |   | 2,258.4 |   |
| Eliminations                                                    |   | (308.7                       | )      | (496.7 | ) | (629.8 | ) |
| Consolidated total                                              |   | 1,657.4                      |   | 2,471.3 |   | 2,923.8 |   |
|                                                            |   |                         |   |   |   |   |   |
| Operating income before amortization and  impairment charges(2) |   |                         |   |   |   |   |   |
| Paper & Board                                               |   | 130.7                        |   | 199.4 |   | 197.4 |   |
| Packaging                                                       |   | 48.5                         |   | 108.6 |   | 107.0 |   |
| Corporate expenses                                              |   | (20.5                        | )      | (38.3 | ) | (31.2 | ) |
| Consolidated total                                              |   | 158.7                        |   | 269.7 |   | 273.2 |   |

 

The tablebelow sets forth certain financial information for our Paper & Boardsegment.

 
|                                                                   |   | **Year ended  December 31,**                                |       |
|------------------------------------------------------------------------|--------|-------------------------------------------------------------|------------|
|                                                                   |   | **2000**                                                    |       | **2001** |   | **2002** |   |
|                                                                   |   | **€**                                                  |       | **%** |   | **€** |   | **%** |   | **€** |   | **%** |   |
|                                                                   |   | **(€  millions except percentages and sales volumes)** |       |
| **Income Statement Data**                                              |   |                                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Sales                                                                  |   | 860.6                                                       |       | 100.0 |   | 1,086.5 |   | 100.0 |   | 1,295.2 |   | 100.0 |   |
| Net changes in work in progress and  finished goods                    |   | 4.4                                                         |       | 0.5 |   | 4.3 |   | 0.4 |   | 9.0 |   | 0.7 |   |
| Net Sales including net change in work in  progress and finished goods |   | 865.0                                                       |       | 100.5 |   | 1,090.8 |   | 100.4 |   | 1,304.2 |   | 100.7 |   |
| Operating expenses                                                     |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Raw material costs                                                     |   | (356.8                                                      | )          | (41.5 | ) | (368.1 | ) | (33.9 | ) | (482.4 | ) | (37.2 | ) |
| External services(1)                                                   |   | (163.5                                                      | )          | (19.0 | ) | (241.5 | ) | (22.2 | ) | (288.3 | ) | (22.3 | ) |
| Labor costs                                                            |   | (124.4                                                      | )          | (14.4 | ) | (159.2 | ) | (14.6 | ) | (186.0 | ) | (14.4 | ) |
| Other operating costs, net                                             |   | (27.8                                                       | )          | (3.2 | ) | (46.4 | ) | (4.3 | ) | (67.2 | ) | (5.2 | ) |
| Depreciation                                                           |   | (61.8                                                       | )          | (7.2 | ) | (76.2 | ) | (7.0 | ) | (82.9 | ) | (6.4 | ) |
| Total operating expenses before  amortization and impairment charges   |   | (734.3                                                      | )          | (85.3 | ) | (891.4 | ) | (82.0 | ) | (1,106.8 | ) | (85.5 | ) |
| Operating income before amortization and  impairment charges(2)        |   | 130.7                                                       |       | 15.2 |   | 199.4 |   | 18.4 |   | 197.4 |   | 15.2 |   |
|                                                                   |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data**                                               |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| EBITDA(3)                                                              |   | 192.5                                                       |       | 22.4 |   | 275.6 |   | 25.4 |   | 280.3 |   | 21.6 |   |
| Assets(4)                                                              |   | 633.9                                                       |       |   |   | 1,070.9 |   |   |   | 1,059.4 |   |   |   |
| Net capital expenditure(5)                                             |   | 35.9                                                        |       |   |   | 86.1 |   |   |   | 77.0 |   |   |   |
|                                                                   |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| **Other Data**                                                         |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Sales volumes (kilotons)                                               |   | 2,053                                                       |       |   |   | 2,660 |   |   |   | 3,133 |   |   |   |

 

----

(1) External services relate to freight charges, energy costs andmaintenance costs from third parties.

(2) Operating income before amortization and impairment charges is nota measure recognized by generally accepted accounting principles and should notbe considered as a substitute for operating income, as an indicator ofliquidity or as a substitute for net cash provided. We view this measure as arelevant supplementary measure of performance in our industry.

(3) EBITDA equals earnings from operations before income taxes, netinterest expense, depreciation, amortization, income from participations andminority interests. EBITDA is a widely accepted financial indicator toinvestors of a company’s ability to incur and service debt.  It is not, however, a measure recognized bygenerally accepted accounting principles in The Netherlands and the United Statesof America and should not be considered as a substitute for operating income,as an indicator of liquidity or as a substitute for net cash provided. Thismethod may not be comparable to the EBITDA calculations of other entities.EBITDA for the year 2002 includes exceptional restructuring expenses of €0.4million. The restructuring expenses relate to a restructuring provision set updue to management’s decision to reduce the total number of employees during2003 by approximately 400.

(4) Assets exclude goodwill and (deferred) income taxes, in accordancewith Dutch GAAP.

(5) Shown net of disposals of capital assets including obsoleteequipment and real estate not used in operations, none of which was material.

 

35

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The tablebelow sets forth certain financial information for our Packaging segment inmillions of euros and as a percentage of sales for the periods indicated.

 
|                                                                   |   | **Year ended  December 31,**                                |       |
|------------------------------------------------------------------------|--------|-------------------------------------------------------------|------------|
|                                                                   |   | **2000**                                                    |       | **2001** |   | **2002** |   |
|                                                                   |   | **€**                                                  |       | **%** |   | **€** |   | **%** |   | **€** |   | **%** |   |
|                                                                   |   | **(€  millions except percentages and sales volumes)** |       |
| **Income Statement Data**                                              |   |                                                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Sales                                                                  |   | 1,105.5                                                     |       | 100.0 |   | 1,881.5 |   | 100.0 |   | 2,258.4 |   | 100.0 |   |
| Net changes in work in progress and  finished goods                    |   | 10.7                                                        |       | 1.0 |   | (4.7 | ) | (0.2 | ) | 4.8 |   | 0.2 |   |
| Net sales including net change in work in  progress and finished goods |   | 1,116.2                                                     |       | 101.0 |   | 1,876.8 |   | 99.8 |   | 2,263.2 |   | 100.2 |   |
| Operating expenses                                                     |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Raw material cost                                                      |   | (646.2                                                      | )          | (58.5 | ) | (1,039.4 | ) | (55.2 | ) | (1,225.7 | ) | (54.3 | ) |
| External services(1)                                                   |   | (102.2                                                      | )          | (9.2 | ) | (191.5 | ) | (10.2 | ) | (234.0 | ) | (10.4 | ) |
| Labor costs                                                            |   | (224.3                                                      | )          | (20.3 | ) | (385.3 | ) | (20.5 | ) | (490.8 | ) | (21.7 | ) |
| Other operating costs, net                                             |   | (47.2                                                       | )          | (4.3 | ) | (78.4 | ) | (4.2 | ) | (124.0 | ) | (5.5 | ) |
| Depreciation                                                           |   | (47.8                                                       | )          | (4.3 | ) | (73.6 | ) | (3.9 | ) | (81.7 | ) | (3.6 | ) |
| Total operating expenses before  amortization and impairment charges   |   | (1,067.7                                                    | )          | (96.6 | ) | (1,768.2 | ) | (94.0 | ) | (2,156.2 | ) | (95.5 | ) |
| Operating income before amortization and  impairment charges(2)        |   | 48.5                                                        |       | 4.4 |   | 108.6 |   | 5.8 |   | 107.0 |   | 4.7 |   |
|                                                                   |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| **Other Financial Data**                                               |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| EBITDA(3)                                                              |   | 96.3                                                        |       | 8.7 |   | 182.2 |   | 9.7 |   | 188.7 |   | 8.4 |   |
| Assets(4)                                                              |   | 641.2                                                       |       |   |   | 1,463.6 |   |   |   | 1397.2 |   |   |   |
| Net capital expenditure(5)                                             |   | 66.5                                                        |       |   |   | 67.5 |   |   |   | 77.7 |   |   |   |
|                                                                   |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| **Other Data**                                                         |   |                                                        |       |   |   |   |   |   |   |   |   |   |   |
| Sales volumes (kilotons)                                               |   | 1,381                                                       |       |   |   | 2,131 |   |   |   | 2,466 |   |   |   |

 

----

(1) External services relate to freight charges, energy costs andmaintenance costs from third parties.

(2) Operating income before amortization and impairment charges is nota measure recognized by generally accepted accounting principles and should notbe considered as a substitute for operating income, as an indicator ofliquidity or as a substitute for net cash provided. We view this measure as arelevant supplementary measure of performance in our industry.

(3) EBITDA equals earnings from operations before income taxes, netinterest expense, depreciation, amortization, income from participations andminority interests.  EBITDA is a widelyaccepted financial indicator to investors of a company’s ability to incur andservice debt.  It is not, however, ameasure recognized by generally accepted accounting principles in TheNetherlands and the United States of America and should not be considered as asubstitute for operating income, as an indicator of liquidity or as asubstitute for net cash provided. This method may not be comparable to theEBITDA calculations of other entities. EBITDA for the year 2002 includesexceptional restructuring expenses of €11.6 million. The restructuring expensesrelate to a restructuring provision set up due to management’s decision toreduce the total number of employees during 2003 by approximately 400.

(4) Assets exclude goodwill and (deferred) income taxes, in accordancewith Dutch GAAP.

(5) Shown net of disposals of capital assets including obsoleteequipment and real estate not used in operations, none of which was material.

 

36

----

 

**Year ended December31, 2002 compared to Year ended December 31, 2001**

 

**Itshould be noted that the total of amounts provided in any segment analysisbelow will not necessarily equal amounts shown on a consolidated basis due tointercompany eliminations and corporate items.**

 

*Sales. *Salesincreased by €452.5 million, or 18.3%, to €2,923.8 million in 2002 from€2,471.3 million in 2001.  The salesincrease was mainly the result of an increase in volumes of 18% as a result ofthe acquisition and consolidation of Alpha as from May 17, 2001.  Sales were also positively influenced by aslight increase in the average sales prices for containerboard and packagingproducts.

 

Sales in the Paper & Board segment increased by €208.7 million, or19.2%, from €1,086.5 million in 2001 to €1,295.2 million in 2002.  The increase is the net result of increasedsales volumes of 17.8% resulting from the acquisition of Alpha and a slightincrease in the average sales prices for containerboard.  Sales in the Paper & Board segmentincluded €630.0 million in 2002 and €496.7****million in 2001 of sales to the Packagingsegment.

 

Sales in the Packaging segment increased by €376.9 million, or 20.0%,from €1,881.5 million in 2001 to €2,258.4 million in 2002.  The increase mainly results from increasedsales volumes of 17.9%, reflecting the acquisition of Alpha, and also comesfrom a slight increase in the average sales prices for packaging products.

 

*Raw material costs. *Rawmaterial costs increased by €159.9 million, or 17.4%, from €917.7 million in2001 to €1,077.6 million in 2002.  Rawmaterial costs in the Paper & Board segment increased to €482.4 million, or31.1%, and in the Packaging segment to €1,225.7 million, or 17.9%.  Raw material costs as a percentage of salesincreased to 37.2% in 2002 from 33.9% in 2001 for our Paper & Board segmentand decreased only slightly to 54.3% from 55.2% for our Packaging segment. Theincrease in the raw material costs in our Paper & Board segment mainlyreflects the sharp increase in recovered paper prices in the second quarter of2002.

 

*External services. *Costsof external services, consisting of freight charges, energy costs andmaintenance costs, increased by €88.6 million, or 20.4%, from €434.7 million in2001 to €523.3 million in 2002. This increase of €88.6 million was mainly dueto increased freight charges (€49.7 million or 26.1%), maintenance costs (€21.8million or 17.9%) and energy costs (€17.1 million or 14.0%) resulting from theacquisition and consolidation of Alpha. The cost of external services as apercentage of sales increased slightly from 17.6% in 2001 to 17.9% in 2002.

 

Costs of external services in the Paper & Board segment increasedby €46.8 million, or 19.4%, from €241.5 million in 2001 to €288.3 million in2002. This increase came from increased freight charges (€23.6 million or28.4%), maintenance costs (€10.4 million or 16.3%) and energy costs (€12.8million or 13.5%), resulting mainly from the acquisition and consolidation ofAlpha. Cost of external services as a percentage of sales in the Paper &Board segment, therefore, increased slightly from 22.2% in 2001 to 22.3% in2002.

 

Costs of external services in the Packaging segment increased by €42.5million, or 22.2%, from €191.5 million in 2001 to €234.0 million in 2002. Thisincrease was the result of increased freight charges (€26.1 million or 24.3%),maintenance costs (€12.0 million or 21.3%) and energy costs (€4.4 million or15.9%) mainly due to the acquisition and consolidation of Alpha. Cost ofexternal services as a percentage of sales in the Packaging segment increasedslightly from 10.2% in 2001 to 10.4% in 2002.

 

*Labor costs. *Laborcosts increased by €136.0 million, or 24.2%, to €697.9 million in 2002 from€561.9 million in 2001, relating mainly to an increase in the number of fulltime employees. The average number of full time employees increased byapproximately 22% from 13,628 in 2001 to 16,626 in 2002. In addition, thedecision was made in the fourth quarter of 2002 to reduce the total number offull time employees during 2003 by approximately 400, for which a restructuringprovision of €12.0 million was made in 2002.

 

Labor costs in the Paper & Board segment, excluding exceptionalrestructuring charges of €0.4 million in 2002, increased by €26.4 million, or16.6%, from €159.2 million to 2001 to €185.6 million in 2002. The increase ismainly the result of general wage increases, higher pension costs, and a netincrease in the average number of full time employees by approximately 14% from3,729 in 2001 to 4,238 in 2002, mainly due to the consolidation of Alpha.

 

37

----

 

Labor costs in the Packaging segment, excluding exceptionalrestructuring charges of €11.6 million in 2002, increased by €93.9 million, or24.3%, from €385.3 million in 2001 to €479.2 million in 2002. This was mainlythe result of general wage increases, higher pension costs, and a net increasein the average number of full time employees by approximately 25% from 9,770 in2001 to 12,223 in 2002, due to the consolidation of Alpha.

 

*Other operating costs. *Otheroperating costs consisting of rent, lease, office, communication, travel,insurance, automation, other expenses and other income increased by €61.9million, or 45.5%, from €135.9 million in 2001 to €197.8 million in 2002,principally relating to the consolidation of Alpha and to increased insurance costs.

 

*Depreciation. *Depreciationcharges increased by €15.4 million, or 10.1%, to €167.8 million in 2002 from€152.4 million in 2001 mainly due to the consolidation of Alpha.

 

*Operating income before amortization and impairment charges. *As a result of thefactors discussed above, including the acquisition of Alpha and corporateexpenses of €31.2 million (2001:  €38.3million; 2000:  €20.5 million), ouroperating income before amortization and impairment charges increased by €3.5million, or 1.3%, to €273.2 million in 2002 from €269.7 million in 2001.  Operating income before amortization andimpairment charges was €197.4 million in the Paper & Board segment for 2002compared to €199.4 million in 2001. Operating income before amortization and impairment charges was €107.0million in the Packaging segment for 2002 compared to €108.6 million in 2001.

 

*Amortization and impairment charges. *Amortization charges of intangible fixed assetsincreased by €7.1 million, or 30.1%, to €30.7 million in 2002 from €23.6 millionin 2001, mainly as a result of the consolidation of Alpha and the amortizationof software development costs as from January 1, 2002.

 

Based on an impairment test performed during 2002, an additionaldepreciation charge was made in 2002 against certain assets in the Packagingsegment to reflect their present value. The impairment was calculated with a discount rate of 8.4% using thediscounted cash flow method for each of the four reporting units, being:  Containerboard and Solid Board within the Paper& Board segment and Corrugated Packaging and Solid Board Packaging withinthe Packaging segment. The impairment charge is allocated to the tangible fixedasset categories on a pro-rata basis.

 

*Operating income. *Asa result of the factors discussed above, our operating income decreased by€23.6 million, or 9.6%, to €222.5 million in 2002 from €246.1 million in 2001.

 

*Interest expense, net. *Interest expense,net increased by €33.5 million, or 17.5%, from €202.7 million in 2001 to €238.2million in 2002.  The increase ininterest expense, net was mainly the result of additional funding obtained in2001 for the financing of the acquisition of Alpha.

 

*Income taxes. *Theeffective tax rate on result from ordinary operations was 34.3% in 2002,compared to 44.2% in 2001. The decrease of the effective tax rate in 2002compared to 2001 is mainly the result of the recognition of operating lossescarried forward from prior years. The weighted average statutory tax rate on aconsolidated basis was approximately 31.4% for 2002 and 30.9% for 2001. Thedifference between the effective tax rate for the year 2002 compared to theweighted average statutory tax rate is mainly the result of permanentdifferences including non-deductible goodwill and other non-tax deductible expenses,together with the recognition of operating losses carried forward from prioryears.

 

*Net income. *Asa result of the factors discussed above, our net income decreased by €21.1million to €(9.9) million in 2002 from €11.2 million in 2001.

 

38

----

 

**Year ended December31, 2001 compared to Year ended December 31, 2000**

 

**Itshould be noted that the total of amounts provided in any segment analysisbelow will not necessarily equal amounts shown on a consolidated basis due tointercompany eliminations and corporate items.**

 

*Sales. *Sales increased by €813.9 million, or 49.1%, to€2,471.3 million in 2001 from €1,657.4 million in 2000.  Sales attributable to Alpha constituted€879.8 million of the overall increase, or €799.3 million net of intercompanyeliminations of €80.5 million. Excluding Alpha, sales were €1,672.0 million, or€14.6 million (0.9%) more than in 2000. Sales, excluding Alpha, wereessentially unchanged as increased sales volumes for packaging products (+3.8%)and increased average sales prices for packaging products (+2.5%) were largelyoffset by decreased average sales prices for containerboard and solid board in2001 compared to 2000 (-5.5%).

 

Sales in thePaper & Board segment increased by €225.9 million, or 26.2%, to €1,086.5million.  The increase is mainly the netresult of a 29.6% increase in sales volumes as a result of the acquisition ofAlpha and lower average sales prices for containerboard and solid board.  Sales in the Paper & Board segmentincluded €489.0 million in 2001 and €308.7****million in 2000 of sales to the Packagingsegment.

 

Sales in thePaper & Board segment, excluding Alpha, decreased by €53.6 million, or6.2%, to €807.0 million in 2001 from €860.6 million in 2000.  This decrease in sales in 2001 from 2000 wasprimarily the result of a 5.5% decrease in the average sales prices for containerboardand solid board.  Limited growth in thecorrugated market and increases in paper production capacity becomingoperational affected the supply and demand of recycled fiber-basedcontainerboard in 2001.  The kraftlinermarkets in Europe were relatively stable in 2001. Exports of kraftliner fromthe United States continued to decrease due to downtime and the permanentclosure of North American capacity. The high value of the US dollar also forcedUS suppliers to reduce their exports of kraftliner in 2001. This helped theEuropean kraftliner market to maintain stable sales prices during 2001.  Sales volumes in 2001 in the Paper &Board segment, excluding Alpha, were slightly higher than in 2000. We estimatethat the growth of the European market for recycled fiber-based containerboardin 2001 was limited to approximately 0.2%.

 

Sales in thePackaging segment increased by €776.0 million, or 70.2%, to €1,881.5million.  The increase is mainly theresult of a 54.3% increase in volumes, mainly due to the acquisition of Alpha,and increased average sales prices for packaging products.

 

Sales in thePackaging segment, excluding Alpha, increased by €69.5 million, or 6.3%, to€1,175.0 million in 2001 from €1,105.5 million in 2000.  The increase was mainly the result of a 3.8%increase in sales volumes and a 2.5% increase in average sales prices forpackaging products. Towards the end of 2001, growth of the packaging market inWestern Europe slowed, though Central and Eastern Europe continued to showpositive development.  The average salesprices for containerboard and solid board decreased in 2001, whereas theaverage sales prices for packaging products increased for the year 2001compared to 2000, reflecting the usual time delay in passing on raw materialprice changes.  However, in the fourthquarter of 2001 packaging prices began to decline because of lower prices forrecycled containerboard.

 

*Raw material costs. *Raw material costs increased by €224.8million, or 32.4%, to €917.7 million in 2001 from €692.9 million in 2000.  Raw material costs in the Paper & Boardsegment increased to €368.1 million, or 3.2%, and in the Packaging segment to€1,039.4 million, or 60.8%.  Rawmaterial costs as a percentage of sales, including Alpha, decreased to 33.9%from 41.5% for our Paper & Board segment and decreased to 55.2% from 58.5%for our Packaging segment.

 

Raw materialcosts in our Paper & Board segment, excluding Alpha decreased by €83.1million, or 23.3%, to €273.7 million in 2001 from €356.8 million in 2000.  This decrease was primarily due to loweraverage prices of recovered paper.  Rawmaterial costs in our Packaging segment, excluding Alpha, increased by €23.4million, or 3.6%, to €669.6 million in 2001 from €646.2 million in 2000,including purchases from our Paper & Board segment.  This increase was due to the increase inaverage sales prices for containerboard and solid board.

 

*External services. *Costs of external services, consistingof freight charges, energy costs and maintenance costs, increased by €167.4million, or 62.6%, to €434.7 million in 2001 from €267.3 million in 2000.  Costs of external services in the Paper& Board segment increased to €241.5 million, or 47.7%, and in the Packagingsegment to €191.5 million, or

 

39

----

 

87.4%.  Costs of external services as a percentageof sales, including Alpha, increased to 22.2% from 19.0% for our Paper &Board segment and increased to 10.2% from 9.2% for our Packaging segment.

 

Costs ofexternal services in the Paper & Board segment, excluding Alpha, increasedto €176.6 million from €163.5 million in 2000, or 8.0%, and in the Packagingsegment to €111.9 million from €102.2 million in 2000, or 9.5%.  The overall increase in the cost of externalservices, excluding an increase of €144.7 million related to Alpha, wasprimarily due to increased maintenance costs of €5.6 million, energy costsof €12.3 million and freight charges of €4.8 million, the latter two primarilyas a result of increases in electricity, gas and oil prices.

 

*Labor costs.* Labor costs increased by €202.6 million, or56.4%, to €561.9 million in 2001 from €359.3 million in 2000.  Labor costs in the Paper & Board segmentincreased to €159.2 million, or 28.0%, and in the Packaging segment to €385.3million, or 71.8%.  Labor costs as apercentage of sales, including Alpha, increased to 14.7% from 14.5% for ourPaper & Board segment and increased to 20.5% from 20.3% for our Packagingsegment.

 

Labor costs inthe Paper & Board segment, excluding Alpha, increased to €126.8 millionfrom €124.4 in 2000, or 1.9%, and in the Packaging segment to €238.3 millionfrom €224.3 million in 2000, or 6.2%. The overall increase, excluding an increase of €181.9 million related toAlpha, was primarily due to general salary and wage increases and an increasein the average number of employees, excluding employees related to Alpha, of1%.  Labor costs were positivelyinfluenced by approximately €4.5 million in both 2001 and 2000 as a result ofpension premium holidays in The Netherlands being declared in both years due toabove-average returns on investments by the Dutch state pension fund.

 

*Other operating costs. *Other operatingcosts consisting of rent, lease, office, communication, travel, insurance,automation, other expenses and other income increased by €52.9 million, or63.7%, to €135.9 million in 2001 from €83.0 million in 2000.  Alpha accounted for €51.3 million of theincrease.

 

*Depreciation. *Depreciation increased by €41.2 million,or 37.1%, to €152.4 million in 2001 from €111.2 million in 2000.  This increase resulted from €43.3 million ofdepreciation in respect of Alpha assets, which was partially offset as a resultof the relatively low level of investment over recent periods.

 

*Operating income before amortization.*Asa result of the factors discussed above, including the acquisition of Alpha andcorporate expenses of €38.3 million (2000: €20.5 million), our operating income before amortization increased by€111.0 million, or 69.9%, to €269.7 million in 2001 from €158.7 million in2000.  Operating income beforeamortization was €199.4 million in the Paper & Board segment for 2001compared to €130.7 million in 2000. Operating income was €108.6 million in the Packaging segment for 2001compared to €48.5 million in 2000. Excluding Alpha, our operating income before amortization in the Paper& Board segment increased by €7.3 million, or 5.6%, to €138.0 million in2001 and operating income before amortization in the Packaging segmentincreased by €16.9 million, or 34.8%, to €65.4 million.

 

*Amortization. *Amortization of intangible fixed assetsincreased by €4.9 million, or 26.2%, to €23.6 million in 2001 from €18.7million in 2000.  The increase primarilyrelates to the amortization of goodwill recognized in respect of theacquisition of Alpha.

 

*Operating income.*Asa result of the factors discussed above, our operating income increased by€106.1 million, or 75.8%, to €246.1 million in 2001 from €140.0 million in2000.

 

*Interest expense,net.*  Interest expense, net increased by€63.5 million, or 45.6%, to €202.7 million in 2001 from €139.2 million in2000.  The increase was primarily theresult of interest on additional borrowings of €1.240,9 million incurred in2001 in connection with the acquisition of Alpha.

 

*Income taxes.* Income taxes were €19.1 million in 2001compared to €13.8 million in 2000. The effective tax rate on results beforeextraordinary items and goodwill amortization was 29.3% in 2001 and 71.3% in2000 compared to a weighted average statutory tax rate on a consolidated basisof approximately 30.9% for 2001 and 35.4% for 2000.  The high effective tax rate on results before extraordinary itemsand goodwill amortization for the year 2000 was mainly due to a prior yearadjustment that was made on deferred tax liabilities in Germany.

 

40

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*Extraordinary items, net of taxation*.We had an extraordinary loss, net of tax, of €13.1 million in 2001. This amountincludes €14.3 million, net of tax, from the write off of the capitalized costsof debt we incurred in 1998, which was replaced by new borrowings incurred inconnection with the acquisition of Alpha, offset by €1.2 million, net of tax,of balance sheet provisions released following the implementation of changes inDutch generally accepted accounting principles with respect to accounting for restructuringand other provisions.

 

*Net income. *As a result of the factors discussed above, ournet income increased by €26.9 million to €11.2 million in 2001 from a net lossof €15.7 million in 2000.

 

**Corporate items**

 

Operating expense from Corporate items (unallocated overhead) beforeamortization and impairment charges decreased from approximately €38.3 millionin 2001 to €31.2 million in 2002, mainly due to non-recurring and incidentalcosts incurred in 2001 due to the acquisition of Alpha.

 

Operating expense from Corporate items (unallocated overhead) beforeamortization and impairment charges increased from approximately €20.5 millionin 2000 to approximately €38.3 million in 2001, mainly due to the acquisitionof Alpha and non-recurring and incidental costs, such as the increase inintercompany profit elimination not allocated to reportable segments followingthe acquisition of Alpha.

 

**RestructuringProvisions**

 

The movements in restructuring provisions are as follows:

 
|                                      |   | **(€ in  millions)** |       |
|-------------------------------------------|--------|---------------------------|------------|
|                                      |   | **Total**                 |       | **Plant  restructuring** |   | **IT  restructuring** |   |
|                                      |   |                      |       | **Kappa  excluding Alpha** |   | **Alpha  acquisition** |   | **Kappa  excluding Alpha** |   | **Alpha  acquisition** |   |
| **Balance at January 1, 2001**            |   | **37.2**                  | ** ** | **26.1** | ** ** | **—** | ** ** | **11.1** | ** ** | **—** | ** ** |
| Acquisitions                              |   | 67.1                      |       | — |   | 63.9 |   | — |   | 3.2 |   |
| Withdrawals                               |   | (42.4                     | )          | (9.0 | ) | (22.1 | ) | (11.1 | ) | (0.2 | ) |
| Additions charged to extraordinary result |   | (1.9                      | )          | (1.9 | ) | — |   | — |   | — |   |
| Translation differences                   |   | (0.3                      | )          | (0.2 | ) | (0.1 | ) | — |   | — |   |
| **Balance at December 31, 2001**          |   | **59.7**                  | ** ** | **15.0** | ** ** | **41.7** | ** ** | **—** | ** ** | **3.0** | ** ** |
|                                      |   |                      |       |   |   |   |   |   |   |   |   |
| Fair value adjustments                    |   | 0.4                       |       | — |   | 0.4 |   | — |   | — |   |
| Withdrawals                               |   | (38.7                     | )          | (16.3 | ) | (19.4 | ) | — |   | (3.0 | ) |
| Additions charged to operating result     |   | 11.3                      |       | 11.3 |   | — |   | — |   | — |   |
| **Balance at December 31, 2002**          |   | **32.7**                  | ** ** | **10.0** | ** ** | **22.7** | ** ** | **—** | ** ** | **—** | ** ** |

 

In connectionwith the acquisition of Alpha, we recorded restructuring provisions (includingAlpha’s existing provisions) of €67.5 million after the application of fairvalue adjustments of €0.4 million in 2002. These restructuring provisionsrelated to plant restructuring (€64.3 million) and IT restructuring (€3.2million). Payments related to these restructuring provisions during 2001 and2002 were approximately €22.3 million and €22.4 million respectively.

 

Theacquisition plant restructuring provision recorded in 2001 related to:

 

•                  the closure ofthe acquired corrugated production plant Kappa Wellpappe Hilden (Hilden,Germany) and transfer of its production to other operating companies in theregion, as a result of which approximately 150 employees became redundant;

 

•                  thetransformation of Kappa Empee (Eindhoven, the Netherlands) into a sheet feedingunit, effective August 28, 2001, as a result of which approximately 60employees became redundant;

 

•                  the closure ofregional offices and other plant restructurings at our operations in Belgium,France, Germany, Slovakia, Spain, Sweden, The Netherlands and the UnitedKingdom.

 

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•                  an existingearly retirement plan running at our Piteå plant in Sweden as part of whichapproximately 80 people were made redundant in prior years.

 

In June 2003,discussions with the local works council have largely been concluded regardingthe closure of Kappa Mennecy Paper (Mennecy, France). The mill will not bestarted-up again after the shut down in April 2003, as a result of which approximately100 employees become redundant.

 

Therestructuring provisions described above were booked against goodwill atacquisition.  As such, these paymentsrelated to these restructuring provisions impact cash flow, but not EBITDA.

 

Excludingrestructuring provisions related to Alpha, the plant restructuring provisionsas at January 1, 2001 of €26.1 million in total related to the closure of ourcorrugated production plant Kappa Isar Wellpappe (Neufahrn, Germany), whichbecame effective as of September 21, 2001, the closure of our solid boardpackaging plant Kappa Oberau in the South of Germany, which became effective asof April 5, 2000 and other plant restructurings.  The restructuring provision in respect of the closure of KappaIsar Wellpappe included provisions in respect of the lay-off of approximately100 employees and the termination of real estate rental contracts. Other plantrestructurings related to our operations in Germany and The Netherlands andmainly related to employee redundancies. In 2001 and 2002, payments from these plant restructuring provisionswere about €9.0 million and €16.3 million respectively.  The IT restructuring provision as at January1, 2001 of €11.1 million was fully offset by payments during 2001.

 

In the fourthquarter of 2002, the decision was made to reduce the total number of employeesduring 2003 by approximately 400, mainly in our Packaging segment, whichresulted in an exceptional restructuring charge of €12.0 million.

 

Furtherreference is made to Note 10 “Provisions” in “Item 18.  Financial Statements.”

 

**Critical AccountingPolicies and Estimates**

 

Our reportedfinancial condition and results of operations are sensitive to accountingpolicies, assumptions and estimates that underlie preparation of our financialstatements. The profile of critical accounting policies, the judgments andother uncertainties affecting application of those policies and the sensitivityof reported results to changes in conditions and assumptions are factors to beconsidered in conjunction with reviewing our Consolidated Financial Statementsand the discussion in this item. Actual results could differ from estimatesunder different assumptions and conditions. We believe that the following discussion addresses our most criticalaccounting policies, which are those that are most important to the portrayalof our financial results and condition and require management’s most difficult,subjective and complex judgments, often as a result of the need to makeestimates about the effect of matters that are inherently uncertain.

 

OurConsolidated Financial Statements are prepared in accordance with generallyaccepted accounting principles in The Netherlands (Dutch GAAP), which differ incertain respects from generally accepted accounting principles in the UnitedStated (US GAAP). In areas in which our Dutch GAAP compliant accountingpolicies do not correspond with the required US GAAP accounting treatment, andthose differences would have a significant effect on our consolidated netincome and/or shareholders’ equity, we have highlighted these differences inthe discussion below.

 

***Businesscombinations and impairment of goodwill, other intangible fixed assets andtangible fixed assets***

 

Accounting policies for business combinations and impairment ofgoodwill, other intangible fixed assets and tangible fixed assets differbetween Dutch and US GAAP.

 

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*•*                                          *Dutch GAAP*

 

Under DutchGAAP, all of our business combinations are accounted for as purchases. The costof an acquired company is assigned to the tangible fixed assets and intangiblefixed assets purchased and the liabilities assumed on the basis of their fairvalues at the date of acquisition. Any excess of purchase price over the fairvalue of the tangible fixed assets and intangible fixed assets is allocated togoodwill, which is amortized on a straight-line basis over its estimated usefullife.

 

In the eventthat the useful life of goodwill that we amortize under Dutch GAAP isdetermined to be less than management’s original estimate, we will be subjectto an increased amortization charge in our statements of income. If this wereto happen with respect to our goodwill originally amortized over a 40-yearperiod of €874.2 million as at December 31, 2002, this would result in anincrease from the current annual charge of approximately €25 million to thefollowing:

 
|                                                     |   | **Revised  estimated useful life** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|
|                                                     |   | **15 years**                       |   | **20 years** |   |
|                                                     |   |                               |   |   |   |
| Revised annual amortization charge (€ in  millions) |   | 79                                 |   | 54 |   |

 

As thisamortization charge is not tax deductible, the above additional charge wouldimpact net income directly.

 

Under DutchGAAP, goodwill, other intangible fixed assets and tangible fixed assets(“long-lived assets”) are written down to estimated net realizable value whennegative conditions are identified. We review our long-lived assets for impairmentat each balance sheet date, to determine whether there is any indication ofimpairment. If such an indication exists, the recoverable amount of the assetsis estimated, being the higher of the asset’s net selling price and its valuein use. The value in use is based on the total of the discounted future cashflows to be derived from that asset. Our estimate of future cash flows is based upon, among other things,certain assumptions about expected future operating performance and value atthe asset’s eventual disposition.  Ourestimate of future cash flows may differ from actual cash flows due to, amongother things, negative industry or economic trends, technological changes,increased competition and/or changes in operating performance.  An impairment loss is recognized when thecarrying value of an asset exceeds the recoverable amount of the asset.

 

Based on animpairment test performed during 2002, we made an additional depreciationcharge against certain tangible fixed assets in the Packaging segment of €20.0million to reflect their present value. The impairment test was calculated witha discount rate of 8.4% using the discounted cashflow method for each of thefour reporting units, being: Containerboard and Solid Board within the Paper & Board segment andCorrugated Packaging and Solid Board Packaging within the Packaging segment.The impairment charge is allocated to the tangible fixed asset categories on apro-rata basis.

 

As at December31, 2002, we had net goodwill of €874.2 million, other intangible fixed assetsof €7.9 million and tangible fixed assets of €1,654.7 million.

 

*•*                                          *US GAAP*

 

Under US GAAP, all of our business combinations are accounted for aspurchases. In accordance with SFAS No. 141, “Business Combinations” (ABP 16,“Business Combinations,” for transactions consummated prior to June 30, 2001),the cost of an acquired company is assigned to the tangible fixed assets andidentifiable intangible fixed assets acquired and liabilities assumed on thebasis of their fair values at the date of acquisition. We did not identify anyadditional intangible fixed assets under US GAAP compared to Dutch GAAP relatedto acquisitions. See Note 28 of the Consolidated Financial Statements includedin “Item 18.  Financial Statements.”

 

In respect of the (large and complex) acquisition of Alpha in 2001, weperformed a further detailed analysis of the purchase price allocation for USGAAP reporting purposes during 2002 which resulted in a downward valuationadjustment on tangible fixed assets of €85.2 million and higher goodwill of€58.9 million (net of taxation of €26.3 million).

 

For US GAAP purposes, we adopted SFAS No. 142, “Goodwill and OtherIntangible Assets.” Upon adoption of SFAS 142, we ceased amortizing goodwill.All other intangible fixed assets are amortized over their estimated usefullives.

 

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SFAS 142 requires us toevaluate our goodwill for impairment at least annually and more frequently ifspecific events indicate that impairment in value may have occurred.

 

In connectionwith the annual goodwill impairment evaluation required by SFAS 142, wedetermined that there was no impairment, and accordingly, no impairment losswas recorded in the 2002 US GAAP income statement. This evaluation required makingassumptions with respect to the identification of our reporting units. Inaddition, it required making certain assumptions and estimates, includingestimates of future cash flows and appropriate discount rates, in order todetermine the fair value of our reporting units identified.

 

SFAS 144,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of” requires that we review our tangible and intangible fixedassets for impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable (a “triggering event”).The review of recoverability requires us to estimate the future cash flowsexpected to result from the use of the asset and its eventual disposition. If thesum of the undiscounted future cash flows is less than the carrying amount ofthe asset, an impairment loss is recognized, which is measured based on thefair value of the asset. Management is required to exercise judgment in thedetermination of whether a triggering event has occurred as well as in thedevelopment of the assumptions used to estimate future cash flows and determinefair value, as needed.  As under DutchGAAP an impairment charge was made on tangible fixed assets in our Packagingsegment of €20.0 million, we reviewed the tangible fixed assets concerned forimpairment under US GAAP resulting in an additional impairment charge of €5.7million under US GAAP.

 

***Inventories***

 

We state ourinventories at the lower of cost or net realizable value.  We determine cost by the first-in, first-outmethod.  We record adjustments to thevalue of our inventory based upon forecasted plans to sell our inventories.  If we determine that cost is less than netrealizable value, then cost is used as basis for inventory valuation.  If net realizable value is less than cost,we write down the related inventory to that value.  We also consider the physical condition of our inventories (e.g.age and quality) in establishing valuation. As of December 31, 2002, we had inventories of €272.2 million in total,including a provision for obsolescence of €12.4 million.

 

***Pension benefits***

 

Pension andother retirement benefits constitute a significant part of our current cost ofoperations but represent obligations that will not be definitively settleduntil far in the future.  We sponsorpension and other retirement plans in various forms covering substantially allemployees who meet eligibility requirements. In general, personnel employed are entitled to pension benefits thatsupplement state-provided social security benefits. We have established pensionand other retirement plans in accordance with the regulations and practices ofthe particular countries in which we operate. Separate pension funds or life insurance companies administer most ofthese plans.  The benefits of the plansare based primarily on years of service and average or final pay formula. Incountries where contributions are made, the amount of the contribution takesaccount of increases in pension rights in line with the development of wagesand inflation, as well as the return achieved by the pension funds or insurancecompany in excess of the actuarial interest rate.  In addition, pension provisions are recorded in the balancesheet.  These provisions are based onactuarial assumptions and certain methods customary in the country concerned.

 

Dutch GAAPpension accounting differs significantly from US GAAP pension accounting.

 

Under DutchGAAP the pension expenses in the statement of income relates to the contributionsthe Group pays to the pension funds and insurers. Any refunds received fromthese funds are off set against the pension expenses in the statement ofincome. In accordance with Dutch pension law for pensions the Group is liablefor any shortfalls in the pension funds and insurers.

 

Under US GAAP,FAS 87, the retirement benefit accounting is intended to reflect therecognition of future benefit costs over an employee’s approximate serviceperiod based on the terms of the relevant plans and the investment and fundingdecisions. Standardized accounting and actuarial valuations determine theaccounting for the pension costs. Inherent in these valuations are keyassumptions, which include:  employeeturnover, mortality and retirement ages; discount rates; expected long-termreturns on plan assets; and future wage increases, which are usually updated onan annual basis at the beginning of 

 

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each fiscal year. Actualcircumstances may vary from these assumptions, giving rise to a differentpension liability, which would be reflected as an additional profit or expensein the statements of income.

 

Changes in therelated pension benefit costs may occur in the future due to changes in theassumptions. The weighted key assumptions used in developing the 2002 netpension benefit costs were a 5.66% discount rate, a 7.50% expected return onplan assets, and a 3.31% rate of future wage increases. In 2002, the netperiodic pension benefit cost was €23.3 million compared to a€15.1 million net periodic pension cost in 2001. The net pension benefitcost is expected to increase to approximately €31.5** **million during 2003,primarily as a result of lower plan assets and a reduction in the expectedreturn on plan assets from 7.50% to 6.76%, reflecting the revised investmentportfolio.

 

The most significant assumptions are the discount rate used to valuethe future obligation and the expected return on plan assets. We selectdiscount rates commensurate with current market interest rates on high-quality,fixed-rate corporate bonds. The expected return on assets is based on thecurrent view of the long-term returns on assets held by the plans, which isinfluenced by historical averages.

 

Changes inthese key assumptions can have a significant impact on the projected benefitobligations, funding requirements and periodic benefit cost incurred by thecompany. The effect on the periodic benefit cost of an upward or downwardchange from the assumptions currently used to calculate the net periodicpension cost is summarized below:

 
| **Changes in assumptions**     |   | **Change in  Assumptions** |   | **2002 (in € millions)  Change in net periodic pension cost** |   |
|--------------------------------|--------|----------------------------|--------|--------------------------------------------------------------------|--------|
| Discount rate                  |   | +0.25                      | %      | -3.3                                                               |   |
| Discount rate                  |   | -0.25                      | %      | +3.3                                                               |   |
|                           |   |                       |   |                                                               |   |
| Expected return on plan assets |   | +0.25                      | %      | -1.4                                                               |   |
| Expected return on plan assets |   | -0.25                      | %      | +1.4                                                               |   |

 

See Note 28 to our audited Consolidated Financial Statements asincluded in “Item 18.  FinancialStatements.”

 

***Restructuring andother provisions***

 

As at December31, 2002, we have included restructuring, legal, environmental, maintenance andother provisions in our financial statements in an aggregate amount of €52.0million.  Restructuring and otherprovisions are recognized when we have a present legal or constructiveobligation as a result of past events, it is probable that an outflow ofresources will be required to settle the obligation and a reliable estimate ofthe amount of the obligation can be made. The amount of each of the liabilities for which we have established aprovision is based on specific estimates and assumptions.  Our estimates and assumptions underlyingthese provisions could be materially affected by factors such as our success atnegotiating termination agreements with redundant employees and relating torental agreements, among others.  Whilewe believe that our current estimates of restructuring and other liabilities areadequate, it is possible that future events could require us to makesignificant adjustments or revisions to these estimates.

 

***Income taxes***

 

Generallyaccepted accounting principles in The Netherlands and the United Stated ofAmerica require that we record a valuation allowance against deferred taxassets associated with carry forward losses if it is more likely than not thatwe will not be able to utilize it to offset future income taxes.

 

We currentlyhave significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which will reduce taxable incomein future periods.  We assess thelikelihood that our deferred tax assets will be realized from future taxableincome, and, to the extent we believe that recovery is not likely, we establisha valuation allowance. We consider future taxable income projections,historical results and ongoing tax planning strategies in assessing therecoverability of deferred tax assets. However, adjustments could be requiredin the future if we determine that the amount to be realized is less or greaterthan the amount we have recorded. Such adjustments, if any, may have a materialimpact on our results of operations.

 

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In valuing ourdeferred tax assets, we provided valuation allowances on future tax benefits of€48 million, €54 million, and €58 million at the end of year 2002, 2001 and2000, respectively.

 

As amultinational Group, we are exposed to varying degrees of uncertainty relatedto tax initiatives and regulatory reviews and audits. Whenever suchuncertainties arise any potential unfavorable consequences are assessed andaccrued for accordingly in our financial statements.

 

The abovediscussion is not intended to be a comprehensive list of all our accountingpolicies.  In many cases, the accountingtreatment of a particular transaction is specifically dictated by generallyaccepted accounting principles, with no need for management’s judgment in theirapplication.  There are also areas inwhich management’s judgment in selecting any available alternative would notproduce a materially different result.

 

**Liquidity and CapitalResources**

 

We havegenerally funded our working capital and capital expenditure needs from ouroperations.  From time to time, however,we have financed acquisitions with loans from banks and other types oflong-term debt.

 

***Net cash fromoperating activities***

 

Net cash flowsin 2002 from operating activities were €273.5 million compared to €235.9million in 2001 and €127.7 million in 2000. The increase in 2002 of €37.6 million is primarily the result of adecrease in net income of €21.1 million, increased non-cash items (primarilynon-cash accretion of interest on our shareholder loans and senior subordinateddiscount notes, depreciation and amortization) of €62.0 million and a decreasein the change in operating assets and liabilities of €3.3 million. The increasein 2001 of €108.2 million is primarily the result of an increase in net incomeof €26.9 million, increased non-cash items (primarily non-cash accretion ofinterest on our shareholder loans and senior subordinated discount notes,depreciation and amortization) of €55.1 million and an increase in the changein operating assets and liabilities of €26.2 million.

 

***Net cash used ininvesting activities***

 

In 2002, cashused in investing activities amounted to €161.8 million, reflecting capitalexpenditures of €162.1 million and investments in intangible fixed assets of€2.3 million (mainly software development costs), offset by a decrease in othernon-current assets of €2.3 million, mainly as a result of redemption of loans,and the proceeds from the disposal of Strojpap a.s., Slovakia, of €0.3 million.

 

In 2001, cashused in investing activities amounted to €1,361.9 million, reflecting ouracquisitions for €1,199.4 million (including acquisition and financingexpenses), capital expenditures of €154.6 million and investments in intangiblefixed assets of €7.9 million. The net investment in intangible fixed assets inthe year 2001 mainly relates to software development costs of €5.7 million anddeferred charges as a result of expenditures that are expected to increaserevenue or reduce costs in the future of €2.2 million.

 

In 2000, cash used in investing activities amounted to €189.9 millionreflecting our capital expenditures of €102.5 million, acquisitions of €85.5million and investments in intangible fixed assets of €1.9 million.  In 2000, we acquired SCAO for €83.8 million(€78.0 million, net of cash acquired) and the activities of Ecological Fibers(USA) for €1.7 million.

 

***Capital expenditures***

 

In 2002, ourcash outflow for capital expenditures was €162.1 million compared to €154.6million in 2001 and €102.5 million in 2000. The increase of €7.5 million wasmainly the result of the acquisition of Alpha. Capital expenditures includecapacity expansions at the acquired Kraftliner mill at Piteå (Sweden), theacquired recycled containerboard mill at Ania (Italy) and the transformation ofthe acquired corrugated production plant Empee (The Netherlands) from a fullyintegrated plant into a sheetfeeder operation.

 

In 2001,capital expenditures mainly increased as a result of the acquisition ofAlpha.  Excluding Alpha, our capitalexpenditures were €105.0 million. Capital expenditures in connection with Alpha in 2001 mainly relate tocapacity 

 

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expansions at our acquiredKraftliner mill in Piteå (Sweden) and recycled containerboard mills in Ania(Italy) and Štúrovo (Slovakia).  Capitalexpenditures in 2001, excluding Alpha, remained at approximately the same levelas in 2000. During 2001, capacity expansions were realized at our solid boardmill Herzberger Papierfabrik (Germany) and recycled containerboard mill inWiesloch (Germany).

 

We havecommitments to acquire plant and machinery amounting to €17.0 million atDecember 31, 2002. These commitments mainly reflect capital expenditures in thePaper & Board segment.

 

***Net cash used infinancing activities***

 

Cash outflowfrom financing activities amounted to €99.7 million in 2002. We made paymentsof €75.5 million under the senior credit facility and short-term borrowings of€18.6 million during the year ended December 31, 2002. In addition, repaymentswere made on other long-term debt of €5.6 million.

 

Cash inflowfrom financing activities amounted to €1,218.4 million in 2001.  We incurred indebtedness of €1,505.0 millionunder a new senior credit facility in May 2001. Additionally, we issued €100.0million principal amount of Senior Subordinated Notes and incurred borrowingsof €299.4 million under shareholders’ loans and issued shares of €0.6million.  The proceeds from the SeniorSubordinated Notes and borrowings were used in conjunction with the acquisitionof Alpha and the repayment of €637.6 million of existing bank debt. Inaddition, we made a repayment of €26.4 million under the new senior creditfacility in December 2001. Payments on long-term loans by certain of oursubsidiaries in their local jurisdictions of €3.4 million and short-termborrowings of €19.2 million were made during the year ended December 31, 2001.

 

Cash inflowfrom financing activities amounted to €21.0 million in 2000. We raisedadditional financing by an increase in our then existing senior credit facilityof €75.0 million.  The additionalborrowings under the senior credit facility were used to repay the bridgefinancing obtained in respect of the financing of the acquisition of SCAO. Wemade payments of €31.8 million under the senior credit facility and repaymentsof short-term borrowings of €20.3 million during the year ended December 31,2000.  In addition, repayments were madeon other long-term debt of €1.9 million.

 

***Indebtedness***

 

*Senior creditfacilities*

 

Our seniorcredit facility currently consists of three term loans and a revolving creditfacility, which can be specified as follows as at December 31, 2002.

 
|                             |   | **Amount in  millions** |    | **Final  Maturity** |          |
|----------------------------------|--------|-------------------------|---------|---------------------|---------------|
| Senior A Amortizing Term Loan    |   | €                  | 653.1   |                | June 30, 2007 |   |
| Senior B Term Loan               |   | €                  | 375.0   |                | June 30, 2008 |   |
| Senior C Term Loan               |   | €                  | 375.0   |                | June 30, 2009 |   |
| Senior Revolving Credit Facility |   | €                  | 250.0   |                | June 30, 2009 |   |
| Total Senior Debt Facilities     |   | €                  | 1,653.1 |                |          |   |

 

All materialfixed assets, accounts receivable, inventories and cash and bank balances ofthe Group are pledged as security on the senior credit facilities. Assetsacquired in future may be required to be included as additional security on thefacilities.  Our senior credit facilityagreement imposes limitations on some financing and investing activities of theGroup and requires adherence to the following financial covenants:  interest cover ratios of earnings beforeinterest, income tax, depreciation and amortization (EBITDA) to senior debt netinterest and total net cash interest; total fixed charge ratios of cash flow tosenior debt service and total debt service; leverage ratio of net borrowings toEBITDA and annual capital expenditures. At December 31, 2002, the Company wasin compliance with all debt covenants.

 

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Under theterms of our senior credit facility, we are required to make mandatoryprepayments in certain circumstances, which include debt covenant violations.We are also permitted to make voluntary pre-payments on indebtedness under thesenior credit facility and the intercreditor agreements.

 

*•*                                          *Term loanfacilities*

 

As of December31, 2002 we had €1,403.1 million outstanding under the term loans. The Group isrequired to repay the remaining debt under the term loan facilities based onthe specific repayment terms for each Tranche. Tranche A of originally €755.0million is repayable in escalating semi-annual installments from the years 2001to 2007; the outstanding balance as at December 31, 2002 amounts to €653.1million. Tranche B of €375.0 million is repayable in full in 2008. Tranche C of€375.0 million is repayable in full in 2009.

 

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Tranche A hasamortization payments at the end of June and December of every year as follows:

 
| **Repayment Date** |   | **Repayment  Amount**     |   |
|--------------------|--------|---------------------------|--------|
|               |   | **(€ in  millions)** |   |
| December 31, 2002  |   | 41.53                     |   |
| June 30, 2003      |   | 47.19                     |   |
| December 31, 2003  |   | 54.74                     |   |
| June 30, 2004      |   | 62.29                     |   |
| December 31, 2004  |   | 67.95                     |   |
| June 30, 2005      |   | 75.50                     |   |
| December 31, 2005  |   | 79.28                     |   |
| June 30, 2006      |   | 84.94                     |   |
| December 31, 2006  |   | 86.83                     |   |
| June 30, 2007      |   | 94.38                     |   |

 

The applicable interest rates are LIBOR plus a maximum interest ratespread of 225 basis points on Tranche A, 275 basis points on Tranche B and 350basis points on Tranche C. Based on our interest cover ratio, the spread onTranche A may be adjusted downwards. The weighted average interest rate for theterm loan facilities was 6.6% at December 31, 2002 (2001:  6.0%).

 

•                                          *Revolvingcredit facility and bank overdrafts*

 

This creditfacility is available for general corporate purposes such as letters of credit,short-term cash advances and ancillary facilities. The letter of credit feeassessed on issued letters of credit under the revolving credit facility is2.125% at December 31, 2002, the interest rate on the short-term cash advancesis LIBOR plus 2.125% and in general no fees are payable on the ancillaryfacilities.

 

The totalamount of bank overdraft facilities guaranteed under the revolving creditfacility amounts to €26.9 million at December 31, 2002 (2001:  €81.0 million), including short-termborrowing under various bank overdraft facilities of €1.4 million (2001:  €19.8 million), bank guarantees issued tothird parties of €8.1 million (2001: €10.4 million) and unallocated available credit facilities of €17.4million (2001:  €50.8 million).

 

*Senior subordinatednotes*

 

In May 2003,Kappa Beheer B.V. issued Senior Subordinated Notes of €95.0 million thatresulted in net proceeds of approximately €100.3 million. On June 23, 2003 theproceeds of this note issuance were used to redeem the euro-denominated SeniorSubordinated Notes of €100.0 million issued on May 18, 2001 by Kappa BeheerB.V. The interest rate on the new Senior Subordinated Notes has been set at 105/8%and is payable semi-annually on January 15 and July 15 of each year commencingon July 15, 2003.

 

In May 2001,we issued €100 million 121⁄2% Senior Subordinated Notes, which mature on July 15,2009.  These funds were used inconnection with the acquisition of Alpha.

 

In July 1999,we issued Senior Subordinated Notes in three tranches, which notes all matureon July 15, 2009:

 

•                      €370 million105/8%Senior Subordinated Notes

 

•                      $100 million105/8%Senior Subordinated Notes

 

•                      €145 millionat maturity 121⁄2% senior subordinated discount notes

 

The cashinflow from the 1999 Senior Subordinated Notes issue was used to repay the€544.5 million mezzanine notes on July 23, 1999 that were scheduled tooriginally mature on July 27, 2008.  Theintercreditor agreement among the Trustee under the indentures governing theSenior Subordinated Notes, Kappa Holding, Kappa Beheer, Kappa Packaging andBarclays Bank PLC, which govern the relative priorities among our creditors andour subsidiaries’ creditors, prohibit the 

 

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servicing of the inter-companydebt in the same circumstances as they prohibit payments of interest on thenotes.  We must also comply with certainfinancial covenants.

 

***Capital Resources***

 

As of December 31, 2002 our total capital resources were €124.0 millionin shareholders’ equity (2001:  €143.7million; 2000:  €141.3 million) and€628.0 million in shareholders loans (2001: €581.8 million; 2000:  €247.4million) and €2,110.6 million in total debt (2001:  €2,181.8 million; 2000: €1,277.0 million).  Totalindebtedness as at December 31, 2002 includes €2,629.8 million of long-termborrowings (2001:  €2,664.9 million;2000:  €1,401.0 million), and short-termdebt of €108.8 million (2001:  €98.7million; 2000:  €73.4 million).

 

We use currency instruments to hedge against exchange rate risksresulting from business activities and financing arrangements in foreigncurrencies.  We do not enter intospeculative positions.

 

We use currency forward contracts with terms of up to one year to fixthe rate of exchange of foreign currency sales denominated in US Dollars,British Pounds, Czech koruna, Swedish krona, Norwegian kroner and Danish krone.

 

We have entered into a currency swap to hedge the future USdollar-denominated interest payments on the US dollar-denominated SeniorSubordinated Notes.

 

We have entered into currency forward contracts, which will mature onJuly 15, 2004, to hedge the currency risk on the principal of the USdollar-denominated Senior Subordinated Notes.

 

The Group has entered into an interest rate swap agreement to reducethe impact of changes in interest rates on the senior credit facility. Thenotional principal amount of the swap agreement is €1,004 million and isdecreasing in line with the decreasing principal on the senior credit facility.This agreement effectively converts the EURIBOR element of the interest onapproximately 67% of the outstanding debt under the senior credit facility froma variable rate to a fixed rate of 4.69%.

 

For more information about our hedging policies and interest rateswaps, see Item 11 “Quantitative and qualitative disclosure about market risk.”

 

The Company had available €223.1 million under its revolving creditfacility as at December 31, 2002.  Cashand cash equivalents as at December 31, 2002 amounted to €233.6 million.  We believe that our working capital issufficient for our present requirements.

 

The top holding companies of the Kappa Packaging Group, Kappa HoldingB.V., Kappa Beheer B.V. and Kappa Packaging B.V. conduct their operationsthrough their subsidiaries. Consequently they hold no significant assets otherthan their investments and advances to their subsidiaries. They depend uponreceipt of sufficient funds from their subsidiaries to meet their obligations.There are currently no restrictions at the non-guarantor operating subsidiarylevel that would limit the payment of dividends to Kappa Packaging B.V. orKappa Holding B.V.

 

***CashObligations***

 

As of December 31, 2002, we had the followingcontractual cash obligations and other commercial commitments:

 
|                                       |   | **Payments  due by period (€ millions)** |   |
|--------------------------------------------|--------|-----------------------------------------------|--------|
|                                       |   | **Total**                                     |   | **< 1  year** |   | **1 – 3  years** |   | **4 – 5 years** |   | **> 5  years** |   |
|                                       |   |                                          |   |   |   |   |   |   |   |   |   |
| Long-term debt                             |   | 2,103.1                                       |   | 105.9 |   | 287.8 |   | 273.3 |   | 1,436.1 |   |
| Capital lease obligations                  |   | 6.1                                           |   | 1.5 |   | 3.3 |   | 1.3 |   | — |   |
| Operating lease obligations                |   | 83.6                                          |   | 17.6 |   | 22.9 |   | 11.2 |   | 31.9 |   |
| Purchase, repurchase and other commitments |   | 3.5                                           |   | 0.9 |   | 0.1 |   | — |   | 2.5 |   |
| Total                                      |   | 2,196.3                                       |   | 125.9 |   | 314.1 |   | 285.8 |   | 1,470.5 |   |

 

Under the revolving credit facility, theGroup has bank guarantees issued to third parties (rental guarantees, creditguarantees, social security taxes) for a total amount of €8.1 million as atDecember 31, 2002 (2001:  €10.4million).

 

50

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***CapitalExpenditure Projection for 2003***

 

The Group hascommitments to acquire plant and machinery amounting to €17.0 million as atDecember 31, 2002.

 

**Research andDevelopment**

 

We incurred research and development costs of €5.3 million, €4.8million and €4.4 million in 2002, 2001 and 2000, respectively.

 

**EnvironmentalRegulation**

 

Compliancewith environmental requirements is a significant factor in our businessoperations, and we commit substantial resources to maintaining environmentalcompliance and managing environmental risk. Our mills and operational plants are affected by a wide range of laws andregulations relating to environmental issues in each jurisdiction in which weare located and by EU environmental regulations.  Our different operations are affected by such laws to differentdegrees according to the jurisdiction involved.  By their nature, our board production and our recovered paperoperations give rise to a considerable number of environmental issues,particularly those relating to air and water quality, waste minimization andwaste disposal, and the clean-up of contaminated soil and groundwater.  We believe that we are currently in materialcompliance with all applicable environmental law regulations and directives.

 

Environmentalregulations in the EU Member States are standardized or in the process of beingstandardized by a series of stringent directives concerning the environment,including:

 

•                                          TheDirective on Integrated Pollution Prevention and Control 96/61/EC, which willrequire our operations in the European Union to demonstrate to the relevantnational regulator that we utilize best available techniques to minimize pollutionand maximize energy efficiency.

 

•                                          TheWaste Framework Directive 75/442/EEC as amended by 91/156/EC, which seeks toimpose a uniform system of waste management across the European Union.

 

•                                          ThePackaging and Packaging Waste Directive 94/62/EC, which requires that we complywith the appropriate national targets to re-use, recover or recycle materialsand products that become waste.  The use of recycled materials in our products andthe recyclability of our products has facilitated our compliance with thepackaging waste controls.

 

In countriesoutside the European Union (Switzerland, Poland, The Czech Republic, The SlovakRepublic, Lithuania and Russia) our operations are not subject to EUenvironmental laws but remain subject to national environmental laws.  We are under statutory duties in mostjurisdictions in which we operate to control discharges into watercourses andsewer systems and to maintain effluent treatment plants where appropriate. Weare also subject to regulations, which impose liability for fines and otherpenalties and, in certain jurisdictions in which we operate, clean-up costs, inthe event of accidental spills and pollution by releases of hazardoussubstances into the environment.

 

We arecurrently addressing potential soil and groundwater contamination at severalother sites and expect that we will incur additional remedial costs from timeto time in the future. We provide for environmental remediation liabilities,which we currently believe are adequate.

 

**Impact of Inflation**

 

We do notbelieve that inflation has had a material impact on our financial position orresults of operations during the past three years.

 

51

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**Newlyissued Dutch GAAP Accounting Standards**

 

The DutchCouncil for Annual Reporting issued RJ 140, “Change in accounting principles,”which provides guidance on the accounting for a change in method of estimation.RJ 140 requires that a change in the method of estimation should be treated asa change in an estimate instead of a change in accounting principle. Thecumulative effect of a change in estimate may therefore no longer be accruedfor as an adjustment to the opening balance of equity.  Retroactive treatment of changes inaccounting estimates is no longer allowed, but these changes should beaccounted for in whichever current or future period is impacted. RJ 140 iseffective for the Group beginning January 1, 2003 and is not expected to haveimpact on our future financial results.

 

The DutchCouncil for Annual Reporting issued RJ 160, “Post balance sheet events,” whichrequires that the appropriation of results for the year be recorded as adividend upon shareholder approval and not upon declaration by management. RJ160 is effective for the Group beginning January 1, 2003 and is not expected tohave impact on our future financial results.

 

The DutchCouncil for Annual Reporting issued RJ 270, “Profit and loss account,” whichprovides additional guidance on the recognition of revenue. RJ 270 additionallyrestricts which gains and losses may be classified as extraordinary within thestatement of income. RJ 270 is effective for the Group beginning January 1,2003, and is not expected to have a material impact on our future financialresults.

 

**Newlyissued US GAAP Standards**

 

The Financial Accounting Standards Board in The United States (FASB)has issued certain Statements of Financial Accounting Standards (SFAS), each ofwhich, when adopted, will affect our consolidated financial statements for USGAAP reporting.

 

In June 2001,the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations” (SFAS143). SFAS 143 establishes accounting standards for the recognition andmeasurement of a liability for the costs of asset retirement obligations. UnderSFAS 143, the costs of retiring an asset will be recorded as a liability whenthe retirement obligation arises, and will be amortized to expense over thelife of the asset. SFAS 143 will become effective for the Group on January 1,2003. The adoption of SFAS 143 is not expected to have a material impact on ourfuture consolidated results of operations, financial position or cash flows.

 

In April 2002,the FASB issued SFAS 145 “Rescission of FAS no. 4, 44, and 64, amendment of FAS13, and technical corrections.” SFAS 145 rescinds SFAS 4 and SFAS 64, whichaddressed the accounting for gains and losses from extinguishment of debt,rescinds SFAS 44 which set forth industry-specific transitional guidance,amends SFAS 13 to require that certain lease modifications that have economiceffects similar to sale-leaseback transactions be accounted for in the samemanner as sale-leaseback transactions and makes technical corrections tocertain existing pronouncements that are not substantive in nature. Theadoption of SFAS 145 is not expected to have a material impact on our futureconsolidated results of operations, financial positions or cash flows.

 

In June 2002,the FASB issued SFAS 146, “Accounting for Costs Associated with Exit orDisposal Activities” (SFAS 146). SFAS 146 requires that a liability for a costassociated with an exit or disposal activity be recognized and measuredinitially at its fair value in the period in which the liability is incurred.Previously a liability for an exit cost was recognized at the date of an entity’scommitment to an exit plan, however, this does not, by itself, create a presentobligation to others that meets the definition of a liability. SFAS 146 will beeffective for the Group for any exit or disposal activities that are initiatedafter December 31, 2002. The adoption of SFAS 146 may have a material impact onour consolidated results of operations and financial position since Dutch GAAPpermits the recognition of liabilities for costs associated with an exit ordisposal activity at the time the exit plan is approved and communicated bymanagement.

 

In November2002, the Financial Accounting Standards Board issued FASB Interpretation No.45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guaranteed of Indebtedness of Others.” FIN 45requires that a liability be recorded in the guarantor’s balance sheet uponissuance of a guarantee. In addition, FIN 45 requires disclosures about theguarantees that an entity has issued, including reconciliation of changes inthe entity’s product warranty liabilities. The initial recognition and initialmeasurement provisions of FIN 45 are applicable on a prospective basis toguarantees issued or modified after December 31, 2002, irrespective of theguarantor’s fiscal year-end.

 

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The disclosure requirements ofFIN 45 are effective for financial statements of interim or annual periodsending after December 15, 2002. The adoption of FIN 45 is not expected to havea material impact on our future consolidated results of operations, financialpositions or cash flows.

 

In January2003, the FASB issued FASB interpretation No. 46 (FIN “46”), “Consolidation ofVariable Interest Entities, and Interpretation of ARB No. 51.” FIN 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the entity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003. For variable interest entities created or acquired prior toFebruary 1, 2003, the provisions of FIN 46 must be applied for the firstinterim or annual period beginning after June 15, 2003. The adoption of FIN 46is not expected to have a material impact on our future consolidated results ofoperations, financial positions or cash flows.

 

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**Item 6****.  Directors,Senior Management and Employees**

 

**A.**                                    **Directorsand Senior Management**

 

We have atwo-tier system of corporate governance, comprising the Management Board andthe Supervisory Board.  Our day-to-daymanagement and policy-making is vested in the Management Board.  The Supervisory Board supervises thepolicies pursued by our Management Board and the general course of affairs ofour company and its business.  UnderDutch law, members of the Supervisory Board cannot simultaneously be members ofthe Managing Board of the same company. We are not subject to the rules for large Dutch companies (“*structuurvennootschappen*”)as set out in section 268 to 274 of Book 2 of the Dutch Civil Code.

 

**Supervisory Board andAudit Committee**

 

Under theArticles of Association of Kappa Holding, the Supervisory Board consists offive members.  The primaryresponsibility of the Supervisory Board is to supervise the policies pursued bythe Management Board and the general course of affairs of our company and itsbusiness.  The Supervisory Board alsosupports the Management Board with advice. In fulfilling their duties, the members of the Supervisory Board arerequired to act in the best interests of our company and its business.  For further details about the powers andduties of our Supervisory Board and the appointment, suspension and removal ofmembers of our Supervisory Board, see “Item 10.B.  Memorandum and Articles of Association.”

 

The followingtable sets out certain information with respect to the members of ourSupervisory Board:

 
| **Name**             |   | **Age** |   | **Appointment**  |   |
|----------------------|--------|---------|--------|------------------|--------|
| Cor Brakel, Chairman |   | 65      |   | February 1, 1999 |   |
| Brent Wheeler        |   | 51      |   | July 27, 1998    |   |
| Marcus Wood          |   | 35      |   | March 13, 2000   |   |
| Rolly van Rappard    |   | 42      |   | July 27, 1998    |   |
| David Milne          |   | 44      |   | March 13, 2000   |   |

 

**Cor Brakel. **Mr. Brakel has beena member of the Supervisory Board of Kappa Holding since February 1, 1999.  He has held various positions at ShellInternational Petroleum Company, Elsevier, Wolters Samson Group and WoltersKluwer N.V.  He is also a member of theSupervisory Board of United Services Group N.V., Aalberts Industries N.V.,Koninklijke Numico N.V. and Athlon Groep N.V.

 

**Brent Wheeler. **Mr. Wheeler has beena member of the Supervisory Board of Kappa Holding since July 27, 1998 as anappointee of Cinven.  He has been aDirector of Cinven since 1991 and has been involved in several of their leadinginvestments including Expro, Gardner Merchant, Generale de Santé, Avecia,McKechnie and Klöckner Pentaplast.  Heis also a director of Klöckner Pentaplast S.A.

 

**Marcus Wood**.  Mr. Wood has been a member of theSupervisory Board of Kappa Holding since March 13, 2000 as an appointee ofCinven.  He has been an investmentdirector of Cinven Limited since 1997. He is also a Director of Santemedia Group Holding S.A.

 

**Rolly van Rappard. **Mr.van Rappard has been a member of the Supervisory Board of Kappa Holding sinceJuly 27, 1998 as an appointee of CVC. He holds masters degrees from Columbia University in New York, UnitedStates and the University of Utrecht, Holland. He has previously held positions at Citicorp and has been a ManagingDirector of CVC Capital Partners B.V. from 1989 to 2002.  He is also a director of CVC CapitalPartners Europe Limited and a member of the Supervisory Boards of Wavin B.V.and Veen Bosch & Keuning Uitgevers N.V.

 

**David Milne**.  Mr. Milne has been a member of theSupervisory Board of Kappa Holding since March 13, 2000 as an appointee of CVC.  He has been a Director of CVC CapitalPartners Limited since 1995.  He is alsoa Director of Kalle Nalo GmbH, EMPE GmbH, Luxfer Holdings Plc. and DT Holding 1A/S.

 

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In 2000 an Audit Committee was established.  The Audit Committee currently has three members, including onefinancial expert. Messrs. Brakel, Wood and Milne comprise the Audit Committeeand Mr. Wood is the financial expert. The Audit Committee has met two times in2002 with the external auditors to discuss their reported findings in respectof their audit of our financial statements and the overall audit process of theCompany. The Audit Committee currently has reviewed the Audit Committee charterand adopted certain adjustments in view of the Sarbanes-Oxley legislation.

 

**Management Board**

 

Our ManagementBoard currently consists of four persons. The Management Board is entrusted with our management and is required toact in accordance with instructions of the Supervisory Board regarding the generalfinancial, social, economic and personnel policies pursued.  For further details about the powers andduties of our Management Board and the appointment, suspension and removal ofmembers of our Management Board, see “Item 10.B.  Memorandum and Articles of Association.”

 

The followingtable sets out certain information with respect to the members of ourManagement Board:

 
| **Name**                 |   | **Age** |   | **Position**                           |   | **Date of  Appointment** |   |
|--------------------------|--------|---------|--------|----------------------------------------|--------|--------------------------|--------|
| Frits Beurskens          |   | 56      |   | President                              |   | July 27, 1997            |   |
| Han Wagter               |   | 53      |   | Chief Financial Officer                |   | June 29, 1999            |   |
| Torbjörn Pettersson |   | 59      |   | Managing Director of Paper & Board |   | May 18, 2001             |   |
| Berry Wiersum            |   | 47      |   | Managing Director of Packaging         |   | July 1, 2000             |   |

 

**Frits Beurskens. **Mr. Beurskens hasbeen a member of the Management Board of Kappa Holding since the acquisition byus of the paper and board production and converting businesses of N.V.Koninklijke KNP BT, in 1998 at which time he became President of the KappaPackaging Group.  He holds a degree fromTechnical College HTS Venlo and a masters degree from the Technical UniversityEindhoven.  Mr. Beurskens joined theDutch subsidiary of Continental Can in 1974 and from 1981 to 1986 held severalmanaging director positions.  Between1987 and 1990 he worked for the Union Minière subsidiaries Zinkwit and Afoxwhere he was managing director.  In1990, Mr. Beurskens joined Roermond-Zülpich Papier, a Kappa Packaging Groupoperating subsidiary, as managing director and in 1993 he became managingdirector of the corrugated board segment of KNP BT. In 1995, he was appointed amember of the KNP BT Packaging executive committee and became President of KNPBT Packaging in late 1996.  He is amember of the Supervisory Board of Océ Technologies B.V.

 

**Han Wagter. **Mr. Wagter joinedthe Kappa Packaging Group on June 29, 1999 as Chief Financial Officer of theKappa Packaging Group and was elected as a member of the Management Boards ofKappa Beheer and Kappa Holding as of that date.  He holds masters degrees in Economy and Accountancy from theUniversity of Amsterdam.  From 1979 to1986 he held a number of accounting positions at Verenigde MachinefabriekenStork.  From 1986 to 1988 he wasDirector of Economic Affairs at Verenigde Machinefabrieken Stork.  From 1988 until 1993 he was Chairman of theManagement Board of Stork Ketels.  From1993 until 1999, he was a member of the Management Board and Chief FinancialOfficer of DAF Trucks N.V.

 

**Torbjörn Pettersson.** Mr. Pettersson was appointed as ManagingDirector of the Paper & Board segment of the merged Kappa Packaging Groupon 18 May, 2001, having held the position of Managing Director forContainerboard at AssiDomän from 1999. He holds a masters degree in Chemistry from Technology University ofLund in Sweden.  He was previously aManaging Director at Stora LELL between 1989 and 1994 and Managing Director atStora Billerud from 1995 to 1999, where he served on the Management Board.  He also held a Managing Director position atNobel Chemicals, a company within the Nobel Industries Group, and was aBusiness Unit Vice Managing Director within Perstop.

 

**Berry Wiersum.** Mr. Wiersum became a member of the ManagementBoard and Managing Director of the Packaging segment on July 1, 2000.  He holds a masters degree in History fromSt. Andrews University in Scotland. From 1979 to 1993, he held several management positions at ICIFibres.  From 1994 to 1999, he served asPresident of Amoco Fabrics Europe and President of Amoco Chemicals Europe.  From 1999 to 2000, he served as DirecteurGénéral and Senior Vice President of CEBAL.

 

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**B.**                                    **Compensation**

 

**Compensationof Members of Supervisory Board**

 

The members ofthe Supervisory Board, other than Mr. Brakel, do not receive any fees from theKappa Packaging group for serving as a member. The aggregate amount of compensation paid to all of our SupervisoryBoard members as a group (five persons) for the year ended December 31, 2002was €45,378 (2001:  €39,705).  There were no pension charges.

 

**Compensationof Members of Management Board**

 

The members ofthe Management Board do not receive any fees for serving as members.  The aggregate amount of compensation paid toall of our Management Board members as a group (4 persons) for the year endedDecember 31, 2002, including salaries, bonuses and pension charges, was€2,978,000 (2001:  €2,940,000, includingthe member who resigned during 2001).

 

**Loansto Members of Supervisory Board and Management Board**

 

At December31, 2002, no loans were outstanding to any member of the Management Board orthe Supervisory Board from any member of the Group.

 

**TerminationBenefits**

 

We canterminate members of the Management Board and/or the Supervisory Board withouthaving to pay termination benefits, with the exception of Mr. Pettersson, whowill receive SEK 2,214,000 for any termination upon the initiative of KappaPackaging.

 

**AnnualBonus Scheme**

 

As a way ofincentivizing management, we operate an annual bonus scheme for members of theManagement Board and other senior managers. Any bonus awarded to an individual will be linked to the profitperformance of the business unit or units with which the individual is mostclosely associated and our overall performance.

 

Bonus schemesand targets are at the full discretion of the Supervisory Board, and aredetermined and reviewed on an annual basis by our Remuneration Committee, whichis currently comprised of Messrs. Brakel, Wheeler, van Rappard and Beurskens.

 

**C.**                                    **BoardPractices**

 

See Items 6.A.and 6.B. above.

 

**D.**                                    **Employees**

 

For 2002, ouraverage number of full time equivalents (including temporary staff) was 16,626(2001:  13,628; 2000:  8,351). The increase in average number of full time equivalents is mainly due tothe consolidation of Alpha as from May 17, 2001.

 

We have inplace a number of collective labor agreements. These agreements customarily have a term of one or two years.  We have historically enjoyed good laborrelations in each of our operating units. Since 1993, there has been no significant industrial action within theKappa Packaging Group.

 

Furtherreference is made to Note 21 to the Consolidated Financial Statements, includedin this document in “Item 18.  FinancialStatements.”

 

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**E.**                                      **ShareOwnership**

 

Individualshare ownership of any member of senior management of the Kappa Packaging Group(currently 119 persons) is less than one percent of any class of stockoutstanding, except for Mr. Beurskens, the President, who holds 14,870depositary receipts of Ordinary Shares A and 851 depository receipts ofPreference Shares B and 5,802 depositary receipts of Ordinary Shares C.

 

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**Item 7****.  MajorShareholders and Related Party Transactions**

 

**A.**                                    **MajorShareholders**

 

The issuedshare capital of the Company is divided into 910,600 Ordinary Shares A, 89,400Ordinary Shares B, 565,346 Ordinary Shares C, 14,813 Ordinary Shares D, 321,250Preference Shares A and 6,250 Preference Shares B.  The ordinary and preference shares of the Company arebeneficially owned by the Cinven entities described below, the CVC entitiesdescribed below and Stichting Senior Management Kappa and other shareholders asset out in the table below.

 

The Cinvenentities are entities whose funds are managed or advised by Cinven, beingcurrently Cinven Fund No.1 Limited Partnership, Cinven Fund US No.  1 Limited Partnership, Second Cinven FundDutch No.  1 Limited Partnership, SecondCinven Fund Dutch No.  2 LimitedPartnership, Second Cinven Fund Dutch No. 3 Limited Partnership, Second Cinven Fund Dutch No.  4 Limited Partnership, Second Cinven FundNo.  1 Limited Partnership, SecondCinven Fund No.  2 Limited Partnership,Second Cinven Fund US No.  1 LimitedPartnership, Second Cinven Fund US No. 2 Limited Partnership, Second Cinven Fund US No.  3 Limited Partnership, Barclays UKRetirement Fund Venture Limited Partnership, Coal Pension Venture LimitedPartnership, Railway Pension Venture Capital Limited, Cinven Nominees Limitedand Second Cinven Fund US No.  1Co-Investment Limited Partnership.

 

The CVCentities are entities whose funds are managed or advised by CVC, being currentlyCiticorp Capital Investors Europe Limited, Stichting Certificaathouders Kappa,Capital Ventures Nominees Limited, CVC European Equity Partners II LimitedPartnership and CVC European Equity Partners II (Jersey) Limited Partnership,Citi-Europe Co-Invest Limited Partnership, CVC European Equity Partners IIILimited Partnership, CVC European Equity Partners III Parallel Fund-A LimitedPartnership, CVC European Equity Partners III Parallel Fund-B LimitedPartnership, CVC Europe Enterprise (Domestic) Limited Partnership and CVCEurope Enterprise (Cayman) Limited Partnership.

 

StichtingSenior Management Kappa is a foundation established to hold the Kappa Holdingshares on behalf of members of senior management of the Kappa Packaging Group(currently 119 persons).  StichtingManagement Kappa owns 8.4% of the voting rights of the Company.

 

The followingchart shows our current issued share structure, following the subscriptionsreceived in connection with the acquisition of Alpha.

 
| **Name**                          |   | **Ordinary  Shares A** |   | **%**  |   | **Ordinary  Shares B** |   | **%**  |   | **Ordinary  Shares C** |   | **%**  |   | **Ordinary  Shares D** |   | **%**  |   | **Pref.  Shares  A** |   | **%**  |   | **Pref.  Shares B** |   | **%**  |   | **Voting  %** |   |
|-----------------------------------|--------|------------------------|--------|--------|--------|------------------------|--------|--------|--------|------------------------|--------|--------|--------|------------------------|--------|--------|--------|----------------------|--------|--------|--------|---------------------|--------|--------|--------|---------------|--------|
| Cinven entities                   |   | 450,000                |   | 49.42  |   |                   |   |   |   | 213,083                |   | 37.69  |   |                   |   |   |   | 160,625              |   | 50.00  |   |                |   |   |   | 45.0          |   |
|                              |   |                   |   |   |   |                   |   |   |   |                   |   |   |   |                   |   |   |   |                 |   |   |   |                |   |   |   |          |   |
| CVC entities                      |   | 360,600                |   | 39.60  |   | 89,400                 |   | 100.00 |   | 252,060                |   | 44.59  |   | 14,813                 |   | 100.00 |   | 160,625              |   | 50.00  |   |                |   |   |   | 43.7          |   |
|                              |   |                   |   |   |   |                   |   |   |   |                   |   |   |   |                   |   |   |   |                 |   |   |   |                |   |   |   |          |   |
| Stichting Senior Management Kappa |   | 100,000                |   | 10.98  |   |                   |   |   |   | 46,413                 |   | 8.21   |   |                   |   |   |   |                 |   |   |   | 6,250               |   | 100.00 |   | 8.4           |   |
| Other shareholders                |   |                   |   |   |   |                   |   |   |   | 53,790                 |   | 9.51   |   |                   |   |   |   |                 |   |   |   |                |   |   |   | 2.9           |   |
| **Total**                         |   | 910,600                |   | 100.00 |   | 89,400                 |   | 100.00 |   | 565,346                |   | 100.00 |   | 14,813                 |   | 100.00 |   | 321,250              |   | 100.00 |   | 6,250               |   | 100.00 |   | 100.00        |   |

 

The Supervisory Board of directors and the Management Board (please see“Item 6.  Directors, Senior Managementand Employees”) hold interest in a total of 30,114 Ordinary Shares A, 1,803Preference Shares B and 15,152 Ordinary Shares C of the Company.  These shares are held through StichtingSenior Management Kappa or through funds managed by Cinven or CVC.

 

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**B.**                                    **RelatedParty Transactions**

* *

*Stichting Senior Management Kappa*

 

StichtingSenior Management Kappa is a foundation established to hold the Kappa Holdingshares on behalf of members of senior management of the Kappa Packaging Group(currently 119 persons).  StichtingManagement Kappa owns 8.4% of the voting rights of the Company.

 

StichtingSenior Management Kappa holds 100,000 Ordinary Shares A, 6,250 PreferenceShares B and 46,413 Ordinary Shares C of the Company at December 31, 2002.

 

StichtingSenior Management Kappa provided €2.5 million in subordinated loan financing toKappa Holding B.V. at December 31, 2002. The principal amount of the loan plusinterest compounded and accrued thereon is due to be repaid not before May 17,2012, unless otherwise agreed.  Interestis fixed at a rate of 7% per annum.

 

KappaPackaging Nederland Holding B.V. provided in total €583,332 to Stichting SeniorManagement Kappa as at December 31, 2002 (2001:  €470,175) that was used to re-purchase shares from departingmanagement, or to finance shares kept in reserve.

* *

*Cinven Limited and CVC Capital Partners*

 

Cinven Limitedand CVC Capital Partners, the equity sponsors, provided €199.7 million in loanfinancing effective July 23, 1998. The principal amount of the loan plusinterest compounded and accrued thereon (€293.1 million at December 31, 2002)is due to be repaid on December 31, 2010. Interest is fixed at a rate of 9% perannum.

 

Effective May17, 2001, Cinven Limited and CVC Capital Partners provided an additional €297.1million in loan financing in connection with the acquisition of Alpha. Theprincipal amount of the loan plus interest compounded and accrued thereon(€332.4 million at December 31, 2002) is due to be repaid not before May 17,2012, unless otherwise agreed. Interest is fixed at a rate of 7% per annum.

 

Cinven Limitedand CVC Capital Partners receive annual management fees of €250,000 each fromthe Group in relation to on-going services as from May 17, 2001 onwards. Thetotal management fee for the year 2002 amounts to €500,000 (2001:  €482,688).

 

**C.**                                    **Interests ofExperts and Counsel**

 

Notapplicable.

 

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**Item 8****.  FinancialInformation**

 

**A.**                                    **ConsolidatedStatements and Other Financial Information**

 

See Item 18.

 

**Legal Proceedings**

 

We are partyto various legal actions arising in the ordinary course of business.  These legal actions cover a broad range ofclaims spanning our entire business.  Webelieve that the resolution of these legal actions will not, individually or inthe aggregate, have a material adverse effect on our financial condition orresult of operations.

 

**Dividend Policy**

 

The Companydoes not currently intend to distribute dividends with respect to its ordinaryshares.  For information regardingdividends on its preference shares, please see Note 15 of the ConsolidatedFinancial Statements included in “Item 18. Financial Statements.”

 

**B.**                                    **SignificantChanges**

 

Notapplicable.

 

**Item 9****.  The Offerand Listing**

 

**A.**                                    **Offer andListing Details**

 

Notapplicable.

 

**B.**                                    **Plan ofDistribution**

 

Notapplicable.

 

**C.**                                    **Markets**

 

All fourtranches of Senior Subordinated Notes are traded on the Luxembourg StockExchange.  None of the SeniorSubordinated Notes are traded on an organized exchange in the United States.

 

For furtherinformation, reference is made to Note 10 to the Consolidated FinancialStatements included in Item 18.

 

**D.**                                    **SellingShareholders**

 

Notapplicable.

 

**E.**                                      **Dilution**

 

Notapplicable.

 

**F.**                                      **Expenses ofthe Issue**

 

Notapplicable.

 

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**Item10.  Additional Information**

 

**A.**                                    **ShareCapital**

 

Notapplicable.

 

**B.**                                    **Memorandum and Articles ofAssociation**

 

Kappa HoldingB.V.  has its registered office inEindhoven (B.V.  number 638.986).

 

***Objects***

 

The objectsfor which Kappa Holding B.V.  isestablished, as set out in Article 2 of the Articles of Association, are:

 

•                                          Tofinance companies and other businesses, to borrow, lend and raise monies, toparticipate in all types of financial transactions, including the issue ofnotes, promissory notes and other securities, to make investments in securitiesin the broadest possible sense, to issue guarantees, to commit the Company forthe benefit of companies and other enterprises with which the Company isassociated in a group and for the benefit of third parties;

 

•                                          Toincorporate, participate in any manner whatsoever, manage, supervise and tocollaborate with companies and other enterprises, to acquire, hold and disposeof or otherwise manage all types of participations and interests in othercompanies and enterprises and to enter into joint ventures with other companiesand enterprises;

 

•                                          Toacquire, manage, exploit, encumber and dispose of movable property, realproperty and property rights, as well as rights or interests in moveableproperty, real property and property rights; and,

 

•                                          Toacquire, exploit and dispose of patents and other intellectual property rights,to acquire and grant licenses, sublicenses and related rights whatever namedand described, and if necessary to protect the rights derived from patents andother intellectual property rights, licenses, sublicenses and related rightsagainst infringement by third parties.

 

The Company isrepresented by the Management Board.  Ifthere is more than one member of the Management Board, two members actingjointly shall also be authorized to represent the Company.  Members of the Management Board mayrepresent the Company and vote on resolutions despite a conflict of interest,as a departure from the general rule stated in the Dutch Civil Code, subject tothe provision below regarding Supervisory Board approval.

 

The Management Board adopts all resolutions by an absolute majority ofthe votes validly cast.  A member may berepresented at the meeting by a fellow member with written authorization.  Such authorization may only apply to the onemeeting mentioned therein.

 

The remuneration of the members of the Management Board, anyentitlement to a bonus and the other conditions of appointment will bedetermined by the Supervisory Board for each member of the Management Boardseparately.

 

The Management Board requires the prior approval from the SupervisoryBoard concerning (among others) (i) any investments or other expenditure notprovided for in the annual budget and in excess of €1,000,000, (ii) borrowingmonies or entering into any other financing arrangements, involving in excessof €2,000,000, other than drawing under previously approved credits, (iii)entering into any unusual agreement or arrangement with a holder of depositaryreceipts, a shareholder, a director of the company or any of its subsidiariesor a member of the Supervisory Board (or a person related to any of suchpersons).

 

The General Meeting of Shareholders is authorized to amend the Articlesof Association.

 

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***Powersand Rights of Members of the Supervisory Board***

 

Members of theSupervisory Board are appointed, suspended and/or dismissed by the GeneralMeeting of Shareholders by a majority representing at least 66% of the votesattaching to all the subscribed ordinary shares A, B, C and D.  The number of members of the SupervisoryBoard will be determined by the General Meeting of Shareholders.  The task of the Supervisory Board is tosupervise the policies pursued by our Management Board and the general courseof our company and its business and to advise the Management Board.

 

***Powers and Rights ofMembers of the Management Board***

 

Members of theManagement Board are appointed and may be suspended or removed from office bythe General Meeting of Shareholders and may also be suspended by theSupervisory Board.  The Management Boardis entrusted with the management of the Company and shall act in accordancewith instructions of the Supervisory Board regarding the general lines of thefinancial, social, economic and personnel policies pursued.

 

***Meetings ofShareholders***

 

The General Meeting of Shareholders must be held within six months fromthe end of the financial year.  TheGeneral Meetings of Shareholders may be held in The Netherlands in Eindhoven aswell as in the municipalities of Amsterdam, Haarlemmermeer and Rotterdam.  Valid resolutions may only be adopted atgeneral meetings of shareholders held elsewhere if the entire subscribedcapital is represented.  The convocationof a general meeting of shareholders shall take place by way of notice sent tothe shareholders and holders of depository receipts no later than on thefifteenth day before that of the meeting. The notice convening the meeting will contain the items to be dealtwith.  ExtraordinaryGeneral Meetings of Shareholders may also be held.

 

**C.**                                    **MaterialContracts**

 

***Sale and PurchaseAgreement***

 

Kappa AlphaHoldings AB, a newly-formed acquisition vehicle owned by Cinven Limited and CVCCapital Partners Limited, entered into a Sale and Purchase Agreement, datedMarch 11, 2001, between AssiDomän, as seller, and Starskottet 20896 AB, underchange of name to Kappa Alpha Holdings AB, as buyer.  The Sale and Purchase Agreement contains standard representationsand warranties as to the business of the seller and requires the seller toprovide ongoing indemnities under certain circumstances.  Through this agreement, Kappa Alpha acquiredthe containerboard and corrugated businesses of AssiDomän for SEK 5.3 billionplus the repayment of existing indebtedness and certain other items ancillaryto a payment on closing of SEK 9.9 billion in total in consideration for sharesrepresenting the seller’s entire holdings in its containerboard and corrugatedbusinesses.  The right to acquire theshares was then assigned to various members of the Kappa Packaging Group, witheach acquired AssiDomän entity purchased by a member of the Kappa PackagingGroup that is either directly or indirectly a wholly-owned subsidiary of KappaPackaging.  The assignment wasaccomplished with a Notice of Assignment, dated May 17, 2001, made by KappaSweden AB to AssiDomän pursuant to the Sale and Purchase Agreement.

 

***Senior CreditAgreement***

 

In connectionwith the acquisition of the containerboard and corrugated businesses ofAssiDomän on May 17, 2001, Kappa Packaging as borrower and guarantor, and KappaHolding, Kappa Beheer and certain of our subsidiaries as guarantors enteredinto a facility agreement with Barclays Capital and Deutsche Bank AG Londonthat amended and restated a senior credit agreement with Barclays Bank PLC andcertain other banks named therein dated July 23, 1998 (the “Senior CreditAgreement”).  The Senior CreditAgreement now provides term borrowings totaling €1,505.0 million and a €250.0million revolving credit facility.  Termloan A in the amount of €755 million amortizes over a period extending fromDecember 31, 2001 to June 30, 2007; term loan B in the amount of €375 millionis due June 30, 2008 and term loan C in the amount of €375 million is due June30, 2009.  The availability of therevolving facility (which may also be borrowed in the form of letters ofcredit) expires on the earlier of June 30, 2007 and the repayment in full ofthe term loans.  We are required to makea prepayment of amounts outstanding under the Senior Credit Agreement fromexcess cash flow, the proceeds of certain sales of assets, certain insuranceclaims or pursuant to purchase price adjustments under the acquisitionagreement with AssiDomän.  We are alsorequired to make certain prepayments in the event of a change in control orlisting of the Company, Kappa Beheer or Kappa Packaging.  The

 

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Senior Credit Agreementcontains customary negative covenants limiting our ability to buy, sell orpledge assets, incur indebtedness, make loans or declare dividends, among otherthings. We are also required to meet several financial covenants on an ongoingbasis and the Senior Credit Agreement contains standard events of default andacceleration provisions.

 

***Wood SupplyAgreement***

 

In connectionwith our acquisition of Alpha, we entered into a wood supply agreement with theforestry division of AssiDomän (now owned by Sveaskog) pursuant to which itwill continue as a key supplier of wood and wood chips to our Piteå mill inSweden.  Under this agreement, the Piteåmill will be supplied with raw materials at market prices until December 31 ofthe year five years after notice of termination is given by either party, whichnotice cannot be given prior to December 31, 2003, subject to a re-negotiationof contract terms, including volume and price, that occurs annually andwhenever there is a change of capacity.

 

**D.**                                    **ExchangeControls**

 

There are currently no exchange controls in effect in The Netherlands,although the Dutch External Financial Relations Act of March 25, 1994 doesauthorize the Dutch Minister of Finance or the Dutch Central Bank to issue suchregulations.  There are currently noother limitations under Dutch law or arising under our articles of associationaffecting cash payments to holders of our Senior Subordinated Notes notresident in The Netherlands (except in respect of residents of and certain personsassociated with certain countries or regimes in order to comply with UnitedNations and European Union sanctions).

 

**E.**                                      **Taxation**

 

**United States FederalIncome Tax Considerations**

 

The followingdiscussion describes material US Federal income tax (“US tax”) consequences toa US Holder, as defined below, of the ownership and disposition of only thefollowing notes:  (i) €370,000,000aggregate principal amount of Kappa Beheer’s 105/8%Senior Subordinated Notes due 2009 (the “euro Notes”), and (ii) $100,000,000aggregate principal amount of Kappa Beheer’s 105/8%Senior Subordinated Notes due 2009 (the “Dollar Notes”) and (iii) €145,000,000aggregate principal amount of Kappa Beheer’s 12 1⁄2% Senior Subordinated DiscountNotes due 2009 (the “Discount Notes” and together with the euro Notes and theDollar Notes the “Notes”).  Thefollowing summary does not describe the US tax consequences to a holder of theunregistered notes issued in 2001 or any additional Notes which we may issue inthe future, and such holder’s US tax consequences may be different from what isset out below.  This discussion appliesto you only if you hold one or more Notes as capital assets (as defined in theInternal Revenue Code of 1986, as amended (the “Code”)) which, generally, areassets held for investment.  Thisdescription is based on (1) the Code, (2) US Treasury regulationsissued under the Code, and (3) administrative and judicial interpretationsof the Code and Treasury regulations, each as in effect on the date of thisreport.  All of these authorities aresubject to change, possibly with retroactive effect.  The Internal Revenue Service (the “IRS”) could take a differentview of the tax consequences of an investment in the Notes. This discussiondoes not address all aspects of US federal income taxation that may be relevantto a particular holder of the Notes based on such holder’s particularcircumstances.  For example, thefollowing discussion does not address the US tax consequences of the ownershipand disposition of the Notes to holders: that are not US Holders that will hold the Notes through a partnershipor other pass-through entity; that are broker-dealers, insurance companies,tax-exempt organizations, real estate investment trusts, regulated investmentcompanies, financial institutions; whose functional currency is not the USdollar; or that hold the Notes as part of an integrated investment (including a“straddle”) comprised of the Notes and one or more other position.  Moreover, this discussion does not includeany description of any state, local, estate or non-US tax consequences.

 

A “US Holder”is a holder of a Note that for US tax purposes is a citizen or resident of TheUnited States; a corporation or other entity taxable as a corporation createdor organized in or under the laws of The United States or any state of TheUnited States (including the District of Columbia); an estate if its income issubject to US federal income taxation regardless of source; a trust if(1) a US court can exercise primary supervision over its administrationand (2) one or more US persons have the authority to control all of itssubstantial decisions; or certain foreign trusts in existence on August 20,1996 that elected to continue to be treated as a US trust.

 

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**You are advised toconsult your own tax advisors to determine the US tax consequences of theownership and disposition of the Notes in light of your own particularcircumstances, as well as to determine the effect of any state, local or non-UStax laws on you.  No representationswith respect to the tax consequences to any particular holder of the Notes aremade hereby.**

 

***Interest on the euroNotes and the Dollar Notes. ***Ifyou hold a euro Note or a Dollar Note, you generally must include interest onsuch note in income when you receive the payment of interest (if you use thecash method of tax accounting), or when it properly accrues (if you use theaccrual method of tax accounting).

 

The foreigncurrency translation rules and the US tax consequences of the receipt ofinterest and principal are discussed below.

 

The followingamounts will be treated as “contingent interest” for US tax purposes.

 

(1)                                  Certain additionalamounts which we are obligated to pay if withholding taxes are imposed onpayments in respect of the Notes and if certain conditions are met, and

 

(2)                                  certain premiumswhich we are obligated to pay if we redeem the Dollar Notes, euro Notes, orDiscount Notes.

 

If, based on such amounts, the Notes are characterized as contingentpayment debt instruments, adverse US tax consequences could result so that US Holderswould have to report such additional interest as OID for US tax purposes.

 

However,Treasury regulations regarding debt instruments that provide for one or morecontingent payments provide that, for purposes of determining whether a debtinstrument is a contingent payment debt instrument, remote or incidentalcontingencies are ignored.  We believethat, as of the date when the Notes were issued for US tax purposes, thelikelihood of payment of the additional amounts or the certain premiums wasremote, and, accordingly, do not intend to treat the Notes as contingentpayment debt instruments.

 

***Disposition ofNotes. ***Whenyou sell or otherwise dispose of a Note (including in a redemption orretirement), you will recognize gain or loss equal to the difference between(i) the amount you realize on the disposition and (ii) your adjusted tax basisin the Note.  For this calculation, youmust exclude from the amount you realize the amount, if any, that isattributable to accrued but unpaid interest, which you must treat as such.  Your adjusted tax basis in a Note generallywill be equal to your initial tax basis in such note, increased by (a) any OIDaccrued through the date of disposition and (b) any market discount you havepreviously taken into income, and reduced by the amount of any amortized notespremium and any payments received with respect to the Note (other than anypayments of qualified stated interest). Your initial tax basis in a Note generally will be your purchase pricefor the Note.

 

Subject to thediscussion of market discount below, your gain or loss generally will becapital gain or loss and will be long-term capital gain or loss, respectively,if you have held your Note for more than one year (under US federal income taxprinciples) at the time of disposition. Subject to limited exceptions, you cannot use capital losses to offsetordinary income.  You generally musttreat any capital gain or loss that you recognize as US source gain or loss forUS foreign tax credit purposes.

 

***Special Rules Applicableto US Holders of euro Notes or Discount Notes***

 

***Interest on the euroNotes. ***USHolders of euro Notes will be required to determine the dollar value of theinterest paid on the euro Notes for purposes of determining the amount ofinterest includible in income.  If youuse the cash method of tax accounting, you must determine this dollar value byusing the spot rate of exchange, as defined below, of the euro in effect on thedate you receive the payment.  You willnot realize foreign currency gain or loss when you receive such payment.  However, you will recognize foreign currencygain or loss upon your actual disposition of the euro which you received, asdiscussed below.

 

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If you use theaccrual method of tax accounting, you must determine the dollar value of theamount of interest that accrues during your taxable year and include thatamount in taxable income.  For interestattributable to an accrual period that begins and ends in a single tax year,your interest income is the dollar value of all the interest accruing in theaccrual period.  If the interest isattributable to an accrual period that spans two tax years, your interestincome is the dollar value of the amount of interest that accrues during theportion of the period within your relevant tax year, determined by allocatingall the interest attributable to the accrual period ratably to each day in theperiod.  You may determine the dollarvalue of the amount of interest you are required to accrue by:

 

(1)                                  using the averagerate of exchange of the euro for the accrual period or partial period, asapplicable; or

 

(2)                                  using, if you soelect, the spot rate of exchange, as defined below, of the euro on the last dayof the accrual period or partial period, as applicable, or the spot rate ofexchange on the date of receipt, if such date is within five business days ofthe last day of the accrual period.

 

You mustdetermine the average rate of exchange for an accrual period or partial period,as applicable, by calculating the simple average of the applicable spot ratesof exchange for each business day of such period or another applicable averagerate of exchange for the period that you reasonably derived and consistentlyapply.  You make the election mentionedin clause (2) above by filing a statement with your first return in whichyou want the election to be effective clearly indicating that you have made theelection.  If you make such an election,you must apply the election consistently to all debt instruments from year toyear and cannot change your election without the consent of the IRS.

 

In addition,if you use the accrual method of tax accounting, you will recognize foreigncurrency gain or loss when you receive an interest payment attributable to anaccrual period.  Foreign currency gainor loss will equal the difference, if any, between the dollar value of theinterest that you received and the dollar value of interest you accrued for theperiod to which the interest payment applies, as calculated above.  To determine the dollar value of theinterest that you received, you generally must translate the amount of theinterest that you received in euros into dollars at the spot rate of exchangeon the date you received the euros.

 

To determinethe spot rate of exchange, you must use a spot rate of exchange that reflects afair market rate of exchange available to the public for currency under a “spotcontract” in a free market and involving representative amounts.  A spot contract is a contract to buy or sella currency on or before two business days following the date of execution ofthe contract.

 

***Original IssueDiscount on the Discount Notes. ***Weissued the Discount Notes with original issue discount (OID).  The OID on the Discount Notes is equal tothe difference between the sum of all payments (including interest and paymentat maturity) required to be made under the Discount Notes and the “issue price”of the Discount Notes.  The “issueprice” of the Discount Notes is the first price at which a substantial amountof the Discount Notes were sold for cash, excluding sales to underwriters,placement agents or wholesalers.

 

If you hold aDiscount Note that you acquired at the time of the initial issuance, you mustinclude OID in ordinary income as it accrues regardless of when you receivesuch OID or your method of tax accounting. For each taxable year (or any portion thereof) that you hold a DiscountNote, the amount of OID that you must include in gross income in respect ofsuch Discount Note will be the sum of the daily portions of OID allocated toeach day during such taxable year (or any portion thereof).  The daily portion of OID to be allocated toeach accrual period will be determined by allocating to each day in an accrualperiod a pro rata portion of the OID allocable to that accrual period.  OID allocable to any accrual period willequal the product of the “adjusted issue price” of the Discount Notes as of thebeginning of such period and the Discount Notes’ yield to maturity.  The “adjusted issue price” of a DiscountNote as of the beginning of any accrual period will equal the issue price ofthe Discount Note increased by OID you previously included in income anddecreased by any payments you received on the Discount Note.

 

Prior to July15, 2004, no cash payments will be made in respect of the Discount Notes.  Therefore, under the OID rules, none of thepayments on the Discount Notes will be characterized as interest for US federalincome tax purposes.

 

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Instead, you will treat eachpayment on a Discount Note as a receipt of accrued OID to the extent thereofand then as a receipt of principal of the Discount Note.

 

In general,the dollar value of the OID and, if applicable, market discount (provided anelection is made to accrue the market discount currently, see below “MarketDiscount, Acquisition Premium”) on a Discount Note will be determined for anyaccrual period by using the average rate of exchange, as defined above, for theaccrual period, or with respect to an accrual period that spans two taxableyears, using the average rate of exchange for the partial period within eachtaxable year.  Applicable Treasuryregulations allow taxpayers to elect, in the manner described above, totranslate OID (but not market discount) at the spot rate on the last day of theaccrual period (and in the case of a partial accrual period, the spot rate ofexchange on the last day of the taxable year) or on the date the OID payment isreceived if such date is within five business days of the end of the accrualperiod.  A US Holder that makes such anelection must apply it according to the rules discussed above.

 

US Holders ofthe Discount Notes will recognize foreign currency gain or loss when payments onthe Discount Notes are received.  At thetime the interest accrued in a prior period is received, the US Holder willrealize exchange gain or loss equal to the difference if any, between:

 

(1)                                  the dollar value ofthe euros received (attributable in the case of OID to the earliest accrualperiod in which such OID has accrued and to which prior payments have not beenattributed), determined by the spot rate of exchange on the date of the receiptof the payment; and

 

(2)                                  the amount ofinterest income in dollars previously taken into account in respect of suchaccrued income.

 

The amount offoreign currency gain or loss with respect to such principal will equal thedifference between (1) the dollar value of the euros received attributableto such principal determined by the spot rate of exchange on the date of thereceipt of the payment and (2) your tax basis in dollars in suchprincipal, described above.

 

***Disposition of euroNotes or Discount Notes. ***Youwill realize an amount in dollars according to the following rules:

 

•                                          Ifyou use the cash method of tax accounting and applicable notes are not tradedon an established securities market, you will realize an amount in dollarsequal to the amount of euros that you receive translated at the spot rate ofexchange on the date you receive the payment.

 

•                                          If(1) you use the cash method of tax accounting or you use the accrualmethod of tax accounting and so elect, and (2) the applicable notes aretraded on an established market, you will realize an amount in dollars equal tothe amount of euros that you receive translated at the spot rate of exchange onthe settlement date.

 

•                                          Ifyou use the accrual method of tax accounting and you do not make the electiondescribed in the preceding sentence, you will realize an amount in dollarsequal to the amount of euros that you receive translated at the spot rate ofexchange on the date of the disposition.

 

Regardless ofyour method of tax accounting, you will determine your initial tax basis indollars for your euro Note or Discount Note by the dollar value of the pricethat you paid on the date you purchased such note.  If you purchased a euro Note or a Discount Note with previouslyowned euros, you generally will be required to treat such euros as if youexchanged such euros for dollars at the spot rate of exchange in effect on thedate of purchase and you purchased your euro Note or Discount Note with theamount of dollars received.

 

You mayrecognize foreign currency gain or loss with respect to the principal of theeuro Notes, or the Discount Notes (taking account of previous payments ofprincipal on the Discount Notes) upon the sale or other disposition (includinga retirement or redemption) of the euro Notes, or the Discount Notes,respectively.  The amount of foreigncurrency gain or loss with respect to such principal that will be recognizedupon the sale or other disposition of the euro Notes or the Discount Notes willbe equal to the difference between:

 

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(1)                                  the dollar value ofsuch principal of the euro Notes or the Discount Notes, determined as describedin the second preceding paragraph; and

 

(2)                                  the dollar value ofsuch principal of the euro Notes or the Discount Notes on the date that it wasacquired, determined as described above.

 

However, thesum of any foreign currency gain or loss shall be recognized only to the extentof the total gain or loss realized on the transaction.

 

***Receipt ofeuros. ***Youwill have a tax basis in any euros received under your euro Notes or DiscountNotes generally equal to the dollar value of the euros determined by using thespot rate of exchange on the date you receive your payment.  If you subsequently exchange your euros fordollars, you will recognize foreign currency gain or loss equal to thedifference between the amount of dollars that you received and your tax basisin the euros.

 

***Source and Characterof Foreign Currency Gain or Loss. ***Yougenerally will have to treat foreign currency gain or loss as US sourceordinary income or loss.

 

***Market Discount,Acquisition Premium***

 

***General*. **If a US Holder acquires a euro Note orDollar Note for an amount that is less than its stated redemption price atmaturity, or in the case of a Discount Note, its revised issue price(generally, adjusted issue price at the time of acquisition), the amount of thedifference will be treated as “market discount,” unless such difference is lessthan a specified de minimis amount. Under the market discount rules of the Code, a US Holder will generallybe required to treat any principal payment on, or any gain on the sale,exchange, retirement or other disposition (including gift) of, a Note asordinary income to the extent of any accrued market discount that has notpreviously been included in income. Market discount generally accrues on a straight-line basis over theremaining term of the Note, unless the US Holder elects to accrue marketdiscount on a constant interest method. A US Holder may not be allowed to deduct immediately all or a portion ofthe interest expense on any indebtedness incurred or continued to purchase orto carry such note.

 

A US Holdermay elect to include market discount in income currently as it accrues (eitheron a straight-line basis or, if the US Holder so elects, on a constant-yieldbasis), in which case the interest deferral rule set forth in the precedingparagraph will not apply.  Such anelection will apply to all market discount notes acquired by the US Holder onor after the first day of the first taxable year to which such election appliesand may be revoked only with the consent of the IRS.

 

A US Holderthat acquires a Discount Note for an amount that is greater than the adjustedissue price of such note, but equal to or less than the sum of all amountspayable on such note after the purchase date, will be considered to havepurchased such note at an “acquisition premium.”  Under the acquisition premium rules of the Code and the OIDTreasury Regulations, the daily portion of OID which such holder must includein its gross income with respect to such note for any taxable year will bereduced by an amount equal to the OID multiplied by a fraction, the numeratorof which is the amount of such acquisition premium and the denominator of whichis the OID remaining for the period from the date the Discount Note waspurchased to its maturity date.

 

***Euro Notes orDiscount Notes. ***AUS Holder of euro Notes or Discount Notes that elects not to include marketdiscount, if any, in income currently as it accrues, must translate such marketdiscount into US dollars at the spot rate on the disposition date of the euroNotes or Discount Notes.  No part ofsuch accrued market discount is treated as exchange gain or loss.  See above “Special Rules Applicable to USHolders of euro Notes or Discount Notes” for treatment of market discount whicha holder elects to include in income currently as it accrues.

 

***Amortization ofNotes Premium***

 

***General. ***A US Holderthat purchases a Note for an amount in excess of the sum of all remainingpayments due on the Note after the purchase date (other than any payments ofqualified stated interest in the case of a Discount Note) will be considered tohave purchased the Note at a premium. Such holder may elect to amortize such premium (as an offset to

 

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interest income), using aconstant–yield method, over the remaining term of the Note.  Such election, once made, generally appliesto all debt instruments held or subsequently acquired by the US Holder on orafter the first taxable year to which the election applies and may be revokedonly with the consent of the IRS.  A USHolder that elects to amortize such premium must reduce its tax basis in theNote by the amount of the premium amortized during its holding period.  With respect to a US Holder that does notelect to amortize notes premium, the amount of such premium will be included inthe US Holder’s tax basis for purposes of computing gain or loss in connectionwith a taxable disposition of the Note.

 

***Euro Notes orDiscount Notes. ***Amortizablenotes premium in respect of a euro Note or Discount Note will be computed in,and, if an election is made to amortize such premium, will reduce interestincome in, units of foreign currency. At the time amortized notes premium offsets interest income, exchangegain or loss, which will be taxable as ordinary income or loss, will berealized with respect to amortized notes premium on such euro Note or DiscountNote based on the difference between the spot rate of exchange on the date ordates such premium is recovered through interest payments on such euro Note orDiscount Note and the spot rate of exchange on the date on which the US Holderacquired such euro Note or Discount Note. With respect to a US Holder that does not elect to amortize notespremium, the amount of notes premium will constitute a market loss when theeuro Note or Discount Note matures.

 

***InformationReporting and Backup Withholding on the Notes. ***In general, if you are a non-corporate USHolder, you may be subject to US information reporting requirements on thepayments of principal or interest on your Notes or of the proceeds of the sale,exchange or other disposition of your Notes paid within the US or throughcertain US-related financial intermediaries.

 

In general, ifyou are a non-corporate holder, you may also be subject to US backupwithholding at a rate of 30% if you do not provide a taxpayer identificationnumber to, or otherwise establish an exemption with, the payor of each paymentregarding your Note.  You may credit anyamounts withheld pursuant to US backup withholding against your US taxliability and may claim a refund for amounts withheld in excess of your taxliability, provided that you furnish the IRS with the required information.

 

**Dutch TaxConsiderations**

 

**General**

 

*The following is a summary of certain Dutchtax consequences of the acquisition, holding and disposal of the Notes.  This summary does not purport to be acomprehensive description of all Dutch tax considerations that may be relevantto a decision to acquire, to hold, and to dispose of the Notes. No conclusionsmay be drawn from this summary regarding topics that are not included herein.Each prospective holder of Notes should consult a professional adviser withrespect to the tax consequences of an investment in the Notes.  The discussion of certain Dutch taxes setforth below is included for general information purposes only.*

 

*This summary is based on Dutch taxlegislation, published case law, treaties, rules, regulations and similardocumentation, in force as of the date of this Country Addendum, withoutprejudice to any amendments introduced at a later date and implemented withretroactive effect.*

 

*This summary does not address the Dutch taxconsequences of a holder of Notes who holds a substantial interest(“aanmerkelijk belang”) in the Company, within the meaning of Section 4.3 ofthe Dutch Income Tax Act 2001. Generally speaking, a holder of Notes holds a substantial interest inthe Company, if such holder of Notes, alone or together with his or her partner(statutory defined term) or certain other related persons, directly orindirectly, holds (i) an interest of 5 percent or more of the total issuedcapital of the Company or of 5 percent or more of the issued capital of a certainclass of shares of the Company, (ii) rights to acquire, directly or indirectly,such interest or (iii) certain profit sharing rights in the Company.*

 

***Withholding Tax***

 

No Dutchwithholding tax is due upon payments on the Notes provided that none of thepayments under the Notes will depend on or will be deemed to depend on profitsor the distribution of profits by the Company.

 

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***Corporate Income Taxand Individual Income Tax***

 

***Residentsof The Netherlands. ***If the holder of Notes is subject to Dutchcorporate income tax and the Notes are attributable to its (deemed) businessassets, income derived from the Notes and gains realized upon the disposal of the Notes are taxable.

 

If the holder of Notes is an individual, resident or deemed to beresident of The Netherlands for Dutch tax purposes (including the individualholder of Notes who has opted to be taxed as a resident of The Netherlands),the income derived from the Notes and the gains realized upon the disposal of the Notes are taxable at the progressiverates of the Income Tax Act 2001, only if:

 

(i)                                     theholder of Notes has an enterprise oran interest in an enterprise, to which enterprise the Notes are attributable; or

 

(ii)                                  such income or gains qualify as income frommiscellaneous activities (“*resultaat uit overigewerkzaamheden*”)  within the meaning of Section 3.4 of the IncomeTax Act 2001, which include the performance of activities with respectto the Notes that exceed “regular, active portfolio management” (“*normaal,actief vermogensbeheer*”).

 

If the above-mentioned conditions (i) or (ii) do not apply to theindividual holder of Notes, the actual income derived from the Notes and theactual gains realized with respect to the Notes will not be taxable.  Instead, such holder of Notes will be taxedat a flat rate of 30% on deemed income from “savings and investments” (“*sparen enbeleggen*”) within the meaning of Section 5.1 of the Income Tax Act2001.  This deemed income amounts to 4%of the average of the individual’s “yield basis” (“*rendementsgrondslag*”) withinthe meaning of article 5.3 of the Income Tax Act 2001 at the beginning of thecalendar year and the individual’s yield basis at the end of the calendar year,insofar the average exceeds a certain threshold.  The Notes will be included in the individual’s yield basis.

 

***Non-residentsof The Netherlands****. *A Holder that is not a residentnor deemed to be a resident of The Netherlands for Dutch tax purposes (nor hasopted to be taxed as a resident of The Netherlands) is not taxable in respectof income derived from the Notes or gains realized upon the redemption anddisposal of the Notes, unless:

 

(i)                                     the Holder has anenterprise or an interest in an enterprise that is, in whole or in part,carried on through a permanent establishment or a permanent representative inThe Netherlands to which enterprise the Notes are attributable; or

 

(ii)                                  the Holder isentitled to a share in the profits of an enterprise that is effectively managedin The Netherlands, other than by way of securities or through an employmentcontract, and to which enterprise the Notes are attributable; or

 

(iii)                               the Holder is anindividual and such income or gains qualify as income from miscellaneousactivities in The Netherlands (“*resultaat uit overige werkzaamheden*”) within the meaning of Section 3.4 of theIncome Tax Act 2001, which include the performance of activities in TheNetherlands with respect to the Notes that exceed “regular, active portfoliomanagement” (“*normaal, actief vermogensbeheer*”)*.*

 

***Gift and EstateTaxes***. Generally, gift and inheritance taxes will be due in The Netherlands inrespect of the acquisition of the Notes by way of a gift by, or on the deathof, a holder of Notes who is a resident or deemed to be a resident of TheNetherlands for the purposes of Dutch gift and inheritance tax at the time ofthe gift or his or her death.

 

An individualof The Netherlands nationality is deemed to be a resident of The Netherlandsfor the purposes of the Dutch gift and inheritance tax, if he or she has beenresident in The Netherlands during the ten years preceding the gift or his orher death.  An individual of any othernationality is deemed to be a resident of The Netherlands for the purposes ofThe Netherlands gift and inheritance tax only if he or she has been residing inThe Netherlands at any time during the twelve months preceding the time of thegift.

 

***Non-residents of TheNetherlands***. No gift or inheritance taxes will arise in The Netherlands in respect ofthe acquisition of the Notes by way of gift by, or as a result of the death of,a Holder who is neither a resident nor deemed to be a resident of TheNetherlands for the purposes of The Netherlands gift and inheritance tax,unless

 

(i)                                     such holder at thetime of the gift has or at the time of his or her death had an enterprise or aninterest in an enterprise that is or was, in whole or in part, carried onthrough a permanent establishment or a permanent

 

69

----

 

representative in The Netherlands and to which Netherlands enterpriseor part thereof, as the case may be, the Notes are or were attributable; or

 

(ii)                                  the Notes are or wereattributable to the assets of an enterprisethat is effectively managed in The Netherlands and the donor is or the deceasedwas entitled to a share in the profits of that enterprise, at the time of thegift or at the time of his or her death, other than by way of securities orthrough an employment contract; or

 

(iii)                               in the case of a gift ofthe Notes by an individual who at the date of the gift was neither a residentnor deemed to be a resident of the Netherlands, such individual dies within 180days after the date of the gift, while at the time of his or her death being aresident or deemed to be a resident of The Netherlands.

 

***Other Taxes andDuties***.  NoDutch capital tax, registration tax, custom duty, turnover tax, stamp duty orany other similar tax or duty other than court fees, will be due in TheNetherlands by a holder of Notes in respect of or in connection with thesubscription, issue, placement, allotment or delivery of the Notes.

 

***Proposed EUDirective on the Taxation of Savings Income***.  On 3rd June, 2003, the European Council ofEconomics and Finance Ministers agreed on proposals under which Member Stateswill be required to provide to the tax authorities of another Member Statedetails of payments of interest (or similar income) paid by a person within itsjurisdiction to an individual resident in that other Member State, except that,for a transitional period, Belgium, Luxembourg and Austria will instead berequired to operate a withholding system in relation to such payments (theending of such transitional period being dependent upon the conclusion ofcertain other agreements relating to information exchange with certain othercountries).  The proposals areanticipated to take effect from 1st January, 2005.

 

**F.**                                      **Dividendsand Paying Agents**

 

Notapplicable.

 

**G.**                                    **Statementsby Experts**

 

Notapplicable.

 

**H.**                                    **Documents onDisplay**

 

We are subjectto the information requirements of the US Securities Exchange Act of 1934, asamended, and file periodic reports and other information with the United StatesSecurities and Exchange Commission.  Wewill file our Annual Reports on Form 20-F and our interim reports on Form 6-K.

 

You mayinspect the information that we filed with the Commission at the publicreference facilities maintained by the Commission at the Commission’s PublicReference Room at 450 Fifth Street, N.W. Washington, D.C.  20549.  You may obtain information on the operationof the Public Reference Room by calling the Commission at 1-800-SEC-0330.  The Commission also maintains a web site athttp://www.sec.gov that contains reports, proxy and information statements andother information regarding registrants that file electronically with theCommission.

 

Uponreasonable request, documents referred to in this Annual Report on Form 20-Fmay be inspected at the company’s head office:

 
| Dr.  Holtroplaan 5                                                                         |                                   |
|-------------------------------------------------------------------------------------------------|----------------------------------------|
| NL - 5652 XR Eindhoven                                                                          |                                   |
| P.O.  Box 8714                                                                             |                                   |
| NL - 5605 LS Eindhoven                                                                          |                                   |
|                                                                                            |                                   |
| Telephone +31 (0)40 214 07  77                                                             | e-mail:  info@kappapackaging.com  |
| Fax            +31  (0)40 214 07 99 | Website:   www.kappapackaging.com |

 

70

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**I.**                                         **SubsidiaryInformation**

 

Not applicable.

 

**Item11.  Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposedto market risks, including adverse changes in interest rates and foreigncurrency exchange rates as discussed below:

 

**Interest rate risk**

 

To reduce ourfloating rate interest exposure on our debt instruments, we entered into aninterest rate swap in 2001 with an original notional amount of€1,004 million. An interest rate swap is a contract between two parties toexchange interest payments on a specified principal amount (referred to as thenotional principal) for a specified period. The swap we entered into involves the exchange of streams of variableinterest payments for fixed rate interest payments. We entered into the swap tohedge against the risk of movements in market rates of interest on our seniordebt and to manage the Group’s exposure to its variable rate borrowing. Theswap is denominated in euros. We do not enter into interest rate derivativeinstruments for trading or speculative purposes.

 

**Foreign currency exchangerate risk**

 

To reduce theUS dollar currency exposure on the US dollar tranche of the Senior SubordinatedNotes, we entered into a US dollar /euro coupon swap.  The coupon swap exchanges the US dollar stream of fixed interestpayments into fixed rate euro payments.

 

To reduce theUS dollar currency exposure on the US dollar tranche of the Senior SubordinatedNotes, we entered into a US dollar call, euro put currency option. The currencyoption allows us to buy US dollar and sell euro at a specified future date thatwould effectively convert the principal amount of the US dollar tranche of theSenior Subordinated Notes into an euro amount. As a result of the recent development of the US dollar/euro exchange rate,we replaced the US dollar call, euro put currency option by three foreigncurrency forward contracts (buy US dollar, sell euro) in April 2003, resultingin a gain of €4.0 million.

 

The majorityof our revenues and costs are generated in euro.  We also generate a portion of our earnings and incur a portion ofcosts in non-euro currencies, including British pounds (GBP), Czech koruna(CZK), Norwegian kroner (NOK), Polish zlotys (PLN), Slovak koruna (SKK), USdollars (US$) and Swedish kronor (SEK).

 

We seek tomanage our currency risk by funding non-euro based operations in localcurrencies.  In order to hedge cashreceipts from firm export sales orders, we enter into foreign currency forwardcontacts to sell the relevant non-euro currencies with varying maturities of nolonger than one year. Our financial results reflect the hedged exchange rateson these sales transactions.

 

The tablebelow provides information about our main foreign currency forward exchangecontracts.

 

| **Currency contracts:**  |   | **Fair value  at  December 31, 2002** |   |
|--------------------------|--------|---------------------------------------|--------|
|                     |   | **(in €  millions)**             |   |
| Receive CZK / Pay € |   | (0.1                                  | )      |
| Receive SEK / Pay € |   | (1.1                                  | )      |
| Receive SKK / Pay € |   | 0.3                                   |   |
| Pay CZK / Receive € |   | 0.1                                   |   |
| Pay GBP/ Receive €  |   | 0.6                                   |   |
| Pay US$/ Receive €  |   | 0.9                                   |   |
| Pay ZAR / Receive € |   | (0.1                                  | )      |
| Pay SEK / Receive GBP    |   | (0.2                                  | )      |

 

71

----

 

***Fair Values***

 

The tablebelow provides information about our interest related derivative financialinstruments and other financial instruments that are sensitive to changes ininterest rates.  For our senior creditfacility and our Senior Subordinated Notes, the table below presents principalpayment amounts and weighted average interest rates by contractual paymentdates.  The discount notes have anon-cash interest portion that is added to the principal on a semi-annualbasis. The variable rate portion of our senior credit facility is based onEURIBOR at December 31, 2002 of 2.80%. The rates presented are notintended to project our expectations for the future.  The table presents notional amounts and related interest ratesfor the swap agreement.  Under this swapagreement, the interest is paid semi-annually to the counterparty.

 

The carryingvalue of the variable interest rate debt under the senior credit facilitiesapproximates fair value. The fair value of the US$ tranche of the SeniorSubordinated Notes is based on the US dollar/euro foreign exchange spot rate asat December 31, 2002.  The fair value ofthe interest rate swap agreement has been determined based on quoted marketprices for similar instruments and/or appropriate valuation models by thecounterparty. The fair values of the loans made to us by Cinven and CVC havebeen determined by means of the discounted cash flow method. The interest rateused is based on actual interest rates at year-end 2002 and 2001, including a riskmark-up determined at the date of issuance of the loans (167 basis points).

 
|                                                                                                                                                               |   | **(in €  millions)** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------|--------|
|                                                                                                                                                               |   | **2003**                  |   | **2004** |   | **2005** |   | **2006** |   | **Thereafter** |   | **Total** |   | **Fair value  at December 31, 2002** |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Long-term debt*                                                                                                                                                   |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable rate                                                                                                                                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior debt                                                                                                                                                        |   | 101.8                     |   | 130.0 |   | 154.6 |   | 172.4 |   | 844.3 |   | 1,403.1 |   | 1,403.1 |   |
| Variable average interest rate repayments                                                                                                                          |   | 6.82                      | %      | 6.82 | % | 6.82 | % | 6.82 | % | 7.70 | % | 7.35 | % |   |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate                                                                                                                                                         |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior subordinated notes (1999)                                                                                                                                   |   | —                    |   | — |   | — |   | — |   | 585.5 |   | 585.5 |   | 623.5 |   |
| Fixed average interest rate loan                                                                                                                                   |   | —                    |   | — |   | — |   | — |   | 11.00 | % | 11.00 | % |   |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior subordinated notes (2001)                                                                                                                                   |   | —                    |   | — |   | — |   | — |   | 100.0 |   | 100.0 |   | 102.5 |   |
| Fixed average interest rate loan                                                                                                                                   |   | —                    |   | — |   | — |   | — |   | 12.50 | % | 12.50 | % |   |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ loans                                                                                                                                           |   | —                    |   | — |   | — |   | — |   | 628.0 |   | 628.0 |   | 780.9 |   |
| Fixed average interest rate loan                                                                                                                                   |   | —                    |   | — |   | — |   | — |   | 7.80 | % | 7.80 | % |   |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| *Derivative Instruments*                                                                                                                                           |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate swap (notional contract 4.69%  contract amount € 1,004.0 million)(1). Pay fixed, receive  variable (EURIBOR at 2.80% at December 31, 2002) |   | —                    |   | — |   | — |   | — |   | — |   | — |   | (26.1 | ) |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Currency swap (notional contract amount  €48.7 million). Receive US$, pay €.                                                                             |   | —                    |   | — |   | — |   | — |   | — |   | — |   | 1.9 |   |
|                                                                                                                                                               |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Currency option (notional contract amount  €95.1 million). Receive US$, pay €. (2)                                                                       |   | —                    |   | — |   | — |   | — |   | — |   | — |   | 8.6 |   |

 

----

(1)                                  Aninterest rate swap was entered into to hedge the floating rate interest on oursenior credit facility:  Tranches A, Band C (€936.0 million as at December 31, 2002).  Under the swap, we pay a fixed rate of 4.69% and receive afloating rate of EURIBOR (2.80% at December 31, 2002) on a semi-annualbasis from the counterparty.  Theinterest swap will expire on June 30, 2004. The notional value of the swap is €936.0 million at December 31, 2002and decreases in line with the decreasing principal on the senior creditfacilities as follows:

 

€904.0 million on June 30, 2003

€868.0 million on December 31, 2003

 

72

----

 

(2)                                  Asa result of the recent development of the US dollar/euro exchange rate, wereplaced the US dollar call, euro put currency option by three foreign currencyforward contracts (buy US dollar, sell euro) in April 2003, resulting in a gainof €4.0 million.

 

Furtherdetails on the financial instruments are disclosed in Note 12 and 18 ofour Consolidated Financial Statements.

 

**Risk on recoveredpaper prices**

 

Pricefluctuations for our operational inputs, especially recovered paper, have aneffect on our gross margins.  We do nothedge these risks with financial instruments.

 

**Item 12. Description of Securities Other than Equity Securities**

 

Notapplicable.

 

**PART II.**

 

**Item 13. Defaults****, Dividend Arrearages and Delinquencies**

 

None.

 

**Item 14. Material****Modifications to the Rights of SecurityHolders and Use of Proceeds**

 

None; Notapplicable.

 

**Item 15. Controls****and Procedures**

 

Within90 days prior to the date of this report, we carried out an evaluation,under the supervision and with the participation of the Management Board, ofthe effectiveness of the design and operation of our disclosure controls andprocedures. Based on this evaluation, which will be used as input for furtherimprovement actions, the Management Board concluded that our controls andprocedures are effective in timely alerting them to material information aboutKappa Holding and its consolidated subsidiaries.

 

However, indesigning our controls and procedures, the Management Board recognized that anycontrols and procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgement in evaluating thecost-benefit relationship of possible controls and procedures. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Group have been detected.

 

There havebeen no significant changes in our internal controls or in other factors thatcould significantly affect those controls subsequent to the date of thisevaluation.

 

**Item16.  [Reserved]**

 

73

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**PART III.**

 

**Item 17. Financial Statements**

 

See Item 18.

 

**Item 18. Financial Statements**

 

See pages F-1through F-50.

 

74

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**INDEX TO FINANCIALSTATEMENTS**

 

**CONSOLIDATED FINANCIAL STATEMENTS OF THEKAPPA PACKAGING GROUP AS AT DECEMBER 31, 2002 AND 2001 AND FOR THE YEARS ENDEDDECEMBER 31, 2002, 2001 AND 2000**

 
| Report of Independent Auditors                        |
|-------------------------------------------------------|
| Consolidated Statements of Income                     |
| Consolidated Balance Sheets                           |
| Consolidated Statements of Cash Flows                 |
| Consolidated Statements of Shareholders’  Equity |
| Notes to Consolidated Financial Statements            |

 

Theconsolidated financial statements contain the financial position, results ofoperations and cash flows for the consolidated entities that include thenon-guarantor subsidiaries.  For thefinancial position, results of operations and cash flows of the issuer of theSenior Subordinated Notes and its guarantors refer to Note 29.

 

F-1

----

 

**REPORT OF INDEPENDENT AUDITORS**

 

**Report of Independent Auditors**

 

**Introduction**

 

We have audited theconsolidated balance sheets of Kappa Holding B.V. and subsidiaries as ofDecember 31, 2002 and 2001 and the related consolidated statements of income,cash flows and shareholders’ equity for each of the three years in the periodended December 31, 2002. These financial statements are the responsibility ofthe Management Board.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.  The consolidatedfinancial statements have been prepared in accordance with accounting principlesgenerally accepted in The Netherlands.

 

**Scope**

 

We conducted our audit inaccordance with auditing standards generally accepted in The Netherlands and inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

**Opinion**

 

In our opinion the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Kappa Holding B.V. and its subsidiaries asof December 31, 2002 and 2001, and the consolidated results of their operationsand their cash flows for each of the three years in the period ended December31, 2002 in accordance with accounting principles generally accepted in theNetherlands.

 

Accounting principles generallyaccepted in The Netherlands vary in certain significant respects from accountingprinciples generally accepted in the United States of America.  The application of the latter would haveaffected the determination of net income for each of the three years in theperiod ended December 31, 2002 and shareholders’ equity at December 31, 2002and 2001 to the extent summarized in Note 28 to the consolidated financialstatements.

 

Amsterdam, April 17, 2003,except for Note 31 as to which the date is June 27, 2003.

 

 

PricewaterhouseCoopersAccountants N.V.

 

F-2

----

 

**KAPPA PACKAGING GROUPCONSOLIDATED STATEMENTS OF INCOME***For the years ended December 31, 2002, 2001 and 2000**(€ inmillions)*

 
|                                                                      |   | **Note** |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|---------------------------------------------------------------------------|--------|----------|--------|------------------------------------|--------|------------------------------------|--------|------------------------------------|--------|
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Sales**                                                                 |   |     |   | 2,923.8                            |   | 2,471.3                            |   | 1,657.4                            |   |
| Net change in work in progress and finished  goods                        |   |     |   | 13.8                               |   | 1.0                                |   | 15.0                               |   |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Net sales including net change in work in progress and finished goods** |   |     |   | 2,937.6                            |   | 2,472.3                            |   | 1,672.4                            |   |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| Raw material costs                                                        |   |     |   | (1,077.6                           | )      | (917.7                             | )      | (692.9                             | )      |
| External services                                                         |   |     |   | (523.3                             | )      | (434.7                             | )      | (267.3                             | )      |
| Labor costs                                                               |   | 20       |   | (697.9                             | )      | (561.9                             | )      | (359.3                             | )      |
| Other operating costs                                                     |   | 21       |   | (197.8                             | )      | (135.9                             | )      | (83.0                              | )      |
| Depreciation, amortization and impairment  charges                        |   | 22       |   | (218.5                             | )      | (176.0                             | )      | (129.9                             | )      |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Total operating costs and expenses**                                    |   |     |   | (2,715.1                           | )      | (2,226.2                           | )      | (1,532.4                           | )      |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Operating income**                                                      |   |     |   | 222.5                              |   | 246.1                              |   | 140.0                              |   |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| Interest expense, net                                                     |   | 23       |   | (192.0                             | )      | (167.8                             | )      | (118.5                             | )      |
| Interest expense on Shareholders’ loans                              |   | 11       |   | (46.2                              | )      | (34.9                              | )      | (20.7                              | )      |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Result before income taxes**                                            |   |     |   | (15.7                              | )      | 43.4                               |   | 0.8                                |   |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| Income taxes                                                              |   | 24       |   | 5.4                                |   | (19.1                              | )      | (13.8                              | )      |
| Income from participations                                                |   |     |   | 0.6                                |   | 0.2                                |   | 0.7                                |   |
| Minority interests                                                        |   |     |   | (0.2                               | )      | (0.2                               | )      | —                             |   |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Income/(loss) before extraordinary items**                              |   |     |   | (9.9                               | )      | 24.3                               |   | (12.3                              | )      |
| Extraordinary items, net of tax                                           |   | 25       |   | —                             |   | (13.1                              | )      | (3.4                               | )      |
|                                                                      |   |     |   |                               |   |                               |   |                               |   |
| **Net income/(loss)**                                                     |   |     |   | (9.9                               | )      | 11.2                               |   | (15.7                              | )      |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-3

----

 

**KAPPAPACKAGING GROUP****CONSOLIDATED BALANCE SHEETS***As atDecember 31, 2002 and 2001**(€ inmillions)*

 
|                                            |   | **Note** |   | **December  31,  2002** |   | **December  31,  2001** |   |
|-------------------------------------------------|--------|----------|--------|-------------------------|--------|-------------------------|--------|
| **Assets**                                      |   |     |   |                    |   |                    |   |
| Cash and cash equivalents                       |   | 2        |   | 233.6                   |   | 217.6                   |   |
| Accounts receivable                             |   |     |   | 451.5                   |   | 468.1                   |   |
| Other receivables                               |   | 4        |   | 55.6                    |   | 72.4                    |   |
| Inventories                                     |   | 5        |   | 272.2                   |   | 253.4                   |   |
|                                            |   |     |   |                    |   |                    |   |
| Total current assets                            |   |     |   | 1,012.9                 |   | 1,011.5                 |   |
| Tangible fixed assets                           |   | 6        |   | 1,654.7                 |   | 1,671.3                 |   |
| Intangible fixed assets                         |   | 7        |   | 882.1                   |   | 924.8                   |   |
| Other non-current assets                        |   | 8        |   | 93.6                    |   | 101.6                   |   |
|                                            |   |     |   |                    |   |                    |   |
|                                            |   |     |   | 3,643.3                 |   | 3,709.2                 |   |
| **Liabilities**                                 |   |     |   |                    |   |                    |   |
| Bank overdrafts                                 |   | 12       |   | 1.4                     |   | 19.8                    |   |
| Current portion of term loan facilities         |   | 12       |   | 101.8                   |   | 75.4                    |   |
| Current portion of other long-term  liabilities |   | 12       |   | 5.6                     |   | 3.5                     |   |
| Other current liabilities                       |   | 9        |   | 507.1                   |   | 482.0                   |   |
|                                            |   |     |   |                    |   |                    |   |
| Total current liabilities                       |   |     |   | 615.9                   |   | 580.7                   |   |
|                                            |   |     |   |                    |   |                    |   |
| Term loan facilities                            |   | 12       |   | 1,301.3                 |   | 1,403.2                 |   |
| Senior subordinated notes                       |   | 12       |   | 685.5                   |   | 671.7                   |   |
| Other long-term liabilities                     |   | 12       |   | 15.0                    |   | 8.2                     |   |
|                                            |   |     |   |                    |   |                    |   |
| Total long-term liabilities                     |   |     |   | 2,001.8                 |   | 2,083.1                 |   |
|                                            |   |     |   |                    |   |                    |   |
| Provisions                                      |   | 10       |   | 272.3                   |   | 318.9                   |   |
|                                            |   |     |   |                    |   |                    |   |
| Shareholders’ loans                        |   | 13       |   | 628.0                   |   | 581.8                   |   |
|                                            |   |     |   |                    |   |                    |   |
| Minority interests                              |   | 14       |   | 1.3                     |   | 1.0                     |   |
|                                            |   |     |   |                    |   |                    |   |
| Commitments and contingencies                   |   | 16       |   |                    |   |                    |   |
|                                            |   |     |   |                    |   |                    |   |
| **Shareholders’ equity**                   |   |     |   |                    |   |                    |   |
| Share capital                                   |   | 15       |   | 0.8                     |   | 0.8                     |   |
| Additional paid-in capital                      |   | 15       |   | 152.9                   |   | 152.9                   |   |
| Legal reserve                                   |   | 15       |   | —                  |   | 4.3                     |   |
| Retained earnings (accumulated deficit)         |   |     |   | (5.6                    | )      | —                  |   |
| Accumulated other comprehensive income          |   |     |   | (24.1                   | )      | (14.3                   | )      |
|                                            |   |     |   |                    |   |                    |   |
| Total Shareholders’ equity                 |   |     |   | 124.0                   |   | 143.7                   |   |
|                                            |   |     |   |                    |   |                    |   |
|                                            |   |     |   | 3,643.3                 |   | 3,709.2                 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-4

----

 

**KAPPAPACKAGING GROUP****CONSOLIDATED STATEMENTS OF CASH FLOWS***For theyears ended December 2002, 2001 and 2000**(€ inmillions)*

 
|                                                                              |   | **Year  ended,  December 31,  2002** |       | **Year  ended,  December 31,  2001** |       | **Year ended  December 31,  2000** |       |
|-----------------------------------------------------------------------------------|--------|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
|                                                                              |   |                                 |       |                                 |       |                               |       |
| **Cash flows from operating activities:**                                         |   |                                 |       |                                 |       |                               |       |
| Net income/(loss)                                                                 |   | (9.9                                 | )          | 11.2                                 |       | (15.7                              | )          |
| *Adjustments to reconcile net income to cash provided**by  operating activities:* |   |                                 |       |                                 |       |                               |       |
| Depreciation of tangible fixed assets                                             |   | 187.8                                |       | 152.4                                |       | 111.2                              |       |
| Amortization of intangible fixed assets                                           |   | 30.7                                 |       | 23.6                                 |       | 19.9                               |       |
| Amortization of finance charges                                                   |   | 11.3                                 |       | 7.5                                  |       | 3.8                                |       |
| Share in result of participations                                                 |   | (0.6                                 | )          | (0.2                                 | )          | (0.8                               | )          |
| Minority interests                                                                |   | 0.2                                  |       | 0.2                                  |       | —                             |       |
| Accretion of Shareholders’ loans and Senior  Subordinated Notes              |   | 60.0                                 |       | 47.1                                 |       | 31.5                               |       |
| Addition to pension provisions                                                    |   | 8.5                                  |       | 7.0                                  |       | 5.4                                |       |
| Addition to/(release from) deferred tax  liabilities                              |   | (7.9                                 | )          | 3.9                                  |       | 10.6                               |       |
| Addition to/(release from) restructuring  and other provisions                    |   | 6.5                                  |       | (7.0                                 | )          | (2.2                               | )          |
| *Changes in operating assets and liabilities:*                                    |   |                                 | * *   |                                 | * *   |                               | * *   |
| Inventories                                                                       |   | (18.2                                | )          | 43.1                                 |       | (19.9                              | )          |
| Accounts receivable                                                               |   | 16.6                                 |       | 41.3                                 |       | (21.2                              | )          |
| Other receivables                                                                 |   | 15.6                                 |       | (51.2                                | )          | 17.1                               |       |
| Accounts payable                                                                  |   | 51.8                                 |       | (37.1                                | )          | 33.4                               |       |
| Accrued liabilities                                                               |   | (31.4                                | )          | 43.1                                 |       | (17.7                              | )          |
| Paid from restructuring and other  provisions                                     |   | (39.5                                | )          | (42.6                                | )          | (23.9                              | )          |
| Paid from pension provisions                                                      |   | (8.0                                 | )          | (6.4                                 | )          | (3.8                               | )          |
|                                                                              |   |                                 |       |                                 |       |                               |       |
| Net cash provided by operating activities                                         |   | 273.5                                |       | 235.9                                |       | 127.7                              |       |
|                                                                              |   |                                 |       |                                 |       |                               |       |
| **Cash flows from investing activities:**                                         |   |                                 | ** ** |                                 | ** ** |                               | ** ** |
| Investments, net in tangible fixed assets                                         |   | (162.1                               | )          | (154.6                               | )          | (102.5                             | )          |
| Investments, net in intangible fixed assets                                       |   | (2.3                                 | )          | (7.9                                 | )          | (3.6                               | )          |
| Investments, net in other non-current  assets                                     |   | 2.3                                  |       | (76.2                                | )          | —                             |       |
| Acquisition of Group companies                                                    |   | —                               |       | (1,123.2                             | )          | (83.8                              | )          |
| Disposal of Group companies                                                       |   | 0.3                                  |       | —                               |       | —                             |       |
|                                                                              |   |                                 |       |                                 |       |                               |       |
| Net cash used in investing activities                                             |   | (161.8                               | )          | (1,361.9                             | )          | (189.9                             | )          |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-5

----

 

**KAPPA PACKAGING GROUP****CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)***For theyears ended December 31, 2002, 2001 and 2000**(€ inmillions)*

 
|                                                     |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |       | **Year ended  December 31,  2000** |       |
|----------------------------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                                     |   |                               | ** ** |                               | ** ** |                               | ** ** |
| **Cash flows from financing activities:**                |   |                               | ** ** |                               | ** ** |                               | ** ** |
| Issuance of term loan facilities                         |   | —                             |       | 1,505.0                            |       | 75.0                               |       |
| Repayment of term loan facilities                        |   | (75.5                              | )          | (664.0                             | )          | (31.8                              | )          |
| Issuance of Shareholders’ loans                     |   | —                             |       | 299.4                              |       | —                             |       |
| Issuance of Senior Subordinated Notes                    |   | —                             |       | 100.0                              |       | —                             |       |
| Issuance of shares                                       |   | —                             |       | 0.6                                |       | —                             |       |
| Short-term borrowings banks repaid                       |   | (18.6                              | )          | (19.2                              | )          | (20.3                              | )          |
| Other long-term debt repaid                              |   | (5.6                               | )          | (3.4                               | )          | (1.9                               | )          |
|                                                     |   |                               |       |                               |       |                               |       |
| Net cash provided by/(used in) financing  activities     |   | (99.7                              | )          | 1,218.4                            |       | 21.0                               |       |
|                                                     |   |                               |       |                               |       |                               |       |
| **Net increase/(decrease) in cash and cash equivalents** |   | 12.0                               |       | 92.4                               |       | (41.2                              | )          |
|                                                     |   |                               |       |                               |       |                               |       |
| Cash and cash equivalents beginning of  period           |   | 217.6                              |       | 76.7                               |       | 112.1                              |       |
|                                                     |   |                               |       |                               |       |                               |       |
| Cash from acquisitions                                   |   | —                             |       | 52.7                               |       | 5.8                                |       |
|                                                     |   |                               |       |                               |       |                               |       |
| Effect of exchange rate changes on cash                  |   | 4.0                                |       | (4.2                               | )          | —                             |       |
|                                                     |   |                               |       |                               |       |                               |       |
| **Cash and cash equivalents end of period**              |   | 233.6                              |       | 217.6                              |       | 76.7                               |       |
|                                                     |   |                               |       |                               |       |                               |       |
| **Supplemental cash flow information:**                  |   |                               | ** ** |                               | ** ** |                               | ** ** |
|                                                     |   |                               |       |                               |       |                               |       |
| Interest paid                                            |   | 165.9                              |       | 155.7                              |       | 98.7                               |       |
| Income taxes paid/(refund)                               |   | 9.4                                |       | (3.9                               | )          | 34.6                               |       |
|                                                     |   |                               | ** ** |                               | ** ** |                               | ** ** |
| Non-cash investing and financing  transactions:          |   |                               |       |                               |       |                               |       |
| Acquisition of assets under capital lease                |   | 8.8                                |       | —                             |       | —                             |       |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-6

----

 

**KAPPAPACKAGING GROUP****CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY***For theyears ended December 31, 2002, 2001 and 2000**(€ inthousands)*

 
|                             |   | **Share  capital** |   | **Additional  paid-  in capital** |   | **Legal  reserve** |   | **Retained  earnings** |   | **Accumulated  other  comprehensive  income/(loss)** |   | **Total** |   | **Comprehensive  income/(loss)** |   |
|----------------------------------|--------|--------------------|--------|-----------------------------------|--------|--------------------|--------|------------------------|--------|------------------------------------------------------|--------|-----------|--------|----------------------------------|--------|
|                             |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   |                             |   |
| **Balance at December 31, 1999** |   | 572                |   | 152,579                           |   | —             |   | 8,863                  |   | (3,938                                               | )      | 158,076   |   |                             |   |
| Net result for the period        |   | —             |   | —                            |   | —             |   | (15,728                | )      | —                                               |   | (15,728   | )      | (15,728                          | )      |
| Translation adjustment           |   | —             |   | —                            |   | —             |   | —                 |   | (1,015                                               | )      | (1,015    | )      | (1,015                           | )      |
| Total comprehensive loss         |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   | (16,743                          | )      |
|                             |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   |                             |   |
| **Balance at December 31, 2000** |   | 572                |   | 152,579                           |   | —             |   | (6,865                 | )      | (4,953                                               | )      | 141,333   |   |                             |   |
| Issuance of shares               |   | 258                |   | 322                               |   | —             |   | —                 |   | —                                               |   | 580       |   |                             |   |
| Net result for the period        |   | —             |   | —                            |   | —             |   | 11,165                 |   | —                                               |   | 11,165    |   | 11,165                           |   |
| Translation adjustment           |   | —             |   | —                            |   | —             |   | —                 |   | (9,388                                               | )      | (9,388    | )      | (9,388                           | )      |
| Transfers                        |   | (7                 | )      | —                            |   | 4,307              |   | (4,300                 | )      | —                                               |   | —    |   |                             |   |
| Total comprehensive income       |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   | 1,777                            |   |
|                             |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   |                             |   |
| **Balance at December 31, 2001** |   | 823                |   | 152,901                           |   | 4,307              |   | —                 |   | (14,341                                              | )      | 143,690   |   |                             |   |
| Net result for the period        |   | —             |   | —                            |   | —             |   | (9,945                 | )      | —                                               |   | (9,945    | )      | (9,945                           | )      |
| Translation adjustment           |   | —             |   | —                            |   | —             |   | —                 |   | (9,713                                               | )      | (9,713    | )      | (9,713                           | )      |
| Transfers                        |   | —             |   | —                            |   | (4,300             | )      | 4,300                  |   | —                                               |   | —    |   |                             |   |
| Total comprehensive loss         |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   | (19,658                          | )      |
|                             |   |               |   |                              |   |               |   |                   |   |                                                 |   |      |   |                             |   |
| **Balance at December 31, 2002** |   | 823                |   | 152,901                           |   | 7                  |   | (5,645                 | )      | (24,054                                              | )      | 124,032   |   |                             |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements.*

 

F-7

----

 

**KAPPA PACKAGING GROUPNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.**                                      **Basis of presentation**

 

***Business***

 

Kappa Holding B.V. (the“Company”) and its subsidiaries in which it owns, directly or indirectly, acontrolling interest (“the Kappa Packaging Group” or “the Group”), isheadquartered in The Netherlands and is engaged in the manufacturing andmarketing of containerboard, solid board, corrugated packaging and solid boardpackaging across a wide range of product lines to a broad base ofcustomers.  The Group effectivelycommenced trading under the name ‘Kappa Packaging’ as per June 1, 1998.

 

On May 17, 2001, KappaPackaging completed the acquisition of AssiDomän’s containerboard andcorrugated packaging business (“Alpha”). Kappa Packaging opted to fully integrate these businesses into the Groupin order to achieve the optimal business and financial effects.

 

The Group has manufacturingfacilities and sales offices in The Netherlands, Germany, United Kingdom,Belgium, France, Poland, Norway, Czech Republic, the United States of America,Spain, Italy, Sweden, Denmark, Finland, Slovakia, Russia, Hungary, Lithuania,Switzerland, Norway and South Africa. Substantially all of the Group’s sales are realized in Europe.  See Note 32 for a summary ofsubsidiaries.

 

**2.**                                      **Summary of significant accounting policies**

 

***Basis of preparation***

 

The accompanying consolidatedfinancial statements are presented in euro and have been prepared in accordancewith accounting principles generally accepted in The Netherlands (‘Dutch GAAP’)on the historical cost basis.

 

These consolidated financialstatements differ in certain respects from the consolidated financialstatements and disclosures included in the Kappa Packaging Group Annual Report2002 furnished to Kappa Packaging Group’s shareholders. Among other things, theparent company (Kappa Holding B.V.) balance sheet and income statement andrelated disclosures are not included in these consolidated financialstatements. In addition, additional footnote disclosures have been added inorder for these consolidated financial statements to comply with the reportingand disclosure requirements of the US Securities and Exchange Commission.

 

Assets and liabilities arestated at cost when acquired or incurred unless indicated otherwise.

 

Where necessary, assets havebeen reduced by provisions to reflect diminution in value.

 

***Use of estimates***

 

The preparation of financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results may differ from theseestimates.

 

F-8

----

 

***Principles ofconsolidation***

 

The consolidated financialstatements include the accounts of the Company and the companies in which ithas a controlling interest (“Group companies”). Group companies are fullyconsolidated; minority interests in equity are shown separately.

 

The results and cash flows ofGroup companies and participations acquired or disposed of by the Group havebeen reflected from the date that controlling interest exists or until the dateof disposal. The results of Alpha have been consolidated as from May 17, 2001.

 

Intercompany accounts,transactions and unrealized profits have been eliminated.

 

***Foreigncurrencies – Transactions***

 

All transactions in foreigncurrencies are recorded at the rate of exchange prevailing at the transactiondate. Accounts receivable, cash and cash equivalents and liabilitiesdenominated in foreign currencies are translated at the exchange ratesprevailing at the balance sheet date. Foreign exchange gains and lossesresulting from transactions in foreign currencies are included in the profitand loss account, except for those transactions that are being hedged.  Foreign exchange gains and losses arising ontrading transactions are taken to operating result:  those arising on cash and cash equivalents, current investmentsand borrowings are taken to financial items. Gains and losses on currency carryforward contracts are deferred and included in income in the same period as theunderlying transaction that is being hedged.

 

***Foreigncurrencies – Consolidation principles***

 

Assets and liabilities offoreign Group companies in currencies other than euro are translated at therates prevailing at the balance sheet date. Income and expenses of foreignGroup companies are translated at the average exchange rates prevailing duringthe year. Translation gains and losses are recorded directly in accumulatedcomprehensive income.

 

Translation differences, net ofrelated taxation, arising from long-term loans to group companies are alsorecorded directly in accumulated comprehensive income.

 

The following translation ratesagainst the euro have been used (main currencies only):

 

| **Currency per €** |   | **December  31, 2002** |   | **Average  2002** |   | **December  31, 2001** |   | **Average  2001** |   | **December  31, 2000** |   | **Average  2000** |   |
|-------------------------|--------|------------------------|--------|-------------------|--------|------------------------|--------|-------------------|--------|------------------------|--------|-------------------|--------|
|                    |   |                   |   |              |   |                   |   |              |   |                   |   |              |   |
| SEK                     |   | 9.1408                 |   | 9.1813            |   | 9.2593                 |   | 9.0842            |   | 8.8610                 |   | 8.4441            |   |
| GBP                     |   | 0.6515                 |   | 0.6191            |   | 0.6098                 |   | 0.6237            |   | 0.6250                 |   | 0.6076            |   |
| USD                     |   | 1.0438                 |   | 0.9002            |   | 0.8850                 |   | 0.9023            |   | 0.9346                 |   | 0.9509            |   |
| CZK                     |   | 31.5956                |   | 31.2199           |   | 32.0513                |   | 34.4531           |   | 35.0877                |   | 35.8316           |   |
| SKK                     |   | 41.3223                |   | 42.6061           |   | 42.7899                |   | 43.4718           |   | 44.0513                |   | 42.3295           |   |

 

***Cash and cashequivalents***

 

The Group considers all highlyliquid instruments with maturity of three months or less to be cash and cashequivalents.  At December 31, 2002all cash and cash equivalents of the Group represents cash held with financialinstitutions. Cash and cash equivalents include a deposit in an escrow-accountof €5.0 million as at December 31, 2002, which will become available to theGroup on April 1, 2003. Bank overdrafts are classified under currentliabilities.

 

***Accounts receivable***

 

Accounts receivable are statedat face value, less an allowance for bad debts of €22.2 million and €27.1million at December 31, 2002 and 2001 respectively. Bad debt expense during theyears ended December 31, 2002, 2001 and 2000 were €6.7 million, €6.2 millionand €2.4 million respectively.

 

F-9

----

 

***Inventories***

 

Inventories are stated at thelower of cost or net realizable value with cost being determined by thefirst-in first-out (‘FIFO’) method. Finished goods inventory and work inprogress consists of the cost of raw materials and consumables, labor costs,depreciation, other direct costs and related production overhead. Inventoriesare reduced by a provision for obsolescence to reflect diminution in value of€12.4 million and €9.5 million at December 31, 2002 and 2001 respectively.Obsolescence expense during the years ended December 31, 2002 and 2001were €2.9 million and €(1.4) million respectively.

 

***Tangible fixedassets***

 

Tangiblefixed assets are stated at the acquisition cost, less accumulated depreciation.Costs include expenditures for major improvements and replacements and interestcosts associated with major construction projects.

Depreciationis calculated on the basis of acquisition price less residual value and theestimated useful life of the related asset on a straight-line basis.

 

The estimated useful lives are:

 

|                        |   | **Years** |   |
|-----------------------------|--------|-----------|--------|
| Buildings:                  |   |      |   |
| Portable buildings          |   | 3         |   |
| Metal buildings             |   | 15 - 20   |   |
| Brick buildings             |   | 30 - 40   |   |
| Plant and equipment         |   | 10 - 20   |   |
| Other tangible fixed assets |   | 3 - 10    |   |

 

Assets under construction(until placed in service) and land are not depreciated. When an asset is soldor otherwise disposed of, the cost and related accumulated depreciation areremoved from the accounts and any resulting gain or loss is included in income.

 

Spare parts that arespecifically attributable to certain machines or installations are capitalized.All other spare parts are charged to the profit and loss account as maintenanceexpense.

 

Tangible fixed assets operatedby the Group under financial lease agreements are capitalized, the cost ofwhich has been determined as the lower of the fair value of the leased propertyor the sum of the discounted value of future lease payments. The correspondingrental obligations, net of finance charges, are presented under liabilitieswith the interest element of the finance charge being taken to income over thelease period. Tangible fixed assets acquired under financial lease agreementsare depreciated over the lesser of the estimated useful life of the asset orthe lease period.

 

***Intangible fixedassets***

 

Goodwill has been recognized onacquisitions, accounted for, using the purchase method, as the excess of the purchaseprice over the fair value of the net assets acquired. Goodwill is onlyrecognized on acquisitions occurring after December 31, 1996, when thepredecessor of the Group changed its accounting policy related to the treatmentof goodwill.  Prior to this date,goodwill was written off directly to equity. Goodwill is now capitalized and amortized on a straight-line basis overits estimated useful life of 40 years. The assessment of 40 years is based upon the consideration that apermanent advantage is being realized mainly because of high entry-barriers tothe market.

 

Software development costsassociated with identified and unique products, which will be controlled by theGroup and have future economic benefits extending beyond one year, arerecognized as an intangible fixed asset. Software development costs recognized as intangible fixed assets areamortized using the straight-line method over their useful lives, not exceedinga period of three years.

 

F-10

----

 

Other intangible fixed assetsmainly relate to consultancy projects, which management believes will provide afuture benefit to the Group. These costs are amortized using the straight-linemethod over their estimated useful lives, not exceeding a period of five years.

 

***Impairmentof long-lived assets***

 

The carrying values oflong-lived assets are reviewed at each balance sheet date, to determine whetherthere is any indication of impairment. If any such indication exists, therecoverable amount of the asset is estimated, being the higher of the asset’snet selling price and its value in use. The value in use is based on the totalof the discounted cash flows to be derived from that asset. An impairment lossis recognized when the carrying value of an asset exceeds the recoverableamount of the asset.

 

A previously recognizedimpairment loss on tangible fixed assets is reversed when there has been achange in the estimates used to determine the recoverable amount, but not,however, to an extent higher then the carrying amount that would have beendetermined had no impairment loss been recognized in prior years.

 

For goodwill, a recognizedimpairment loss is not reversed unless the impairment loss was caused by aspecific external event of an exceptional nature that is not expected to recurand subsequent external events have occurred which reverse the effect of thatevent.

* *

***Other non-currentassets***

 

Associated companies, beingthose companies in which significant influence but not control is exercisedover the business and financial policies, are valued to reflect the Group’sshare in the associated company’s equity, determined in accordance with theGroup’s accounting principles. Other participations, being those companies inwhich no significant influence is exercised, are valued at the lower of costand net realizable value.

 

Other non-current assetsinclude participations, receivables with financing characteristics due fromparticipations, deferred tax assets and capitalized financing charges. Thecapitalized financing charges are stated at cost and are being amortized overthe term of the related debt*.*

 

***Derivativefinancial instruments***

 

The estimated fair value ofderivative financial instruments is determined using quoted market prices, ormarket pricing models.  Gains and losseson derivative financial instruments that meet the criteria for hedgeaccounting, including those on terminated contracts, are deferred and includedin income in the same period that the hedged transaction is realized.  Realized gains and losses and unrealizedlosses on instruments not meeting the criteria for hedge accounting treatmentare included in income.  Any differencesbetween amounts paid or received on interest rate swap agreements arerecognized as adjustments to interest expense over the life of each swap,thereby adjusting the interest rate on the hedged obligation.  In the event that the hedged transactionterminates, the deferred gains or losses on the associated derivative will berecorded in the income statement.  Optionpremiums paid on swaptions are recorded as an asset and amortized over the lifeof the swap.

 

***Concentrationof credit risk***

 

Financial instruments thatpotentially subject the Group to concentrations of credit risk consistprincipally of cash investments, foreign currency exchange contracts and tradeaccounts receivable.  The Group placesits cash and investments and executes its foreign currency exchange contractswith major commercial banks with investment grade ratings.

 

Concentration of credit risk withrespect to trade receivables is generally limited due to the large number ofcustomers and their dispersion across geographic areas.

 

F-11

----

 

***Pensionprovisions***

 

In general, personnel employedare entitled to pension benefits that supplement state-provided social securitybenefits. Pension or other retirement plans have been established in accordancewith regulations and practices of the countries in which the plans are located.Most of the plans are administered by separate pension funds or life insurancecompanies.

 

The benefits of the plans arebased primarily on years of service and average or final pay formula. Incountries where contributions are made, the amount of the contribution takesaccount of increases in pension rights in line with the development of wagesand inflation, as well as of the return achieved by the pension funds in excessof the actuarial interest rate.

 

The Group operates majorpension plans in The Netherlands, United Kingdom, Germany and Sweden.

In The Netherlands and UnitedKingdom mainly defined benefit plans are administered by separate pension fundscovering substantially all employees in those two countries.

The retirement plans in Germanyare mainly defined benefit plans and are provided for by the company (bookreserves).

In Sweden, the Group operatesdefined benefit and defined contribution plans. Some of these plans areexternally insured, others are provided for by the company (book reserves).

 

The provisions for pensions andsimilar commitments (relating primarily to non-reinsured pension entitlements,past-service premiums falling due in the future and commitments to formeremployees), are accrued at an actuarial-determined value.

 

***Deferredtax assets and liabilities***

 

Deferred tax assets andliabilities are established for temporary differences in the valuation ofassets and liabilities for reporting and fiscal purposes and for loss carryforwards.

 

Deferred taxes are stated atnominal value and are determined using the local tax rates prevailing on thebalance sheet date. Within tax groups, where the exercise periods permit,deferred tax assets and liabilities are netted. Net deferred tax assets arerecognized to the extent that it is probable that future taxable profits willbe available against which unused tax losses can be utilized and are presentedin the balance sheet under ‘financial fixed assets’. Net deferred taxliabilities are presented under ‘provisions’.

 

***Restructuringprovisions and other provisions***

 

Restructuring provisions andother provisions are recognized when the Group has a present legal orconstructive obligation as a result of past events, it is probable that anoutflow of resources will be required to settle the obligation and a reliableestimate of the amount of the obligation can be made.

 

Other provisions includeenvironmental provisions, maintenance provisions and provisions for claims,disputes and legal proceedings.

 

F-12

----

 

***Revenue recognition***

 

Net sales represent theinvoiced value of deliveries to third parties, less discounts, commissions andsales tax. Sales are recognized when the risk and rewards of ownership of theproduct are transferred to the customer, generally meaning that sales are recordedupon shipment of goods to customers in accordance with agreed terms of sale.

 

Costs of sales are matched withthe related sales.

 

Other income and expenses arerecorded in the period in which they originate.

 

***Shippingand handling costs***

 

Shipping and handling costs areexpensed as incurred.  The amountscharged to expense as part of external services during the years ended December31, 2002, 2001 and 2000 were €240.3 million, €190.7 million and €113.7 millionrespectively.

 

***Advertising costs***

 

Advertising and promotionalcosts are expensed as incurred.  Theamounts charged to expense as part of other operating costs during the yearsended December 31, 2002, 2001 and 2000 were €9.0 million, €9.3 million and €4.4million respectively.

 

***Research and development***

 

Costs for research anddevelopment activities are expensed as incurred, except for softwaredevelopment costs.  The amounts chargedto operating expenses during the years ended December 31, 2002, 2001 and 2000were €5.3 million, €4.8 million and €4.4 million respectively.

 

***Environmentalexpenditures***

 

Environmental expendituresresulting from the remediation of an existing condition caused by pastoperations, and which do not contribute to current or future revenues, areexpensed as incurred. The Group provides for environmental expenditures, basedon management decisions and current interpretations of environmental laws andregulations, when it is probable that a present obligation has arisen and theamount of such liability can be reasonably estimated. Provisions are notdiscounted or reduced for potential recoveries from third parties.

 

***Incomefrom participations***

 

Income from participationsinclude the Group’s proportionate share in the results of joint ventures andcompanies deemed to be associated companies together with dividends receivedfrom other participations.

 

***Incometaxes***

 

The amount of income taxincluded in the statements of income is based upon income before tax inaccordance with the prevailing regulations and rates, taking into account timingdifferences and permanent differences between income for book purposes and fortax purposes. Deferred tax assets and liabilities arising from temporarydifferences between the value of assets and liabilities for reporting and taxpurposes are calculated on the basis of the current rates of income tax.  Deferred tax assets are also recognized ontax loss carry forwards.

 

Valuation allowances areestablished on deferred tax assets when management estimates that it is morelikely than not that the related benefit will not be realized.

 

F-13

----

 

***Extraordinaryincome and expense***

 

Extraordinary income andexpense include gains and losses that are not related to normal businessoperations of the Group.

 

***Cashflow statement***

 

The cash flow statement has been prepared applying the indirectmethod.  The cash and cash equivalentsin the cash flow statement comprise the balance sheet item cash and cashequivalents.  Cash flows in foreigncurrencies have been translated at average exchange rates.  Exchange differences affecting cash itemsare shown separately in the cash flow statement.  Income and expenses in respect of interest and taxation onprofits are included in the net cash flow from operating activities.  The cash flow is prepared in compliance withDutch GAAP and International Financial Reporting Standards.

 

**3.**                                      **Acquisitions**

 

In 2001 the Group acquiredAlpha, the containerboard and corrugated packaging businesses of AssiDomän. Theresults of operations of these businesses are included in the statement ofincome as from May 17, 2001.

 

The acquisition was accountedfor using the purchase method of accounting. Accordingly, the cost of theacquisition was allocated to identifiable assets and liabilities based on theirestimated fair values. Total purchase price of the acquisition of Alpha was€1,120.9 million, including acquisition expenses, of which the amount allocatedto goodwill was €218.8 million, after the application of adjustments to thefair market value of €13.5 million in 2002, as a result of which the fairmarket value increased from €387.7 million to €401.2 million. Goodwill from theacquisition is amortized on a straight-line basis over 40 years.

 

In addition, in 2001 the Groupincreased its participation in Kappa Štúrovo a.s., Slovakia, from 94.5% to98.5% for €2.3 million.

 

The allocation of the totalpurchase price for the acquisitions was as follows:

 
|                                                   |   | **(€ in  millions)** |   |
|--------------------------------------------------------|--------|---------------------------|--------|
|                                                   |   |                      |   |
| Total purchase price                                   |   | 1,116.4                   |   |
| Acquisition expenses                                   |   | 6.8                       |   |
|                                                   |   |                      |   |
| Total purchase price, including acquisition  expenses  |   | 1,123.2                   |   |
| Less:   Liabilities acquired                      |   | (503.2                    | )      |
|                                                   |   |                      |   |
| Total purchase price, net of acquired  liabilities     |   | 620.0                     |   |
| Less:   Fair market value                         |   | (401.2                    | )      |
|                                                   |   |                      |   |
| Excess of total purchase price over fair  market value |   | 218.8                     |   |
|                                                   |   |                      |   |
| Goodwill                                               |   | 218.8                     |   |

 

In order to finance theacquisition of Alpha, the Group raised €1,505.0 million under new Senior CreditFacilities by issuance of Senior Debt, €100.0 million by issuance of SeniorSubordinated Notes, €299.4 million by issuance of Shareholders’ loans and €0.6million by issuance of ordinary shares.

 

F-14

----

 

The following unaudited proforma summary presents the consolidated results of operations of the Group asif the acquisition had occurred on January 1, 2001 of the respective year andincludes the consequences of financing. This pro forma summary does not necessarily reflect the results ofoperations, as they would have been if the acquisition had been completed as ofJanuary 1, 2001 and is not necessarily indicative for future results.

 
|                                  |   | **(€ in  millions)**   |   |
|---------------------------------------|--------|-----------------------------|--------|
|                                  |   | **December 31,  2001** |   |
|                                  |   |                        |   |
| Sales                                 |   | 2,994.8                     |   |
| Net income before extraordinary items |   | 28.4                        |   |
| Net income                            |   | 15.4                        |   |

 

**4.**                                      **Other receivables**

 
|                               |   | **(€ in  millions)**   |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                               |   |                        |   |   |   |
| Prepayments and accrued income     |   | 19.2                        |   | 18.0 |   |
| Corporate income tax               |   | 3.9                         |   | 5.2 |   |
| Other taxation and social security |   | 17.9                        |   | 13.3 |   |
| Other                              |   | 14.5                        |   | 35.9 |   |
|                               |   | 55.5                        |   | 72.4 |   |

 

**5.**                                      **Inventories**

 
|                       |   | **(€ in  millions)**   |   |
|----------------------------|--------|-----------------------------|--------|
|                       |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                       |   |                        |   |   |   |
| Raw materials              |   | 105.8                       |   | 98.9 |   |
| Work in progress           |   | 18.1                        |   | 19.8 |   |
| Finished goods             |   | 144.0                       |   | 132.3 |   |
| Prepayments on inventories |   | 4.3                         |   | 2.4 |   |
|                       |   | 272.2                       |   | 253.4 |   |

 

See Note 30 for the relatedinventory obsolescence reserve.

 

F-15

----

 

**6.**                                      **Tangible fixed assets**

 
|                                |   | **(€ in  millions)** |   |
|-------------------------------------|--------|---------------------------|--------|
|                                |   | **Land**                  |   | **Buildings** |   | **Plant,  equipment  and other** |   | **Total** |   |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2000:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 97.8                      |   | 247.6 |   | 793.4 |   | 1,138.8 |   |
| Accumulated depreciation            |   | —                    |   | (37.0 | ) | (226.8 | ) | (263.8 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net book value                      |   | 97.8                      |   | 210.6 |   | 566.6 |   | 875.0 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |
| Acquisitions                        |   | 56.8                      |   | 209.6 |   | 524.7 |   | 791.1 |   |
| Net investment                      |   | —                    |   | 19.8 |   | 134.8 |   | 154.6 |   |
| Translation                         |   | —                    |   | 4.6 |   | (1.6 | ) | 3.0 |   |
| Depreciation                        |   | —                    |   | (24.2 | ) | (128.2 | ) | (152.4 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net changes                         |   | 56.8                      |   | 209.8 |   | 529.7 |   | 796.3 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2001:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 154.6                     |   | 475.1 |   | 1,408.4 |   | 2,038.1 |   |
| Accumulated depreciation            |   | —                    |   | (54.7 | ) | (312.1 | ) | (366.8 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net book value at December 31, 2001 |   | 154.6                     |   | 420.4 |   | 1,096.3 |   | 1,671.3 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |
| Fair value adjustments              |   | —                    |   | 3.2 |   | — |   | 3.2 |   |
| Financial leases                    |   | —                    |   | 0.3 |   | 8.5 |   | 8.8 |   |
| Transfers                           |   | —                    |   | 18.9 |   | (13.1 | ) | 5.8 |   |
| Net investment                      |   | 2.3                       |   | 6.6 |   | 153.2 |   | 162.1 |   |
| Translation                         |   | 0.1                       |   | (5.8 | ) | (3.0 | ) | (8.7 | ) |
| Depreciation                        |   | —                    |   | (27.6 | ) | (140.2 | ) | (167.8 | ) |
| Impairment charges                  |   | (1.5                      | )      | (6.2 | ) | (12.3 | ) | (20.0 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net changes                         |   | 0.9                       |   | (10.6 | ) | (6.9 | ) | (16.6 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2002:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 157.0                     |   | 492.6 |   | 1,515.6 |   | 2,165.2 |   |
| Accumulated depreciation            |   | (1.5                      | )      | (82.8 | ) | (426.2 | ) | (510.5 | ) |
| Net book value at December 31, 2002 |   | 155.5                     |   | 409.8 |   | 1,089.4 |   | 1,654.7 |   |

 

The book value of tangiblefixed assets held under finance lease amounts to €8.4 million as at December31, 2002 (2001:  €0 million).

 

F-16

----

 

**7.**                                      **Intangible fixed assets**

 
|                                |   | **(€ in  millions)** |   |
|-------------------------------------|--------|---------------------------|--------|
|                                |   | **Goodwill**              |   | **Software  develop-  ment  costs** |   | **Other** |   | **Total** |   |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 1999:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 727.0                     |   | — |   | 5.4 |   | 732.4 |   |
| Accumulated amortization            |   | (29.4                     | )      | — |   | (0.9 | ) | (30.3 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net book value at December 31, 1999 |   | 697.6                     |   | — |   | 4.5 |   | 702.1 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |
| Additions                           |   | 23.9                      |   | 1.9 |   | — |   | 25.8 |   |
| Amortization                        |   | (18.7                     | )      | — |   | (1.2 | ) | (19.9 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net changes                         |   | 5.2                       |   | 1.9 |   | (1.2 | ) | 5.9 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2000:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 750.9                     |   | 1.9 |   | 5.4 |   | 758.2 |   |
| Accumulated amortization            |   | (48.1                     | )      | — |   | (2.1 | ) | (50.2 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net book value at December 31, 2000 |   | 702.8                     |   | 1.9 |   | 3.3 |   | 708.0 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |
| Additions                           |   | 232.3                     |   | 5.7 |   | 2.2 |   | 240.2 |   |
| Amortization                        |   | (22.1                     | )      | — |   | (1.5 | ) | (23.6 | ) |
| Translation differences             |   | 0.2                       |   | — |   | — |   | 0.2 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Net changes                         |   | 210.4                     |   | 5.7 |   | 0.7 |   | 216.8 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2001:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 983.4                     |   | 7.6 |   | 7.6 |   | 998.6 |   |
| Accumulated amortization            |   | (70.2                     | )      | — |   | (3.6 | ) | (73.8 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net book value at December 31, 2001 |   | 913.2                     |   | 7.6 |   | 4.0 |   | 924.8 |   |
|                                |   |                      |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |
| Additions                           |   | —                    |   | 2.1 |   | 0.2 |   | 2.3 |   |
| Fair value adjustments              |   | (13.5                     | )      | — |   | — |   | (13.5 | ) |
| Amortization                        |   | (24.7                     | )      | (3.3 | ) | (2.7 | ) | (30.7 | ) |
| Translation differences             |   | (0.8                      | )      | — |   | — |   | (0.8 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| Net changes                         |   | (39.0                     | )      | (1.2 | ) | (2.5 | ) | (42.7 | ) |
|                                |   |                      |   |   |   |   |   |   |   |
| **At December 31, 2002:**           |   |                      |   |   |   |   |   |   |   |
| Cost                                |   | 969.1                     |   | 9.7 |   | 2.4 |   | 981.2 |   |
| Accumulated amortization            |   | (94.9                     | )      | (3.3 | ) | (0.9 | ) | (99.1 | ) |
| Net book value at December 31, 2002 |   | 874.2                     |   | 6.4 |   | 1.5 |   | 882.1 |   |

 

F-17

----

 

The goodwill movements perreportable segment during 2002 can be specified as follows:

 
|                                |   | **(€ in  millions)** |   |
|-------------------------------------|--------|---------------------------|--------|
|                                |   | **Total**                 |   | **Paper  & Board** |   | **Packaging** |   |
|                                |   |                      |   |   |   |   |   |
| Balance at January 1, 2002          |   | 913.2                     |   | 772.4 |   | 140.8 |   |
|                                |   |                      |   |   |   |   |   |
| Fair value adjustments acquisitions |   | (13.5                     | )      | (3.2 | ) | (10.3 | ) |
| Amortization                        |   | (24.7                     | )      | (21.1 | ) | (3.6 | ) |
| Translation                         |   | (0.8                      | )      | (0.8 | ) | — |   |
| Balance at December 31, 2002        |   | 874.2                     |   | 747.3 |   | 126.9 |   |

 

Goodwillis amortized on a straight-line basis over the estimated useful life of 40years. Goodwill amortization charges on an annual basis will be approximately€25.0 million for the coming five years.

 

F-18

----

 

**8.**                                      **Other non-current assets**

 
|                                |   | **(€ in  millions)** |   |
|-------------------------------------|--------|---------------------------|--------|
|                                |   | **Finance  Charges**      |   | **Partici-  pations** |   | **Receivables  from  partici-  pations** |   | **Deferred  tax assets** |   | **Other  receivables** |   | **Total** |   |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **At December 31, 2000:**           |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Cost                                |   | 42.4                      |   | 3.5 |   | 0.3 |   | — |   | 2.4 |   | 48.6 |   |
| Accumulated amortization            |   | (8.5                      | )      | — |   | — |   | — |   | — |   | (8.5 | ) |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net book value at December 31, 2000 |   | 33.9                      |   | 3.5 |   | 0.3 |   | — |   | 2.4 |   | 40.1 |   |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Acquisitions                        |   | —                    |   | 3.1 |   | — |   | — |   | 6.8 |   | 9.9 |   |
| Additions                           |   | 76.5                      |   | 0.1 |   | 0.3 |   | 5.7 |   | 1.8 |   | 84.4 |   |
| Disposals                           |   | (22.0                     | )      | — |   | — |   | — |   | — |   | (22.0 | ) |
| Redemptions                         |   | —                    |   | — |   | (0.2 | ) | — |   | (0.6 | ) | (0.8 | ) |
| Share of results                    |   | —                    |   | (1.9 | ) | — |   | — |   | — |   | (1.9 | ) |
| Dividend received                   |   | —                    |   | (0.3 | ) | — |   | — |   | — |   | (0.3 | ) |
| Amortization                        |   | (7.4                      | )      | — |   | — |   | — |   | — |   | (7.4 | ) |
| Transfers                           |   | 0.2                       |   | — |   | — |   | — |   | (0.2 | ) | — |   |
| Translation differences             |   | —                    |   | (0.1 | ) | — |   | — |   | (0.3 | ) | (0.4 | ) |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net changes                         |   | 47.3                      |   | 0.9 |   | 0.1 |   | 5.7 |   | 7.5 |   | 61.5 |   |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **At December 31, 2001*:***         |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Cost                                |   | 97.2                      |   | 4.4 |   | 0.4 |   | 5.7 |   | 9.9 |   | 117.6 |   |
| Accumulated amortization            |   | (16.0                     | )      | — |   | — |   | — |   | — |   | (16.0 | ) |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net book value at December 31, 2001 |   | 81.2                      |   | 4.4 |   | 0.4 |   | 5.7 |   | 9.9 |   | 101.6 |   |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Changes in net book value:          |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Additions                           |   | 0.6                       |   | — |   | — |   | — |   | 0.8 |   | 1.4 |   |
| Redemptions                         |   | —                    |   | — |   | — |   | — |   | (3.1 | ) | (3.1 | ) |
| Share of results                    |   | —                    |   | 0.3 |   | — |   | — |   | — |   | 0.3 |   |
| Dividend received                   |   | —                    |   | (0.5 | ) | — |   | — |   | — |   | (0.5 | ) |
| Amortization                        |   | (11.3                     | )      | — |   | — |   | — |   | — |   | (11.3 | ) |
| Transfers                           |   | —                    |   | (0.9 | ) | (0.3 | ) | 6.3 |   |   |   | 5.1 |   |
| Translation differences             |   | —                    |   | — |   | — |   | — |   | 0.1 |   | 0.1 |   |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Net changes                         |   | (10.7                     | )      | (1.1 | ) | (0.3 | ) | 6.3 |   | (2.2 | ) | (8.0 | ) |
|                                |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **At December 31, 2002*:***         |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Cost                                |   | 98.1                      |   | 3.3 |   | 0.1 |   | 12.0 |   | 7.7 |   | 121.2 |   |
| Accumulated amortization            |   | (27.6                     | )      | — |   | — |   | — |   | — |   | (27.6 | ) |
| Net book value at December 31, 2002 |   | 70.5                      |   | 3.3 |   | 0.1 |   | 12.0 |   | 7.7 |   | 93.6 |   |

 

F-19

----

 

Thefinance charges relate to the deferred debt issuance costs of the SeniorSubordinated Notes and senior credit facilities.  During 2001, €76.5 million of financing costs related to theissuance of new Senior Debt (€1,505.0 million) and Senior Subordinated Notes(€100.0) were capitalized.  Theremaining book value as at May 17, 2001 of the capitalized financing costsrelated to the refinanced Senior Debt issued in 1998 of €22.0 million waswritten off against extraordinary items.

 

Participationsand receivables from participations represent investments in and loans toaffiliated companies of which the Group owns a 20% - 50% interest and areaccounted for under the equity method.

 

Deferredtax assets are further detailed in Note 11.

 

**9.**                                      **Other current liabilities**

 
|                             |   | **(€ in  millions)**   |   |
|----------------------------------|--------|-----------------------------|--------|
|                             |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                             |   |                        |   |   |   |
| Accounts payable                 |   | 291.3                       |   | 239.5 |   |
| Social charges and taxes payable |   | 38.0                        |   | 42.6 |   |
| Other liabilities                |   | 9.5                         |   | 18.1 |   |
| Accrued labor costs              |   | 61.4                        |   | 46.9 |   |
| Accrued interest expenses        |   | 28.8                        |   | 29.4 |   |
| Accrued external services        |   | 26.5                        |   | 19.1 |   |
| Other accrued expenses           |   | 51.6                        |   | 86.4 |   |
|                             |   | 507.1                       |   | 482.0 |   |

 

The amount of income taxincluded in social charges and taxes payable is €4.6 million as at December 31,2002

(2001:  €12.7million).

 

**10.**                               **Provisions**

 
|                               |   | **(€ in  millions)**   |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                               |   |                        |   |   |   |
| Accrued pensions                   |   | 113.0                       |   | 112.5 |   |
| Deferred tax liabilities           |   | 107.3                       |   | 118.3 |   |
| Restructuring and other provisions |   | 52.0                        |   | 88.1 |   |
|                               |   | 272.3                       |   | 318.9 |   |

 

Deferredtaxes are detailed in Note 11 hereafter.

 

Detailsof the restructuring and other provisions are set out below:

 
|                     |   | **(€ in  millions)**   |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                     |   |                        |   |   |   |
| Restructuring provisions |   | 32.7                        |   | 59.7 |   |
| Other provisions:        |   |                        |   |   |   |
| - Environmental          |   | 6.3                         |   | 10.5 |   |
| - Insurance              |   | 5.0                         |   | 10.2 |   |
| - Other                  |   | 8.0                         |   | 7.7 |   |
|                     |   | 52.0                        |   | 88.1 |   |

 

F-20

----

 

The movements in therestructuring and other provisions are as follows:

 
|                                  |   | **(€ in  millions)** |   |
|---------------------------------------|--------|---------------------------|--------|
|                                  |   | **Total**                 |   | **Restructuring  provisions** |   | **Other  provisions** |   |
|                                  |   |                      |   |   |   |   |   |
| Balance at January 1, 2002            |   | 88.1                      |   | 59.7 |   | 28.4 |   |
|                                  |   |                      |   |   |   |   |   |
| Fair value adjustments acquisitions   |   | (2.2                      | )      | 0.4 |   | (2.6 | ) |
| Withdrawals                           |   | (39.5                     | )      | (38.7 | ) | (0.8 | ) |
| Additions charged to operating result |   | 6.4                       |   | 11.3 |   | (4.9 | ) |
| Transfer to other current liabilities |   | (0.8                      | )      | — |   | (0.8 | ) |
| Balance at December 31, 2002          |   | 52.0                      |   | 32.7 |   | 19.3 |   |

 

Restructuring and otherprovisions were reduced by €2.2 million, following fair value adjustments maderelating to the acquisition of Alpha in 2001.

 

Payments from restructuring andother provisions for the year ended December 31, 2002 were €39.5 million(2001:  €42.6 million). Payments in 2002mainly related to the close down of two corrugated production plants in Germanyin 2001 (Kappa Wellpappe Hilden and Kappa Isar Wellpappe) and the restructuringof Kappa Empee (Eindhoven, The Netherlands).

 

In 2002, €11.3 million wasadded to the restructuring provisions against operating result mainly as aresult of the decision to reduce the total number of employees during 2003 byapproximately 400 for which a provision was made of €12.0 million. From otherprovisions, €4.9 million was released against operating result in 2002 mainlyas a result of the release of €5.0 million from the insurance provision againstinsurance costs (see below).

 

Included in the restructuringand other provisions is €34.8 million and €39.0 million, which represents thecurrent portion at December 31, 2002 and 2001, respectively.

 

*Restructuring*

 

The restructuring provisionsmainly relate to provisions for plant restructurings following the acquisitionand subsequent integration of Alpha. The plant restructuring includesreductions in the number of staff and plant closures.

 

*Environmental*

 

The Group experienced certainenvironmental costs, which will remediate pursuant to constructive obligations.

 

*Insurance*

 

In 1999, three of the Group’soperating plants experienced fire damage. As a result of the damage, aprovision was set up in 1999 of €18.6 million against insurance proceedsreceived for expected increased insurance costs for future years related tothese damages. The remaining balance as at December 31, 2002 of €5.0 million(2001:  €10.2 million) will be releasedin 2003.

 

*Other*

 

Other provisions mainly relateto legal matters (2002:  €5.2 millionand 2001:  €3.4 million) and maintenancecosts of gas turbines, which will be incurred about once every three years(2002:  €2.6 million and 2001:  €2.5 million).

 

F-21

----

 

**11.**                               **Deferred taxes**

 

Significant components of theGroup’s deferred tax assets and liabilities are as follows:

 
|                                 |   | **(€ in  millions)** |   |
|--------------------------------------|--------|---------------------------|--------|
|                                 |   | **December  31, 2002**    |   | **December  31, 2001** |   |
| **Deferred tax assets**              |   |                      |   |   |   |
| Financial fixed assets               |   | 12.8                      |   | 9.7 |   |
| Provisions                           |   | 4.3                       |   | 14.9 |   |
| Other                                |   | 17.9                      |   | 20.4 |   |
|                                 |   |                      |   |   |   |
| Operating losses carried forward     |   | 119.7                     |   | 85.4 |   |
| Less:   valuation allowances    |   | (47.8                     | )      | (54.4 | ) |
|                                 |   |                      |   |   |   |
| Net operating losses carried forward |   | 71.9                      |   | 30.9 |   |
|                                 |   |                      |   |   |   |
|                                 |   | 106.9                     |   | 76.0 |   |
| **Deferred tax liabilities**         |   |                      |   |   |   |
| Tangible fixed assets                |   | (149.7                    | )      | (134.9 | ) |
| Goodwill                             |   | (28.0                     | )      | (25.9 | ) |
| Other                                |   | (24.5                     | )      | (27.9 | ) |
|                                 |   |                      |   |   |   |
| **Net deferred tax liabilities**     |   | (95.3                     | )      | (112.7 | ) |

 

Net deferred tax liabilitiesare presented as follows:

 
|                             |   | **(€ in  millions)** |   |
|----------------------------------|--------|---------------------------|--------|
|                             |   | **December  31, 2002**    |   | **December  31, 2001** |   |
|                             |   |                      |   |   |   |
| Financial fixed assets           |   | 12.0                      |   | 5.7 |   |
| Provisions                       |   | (107.3                    | )      | (118.4 | ) |
| **Net deferred tax liabilities** |   | (95.3                     | )      | (112.7 | ) |

 

Valuation allowances have beenrecognized against the net operating losses carried forward, after offset oftiming differences, mainly for a German subsidiary (Holfelder) and the Germanand UK Holding companies, since it is uncertain that these net operating lossescarried forward will be fully utilized.

 

The Group has operating losscarry forwards as at December 31, 2002 of €402 million. Expiration isapproximately as follows:

 
|                                      |   | **(€ in  millions)** |   |
|-------------------------------------------|--------|---------------------------|--------|
| Limited:                                  |   |                      |   |
| -   2003                   |   | 3                         |   |
| -   2004    2008 |   | 54                        |   |
| -   Beyond 2008            |   | 11                        |   |
| Unlimited:                                |   | 334                       |   |
| Total                                     |   | 402                       |   |

 

F-22

----

 

**12.**                               **Borrowings and Debt**

 
|                                                     |   | **(€ in  millions)**   |   |
|----------------------------------------------------------|--------|-----------------------------|--------|
|                                                     |   | **December 31,  2002** |   | **December 31,  2001** |   |
|                                                     |   |                        |   |   |   |
| **Short-term:**                                          |   |                        |   |   |   |
| Bank overdraft under revolving credit  facility          |   | 1.4                         |   | 19.8 |   |
|                                                     |   |                        |   |   |   |
| **Long-term:**                                           |   |                        |   |   |   |
| Term loan facilities:                                    |   |                        |   |   |   |
| Tranche A                                                |   | 653.1                       |   | 728.6 |   |
| Tranche B                                                |   | 375.0                       |   | 375.0 |   |
| Tranche C                                                |   | 375.0                       |   | 375.0 |   |
| Senior subordinated notes                                |   | 685.5                       |   | 671.7 |   |
| Other                                                    |   | 5.3                         |   | 8.9 |   |
|                                                     |   |                        |   |   |   |
| Total long-term loans                                    |   | 2,093.9                     |   | 2,159.2 |   |
| Other long-term liabilities                              |   | 15.3                        |   | 2.8 |   |
|                                                     |   |                        |   |   |   |
| Total long-term liabilities                              |   | 2,109.2                     |   | 2,162.0 |   |
| Current portion of long-term liabilities                 |   | (107.4                      | )      | (78.9 | ) |
| Total long-term liabilities (excluding  current portion) |   | 2,001.8                     |   | 2,083.1 |   |

 

***SeniorCredit Facilities***

 

On May 17, 2001, the KappaPackaging Group entered into senior credit facilities of €1,755.0 million (now€1,653.1 million after amortization payments), to finance the acquisition ofAlpha and to refinance the previous senior credit facility.  These facilities include €1,505.0 millionof term loan facilities, as well as a revolving credit facility, which providesup to an aggregate of €250.0 million.

 

All material fixed assets,accounts receivable, inventories and cash and cash equivalents of the Group arepledged as security on the senior credit facilities.  Assets acquired in the future may be required to be included asadditional security on the facilities. The senior credit facility agreement imposes limitations on somefinancing and investing activities of the Group and requires adherence to thefollowing financial covenants:  interestcover ratios of earnings before interest, income tax, depreciation andamortization (“EBITDA”) to senior debt net interest and total net cashinterest; total fixed charge ratios of cash flow to senior debt service andtotal debt service; leverage ratio of net borrowings to EBITDA and annualcapital expenditures.  At December 31,2002 the Company was in compliance with all debt covenants.

 

*Term loan facilities (‘Senior Debt’)*

The Group is required to repaythe remaining debt as at December 31, 2002 of €1,403.1 million under theterm loan facilities based on the specific repayment terms for each Tranche.Tranche A of originally €755.0 million is repayable in escalatingsemi-annual installments from the years 2001 to 2007; the outstanding balanceas at December 31, 2002 amounts to €653.1 million. Tranche B of€375.0 million is repayable in full in 2008. Tranche C of€375.0 million is repayable in full in the year 2009. Prepayments of thefacilities are possible, and in certain cases prepayments of the loans will berequired.

 

The applicable interest ratesare LIBOR plus a maximum interest rate spread of 225 basis points on Tranche A,275 basis points on Tranche B and 350 basis points on Tranche C. Based on theinterest cover ratio, the spread on Tranche A may be adjusted downwards. Theweighted average interest rate for the term loan facilities was 6.6% atDecember 31, 2002 (2001:  6.0%;2000:  6.9%). The interest charge forthe year ended December 31, 2002 was €104.1 million (2001:  €87.6 million; 2000:  €42.3 million).

 

F-23

----

 

*Revolving credit facility and bank overdrafts*

This credit facility isavailable for general corporate purposes such as letters of credit, short-termcash advances and ancillary facilities. The letter of credit fee assessed onissued letters of credit under the revolving credit facility is 2.125% as atDecember 31, 2002, the interest rate on the short term cash advances is LIBORplus 2.125% and in general no fees are payable on the ancillary facilities.

 

The total amount of bankoverdraft facilities guaranteed under the revolving credit facility amounts to€26.9 million at December 31, 2002 (2001: €81.0 million), including:  shortterm borrowings under various bank overdraft facilities of €1.4 million(2001:  €19.8 million), bank guaranteesissued to third parties of €8.1 million (2001: €10.4 million) and unallocated available credit facilities of €17.4million (2001:  €50.8 million).

 

The interest charge onshort-term borrowings under bank overdraft facilities for the year endedDecember 31, 2002 was €1.4 million (2001: €4.3 million; 2000:  €6.4million).

 

***SeniorSubordinated Notes***

 

*Senior Subordinated Notes (1999)*

The Group issued SeniorSubordinated Notes on July 23, 1999 in three tranches, all maturing on July 15,2009.  The interest rates are 105/8%for the euro (€370.0 million) and US dollar-denominated Senior SubordinatedNotes (€95.1 million) and 121⁄2% for the euro-denominated seniorsubordinated discount notes (€106.6 million). These Senior Subordinated Notes were issued at €544.4 million and forthe accumulated period ended December 31, 2002 a principal of€41.1 million was accredited on the discount notes.

 

The interest on the notes ispayable semi-annually on January 15 and July 15.  On the senior subordinated discount notes, non cash interestshall accrue until July 15, 2004.  Afterthis date, interest is payable semi-annually.

 

The interest charge on theSenior Subordinated Notes for the year ended December 31, 2002 was €62.8million (2001:  €61.2 million;2000:  €59.8 million).

 

Subject to certainrestrictions, the Group can redeem the notes in whole or in part prior to thedate of maturity.  If an event ofdefault occurs, the holders of the notes can require the Group to redeem thenotes.

 

The notes are seniorsubordinated unsecured indebtedness. The notes rank effectively subordinated to the Group’s senior and otherindebtedness and rank senior to the Company’s Shareholders’ loans.

 

*Senior Subordinated Notes (2001)*

The euro-denominated SeniorSubordinated Notes, issued in 2001 in the amount of €100.0 million, mature onJuly 15, 2009.  The interest rate is 121⁄2% per year, payable semi-annually.  Theinterest charge on the Senior Subordinated Notes for the year ended December31, 2002 was €12.5 million (2001:  €7.7million).

 

Redemption can take place forall or part of the notes at any time. If the Group sells certain assets or is the subject of specific kinds ofchanges of control, the Company must, unless certain conditions are met, offerto redeem the notes.

 

Together with these notes,warrants have been issued which entitle holders to purchase 17,600 ordinaryshares C (nominal value €0.45) of the Company. See Note 15 Shareholders’ Equity.

 

The notes are seniorsubordinated unsecured indebtedness. The notes rank effectively subordinated to the Group’s senior and otherindebtedness and rank senior to the Company’s Shareholders’ loans.

 

F-24

----

 

***ScheduledMaturities***

 

Scheduled maturities oflong-term liabilities for the next five years are as follows:

 
|                |   | **(€ in  millions)** |   |
|---------------------|--------|---------------------------|--------|
| 2003                |   | 107.4                     |   |
| 2004                |   | 133.1                     |   |
| 2005                |   | 158.0                     |   |
| 2006                |   | 174.1                     |   |
| 2007                |   | 100.5                     |   |
| 2008 and thereafter |   | 1,436.1                   |   |
| Total               |   | 2,109.2                   |   |

 

**13.**                               **Shareholders’ loans**

 

In 1998, the Company enteredinto loans in the amount of €199.7 million due to the CVC entities and Cinvenentities. Non-cash interest at a rate of 9% is and will be accrued on the loanamount until maturity of the loan on December 31, 2010.

 

During 2001, new loans wereentered into in the amount of €299.4 million with CVC, Cinven and StichtingSenior Management Kappa with an interest rate of 7.0%. Non-cash interest is andwill be accrued on the loan amount until maturity of the loan on May 17, 2012,unless agreed upon otherwise.

 

Interest expense for the yearended December 31, 2002, 2001 and 2000 was €46.2 million, €34.9 and €20.7million respectively.

 

The Shareholders’ loans andinterest accrued thereon are subordinated to the Senior Debt and SeniorSubordinated Notes (reference is made to Note 12).

 
|                        |   | **(€ in  millions)** |   |
|-----------------------------|--------|---------------------------|--------|
|                        |   | **Total book  value**     |   | **Accrued  interest** |   | **Contract  value** |   |
|                        |   |                      |   |   |   |   |   |
| 7% Shareholders’ loans |   | 334.9                     |   | 35.5 |   | 299.4 |   |
| 9% Shareholders’ loans |   | 293.1                     |   | 93.4 |   | 199.7 |   |
|                        |   | 628.0                     |   | 128.9 |   | 499.1 |   |

 

**14.**                               **Minority interests**

 

Minority interests relate tothe shares not owned by Kappa Packaging in Kappa Štúrovo a.s., Slovakia (1.5%).

 

F-25

----

 

**15.**                               **Shareholders’ equity**

 

The authorized capital is €1.5million divided into:

 
| **Number of  shares** |   | **Shares**                            |   | **Nominal  value each** |   |
|-----------------------|--------|---------------------------------------|--------|-------------------------|--------|
| 1,500,000             |   | Class A  ordinary shares              |   | €                  | 0.45   |   |
| 100,000               |   | Class B  ordinary shares              |   | €                  | 0.11   |   |
| 660,000               |   | Class C  ordinary shares              |   | €                  | 0.45   |   |
| 40,000                |   | Class D ordinary  shares              |   | €                  | 0.11   |   |
| 100,000               |   | Class E  ordinary shares              |   | €                  | 0.45   |   |
| 875,000               |   | Class A  cumulative preference shares |   | €                  | 0.45   |   |
| 100,000               |   | Class B  cumulative preference shares |   | €                  | 0.45   |   |

 

During 2002, no shares wereissued. As at December 31, 2002, the total number of shares issued andpaid-in is 1,907,659, which can be specified as follows:

 
| **Number of Ordinary Shares**     |   | **Total** |       | **Ordinary A** |       | **Ordinary B** |       | **Ordinary C** |       | **Ordinary D** |       |
|-----------------------------------|--------|-----------|------------|----------------|------------|----------------|------------|----------------|------------|----------------|------------|
|                              |   |      | ** ** |           | ** ** |           | ** ** |           | ** ** |           | ** ** |
| As at December 31, 2002           |   | 1,580,159 |       | 910,600        |       | 89,400         |       | 565,346        |       | 14,813         |       |
| At a nominal value each of € |   |      |       | 0.45           |       | 0.11           |       | 0.45           |       | 0.11           |       |
| Total nominal value (in €)   |   | 675,639   |       | 409,770        |       | 9,834          |       | 254,406        |       | 1,629          |       |

 
| **Number of  Preference Shares**  |   | **Total** |   | **Preference A** |   | **Preference B** |   |   |   |   |   |
|-----------------------------------|--------|-----------|--------|------------------|--------|------------------|--------|--------|--------|--------|--------|
|                              |   |      |   |             |   |             |   |   |   |   |   |
| As at December 31, 2002           |   | 327,500   |   | 321,250          |   | 6,250            |   |   |   |   |   |
| At a nominal value each of € |   |      |   | 0.45             |   | 0.45             |   |   |   |   |   |
| Total nominal value (in €)   |   | 147,375   |   | 144,562          |   | 2,813            |   |   |   |   |   |

 

The ordinary and preferenceshares of the Company are beneficially owned by funds advised or managed byCinven and CVC and the foundation Stichting Senior Management Kappa.

 

The Supervisory Board and theManagement Board hold interest in a total of 33,467 Ordinary Shares A, 1,803Preference Shares B and 17,320 Ordinary Shares C of the Company. These sharesare held through Stichting Senior Management Kappa or through funds managed byCinven or CVC.

 

***Ordinaryshares***

 

The nominal value of the ordinary shares A is€0.45 per share and the nominal value of the ordinary shares B is €0.11 pershare.  The shares were issued basedupon the cash value of the ordinary shares A of €4.54 per share and of theordinary shares B of €4.54 per share, which resulted in additional paid-incapital of €4.1 million.  Holders of theordinary shares are entitled to ordinary dividends declared by the Company,whereby the nominal value of each share increased with premium paid to thatshare is decisive.

 

The nominal value of the ordinary shares C is€0.45 per share and of the nominal value of ordinary shares D is €0.11 pershare. The shares were issued based upon the cash value of the ordinary sharesC of €1.00 per share and of the ordinary shares D of €1.00 per share, whichresulted in additional paid-in capital of €0.3 million. Holders of the ordinaryshares are entitled to any ordinary dividends declared by the Company, wherebythe nominal value of each share increased with premium paid to that share is decisive.

 

F-26

----

 

Together with the SeniorSubordinated Notes, warrants have been issued which entitle holders to purchase17,600 ordinary shares C (nominal value €0.45) of the Company.  The warrants cannot be exercised before July16, 2003 and will lapse and be no longer exercisable upon the redemption of thenotes.  The total exercise price of€7,987 (NLG 1 per ordinary share C) was paid by the initial purchaser upon issueof the warrants.  If the warrants lapseunexercised, the exercise price paid will not be returned to the holder of thewarrants.

 

***Cumulativepreference shares***

 

The Company issued, for anamount of €453.78 per share, cumulative preference shares A and B of €0.45 parvalue, which resulted in additional paid-in capital of €148.5 million.  Such shares carry four votes per share.

 

Provided that the Company’sequity is larger than the amount of the paid-in and called-up share capitalplus the reserves which are required to be maintained by law or the articles ofassociation, each holder of cumulative preference shares is entitled to anannual preference dividend of 6.0 % of the sum of the nominal value of theshares held by him, the premium paid on them and a possible deficit asdescribed below.

 

Insofar as the Company is notpermitted to make distributions of the cumulative preference dividend referredto above, the holders of cumulative preference shares shall be paid thefollowing:

 

(a)                                  insofaras an amount is available for distribution, first of all the amount will bedistributed to the holders of cumulative preference shares A to which they areentitled or less in proportion to the amount available;

 

(b)                                 ifafter distribution to the holders of cumulative preference shares A of theamount to which they are entitled there is still room for furtherdistributions, the holders of cumulative preference shares B will be paid anamount in proportion to the amount available up to the maximum of the amount towhich they are entitled.

 

If in any year the holders ofany class of cumulative preference shares are not paid the full amount to whichthey are entitled, the deficit will still be paid to the shareholdersconcerned, charged to the profit of a following year or following years, beforeany other distribution of profits is made to shareholders, and always in such amanner that first all holders of cumulative preference shares A and thenholders of cumulative preference shares B will be paid the amount due to them.

 

No dividends have been issuedto date, however, the dividends have accumulated according to the preferenceshare agreements.  As at December 31,2002, the accumulated dividend claim of the holders’ of the cumulativepreference A and B shares amounts to €44.0million (2001:  €33.1 million).

 

There are no conversion rightson the preference shares.

 

***Legalreserve***

 

On December 28, 2001, the facevalue of all shares was denominated from NLG to EUR value. This resulted in adecrease in the issued and paid-in share capital of €7 thousand for which alegal reserve has been made.

 

When positive retained earningsare realized, a legal reserve has to be set up related to capitalizeddevelopment costs in the amount of €6.4 million as per the position at December31, 2002 (2001:  €3.3 million).

 

F-27

----

 

**16.**                               **Commitments and contingencies**

 

***Lease commitments***

 

TheGroup leases certain plant facilities and equipment under non-cancelablefinancial and operating leases. Future minimum lease payments under allnon-cancelable financial and operating leases at December 31, 2002 are asfollows:

 
|                |   | **(€ in  millions)** |   |
|---------------------|--------|---------------------------|--------|
|                |   | **Operational  lease**    |   | **Financial  lease** |   |
| 2003                |   | 17.6                      |   | 1.5 |   |
| 2004                |   | 13.7                      |   | 1.6 |   |
| 2005                |   | 9.2                       |   | 1.7 |   |
| 2006                |   | 6.3                       |   | 1.3 |   |
| 2007                |   | 4.8                       |   | — |   |
| 2008 and thereafter |   | 32.0                      |   | — |   |
| Total               |   | 83.6                      |   | 6.1 |   |

 

Leaseexpenses for non-cancelable leases and other operating leases charged to theincome statement during the periods ended December 31, 2002, December 31, 2001and December 31, 2000 were €34.5 million, €32.0 million and €18.3 millionrespectively.

 

***Purchase commitments***

 

Purchase,repurchase and other commitments at December 31, 2002 are as follows:

 
|                            |   | **(€ in  millions)** |   |
|---------------------------------|--------|---------------------------|--------|
| Within 1 year                   |   | 0.9                       |   |
| After 1 year but within 5 years |   | 0.1                       |   |
| After 5 years                   |   | 2.5                       |   |
| Total                           |   | 3.5                       |   |

 

***Capital expenditurecommitments***

 

TheGroup has commitments to acquire plant and machinery amounting to €17.0 millionat December 31, 2002 (2001:  €25.1million).

 

***Guarantees***

 

Under the revolving creditfacility, the Group has bank guarantees issued to third parties (rentalguarantees, credit guarantees, social security taxes) for a total amount of€8.1 million at December 31, 2002 (2001: €10.4 million).

 

F-28

----

 

**17.**                               **Risks and uncertainties**

 

The Group is exposed tocommodity risk for recovered paper and wood. The Group provided some protectionagainst any shortage of supply of recovered paper through the Group’s owncollection centers, which satisfy about one third of the Group’s overallrecovered paper requirements, and by increasing strategic stock levels togetherwith increased long-term supply contracts. In respect of wood supply, the Groupprovided some protection against any shortage through the Group’s wood and woodchip supply contract entered into with the forestry division of AssiDomän (nowowned by Sveaskog).

 

Management believes it has adequatelyprovided for the collection risk on the Group’s accounts receivable byrecording an allowance for doubtful accounts, which reduces such amounts totheir net realizable value.

 

The Group is exposed to creditrisk in the event of non-performance by counterparties to interest rate swapagreements and forward currency contracts. However, because the Group dealsonly with major commercial banks with investment grade ratings, it does notanticipate non-performance by any of these counterparties.  The Group has deposited its cash and cashequivalents with reputable financial institutions and believes the risk of lossto be remote.

 

The Group is exposed to marketrisk in the form of foreign exchange rates and interest rate risks.  The Group entered into an interest rate swapin order to limit exposure to fluctuation in interest rates.

 

The Group is exposed tomovements in the euro currency exchange rate against mainly the US dollar,British pound sterling, Czech Koruna, Slovak Koruna, Swedish Krona, NorwegianKroner, Danish Krone and on cash and cash equivalents, accounts receivables andaccounts payables denominated in currencies other than the euro. The Group usesforeign currency forward contracts to reduce the exposure of foreigndenominated sales commitments to exchange rate movements between the date ofentering into the transaction and the date the transaction is settled.  The Group is also exposed to foreigncurrency fluctuations on its net investments in subsidiaries in non-eurocountries.

 

F-29

----

 

**18.**                               **Financial instruments**

 
|                                      |   | **(€ in  millions)** |   |
|-------------------------------------------|--------|---------------------------|--------|
|                                      |   | **December  31, 2002**    |   | **December  31, 2001** |   |
|                                      |   | **Contract  volume**      |   | **Carrying  value** |   | **Fair value** |   | **Contract  volume** |   | **Carrying  value** |   | **Fair   value** |   |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **Long-term debt:**                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Variable rate debt:*                     |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Term Loan Facilities (Tranche A, B and C) |   | —                    |   | 1,403.1 |   | 1,403.1 |   | — |   | 1,478.6 |   | 1,478.6 |   |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Fixed rate debt:*                        |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ loans                  |   | —                    |   | 628.0 |   | 780.9 |   | — |   | 581.8 |   | 643.0 |   |
| Senior Subordinated Notes issued 1999     |   | —                    |   | 585.5 |   | 623.5 |   | — |   | 571.1 |   | 646.7 |   |
| Senior Subordinated Notes issued 2001     |   | —                    |   | 100.0 |   | 102.5 |   | — |   | 100.0 |   | 100.0 |   |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **Derivative contracts:**                 |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Interest derivates:*                     |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Interest Rate Swap                        |   | 936.0                     |   | — |   | (26.1 | ) | 986.0 |   | — |   | (16.9 | ) |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Currency contracts:*                     |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Receive CHF, pay €                   |   | 0.3                       |   | — |   | — |   | — |   | — |   | — |   |
| Receive CZK, pay €                   |   | 3.6                       |   | — |   | (0.1 | ) | 1.5 |   | — |   | — |   |
| Receive NOK, pay €                   |   | 1.7                       |   | — |   | — |   | — |   | — |   | — |   |
| Receive SEK, pay €                   |   | 136.7                     |   | — |   | (1.1 | ) | 84.0 |   | — |   | (2.2 | ) |
| Receive SKK, pay €                   |   | 20.4                      |   | — |   | 0.3 |   | 13.9 |   | — |   | (0.2 | ) |
| Receive US$, pay €                   |   | —                    |   | — |   | — |   | 7.0 |   | — |   | — |   |
| Receive GBP, pay €                   |   | —                    |   | — |   | — |   | 18.0 |   | — |   | (0.3 | ) |
| Pay CZK, receive €                   |   | 5.4                       |   | — |   | 0.1 |   | 11.0 |   | — |   | 0.1 |   |
| Pay GBP, receive €                   |   | 41.0                      |   | — |   | 0.6 |   | 7.2 |   | — |   | 0.1 |   |
| Pay NOK, receive €                   |   | 5.1                       |   | — |   | — |   | 3.2 |   | — |   | — |   |
| Pay PLN, receive €                   |   | 0.4                       |   | — |   | — |   | — |   | — |   | — |   |
| Pay SEK, receive €                   |   | 24.4                      |   | — |   | — |   | 16.2 |   | — |   | 0.3 |   |
| Pay US$, receive €                   |   | 18.1                      |   | — |   | 0.9 |   | 31.5 |   | — |   | 0.2 |   |
| Pay ZAR, receive €                   |   | 1.2                       |   | — |   | (0.1 | ) | 0.3 |   | — |   | — |   |
| Pay SEK, receive GBP                      |   | 14.7                      |   | — |   | (0.2 | ) | 3.3 |   | — |   | — |   |
| Receive SEK, pay DKK                      |   | 2.0                       |   | — |   | — |   | — |   | — |   | — |   |
| Receive SEK, pay GBP                      |   | 3.7                       |   | — |   | — |   | 1.6 |   | — |   | — |   |
| Receive SEK, pay NOK                      |   | 0.2                       |   | — |   | — |   | — |   | — |   | — |   |
| Receive US$, pay SEK                      |   | —                    |   | — |   | — |   | 0.6 |   | — |   | — |   |
| Receive SEK, pay US$                      |   | 0.5                       |   | — |   | — |   | 0.3 |   | — |   | — |   |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Currency options:*                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Pay €, receive US$                   |   | 95.1                      |   | 1.0 |   | 8.6 |   | 95.1 |   | 1.7 |   | 17.5 |   |
|                                      |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| *Currency swaps:*                         |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Pay €, receive US$                   |   | 19.5                      |   | — |   | 1.9 |   | 29.2 |   | — |   | 6.6 |   |

 

***Fair Values***

 

Fair values ofcash equivalents, short-term debt, and other short-term financial instrumentsapproximate cost.  The fair value offixed rate long-term debt is based on interest rates that are currentlyavailable to the Group for issues of debt with similar terms and remainingmaturities.  The fair values of theShareholders’ loans have been determined by means of the discounted cash flowmethod. The interest rate used is based on actual interest rates at year-end2002 and 2001, including a risk mark-up determined at the date of issuance ofthe loans (167 basis points).

 

F-30

----

 

The carrying value of variablerate debt approximates fair value.  Theestimated fair value of the Group’s interest and currency derivatives is basedupon market rates at December 31, 2002 for similar financial instrumentswith like maturities.

 

***Interestderivatives***

 

The Group hasentered into an interest rate swap agreement to reduce the impact of changes ininterest rates on its Senior Debt.  Thenotional principal amount of the swap agreement is €1,004.0 million and isdecreasing in line with the decreasing principal on the Senior Debt.  This agreement effectively converts theEURIBOR element of the interest on the Senior Debt from variable to a fixedrate of 4.69%.

 

***Currencycontracts***

 

Currencyinstruments are used to hedge against exchange rate risks resulting frombusiness activities and financing arrangements in foreign currencies.  No speculative positions are entered into.

 

Currencyforward contracts with terms up to one year are entered into to fix the rate ofexchange on foreign currency sales.

Currencyoptions, which will mature on July 15, 2004, have been entered into so as tohedge the currency risk on the USD Senior Subordinated Notes principal.

Currency swapshave been entered into to hedge the future USD interest payments on the USDSenior Subordinated Notes.

 

**19.**                               **Related party transactions**

 

*Stichting Senior Management Kappa*

 

Stichting Senior ManagementKappa is a foundation established to hold the Kappa Holding B.V., shares onbehalf of members of senior management of the Group. Stichting SeniorManagement Kappa owns 8.4% of the voting rights of the Company.

Stichting Senior Managementholds 100,000 Ordinary Shares A, 6,250 Preference Shares B and 46,413 OrdinaryShares C of the Company at December 31, 2002.

Stichting Senior ManagementKappa provided €2.5 million financing subordinated loan to Kappa Holding B.V.at December 31, 2002. The principal amount of the loan plus interest compoundedand accrued thereon is due to be repaid not before May 17, 2012, unlessotherwise agreed. Interest is fixed at a rate of 7% per annum.

Kappa Packaging NederlandHolding B.V. provided in total €583,332 to Stichting Senior Management Kappa asat December 31, 2002 (2001:  €470,175),which was used to re-purchase shares from departing management, or to financeshares kept in reserve.

 

*Cinven Limited and CVC Capital Partners*

 

Cinven Limited and CVC CapitalPartners, the equity sponsors, provided €199.7 million in loan financingeffective July 23, 1998. The principal amounts of the loan plus interestcompounded and accrued thereon (€293.1 million at December 31, 2002) is due tobe repaid on December 31, 2010. Interest is fixed at a rate of 9% per annum.

Effective May 17, 2001, CinvenLimited and CVC Capital Partners provided an additional €297.1 million in loanfinancing in connection with the acquisition of Alpha. The principal amount ofthe loan plus interest compounded and accrued thereon (€332.4 million atDecember 31, 2002) is due to be repaid not before May 17, 2012, unlessotherwise agreed. Interest is fixed at a rate of 7% per annum.

Cinven Limited and CVC CapitalPartners receive annual management fees of €250,000 each from the Group inrelation to on-going services as from May 17, 2001 onwards. The totalmanagement fee for the year 2002 amounts to €500,000 (2001:  €482,688).

 

F-31

----

 

**20.**                               **Personnel data**

 
|                 |   | **(€ in  millions)**          |   |
|----------------------|--------|------------------------------------|--------|
|                 |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|                 |   |                               |   |   |   |   |   |
| **Labor costs**      |   |                               |   |   |   |   |   |
| Wages and salaries   |   | 509.8                              |   | 420.7 |   | 271.7 |   |
| Social charges       |   | 98.6                               |   | 78.3 |   | 50.2 |   |
| Pension expense      |   | 22.6                               |   | 12.1 |   | 4.7 |   |
| Other personnel cost |   | 66.9                               |   | 50.8 |   | 32.7 |   |
|                 |   | 697.9                              |   | 561.9 |   | 359.3 |   |

 

In the fourth quarter of 2002,a restructuring provision was set up in the amount of €12.0 million due to thedecision to reduce the total number of employees during 2003 by approximately400.

 

Number of personnel analyzed bygeographical area is as follows:

 
|                                   |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |       | **Year ended  December 31,  2000** |       |
|----------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                   |   |                               | ** ** |                               | ** ** |                               | ** ** |
| The Netherlands                        |   | 3,962                              |       | 3,766                              |       | 3,434                              |       |
| Germany                                |   | 3,030                              |       | 3,060                              |       | 2,858                              |       |
| United Kingdom                         |   | 1,063                              |       | 801                                |       | 281                                |       |
| Nordic & Central Europe            |   | 5,331                              |       | 3,724                              |       | 957                                |       |
| Belgium                                |   | 381                                |       | 392                                |       | 396                                |       |
| Italy & Spain                      |   | 1,204                              |       | 733                                |       | 12                                 |       |
| France                                 |   | 1,467                              |       | 1,022                              |       | 413                                |       |
| Switzerland                            |   | 180                                |       | 126                                |       | —                             |       |
| Other                                  |   | 8                                  |       | 4                                  |       | —                             |       |
| Total (average, full-time equivalents) |   | 16,626                             |       | 13,628                             |       | 8,351                              |       |

 

Number of personnel analyzed byactivity:

 
|                                   |   | **Year ended  December 31,  2002** |       | **Year ended  December 31,  2001** |       | **Year ended  December 31,  2000** |       |
|----------------------------------------|--------|------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                                   |   |                               | ** ** |                               | ** ** |                               | ** ** |
| Paper & Board                      |   | 4,238                              |       | 3,729                              |       | 2,478                              |       |
| Packaging                              |   | 12,223                             |       | 9,770                              |       | 5,697                              |       |
| Corporate                              |   | 165                                |       | 129                                |       | 176                                |       |
| Total (average, full-time equivalents) |   | 16,626                             |       | 13,628                             |       | 8,351                              |       |

 

F-32

----

 

**21.**                               **Other operating costs**

 
|                        |   | **(€ in  millions)**          |   |
|-----------------------------|--------|------------------------------------|--------|
|                        |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|                        |   |                               |   |   |   |   |   |
| Rent and lease              |   | 34.5                               |   | 32.0 |   | 21.6 |   |
| General management expenses |   | 81.5                               |   | 69.9 |   | 41.6 |   |
| Other operating expenses    |   | 81.8                               |   | 34.0 |   | 19.8 |   |
|                        |   | 197.8                              |   | 135.9 |   | 83.0 |   |

 

General management expensesinclude office expenses, communication costs, automation costs, travellingcosts and consultancy fees.

Other operating expensesconsist of amongst others, insurance fees, advertising and promotionalexpenses.

 

**22.**                               **Depreciation, amortization and impairment charges**

 
|                                                 |   | **(€ in  millions)**          |   |
|------------------------------------------------------|--------|------------------------------------|--------|
|                                                 |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|                                                 |   |                               |   |   |   |   |   |
| **Depreciation and amortization**                    |   |                               |   |   |   |   |   |
| Goodwill                                             |   | 24.7                               |   | 22.1 |   | 18.7 |   |
| Other intangible fixed assets                        |   | 6.0                                |   | 1.5 |   | — |   |
| Buildings                                            |   | 27.6                               |   | 24.2 |   | 20.4 |   |
| Plant, equipment and other tangible fixed  assets    |   | 140.2                              |   | 128.2 |   | 90.8 |   |
|                                                 |   |                               |   |   |   |   |   |
|                                                 |   | 198.5                              |   | 176.0 |   | 129.9 |   |
| **Impairment charges**                               |   |                               |   |   |   |   |   |
| Land                                                 |   | 1.5                                |   | — |   | — |   |
| Buildings                                            |   | 6.2                                |   | — |   | — |   |
| Plant and equipment and other tangible  fixed assets |   | 12.3                               |   | — |   | — |   |
|                                                 |   |                               |   |   |   |   |   |
|                                                 |   | 20.0                               |   | — |   | — |   |
|                                                 |   |                               |   |   |   |   |   |
| Total                                                |   | 218.5                              |   | 176.0 |   | 129.9 |   |

 

Based on an impairment testperformed during 2002, an additional depreciation charge was made againstcertain assets in the Packaging segment to reflect their present value.

 

The impairment was calculatedwith a discount rate of 8.4% using the discounted cashflow method for each ofthe four reporting units, being: Containerboard and Solid Board within the Paper & Board segment andCorrugated Packaging and Solid Board Packaging within the Packaging segment.The impairment charge has been allocated to the tangible fixed asset categorieson a pro-rata basis.

 

F-33

----

 

**23.**                               **Interest expense, net and capitalized interest**

 
|                                    |   | **(€ in  millions)**          |   |
|-----------------------------------------|--------|------------------------------------|--------|
|                                    |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|                                    |   |                               |   |   |   |   |   |
| Interest income                         |   | (8.0                               | )      | (10.0 | ) | (2.6 | ) |
| Interest expense                        |   | 188.7                              |   | 170.4 |   | 117.3 |   |
| Amortization of deferred finance charge |   | 11.3                               |   | 7.5 |   | 3.8 |   |
| Interest capitalized                    |   | —                             |   | (0.1 | ) | — |   |
| Interest  expense, net                  |   | 192.0                              |   | 167.8 |   | 118.5 |   |

 

Interest is capitalized onlong-term construction projects and is included in tangible fixed assets.

 

**24.**                               **Income taxes**

 
|                                   |   | **(€ in  millions)**          |   |
|----------------------------------------|--------|------------------------------------|--------|
|                                   |   | **Year ended  December 31,  2002** |   | **Year ended  December 31,  2001** |   | **Year ended  December 31,  2000** |   |
|                                   |   |                               |   |   |   |   |   |
| **Income before tax on:**              |   |                               |   |   |   |   |   |
| Ordinary activities                    |   | (15.3                              | )      | 43.4 |   | 1.5 |   |
| Extraordinary items                    |   | —                             |   | (20.1 | ) | (5.2 | ) |
| Total income before tax                |   | (15.3                              | )      | 23.3 |   | (3.7 | ) |
|                                   |   |                               |   |   |   |   |   |
| The Netherlands                        |   | (39.3                              | )      | (5.6 | ) | 8.4 |   |
| Foreign                                |   | 24.0                               |   | 28.9 |   | (12.1 | ) |
|                                   |   | (15.3                              | )      | 23.3 |   | (3.7 | ) |
| **Income tax expenses/(benefits) on:** |   |                               |   |   |   |   |   |
| Income tax from ordinary activities    |   | (5.4                               | )      | 19.1 |   | 13.8 |   |
| Income tax from extraordinary items    |   | —                             |   | (7.0 | ) | (1.8 | ) |
| Total income tax expenses              |   | (5.4                               | )      | 12.1 |   | 12.0 |   |
|                                   |   |                               |   |   |   |   |   |
| The Netherlands                        |   | (9.4                               | )      | (2.2 | ) | 6.4 |   |
| Foreign                                |   | 4.0                                |   | 14.3 |   | 5.6 |   |
|                                   |   | (5.4                               | )      | 12.1 |   | 12.0 |   |
|                                   |   |                               |   |   |   |   |   |
| Current                                |   | 2.5                                |   | 7.8 |   | 1.4 |   |
| Deferred                               |   | (7.9                               | )      | 4.3 |   | 10.6 |   |
|                                   |   | (5.4                               | )      | 12.1 |   | 12.0 |   |

 

Taxation is calculated inaccordance with the relevant tax laws and certain agreements made between theGroup and the respective tax authorities.

 

F-34

----

 

The tax charge for the year wascalculated taking into account that certain costs are not tax deductible, forinstance amortization of goodwill in certain countries and other partiallydeductible expenses.

 

The allocation of taxes can bespecified as follows:

 
|                              |   | **Year ended  December 31,   2002** |   | **Year ended    December 31,   2001** |   | **Year ended    December 31,   2000** |   |
|-----------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|---------------------------------------|--------|
|                              |   |                                |   |                                  |   |                                  |   |
| Ordinary result before taxes      |   | (15.7                               | )      | 43.4                                  |   | 1.5                                   |   |
| Tax charge                        |   | 5.4                                 |   | (19.1                                 | )      | (13.8                                 | )      |
| Effective tax rate                |   | 34.3                                | %      | 44.2                                  | %      | 71.3                                  | %      |
|                              |   |                                |   |                                  |   |                                  |   |
| Extraordinary result before taxes |   |                                |   | (20.1                                 | )      | (5.2                                  | )      |
| Tax charge                        |   | —                              |   | 7.0                                   |   | 1.8                                   |   |
| Effective tax rate                |   | —                              |   | 35.0                                  | %      | 35.0                                  | %      |

 

The effective tax rate onresult from ordinary operations was 34.3% in 2002, compared to 44.2% and 71.3%in 2001 and 2000 respectively. The weighted average statutory tax rate on aconsolidated basis was approximately 31.4% for 2002, 30.9% for 2001 and 35.4%for 2000.

 

The difference between theeffective tax rate and the weighted average statutory tax rate for the years2002, 2001 and 2000 respectively is mainly the result of permanent differencesincluding non-deductible goodwill and other non-tax deductible expenses. Inaddition, income taxes in 2002 were positively influenced by the recognition ofoperating losses carried forward from prior years.

 

In the year 2000, income taxeswere negatively influenced by a prior year adjustment made on deferred taxliabilities in Germany.

 

**25.**                               **Extraordinary items**

 
|                           |   | **(€ in  millions)**             |   |
|--------------------------------|--------|---------------------------------------|--------|
|                           |   | **Year ended    December 31,   2002** |   | **Year ended    December 31,   2001** |   | **Year ended    December 31,   2000** |   |
|                           |   |                                  |   |   |   |   |   |
| Extraordinary items before tax |   | —                                |   | (20.1 | ) | (5.2 | ) |
| Tax benefit/(charge)           |   | —                                |   | 7.0 |   | 1.8 |   |
|                           |   | —                                |   | (13.1 | ) | (3.4 | ) |

 

The extraordinary loss of €13.1million, net of taxation, in 2001, was the result of the write off ofcapitalized finance charges (€14.3 million, net of taxation), related to theSenior Debt issued in 1998, which was replaced by new Senior Debt following theacquisition of Alpha and the release of restructuring and other provisionsfollowing the implementation of changes in Dutch generally accepted accountingprinciples as per January 1, 2001 (€1.2 million, net of taxation).

 

In 2000, Kappa Packagingcompleted the coordination of its accounting policies throughout the Group,which resulted in an extraordinary loss of €3.4 million, net of taxation.

 

F-35

----

 

**26.**                               **Remuneration and loans to the Management Board andSupervisory Board**

 

Theremuneration of the members of the Management Board, including salaries,bonuses and pension charges amounted to €2,978,000 in 2002 (2001:  €2,940,000 including members who resignedduring 2001).

 

The members of the SupervisoryBoard, excluding one member, do not receive any fees from the Group for servingas a member. The aggregate amount of compensation paid to all of ourSupervisory Board members as a group (five persons) for the year ended December31, 2002 was €45,378 (2001:  €39,705).There were no pension charges.

 

At December 31, 2002, no loanswere outstanding to any member of the Management Board or the Supervisory Boardfrom any member of the Group.

 

The Supervisory Boarddetermines the remuneration of the members of the Management Board, anyentitlement to a bonus and the other conditions of appointment for each memberof the Management Board separately.

 

**27.**                               **Segmentation**

 

The operations of KappaPackaging consist of two reportable segments: the Paper and Board segment (“Paper & Board”) and the corrugated andsolid board Packaging segment (“Packaging”). The Paper & Board segmentuses wood and recovered paper to produce containerboard and solid board forPackaging, as well as specialty and graphic board.  The Packaging segment uses containerboard and solid board forpackaging as raw material inputs for the production and sale of corrugatedcontainers and solid board packaging. The results of each segment are reportedto the Supervisory Board on a monthly basis.

 

Corporate items are not allocatedto the segments and include costs incurred by the Corporate Head Office as wellas costs and assets relating to country holding companies.

 

**Reportable Segments**

 
|                                                       |   | **(€ in  millions)** |   |
|------------------------------------------------------------|--------|---------------------------|--------|
|                                                       |   | **Paper  &  Board**   |   | **Packaging** |   | **Total   reportable   segments** |   | **Eliminations** |   | **Corporate   Items** |   | **Total** |   |
|                                                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| **Year ended December 31, 2002**                           |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Sales, external                                            |   | 665.2                     |   | 2,258.6 |   | 2,923.8 |   | — |   | — |   | 2,923.8 |   |
| Sales to other reportable segments                         |   | 630.0                     |   | (0.2 | ) | 629.8 |   | (629.8 | ) | — |   | — |   |
|                                                       |   | 1,295.2                   |   | 2,258.4 |   | 3,553.6 |   | (629.8 | ) | — |   | 2,923.8 |   |
|                                                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| EBITDA (1)                                                 |   | 280.3                     |   | 188.7 |   | 469.0 |   | — |   | (28.0 | ) | 441.0 |   |
| Depreciation and impairment charges  tangible fixed assets |   | (82.9                     | )      | (101.7 | ) | (184.6 | ) | — |   | (3.2 | ) | (187.8 | ) |
| Depreciation tangible fixed assets                         |   | (82.9                     | )      | (81.7 | ) | (164.6 | ) | — |   | (3.2 | ) | (167.8 | ) |
| EBITA (2)                                                  |   | 197.4                     |   | 87.0 |   | 284.4 |   | — |   | (31.2 | ) | 253.2 |   |
|                                                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Goodwill                                                   |   | 747.3                     |   | 126.9 |   | 874.2 |   | — |   | — |   | 874.2 |   |
| Assets (3)                                                 |   | 1,059.4                   |   | 1,397.2 |   | 2,456.6 |   | — |   | 296.7 |   | 2,753.3 |   |
|                                                       |   |                      |   |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures                                       |   | 77.0                      |   | 77.3 |   | 154.3 |   | — |   | 7.8 |   | 162.1 |   |

 

F-36

----

 
|                               |   | **(€ in  millions)** |       |
|------------------------------------|--------|---------------------------|------------|
|                               |   | **Paper  &  Board**   |       | **Packaging** |   | **Total   reportable   segments** |   | **Eliminations** |   | **Corporate   Items** |   | **Total** |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| **Year ended December 31, 2001**   |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Sales, external                    |   | 589.8                     |       | 1,881.5 |   | 2,471.3 |   | — |   | — |   | 2,471.3 |   |
| Sales to other reportable segments |   | 496.7                     |       | — |   | 496.7 |   | (496.7 | ) | — |   | — |   |
|                               |   | 1,086.5                   |       | 1,881.5 |   | 2,968.0 |   | (496.7 | ) | — |   | 2,471.3 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| EBITDA (1)                         |   | 275.6                     |       | 182.2 |   | 457.8 |   | — |   | (35.7 | ) | 422.1 |   |
| Depreciation                       |   | (76.2                     | )          | (73.6 | ) | (149.8 | ) | — |   | (2.6 | ) | (152.4 | ) |
| EBITA (2)                          |   | 199.4                     |       | 108.6 |   | 308.0 |   | — |   | (38.3 | ) | 269.7 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                           |   | 772.4                     |       | 140.8 |   | 913.2 |   | — |   | — |   | 913.2 |   |
| Assets (3)                         |   | 1,070.9                   |       | 1,463.6 |   | 2,534.5 |   | — |   | 250.7 |   | 2,785.2 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures               |   | 86.1                      |       | 67.5 |   | 153.6 |   | — |   | 1.0 |   | 154.6 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| **Year ended December 31, 2000**   |   |                      | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Sales, external                    |   | 551.9                     |       | 1,105.5 |   | 1,657.4 |   | — |   | — |   | 1,657.4 |   |
| Sales to other reportable segments |   | 308.7                     |       | — |   | 308.7 |   | (308.7 | ) | — |   | — |   |
|                               |   | 860.6                     |       | 1,105.5 |   | 1,966.1 |   | (308.7 | ) | — |   | 1,657.4 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| EBITDA (1)                         |   | 192.5                     |       | 96.3 |   | 288.8 |   | — |   | (18.9 | ) | 269.9 |   |
| Depreciation                       |   | (61.8                     | )          | (49.2 | ) | (111.0 | ) | — |   | (0.2 | ) | (111.2 | ) |
| EBITA (2)                          |   | 130.7                     |       | 47.1 |   | 177.8 |   | — |   | (19.1 | ) | 158.7 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Goodwill                           |   | —                    |       | — |   | — |   | — |   | 702.8 |   | 702.8 |   |
| Assets (3)                         |   | 633.9                     |       | 641.2 |   | 1,275.1 |   | — |   | 130.4 |   | 1,405.5 |   |
|                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |
| Capital expenditures               |   | 35.9                      |       | 66.5 |   | 102.4 |   | — |   | 0.1 |   | 102.5 |   |

 

----

(1)                                  EBITDAequals earnings from operations before income taxes, net financial items,depreciation, income from participations and minority interests.  EBITDA is a widely accepted financialindicator to investors of a company’s ability to incur and service debt.  It is not, however, a measure recognized bygenerally accepted accounting principles in The Netherlands and the UnitedStates of America and should not be considered as a substitute for operatingincome, as an indicator of liquidity or as a substitute for net cash provided.This method may not be comparable to the EBITDA calculations of other entities.EBITDA for the year 2002 includes exceptional restructuring expenses of €12.0million, incurred in the Paper & Board segment (€0.4 million) and thePackaging segment (€11.6 million). These restructuring expenses relate to arestructuring provision set up in 2002 due to management’s decision to reducethe total number of employees during 2003 by approximately 400.

(2)                                  EBITAequals earnings from operations before income taxes, net financial items,income from participations and minority interests. EBITA for the year 2002 includesexceptional restructuring expenses of €12.0 million, incurred in the Paper& Board segment (€0.4 million) and the Packaging segment (€11.6 million)(see (1)), and impairment charges of tangible fixed assets of €20.0 million,incurred in the Packaging segment.

(3)                                  Assetsexclude (deferred) income taxes and goodwill, in accordance with Dutch GAAP.

 

F-37

----

** **
|                                                                                |   | **(€ in  millions)**          |   |
|-------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                |   | **Year ended  December 31,  2002** |   | **Year ended    December 31,  2001** |   | **Year ended    December 31,   2000** |   |
|                                                                                |   |                               |   |   |   |   |   |
| Reconciliation from operating income to  income before tax and extraordinary items: |   |                               |   |   |   |   |   |
| Operating income                                                                    |   | 222.5                              |   | 246.1 |   | 140.0 |   |
| Interest expense                                                                    |   | (238.2                             | )      | (202.7 | ) | (139.2 | ) |
| Income from participations                                                          |   | 0.6                                |   | 0.2 |   | 0.7 |   |
| Minority interests                                                                  |   | (0.2                               | )      | (0.2 | ) | — |   |
| Income before tax and extraordinary items                                           |   | (15.3                              | )      | 43.4 |   | 1.5 |   |

 
|                             |   | **(€ in  millions)**            |       |
|----------------------------------|--------|--------------------------------------|------------|
|                             |   | **Year ended    December 31,  2002** |       | **Year ended    December 31,   2001** |   | **Year ended    December 31,   2000** |   |
|                             |   |                                 |       |   |   |   |   |
| **Enterprise wide disclosures:** |   |                                 | ** ** |   | ** ** |   | ** ** |
| **Sales by destination**         |   |                                 | ** ** |   | ** ** |   | ** ** |
| The Netherlands                  |   | 426.7                                |       | 382.2 |   | 382.9 |   |
| *Rest of European Union*         |   |                                 |       |   |   |   |   |
| United Kingdom                   |   | 300.7                                |       | 257.7 |   | 135.8 |   |
| France                           |   | 296.0                                |       | 262.1 |   | 194.3 |   |
| Germany                          |   | 611.7                                |       | 554.9 |   | 545.9 |   |
| Italy and Spain                  |   | 361.8                                |       | 284.1 |   | 43.1 |   |
| Nordic and Central Europe        |   | 285.7                                |       | 230.1 |   | 12.5 |   |
| Belgium                          |   | 168.4                                |       | 120.3 |   | 94.4 |   |
| Others European Union            |   | 38.8                                 |       | 32.9 |   | 33.9 |   |
| *Rest of Europe*                 |   |                                 |       |   |   |   |   |
| Nordic and Central Europe        |   | 228.2                                |       | 218.9 |   | 120.7 |   |
| Switzerland                      |   | 41.6                                 |       | 32.8 |   | 14.2 |   |
| Others                           |   | 8.3                                  |       | — |   | — |   |
| *Rest of World*                  |   | 155.9                                |       | 95.3 |   | 79.7 |   |
| **Total**                        |   | **2,923.8**                          | ** ** | **2,471.3** | ** ** | **1,657.4** | ** ** |

 

F-38

----

 
|                             |   | **(€ in  millions)**             |       |
|----------------------------------|--------|---------------------------------------|------------|
|                             |   | **Year ended    December 31,   2002** |       | **Year ended    December 31,   2001** |   | **Year ended    December 31,   2000** |   |
|                             |   |                                  |       |   |   |   |   |
| **Enterprise wide disclosures:** |   |                                  | ** ** |   | ** ** |   | ** ** |
| **Sales by country of origin**   |   |                                  | ** ** |   | ** ** |   | ** ** |
| The Netherlands                  |   | 644.2                                 |       | 768.8 |   | 732.5 |   |
| *Rest of European Union*         |   |                                  |       |   |   |   |   |
| United Kingdom                   |   | 228.8                                 |       | 181.7 |   | 101.0 |   |
| France                           |   | 249.5                                 |       | 213.5 |   | 135.6 |   |
| Germany                          |   | 586.9                                 |       | 576.0 |   | 515.6 |   |
| Italy and Spain                  |   | 326.2                                 |       | 191.3 |   | 13.9 |   |
| Nordic and Central Europe        |   | 444.4                                 |       | 250.9 |   | — |   |
| Belgium                          |   | 122.8                                 |       | 44.1 |   | 46.2 |   |
| *Rest of Europe*                 |   |                                  |       |   |   |   |   |
| Nordic and Central Europe        |   | 259.2                                 |       | 198.3 |   | 94.4 |   |
| Switzerland                      |   | 36.6                                  |       | 22.7 |   | — |   |
| *Rest of World*                  |   | 25.2                                  |       | 24.0 |   | 18.2 |   |
| **Total**                        |   | **2,923.8**                           | ** ** | **2,471.3** | ** ** | **1,657.4** | ** ** |
|                             |   |                                  | ** ** |   | ** ** |   | ** ** |
| **Enterprise wide disclosures:** |   |                                  | ** ** |   | ** ** |   | ** ** |
| **Long -lived assets*)**         |   |                                  | ** ** |   | ** ** |   | ** ** |
| The Netherlands                  |   | 1,247.4                               |       | 1,284.4 |   | 813.1 |   |
| *Rest of European Union*         |   |                                  |       |   |   |   |   |
| United Kingdom                   |   | 118.1                                 |       | 130.4 |   | 159.6 |   |
| France                           |   | 96.6                                  |       | 104.4 |   | 76.0 |   |
| Germany                          |   | 358.9                                 |       | 377.3 |   | 445.7 |   |
| Italy & Spain                |   | 139.5                                 |       | 135.4 |   | 0.7 |   |
| Nordic & Central Europe      |   | 334.2                                 |       | 331.8 |   | — |   |
| Belgium                          |   | 36.5                                  |       | 18.5 |   | 20.6 |   |
| *Rest of Europe*                 |   |                                  |       |   |   |   |   |
| Nordic & Central Europe      |   | 185.1                                 |       | 193.1 |   | 67.3 |   |
| Switzerland                      |   | 20.4                                  |       | 20.8 |   | — |   |
| *Rest of World*                  |   | 0.1                                   |       | — |   |   |   |
| **Total**                        |   | **2,536.8**                           | ** ** | **2,596.1** | ** ** | **1,583.0** | ** ** |

 

----

(*)                                 Long-livedassets include tangible fixed assets and intangible fixed assets.  Goodwill is allocated to the corporatecompanies in The Netherlands for purposes of presenting enterprise widedisclosure.

 

F-39

----

 

**28.**                               **Summary of differences between Dutch generallyaccepted accounting principles and US generally accepted accounting principles**

 

The Group’s financial statements have beenprepared in accordance with generally accepted accounting principles in TheNetherlands (Dutch GAAP), which differ in certain significant respects fromgenerally accepted accounting principles in the United States of America (USGAAP).  The effect of the application ofUS GAAP to net income and shareholders’ equity is set out in the tables below.

** **
|                                   |                                    | **(€ in  millions)**            |   |
|----------------------------------------|-----------------------------------------|--------------------------------------|--------|
|                                   |                                    | **Year ended    December 31,  2002** |   | **Year ended    December 31,  2001** |   | **Year ended    December 31,  2000** |   |
|                                   |                                    |                                 |   |   |   |   |   |
| **Net income/(loss) under Dutch GAAP** |                                    | **(9.9**                             | **)**  | **11.2** | ** ** | **(15.7** | **)** |
| a)                                     | Goodwill adjustments - amortization     |                                 | 24.7   |   | 1.7 |   | 1.0 |   |
| b)                                     | Fair value adjustment Alpha acquisition |                                 | 2.6    |   | — |   | — |   |
| c)                                     | Impairment long-lived assets            |                                 | (5.7   | ) | — |   | — |   |
| d)                                     | Restructuring costs                     |                                 | (10.6  | ) | (46.7 | ) | (19.2 | ) |
| e)                                     | Insurance loss provision                |                                 | (5.2   | ) | (4.9 | ) | (3.5 | ) |
| f)                                     | Gain recorded on insurance proceeds     |                                 | — |   | — |   | 14.1 |   |
| g)                                     | Other intangible assets                 |                                 | 0.1    |   | (0.5 | ) | 1.2 |   |
| h)                                     | Swaption                                |                                 | — |   | (5.3 | ) | (1.5 | ) |
| i)                                     | Financial instruments                   |                                 | (5.1   | ) | (19.7 | ) | 7.7 |   |
| j)                                     | Pensions                                |                                 | (2.3   | ) | (2.8 | ) | (3.7 | ) |
| k)                                     | Acquisition Kappa SCAO                  |                                 | — |   | — |   | (0.7 | ) |
|                                   | Deferred taxes on US GAAP adjustments   |                                 | 9.1    |   | 28.0 |   | (2.0 | ) |
|                                   |                                    |                                 |   |   |   |   |   |
| **Net income/(loss) under US GAAP**    |                                    | **(2.3**                             | **)**  | **(39.0** | **)** | **(22.3** | **)** |

 
|                                           |                                          | **(€ in  millions)** |       |
|------------------------------------------------|-----------------------------------------------|---------------------------|------------|
|                                           |                                          | **December  31, 2002**    |       | **December  31, 2001** |   |
|                                           |                                          |                      |       |   |   |
| **Shareholders’ equity under Dutch GAAP** |                                          | **124.0**                 | ** ** | **143.7** | ** ** |
| a)                                             | Goodwill adjustments – amortization      |                      | 29.7       |   | 5.0 |   |
| a)                                             | Goodwill adjustments – Alpha acquisition |                      | 58.9       |   | — |   |
| b)                                             | Fair value adjustment Alpha acquisition       |                      | (82.6      | ) | — |   |
| c)                                             | Impairment of long-lived assets               |                      | (5.7       | ) | — |   |
| d)                                             | Restructuring provision                       |                      | (106.3     | ) | (95.7 | ) |
| e)                                             | Insurance loss provision                      |                      | 5.0        |   | 10.2 |   |
| f)                                             | Gain on insurance proceeds                    |                      | —     |   | — |   |
| g)                                             | Other intangible assets                       |                      | (1.4       | ) | (1.5 | ) |
| h)                                             | Swaption                                      |                      | —     |   | — |   |
| i)                                             | Financial instruments                         |                      | (20.1      | ) | (15.0 | ) |
| j)                                             | Pensions                                      |                      | (1.8       | ) | (12.2 | ) |
| j)                                             | Pensions – additional minimum liability  |                      | (71.7      | ) | (8.3 | ) |
| j)                                             | Pensions – intangible asset              |                      | 0.5        |   | 1.1 |   |
| k)                                             | Acquisition Kappa SCAO                        |                      | (0.7       | ) | (0.7 | ) |
|                                           | Deferred taxes on US GAAP adjustments         |                      | 95.0       |   | 42.5 |   |
| **Shareholders’ equity under US GAAP**    |                                          | **22.8**                  | ** ** | **69.1** | ** ** |

 

F-40

----

 

***(a)***                                 ***Goodwill***

 

*a.1*                               *Acquisitions prior to January 1, 1997*

 

For acquisitions occurringprior to January 1, 1997, the Predecessor assigned the purchase price to thefair value of the assets acquired and liabilities assumed with the excessrecorded as goodwill. There were three significant acquisitions from 1989 to1994 that resulted in goodwill. Goodwill was written off directly to equity inaccordance with enacted Dutch GAAP principles at the date of acquisition. UnderUS GAAP, goodwill is recorded as an asset and amortized over its estimateduseful life of 40 years through December 31, 2001. Thereafter, goodwillrecorded under US GAAP is not amortized but tested for impairment on an annualbasis.

 

*a.2*                               *Acquisition of Kappa Packaging Group onMay 31, 1998*

 

The following table shows theadjustments to goodwill arising on acquisition (May 31, 1998):

 
|                                 |   | **(€ in  millions)** |   |
|--------------------------------------|--------|---------------------------|--------|
|                                 |   | **Pensions**              |   | **Restructuring  and   Other Provisions** |   | **Other  Intangibles** |   | **Total** |   |
|                                 |   |                      |   |   |   |   |   |   |   |
| 1) Provisions                        |   | —                    |   | 92.7 |   | — |   | 92.7 |   |
| 2) Pension liability                 |   | (6.4                      | )      | — |   | — |   | (6.4 | ) |
| 2) Pension – additional minimum |   | (3.8                      | )      | — |   | — |   | (3.8 | ) |
| 3) Intangible assets                 |   | 2.3                       |   | — |   | (2.2 | ) | 0.1 |   |
| Deferred tax                         |   | 2.8                       |   | (32.4 | ) | 0.7 |   | (28.9 | ) |
| Reduction of goodwill, net           |   | (5.1                      | )      | 60.3 |   | (1.5 | ) | 53.7 |   |

 

On purchase of the KappaPackaging Group, the application of US GAAP to the closing balance sheetaffects the determination of goodwill as of May 31, 1998 in the following ways:

 

1                                          Certainrestructuring and environmental provisions shown above are eliminated from theUS GAAP acquisition balance sheet as these provisions did not meet theguidelines of EITF 95-3, which sets out the criteria for when a restructuringprovision should be recorded.  Inaddition, provisions were booked in the acquisition balance sheet relating toreorganization provisions that do not qualify as costs to exit an activity. Allof these provisions are reversed in the US GAAP acquisition closing balancesheet.

 

2                                          Thepension liability and additional minimum liability is higher under US GAAP andan intangible asset is recorded under US GAAP as described in (j) below.

 

3                                          Asdescribed in (g) intangible assets are included in the acquisition balancesheet under Dutch GAAP and are reversed under US GAAP.

 

F-41

----

 

*a.3*                               *Acquisition of Alpha on May 17, 2001*

 

The following table shows theadjustments to goodwill arising on acquisition (May 17, 2001):

 
|                                  |   | **(€ in  millions)** |   |
|---------------------------------------|--------|---------------------------|--------|
|                                  |   | **Pensions**              |   | **Restructuring  and Other   Provisions** |   | **Tangible  fixed   assets** |   | **Total** |   |
|                                  |   |                      |   |   |   |   |   |   |   |
| 1) Restructuring and other provisions |   | —                    |   | 38.6 |   | — |   | 38.6 |   |
| 2) Pension liability                  |   | 26.8                      |   | — |   | — |   | 26.8 |   |
| 3) Tangible fixed assets              |   | —                    |   | — |   | (85.2 | ) | (85.2 | ) |
| Deferred tax                          |   | (8.0                      | )      | (13.5 | ) | 26.3 |   | 4.8 |   |
| Reduction of goodwill, net            |   | 18.8                      |   | 25.1 |   | (58.9 | ) | (15.0 | ) |

 

On purchase of Alpha, theapplication of US GAAP to the closing balance sheet affects the determinationof goodwill as of May 17, 2001 in the following ways:

 

1                                Certain restructuringand other provisions related to the Alpha acquisition were recorded for DutchGAAP purposes.  However, theseprovisions are reconciling items for US GAAP as they did not meet therecognition criteria. These provisions can be specified as follows:

 

(a)                                            €17.1million of restructuring charges were excluded from the US GAAP provisions. Thereconciling item is the result of the timing and communication of therestructuring plan. Dutch GAAP allows for the finalization of the documentationprior to the release of financial statements, whereas EITF 95-3 for US GAAPrequires documentation as of the balance sheet date.

 

(b)                                           Additionally,€5.5 million of environmental provisions were established for Dutch GAAP andexcluded for US GAAP.  The environmentalaccruals did not meet the US GAAP legal obligation criteria as of the date ofacquisition and are therefore shown as a reconciling item.

 

(c)                                            TheCompany included approximately €16.0 million in the purchase price allocation forthe advice on the restructuring of certain areas of manufacturinginfrastructure.  This liability isrecorded under Dutch GAAP as it was necessary to identify areas to berestructured to align the Alpha acquisition. However, such a liability is notacceptable under US GAAP and is excluded from the purchase price allocation.These costs will be expensed when incurred.

 

2                                The pension liabilityis lower under US GAAP as no assets are recorded under Dutch GAAP. Furtherreference is made to (j) below.

 

3                                See explanation in (b)below.

 

The differences in goodwillamortization between Dutch GAAP and US GAAP as a result of the aboveadjustments are shown in the US GAAP reconciliation.

 

***(b)***                                 ***Fair value adjustment Alphaacquisition***

 

In finalizing the purchaseprice allocation during 2002 for US GAAP reporting purposes related to thelarge and complex acquisition of Alpha in 2001, it was revealed that tangiblefixed assets had been overvalued by €85.2 million. This resulted in a (gross)fair value adjustment of €85.2 million and lower depreciation expenses in 2002of €2.6 million for US GAAP purposes. Other fair value adjustments aredescribed in (a) above.

 

F-42

----

 

***(c)***                                  ***Impairment of long- lived assets***

 

Under Dutch GAAP, an impairmentcharge of €20.0 million was recorded during 2002 in the Packaging segment asthe amount that the sum of its future discounted cash flows exceeded itscarrying value.  This impairment chargeunder Dutch GAAP indicated that certain long-lived assets of the Packagingsegment might not be recoverable under US GAAP.  SFAS 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets* (“SFAS 144”), requires an impairment loss to berecognized only if the carrying amount of a long-lived asset group is notrecoverable.  The carrying amount is notrecoverable when the undiscounted cash flows expected to be generated from theuse of a long-lived asset group and its eventual disposition are less than thecarrying amount of the asset group. Under US GAAP, long-lived assets aregrouped with other assets and liabilities at the lowest level for which thereare identifiable cash flows that are largely independent of the cash flows ofother groups of assets.  As such, animpairment test was performed for US GAAP at four European plants, whichresulted in an additional impairment charge in the Packaging segment under USGAAP of €5.7 million. The impairment charge was measured as the amount that theestimated discounted cash flows exceeded the carrying value of the long-livedasset group. The total impairment charge recorded under US GAAP during 2002 inthe Packaging segment was €25.7 million.

 

***(d)***                                 ***Restructuring provisions***

 

***Plantrestructuring***

 

Until 2000, under Dutch GAAP when a decisionwas made to reorganize part of the Company’s business, provisions were made andallowed for redundancies as well as other closing, integration and movingcosts.  Several of the Group companiesundertook reorganizations during 2000, 2001and 2002.

 

Under US GAAP only costs that qualify asexits costs and therefore do not relate to the ongoing operations of thecompany may be provided for.  Inaddition, a number of specific criteria also must be met before these coststhat do qualify as exit costs can be recognized as an expense.  Among these is the requirement that all thesignificant actions to be taken as part of the reorganization must beidentified along with their expected completion dates and the exit program mustbe approved and communicated by the balance sheet date.  Costs that do not qualify as exit costs areexpensed when the obligation exists to pay cash or otherwise sacrifice assets.

 

As from January 1, 2001, Dutch GAAP becamemore similar to US GAAP.  However, in2001 restructuring provisions were recorded in the Dutch GAAP financialstatements in the amount of €31.5 million as part of the purchase priceallocation of the Alpha acquisition, which do not qualify for US GAAP.  See (a.1) and (a.3) above.  Of these Alpha acquisition provisions, €11.4million was spent in 2001.

 

During 2001, payments were maderelated to provisions that were reconciling items for US GAAP. Additionally,certain previously established Dutch GAAP provisions met the requirements forrecognition in accordance with US GAAP. The total balance amounted to €24.2million.  This balance mainly includes arestructuring provision set up in respect of the closure of our corrugatedproduction plant Kappa Isar Wellpappe (Neufahrn, Germany) effective September21, 2001.

 

***ITrestructuring***

 

Until 2000, purchase accountingin accordance with Dutch GAAP allowed for provisions related to ITrestructuring.  These provisions coveredthe estimated cost associated with programs to update the management informationsystems for the acquired Group companies. These programs related to the implementation of common processes inrespect of Finance, Human Resource Management and Information CommunicationTechnology, the renewal of processes and integration and harmonization of primarybusiness processes and the building of a Pan-European structure.

 

Under US GAAP, these costs area period expense. As such these provisions were reversed for US GAAP. In 2001,approximately €11.1 million of IT expenses were charged against the IT restructuringprovision under Dutch GAAP.

 

As part of the acquisition aprovision of €3.2 million was established, mainly to cover the estimated costsassociated with the carve out of the acquired Alpha business from the AssiDomäncomputer network and the inevitable integration with the existing KappaPackaging network, which both qualify as a restructuring provision for Dutchand US GAAP.

 

F-43

----

 

***(e)***                                  ***Insurance Loss Provision (includedin other provisions)***

 

In 1998 and 1999, three of theoperating plants experienced fire damage. As a consequence, the Company expected increases in insurance premiumsover the next five years and recorded a provision for these costs.

 

Following changes in Dutch GAAPas from January 1, 2001, the remaining balance of the provision of €15.1million as at January 1, 2001 was to be released in equal portions in 2001,2002 and 2003.  In 2001 and 2002, €4.9million respectively €5.2 million was released from the provision.

 

For US GAAP, insurance premiumsare a period expense and a provision for expected costs is not allowed.  As such, this provision was reversed for USGAAP.

 

***(f)***                                    ***Gain recorded on Insurance Proceeds***

 

Under Dutch GAAP for the firedamage on the operating plants, the insurance proceeds were estimated and theexcess over the net book value of the assets was recorded as an extraordinarygain.

 

For US GAAP, gains frominsurance proceeds from fire damage are not extraordinary and are onlyrecognized when realized.  As a result,the amount of the gain that was not realized for US GAAP purposes in 1999 wasreversed in 1999 under US GAAP and recognized in 2000.

 

***(g)***                                 ***Other Intangible Assets***

 

Under Dutch GAAP, costs incurred inconnection with business process reengineering are capitalizable if futureeconomic benefits from these assets are expected.  Under US GAAP, the costs associated with business processreengineering, whether internal or external, must be expensed as incurred.

 

Under Dutch GAAP, €0.1 million respectively€1.8 million of business process reengineering costs were capitalized in 2002respectively 2001, and €0.5 million respectively €1.3 million was amortized.

 

***(h)***                                 ***Swaption***

 

Under Dutch GAAP, optionpremiums paid on swaptions are recorded as an asset and amortized over the lifeof the swap.

 

Under US GAAP, the premium isrecorded as an asset and if the swaption does not meet the criteria to qualifyas an effective hedge then the swaption is marked to market, with changes in thefair value recorded in the profit and loss statement.

 

In 1999, the swaption wassold.  For Dutch GAAP purposes, the gainof €7.3 million was initially deferred and being recognized on a straight-linebasis over 5 years.  For US GAAPpurposes, the gain was recorded in the profit and loss statement for the yearended December 31, 1999.

 

In 2001, for Dutch GAAPpurposes, the remaining book value of the option premium paid on the swaption(€5.3 million) was written off, following the refinancing in 2001 inconjunction with the acquisition of Alpha.

 

F-44

----

 

***(i)***                                    ***Financial Instruments***

 

In 1999, when the Companyreceived the proceeds on the high yield notes due to the fact that the noteswere denominated in US Dollars, a call option was purchased to hedge the USdollar-denominated principal of the debt against the euro.

 

Under US GAAP, the call optionis market-to-market and the debt is translated at the spot rate at the date ofeach balance sheet.  The translationgains and losses on the option are included in statements of income.

 

Under Dutch GAAP, the USdollar-denominated principal of the debt is translated at the option rate andthe call option premium capitalized and amortized on a straight line basis over5 years.

 

All other financialinstruments, e.g. interest rate swap, cross currency swap and foreign currencyforward contracts, under US GAAP are capitalized as from January 1, 2001 andmarket-to-market at the date of the balance sheet. Value changes are recordedagainst the statements of income.

 

F-45

----

 

***(j)***                                    ***Pensions***

 

Under US GAAP, FAS 87 requiresthe use of significant actuarial assumptions annually to reflect current marketand economic conditions.  Additionally,only those accumulated gains or losses arising in the schemes from a differencebetween the actual experience of the schemes and actuarial assumptions made,falling outside ten percent of the greater of the projected benefit obligationor the market value of the assets are being amortized.

 

This method differs from theaccounting policy applied by the Group, whereby the accrual for pension costsrepresents the present value, based on actuarial assumptions, of future pensioncontributions concerning past service cost and the costs of the unfundedpension plan of the German operations.

 

*Pension disclosures*

 

In general, personnel employedare entitled to pension benefits that supplement state-provided social securitybenefits. Pension or other retirement plans have been established in accordancewith regulations and practices of the countries in which they are located. Mostof the plans are administered by separate pension funds or life insurancecompanies.

 

The benefits of the plans arebased primarily on years of service and average or final pay formula. Incountries where contributions are made, the amount of the contribution takesaccount of increases in pension rights in line with the development of wagesand inflation, as well as of the return achieved by the pension funds in excessof the actuarial interest rate.

 

The Group operates majorpension plans in The Netherlands, United Kingdom, Germany and Sweden.

In The Netherlands and UnitedKingdom mainly defined benefit plans are administered by separate pension fundscovering substantially all employees.

 

The retirement plans in Germanyare mainly defined benefit plans and are provided for by the company (bookreserves).

In Sweden, the Group operatesdefined benefit and defined contribution plans. Some of these plans areexternally insured, others are provided for by the company (book reserves).

 

The provisions for pensions andsimilar commitments (relating primarily to non-reinsured pension entitlements,past-service premiums falling due in the future and commitments to formeremployees), are accrued at actuarial value.

For the provision of US GAAPinformation, the prospective pension obligation, i.e., the Projected BenefitObligation (PBO), was determined in accordance with SFAS 87. Moreover, theAccumulated Benefit Obligation (ABO) was determined in accordance with SFAS 87.

 

In accordance with SFAS 87, theexcess of plan assets over projected benefit obligation, as of January 1, 1997,the transition date, is recognized as a part of periodic pension costs on aprospective basis.  The following tablepresents the components of the net periodic pension costs:

 
|                                              |   | **(€ in  millions)**             |       |
|---------------------------------------------------|--------|---------------------------------------|------------|
|                                              |   | **Year ended    December 31,   2002** |       | **Year ended    December 31,   2001** |   | **Year ended    December 31,   2000** |   |
|                                              |   |                                  |       |   |   |   |   |
| **Net periodic pension cost**                     |   |                                  | ** ** |   | ** ** |   | ** ** |
| Service cost                                      |   | (20.0                                 | )          | (16.3 | ) | (10.8 | ) |
| Interest cost                                     |   | (33.5                                 | )          | (28.7 | ) | (16.8 | ) |
| Expected return on plan assets                    |   | 37.2                                  |       | 31.0 |   | 18.1 |   |
| Net amortization and deferral and other  expenses |   | (7.6                                  | )          | (0.9 | ) | (3.7 | ) |
| Other costs and countries                         |   | (5.3                                  | )          | (2.4 | ) | — |   |
|                                              |   |                                  |       |   |   |   |   |
| Net periodic pension costs under US GAAP          |   | (29.2                                 | )          | (17.3 | ) | (13.2 | ) |
| Net periodic pension costs under Dutch GAAP       |   | (26.9                                 | )          | (14.5 | ) | (9.5 | ) |
| Additional pension costs                          |   | (2.3                                  | )          | (2.8 | ) | (3.7 | ) |

 

F-46

----

 
|                                            |   | **December  31,   2002** |   | **December  31,   2001** |   |
|-------------------------------------------------|--------|--------------------------|--------|--------------------------|--------|
|                                            |   |                     |   |                     |   |
| **Change in projected benefit obligation**      |   |                     |   |                     |   |
| Benefit obligation at beginning of year         |   | (578.8                   | )      | (305.7                   | )      |
| Acquisition of Alpha                            |   | (2.3                     | )      | (235.9                   | )      |
| Service cost                                    |   | (20.0                    | )      | (16.3                    | )      |
| Interest cost                                   |   | (33.5                    | )      | (28.7                    | )      |
| Plan participants’ contributions           |   | (3.1                     | )      | (2.6                     | )      |
| Changes in plan                                 |   | (2.3                     | )      | —                   |   |
| Actuarial gain/(loss)                           |   | (17.9                    | )      | (0.3                     | )      |
| Benefits paid                                   |   | 18.8                     |   | 14.5                     |   |
| Curtailment gain                                |   | —                   |   | 0.2                      |   |
| Translation adjustments                         |   | 12.7                     |   | (4.0                     | )      |
|                                            |   |                     |   |                     |   |
| **Projected benefit obligation at end of year** |   | (626.4                   | )      | (578.8                   | )      |
|                                            |   |                     |   |                     |   |
| **Change in plan assets**                       |   |                     |   |                     |   |
| Fair value of plan assets at beginning of  year |   | 488.9                    |   | 266.8                    |   |
| Acquisition of Alpha                            |   | 2.3                      |   | 229.8                    |   |
| Actual return on plan assets                    |   | (43.6                    | )      | (10.8                    | )      |
| Employer contribution                           |   | 9.7                      |   | 4.3                      |   |
| Changes in plan                                 |   | —                   |   | —                   |   |
| Plan participants’ contributions           |   | 3.1                      |   | 2.6                      |   |
| Benefits paid                                   |   | (11.8                    | )      | (8.5                     | )      |
| Translation adjustments                         |   | (13.3                    | )      | 4.7                      |   |
|                                            |   |                     |   |                     |   |
| **Fair value of plan assets at end of year**    |   | 435.3                    |   | 488.9                    |   |
|                                            |   |                     |   |                     |   |
| **Funded Status**                               |   | (191.1                   | )      | (90.0                    | )      |
| Unrecognized transition cost                    |   | 1.2                      |   | 2.4                      |   |
| Unrecognized prior service cost                 |   | 0.5                      |   | 0.6                      |   |
| Unrecognized net actuarial loss/(gain)          |   | 86.9                     |   | (11.2                    | )      |
| Other costs and countries                       |   | (12.2                    | )      | (11.8                    | )      |
|                                            |   |                     |   |                     |   |
| **Net pension liability**                       |   | (114.7                   | )      | (110.0                   | )      |
|                                            |   |                     |   |                     |   |
| **Additional minimum liability**                |   | (71.7                    | )      | (8.3                     | )      |
| Intangible asset                                |   | 0.5                      |   | 1.1                      |   |
|                                            |   |                     |   |                     |   |
| **Reduction to equity**                         |   | (71.2                    | )      | (7.2                     | )      |
|                                            |   |                     |   |                     |   |
| **Weighted average assumptions**                |   |                     |   |                     |   |
| Discount rate                                   |   | 5.5                      | %      | 5.7                      | %      |
| Expected return on plan assets.                 |   | 6.8                      | %      | 7.5                      | %      |
| Rate of compensation increase                   |   | 3.3                      | %      | 3.3                      | %      |
| Increase of state pension                       |   | 2.2                      | %      | 2.3                      | %      |
| Pension increases                               |   | 2.2                      | %      | 2.3                      | %      |

 

F-47

----

 

***(k)***                                 ***Acquisition Kappa SCAO***

 

Under Dutch GAAP the results ofthe operations of Kappa SCAO are consolidated as from the date economicownership is applicable. Under US GAAP the results of operations areconsolidated as from the closing date of the acquisition.  For Dutch GAAP reporting purposes theresults of the operations of Kappa SCAO have been consolidated as from January1, 2000, for US GAAP purposes, the results are included from the effective dateof March 20, 2000.  The result of theoperations of Kappa SCAO for the period January 1, 2000 until March 20, 2000was €0.7 million.

 

***(l)***                                    ***Extraordinary items***

 

The non-recurring items, whichare recorded as extraordinary items under Dutch GAAP do not qualify asextraordinary items under US GAAP.

 

***(m)***                              ***Operating income under US GAAPpresentation***

 

The income statement presentedin the US GAAP format would result in a reclassification of extraordinary itemsto operating income for the year 2000. For the year 2001, the income statement presented in the US GAAP formatwould result in a reclassification of extraordinary items to financial expenses(€22.0 million loss before taxation) and to a separate line between operatingincome and extraordinary item (€1.9 million gain before taxation).

 

***(n)***                                 ***Balance sheet reclassificationsunder US GAAP presentation***

 

The balance sheet presented inthe US GAAP format would result in a reclassification of the Shareholders’loans to liabilities from the mezzanine level as there are no equitycharacteristics of this debt as defined under US GAAP.

 

***(o)***                                 ***Cash flow***

 

Thecash flow statement has been prepared on a consistent basis and presented inaccordance with Dutch GAAP and International Financial and Reporting Standards.

 

***Recently issued accounting pronouncements***

 

TheFinancial Accounting Standards Board in The United States (FASB) has issuedcertain Statements of Financial Accounting Standards (SFAS), each of which,when adopted, will affect our consolidated financial statements for US GAAPreporting.

 

In June2001, the FASB issued SFAS 143, “Accounting for Asset RetirementObligations” (SFAS 143). SFAS 143 establishes accounting standards for therecognition and measurement of a liability for the costs of asset retirementobligations. Under SFAS 143, the costs of retiring an asset will be recorded asa liability when the retirement obligation arises, and will be amortized toexpense over the estimated useful life of the asset. SFAS 143 will becomeeffective for the Group on January 1, 2003. The adoption of SFAS 143 isexpected not to have a material impact on the consolidated results ofoperations, financial position or cash flows.

 

In April 2002, the FASB issuedSFAS 145 “Recission of FAS no. 4, 44, and 64, amendment of FAS 13, andtechnical corrections.” SFAS 145 rescinds SFAS 4 and SFAS 64, which addressedthe accounting for gains and losses from extinguishments of debt, rescinds SFAS44 which set forth industry-specific transitional guidance, amends SFAS 13 torequire that certain lease modifications that have economic effects similar tosale-leaseback transactions be accounted for in the same manner as sale-leasebacktransactions and makes technical corrections to certain existing pronouncementsthat are not substantive in nature. The adoption of SFAS 145 is not expected tohave a material impact on our consolidated results of operations, financialpositions or cash flows.

 

In June 2002, the FASB issuedSFAS 146, “Accounting for costs Associated with Exit or Disposal Activities”(SFAS 146). SFAS 146 requires that a liability for a cost associated with anexit or disposal activity be recognized and measured initially at its fairvalue in the period in which the liability is incurred. Previously a liabilityfor an exit cost was recognized at the date

 

F-48

----

 

of an entity’s commitment to anexit plan, however, this does not, by itself, create a present obligation toothers that meets the definition of a liability. SFAS 146 will be effective forthe Group for any exit or disposal activities that are initiated after December31, 2002. The adoption of SFAS 146 may have a material impact on ourconsolidated results of operations and financial position since Dutch GAAPpermits the recognition of liabilities for costs associated with an exit ordisposal activity at the time the exit plan is approved and communicated by management.

 

In November 2002, the FinancialAccounting Standards Board issued FASB Interpretation No. 45 (“FIN 45”),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guaranteed of Indebtedness of Others.” FIN 45 requires that aliability recorded in the guarantor’s balance sheet upon issuance of aguarantee. In addition, FIN 45 requires disclosures about the guarantees thatan entity has issued, including reconciliation of changes in the entity’sproduct warranty liabilities. The initial recognition and initial measurementprovisions of FIN 45 are applicable on a prospective basis to guarantees issuedor modified after December 31, 2002, irrespective of the guarantor’s fiscalyear-end. The disclosure requirements of FIN 45 are effective for financialstatements of interim or annual periods ending after December 15, 2002. Theadoption of FIN 45 is not expected to have a material impact on our futureconsolidated results of operations, financial positions or cash flows.

 

In January 2003, the FASBissued FASB interpretation No. 46 (FIN “46”), “Consolidation of VariableInterest Entities, and Interpretation of ARB No. 51.” FIN 46 requires certainvariable interest entities to be consolidated by the primary beneficiary of theentity if the entity investors in the entity do not have the characteristics ofa controlling financial interest or do not have sufficient equity at risk forthe entity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003. Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003. The adoption of FIN 46 is not expected to have amaterial impact on our future consolidated results of operations, financialpositions or cash flows.

 

**29.**                               **Supplemental Guarantor Footnote**

 

Presented below is informationfor Kappa Beheer B.V., the issuer of the Group’s high yield debt securitiesunder this registration statement, Kappa Holding B.V., Kappa Packaging B.V. andthe subsidiaries of Kappa Packaging B.V. (“Kappa Packaging Subsidiaries”).

 

Kappa Beheer B.V., KappaPackaging B.V. and Kappa Packaging Subsidiaries are wholly-owned subsidiariesof Kappa Holding B.V.  Pursuant to theindentures and the notes, Kappa Packaging B.V. and Kappa Holding B.V. jointly andseverally, fully and unconditionally guarantee Kappa Beheer B.V.’s high yielddebt securities.  Kappa Holding B.V. isthe parent guarantor and Kappa Packaging B.V. is the subsidiary guarantor.

 

The Group has not providedreconciliations from Dutch GAAP to US GAAP for the columns relating to theguarantor entities as such reconciliations would not materially affect aninvestor’s understanding of the nature of the guarantee.  The majority of the reconciling itemsbetween Dutch GAAP and US GAAP relate to the operating activities of thenon-guarantor subsidiaries and these amounts would only affect the guarantors’investment in group companies and equity earnings of subsidiaries.

 

F-49

----

 

**KAPPA PACKAGING GROUP**

**CONSOLIDATEDSTATEMENTS OF INCOME**

*For the year endedDecember 31, 2002*

*(€ in millions)*

 
|                                                                      |   | **Consolidated**              |   |             |   | **Non-Guarantor  Subsidiaries**      |   | **Subsidiary   Guarantor**  |   | **Issuer**             |   | **Parent   Guarantor**   |   |
|---------------------------------------------------------------------------|--------|-------------------------------|--------|------------------|--------|--------------------------------------|--------|-----------------------------|--------|------------------------|--------|--------------------------|--------|
|                                                                      |   | **Kappa   Packaging   Group** |   | **Eliminations** |   | **Kappa   Packaging   Subsidiaries** |   | **Kappa   Packaging  B.V.** |   | **Kappa  Beheer B.V.** |   | **Kappa  Holding  B.V.** |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Sales**                                                                 |   | 2,923.8                       |   | —           |   | 2,923.8                              |   | —                      |   | —                 |   | —                   |   |
| Net change in work in progress and finished  goods                        |   | 13.8                          |   | —           |   | 13.8                                 |   | —                      |   | —                 |   | —                   |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Net sales including net change in work in progress and finished goods** |   | 2,937.6                       |   | —           |   | 2,937.6                              |   | —                      |   | —                 |   | —                   |   |
| Raw material costs                                                        |   | (1,077.6                      | )      | —           |   | (1,077.6                             | )      | —                      |   | —                 |   | —                   |   |
| External services                                                         |   | (523.3                        | )      | —           |   | (523.3                               | )      | —                      |   | —                 |   | —                   |   |
| Labor costs                                                               |   | (697.9                        | )      | —           |   | (697.9                               | )      | —                      |   | —                 |   | —                   |   |
| Other operating costs                                                     |   | (197.8                        | )      | —           |   | (197.4                               | )      | —                      |   | —                 |   | (0.4                     | )      |
| Depreciation, amortization and impairment  charges                        |   | (218.5                        | )      | —           |   | (217.9                               | )      | (0.6                        | )      | —                 |   | —                   |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Total operating costs and expenses**                                    |   | (2,715.1                      | )      | —           |   | (2,714.1                             | )      | (0.6                        | )      | —                 |   | (0.4                     | )      |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Operating income**                                                      |   | 222.5                         |   | —           |   | 223.5                                |   | (0.6                        | )      | —                 |   | (0.4                     | )      |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| Interest income/(expense), net                                            |   | (192.0                        | )      | —           |   | (220.4                               | )      | (11.8                       | )      | 40.2                   |   | —                   |   |
| Interest income/(expense) Holding/Beheer  loan                            |   | —                        |   | —           |   | —                               |   | —                      |   | (47.4                  | )      | 47.4                     |   |
| Interest expense Shareholders’ loans                                 |   | (46.2                         | )      | —           |   | 0.1                                  |   | —                      |   | —                 |   | (46.3                    | )      |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Result before income taxes**                                            |   | (15.7                         | )      | —           |   | 3.2                                  |   | (12.4                       | )      | (7.2                   | )      | 0.7                      |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| Income taxes                                                              |   | 5.4                           |   | —           |   | 0.2                                  |   | 1.6                         |   | 4.9                    |   | (1.3                     | )      |
| Income from participations                                                |   | 0.6                           |   | —           |   | 0.6                                  |   | —                      |   | —                 |   | —                   |   |
| Minority interests                                                        |   | (0.2                          | )      | —           |   | —                               |   | (0.2                        | )      | —                 |   | —                   |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Income/(loss) before extraordinary items**                              |   | (9.9                          | )      | —           |   | 4.0                                  |   | (11.0                       | )      | (2.3                   | )      | (0.6                     | )      |
| Extraordinary items, net of tax                                           |   | —                        |   | —           |   | —                               |   | —                      |   | —                 |   | —                   |   |
|                                                                      |   |                          |   |             |   |                                 |   |                        |   |                   |   |                     |   |
| **Income before equity in earnings of subsidiaries**                      |   | (9.9                          | )      | —           |   | 4.0                                  |   | (11.0                       | )      | (2.3                   | )      | (0.6                     | )      |
| Equity in earnings of subsidiaries                                        |   | —                        |   | 12.3             |   | —                               |   | 4.0                         |   | (7.0                   | )      | (9.3                     | )      |
| **Net income/(loss)**                                                     |   | (9.9                          | )      | 12.3             |   | 4.0                                  |   | (7.0                        | )      | (9.3                   | )      | (9.9                     | )      |

 

F-50

----

 

**KAPPA PACKAGING GROUP**

**CONSOLIDATED BALANCESHEET**

*As at December 31,2002*

*(€ in millions)*

 
|                                            |   | **Consolidated**              |   |             |   | **Non-Guarantor  Subsidiaries**     |   | **Subsidiary   Guarantor**   |   | **Issuer**             |   | **Parent   Guarantor**    |   |
|-------------------------------------------------|--------|-------------------------------|--------|------------------|--------|-------------------------------------|--------|------------------------------|--------|------------------------|--------|---------------------------|--------|
|                                            |   | **Kappa   Packaging   Group** |   | **Eliminations** |   | **Kappa  Packaging   Subsidiaries** |   | **Kappa   Packaging   B.V.** |   | **Kappa  Beheer B.V.** |   | **Kappa   Holding  B.V.** |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| **Assets**                                      |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Cash and cash equivalents                       |   | 233.6                         |   | —           |   | 233.6                               |   | —                       |   | —                 |   | —                    |   |
| Accounts receivable                             |   | 451.5                         |   | —           |   | 451.5                               |   | —                       |   | —                 |   | —                    |   |
| Other receivables                               |   | 55.6                          |   | —           |   | 55.1                                |   | 0.1                          |   | —                 |   | 0.4                       |   |
| Inventories                                     |   | 272.2                         |   | —           |   | 272.2                               |   | —                       |   | —                 |   | —                    |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Total current assets                            |   | 1,012.9                       |   | —           |   | 1,012.4                             |   | 0.1                          |   | —                 |   | 0.4                       |   |
| Investments in Group companies                  |   | —                        |   | (512.3           | )      | —                              |   | 264.5                        |   | 123.8                  |   | 124.0                     |   |
| Loans to Group companies                        |   | —                        |   | (3,689.2         | )      | —                              |   | 2,350.8                      |   | 1,338.4                |   | —                    |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Total investments and advances affiliates       |   | —                        |   | (4,201.5         | )      | —                              |   | 2,615.3                      |   | 1,462.2                |   | 124.0                     |   |
| Tangible fixed assets                           |   | 1,654.7                       |   | —           |   | 1,654.7                             |   | —                       |   | —                 |   | —                    |   |
| Intangible fixed assets                         |   | 882.1                         |   | —           |   | 853.2                               |   | 21.2                         |   | 7.7                    |   | —                    |   |
| Other non-current assets                        |   | 93.6                          |   | —           |   | 57.8                                |   | 35.8                         |   | —                 |   | —                    |   |
|                                            |   | 3,643.3                       |   | (4,201.5         | )      | 3,578.1                             |   | 2,672.4                      |   | 1,469.9                |   | 124.4                     |   |
| **Liabilities**                                 |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Bank overdrafts                                 |   | 1.4                           |   | —           |   | 1.4                                 |   | —                       |   | —                 |   | —                    |   |
| Current portion of term loan facilities         |   | 101.8                         |   | —           |   | —                              |   | 101.8                        |   | —                 |   | —                    |   |
| Current portion of other long-term  liabilities |   | 5.6                           |   | —           |   | 5.6                                 |   | —                       |   | —                 |   | —                    |   |
| Other current liabilities                       |   | 507.1                         |   | —           |   | 478.4                               |   | 0.6                          |   | 28.1                   |   | —                    |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Total current liabilities                       |   | 615.9                         |   | —           |   | 485.4                               |   | 102.4                        |   | 28.1                   |   | —                    |   |
| Long-term debt due to Group companies           |   | —                        |   | (3,689.2         | )      | 2,540.9                             |   | 1,143.6                      |   | —                 |   | 4.7                       |   |
| Term loan facilities                            |   | 1,301.3                       |   | —           |   | —                              |   | 1,301.3                      |   | —                 |   | —                    |   |
| Senior subordinated notes                       |   | 685.5                         |   | —           |   | —                              |   | —                       |   | 685.5                  |   | —                    |   |
| Other long-term debt                            |   | 15.0                          |   | —           |   | 15.0                                |   | —                       |   | —                 |   | —                    |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Total long-term liabilities                     |   | 2,001.8                       |   | (3,689.2         | )      | 2,555.9                             |   | 2,444.9                      |   | 685.5                  |   | 4.7                       |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Provisions                                      |   | 272.3                         |   | —           |   | 272.3                               |   | —                       |   | —                 |   | —                    |   |
| Shareholders’ loans                        |   | 628.0                         |   | —           |   | —                              |   | —                       |   | —                 |   | 628.0                     |   |
| Kappa  Holding/Kappa Beheer loan                |   | —                        |   | —           |   | —                              |   | —                       |   | 632.3                  |   | (632.3                    | )      |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Minority interests                              |   | 1.3                           |   | —           |   | —                              |   | 1.3                          |   | —                 |   | —                    |   |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| **Shareholders’ equity**                   |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Share capital                                   |   | 0.8                           |   | —           |   | —                              |   | —                       |   | —                 |   | 0.8                       |   |
| Additional paid-in capital                      |   | 152.9                         |   | (558.6           | )      | 256.2                               |   | 151.2                        |   | 151.2                  |   | 152.9                     |   |
| Retained earnings                               |   | (5.6                          | )      | (13.2            | )      | 19.6                                |   | (3.3                         | )      | (3.1                   | )      | (5.6                      | )      |
| Cumulative translation adjustment               |   | (24.1                         | )      | 59.5             |   | (11.3                               | )      | (24.1                        | )      | (24.1                  | )      | (24.1                     | )      |
|                                            |   |                          |   |             |   |                                |   |                         |   |                   |   |                      |   |
| Total Shareholders’ equity                 |   | 124.0                         |   | (512.3           | )      | 264.5                               |   | 123.8                        |   | 124.0                  |   | 124.0                     |   |
|                                            |   | 3,643.3                       |   | (4,201.5         | )      | 3,578.1                             |   | 2,672.4                      |   | 1,469.9                |   | 124.4                     |   |

 

F-51

----

 

**KAPPA PACKAGING GROUP**

**CONSOLIDATED CASHFLOW STATEMENT**

*For the year endedDecember 31, 2002*

*(€ in millions)*

 
|                                                                   |   | **Consolidated**              |       |             |       | **Non-Guarantor  Subsidiaries**     |       | **Subsidiary   Guarantor**  |       | **Issuer**             |       | **Parent   Guarantor**   |       |
|------------------------------------------------------------------------|--------|-------------------------------|------------|------------------|------------|-------------------------------------|------------|-----------------------------|------------|------------------------|------------|--------------------------|------------|
|                                                                   |   | **Kappa   Packaging   Group** |       | **Eliminations** |       | **Kappa  Packaging   Subsidiaries** |       | **Kappa   Packaging  B.V.** |       | **Kappa  Beheer B.V.** |       | **Kappa  Holding  B.V.** |       |
|                                                                   |   |                          | ** ** |             | ** ** |                                | ** ** |                        | ** ** |                   | ** ** |                     | ** ** |
| **Cash flows from operating activities**                               |   | (9.9                          | )          | 12.3             |       | 4.0                                 |       | (7.0                        | )          | (9.3                   | )          | (9.9                     | )          |
| Net income                                                             |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| *Adjustments to reconcile net income to cash  provided by operations:* |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Depreciation of tangible fixed  assets                                 |   | 187.8                         |       | —           |       | 187.8                               |       | —                      |       | —                 |       | —                   |       |
| Amortization of intangible  fixed assets                               |   | 30.7                          |       | —           |       | 30.1                                |       | 0.6                         |       | —                 |       | —                   |       |
| Amortization of finance charges                                        |   | 11.3                          |       | —           |       | 5.1                                 |       | 5.6                         |       | 0.6                    |       | —                   |       |
| Share in result of  participations                                     |   | (0.6                          | )          | —           |       | (0.6                                | )          | —                      |       | —                 |       | —                   |       |
| Minority interests                                                     |   | 0.2                           |       | —           |       | —                              |       | 0.2                         |       | —                 |       | —                   |       |
| Non-cash interest on  Shareholders’ loans                         |   | 46.2                          |       | —           |       | —                              |       | —                      |       | —                 |       | 46.2                     |       |
| Non-cash interest on Senior  Subordinated Notes                        |   | 13.8                          |       | —           |       | —                              |       | —                      |       | 13.8                   |       | —                   |       |
| Non-cash interest on Kappa  Holding/Kappa Beheer loan                  |   | —                        |       | —           |       | —                              |       | —                      |       | 47.4                   |       | (47.4                    | )          |
| Addition to/(release from) pension  provisions                         |   | 8.5                           |       | —           |       | 8.5                                 |       | —                      |       | —                 |       | —                   |       |
| Addition to/(release from) deferred tax  liabilities                   |   | (7.9                          | )          | —           |       | (7.9                                | )          | —                      |       | —                 |       | —                   |       |
| Addition to/(release from restructuring and  other provisions          |   | 6.5                           |       | —           |       | 6.5                                 |       | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| *Changes in operating assets and  liabilities:*                        |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Inventories                                                            |   | (18.2                         | )          | —           |       | (18.2                               | )          | —                      |       | —                 |       | —                   |       |
| Accounts receivable                                                    |   | 16.6                          |       | —           |       | 16.6                                |       | —                      |       | —                 |       | —                   |       |
| Other receivables                                                      |   | 15.6                          |       | —           |       | 12.4                                |       | 3.6                         |       | —                 |       | (0.4                     | )          |
| Accounts payable                                                       |   | 51.8                          |       | —           |       | 51.8                                |       | —                      |       | —                 |       | —                   |       |
| Accrued liabilities                                                    |   | (31.4                         | )          | —           |       | (28.8                               | )          | (2.0                        | )          | (0.4                   | )          | (0.2                     | )          |
| Increase/(decrease) in  intercompany receivables, net                  |   | —                        |       | —           |       | (10.7                               | )          | 67.4                        |       | (59.1                  | )          | 2.4                      |       |
| Paid from restructuring and  other provisions                          |   | (39.5                         | )          | —           |       | (39.5                               | )          | —                      |       | —                 |       | —                   |       |
| Paid from pension provision                                            |   | (8.0                          | )          | —           |       | (8.0                                | )          | —                      |       | —                 |       | —                   |       |
| Equity in earnings of group  companies                                 |   | —                        |       | (12.3            | )          | —                              |       | (4.0                        | )          | 7.0                    |       | 9.3                      |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Net cash flow from operating  activities                               |   | 273.5                         |       | —           |       | 209.1                               |       | 64.4                        |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| **Cash flow from investing activities**                                |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Investments, net in tangible  fixed assets                             |   | (162.1                        | )          | —           |       | (162.1                              | )          | —                      |       | —                 |       | —                   |       |
| Investments, net in intangible  fixed assets                           |   | (2.3                          | )          | —           |       | (2.3                                | )          | —                      |       | —                 |       | —                   |       |
| Investments, net in non-current  assets                                |   | 2.3                           |       | —           |       | 2.3                                 |       | —                      |       | —                 |       | —                   |       |
| Disposal of Group companies                                            |   | 0.3                           |       | —           |       | 0.3                                 |       | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Net cash used in investing  activities                                 |   | (161.8                        | )          | —           |       | (161.8                              | )          | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          | ** ** |             | ** ** |                                | ** ** |                        | ** ** |                   | ** ** |                     | ** ** |
| **Cash flow from financing activities**                                |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Repayment of term loan  facilities                                     |   | (75.5                         | )          | —           |       | —                              |       | (75.5                       | )          | —                 |       | —                   |       |
| Short-term borrowings banks repaid                                     |   | (18.6                         | )          | —           |       | (18.6                               | )          | —                      |       | —                 |       | —                   |       |
| Other long-term debt repaid                                            |   | (5.6                          | )          | —           |       | (5.6                                | )          | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Net cash flow used in financing  activities                            |   | (99.7                         | )          | —           |       | (24.2                               | )          | (75.5                       | )          | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| **Change in cash and equivalents**                                     |   | 12.0                          |       | —           |       | 23.1                                |       | (11.1                       | )          | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Cash and cash equivalents  beginning of the period                     |   | 217.6                         |       | —           |       | 206.5                               |       | 11.1                        |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Effect of exchange rate changes  on cash                               |   | 4.0                           |       | —           |       | 4.0                                 |       | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| **Cash and cash equivalents end of period**                            |   | 233.6                         |       | —           |       | 233.6                               |       | —                      |       | —                 |       | —                   |       |
|                                                                   |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| **Supplemental cash flow information**                                 |   |                          |       |             |       |                                |       |                        |       |                   |       |                     |       |
| Interest paid                                                          |   | 165.9                         |       | —           |       | (3.5                                | )          | 107.8                       |       | 61.6                   | * *   | *—*                 | * *   |
| Income taxes paid/(refund)                                             |   | 9.4                           |       | —           |       | 9.4                                 |       | —                      |       | —                 |       | —                   |       |

 

52

----

 

**30.**                               **Valuation and Qualifying Accounts**

 
| **(€ in millions)**        |   | **Balance at  the   beginning of the   year** |   | **Charges to  costs and   expenses** |   | **Deductions** |   | **Acquisitions** |   | **Balance at  the end of  the year** |   |
|---------------------------------|--------|-----------------------------------------------|--------|--------------------------------------|--------|----------------|--------|------------------|--------|--------------------------------------|--------|
| *Year ended December 31, 2002*  |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Allowance for doubtful accounts |   | 27.1                                          |   | 6.7                                  |   | (11.6          | )      | —           |   | 22.2                                 |   |
| *Year ended December 31, 2001*  |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Allowance for doubtful accounts |   | 7.8                                           |   | 6.2                                  |   | (2.5           | )      | 15.6             |   | 27.1                                 |   |
| *Year ended December 31,2000*   |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Allowance for doubtful accounts |   | 9.0                                           |   | 2.4                                  |   | (3.6           | )      | —           |   | 7.8                                  |   |
|                            |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| *Year ended December 31, 2002*  |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Inventory obsolescence reserve  |   | 9.5                                           |   | 2.9                                  |   | —         |   | —           |   | 12.4                                 |   |
| *Year ended December 31, 2001*  |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Inventory obsolescence reserve  |   | 3.4                                           |   | (1.4                                 | )      | —         |   | 7.5              |   | 9.5                                  |   |
| *Year ended December 31,2000*   |   |                                          |   |                                 |   |           |   |             |   |                                 |   |
| Inventory obsolescence reserve  |   | 4.1                                           |   | —                               |   | (0.7           | )      | —           |   | 3.4                                  |   |

 

Comparative figures for theinventory obsolescence reserve have been adjusted as the adjustment forintercompany profit elimination on inventory was incorrectly accounted for aspart of the inventory obsolescence reserve.

 

**31.**                               **Subsequent Events**

 

In March 2003, the Group agreedto acquire a small Norwegian corrugated board manufacturer Grenland Papp AS andto increase its interest in Orko Pak B.V. from 50% to 100%, a small corrugatedconverting plant in the North of The Netherlands.

 

In May 2003, the KappaPackaging Group issued Senior Subordinated Notes of €95.0 million that resultedin net proceeds of €100.7 million. On June 23, 2003 the proceeds of this noteissuance were used to redeem the euro-denominated mezzanine notes of €100.0million issued on May 18, 2001 by Kappa Beheer B.V. The total redemption of themezzanine notes amounted to €107.5 million including accumulated interest andan early repayment charge. The warrants issued together with the mezzaninenotes were cancelled.

 

The interest rate on the newSenior Subordinated Notes has been set at 105/8% and ispayable semi-annually on January 15 and July 15 of each year commencing on July15, 2003.

 

In June 2003, discussions withthe local works council have largely been concluded regarding the closure ofKappa Mennecy Paper (Mennecy, France). The mill will not be started-up againafter the shut down in April 2003, as a result of which approximately 100employees become redundant.

 

F-53

----

 

**32.**                               **Summary of subsidiaries**

 

All subsidiaries are 100% ownedless otherwise noted.

 
| ***Corporate***                                                                               |   |                   |
|-----------------------------------------------------------------------------------------------|--------|------------------------|
| Kappa Beheer B.V., Eindhoven                                                                  |   | The  Netherlands       |
| Kappa  Packaging B.V., Eindhoven                                                              |   | The  Netherlands       |
| Kappa Packaging Nederland Holding B.V., Eindhoven                                             |   | The Netherlands        |
| Kappa Packaging Nederland B.V., Eindhoven                                                     |   | The  Netherlands       |
| Kappa  Packaging International B.V., Eindhoven                                                |   | The  Netherlands       |
| Kappa  Packaging (Deutschland) GmbH, Cologne                                                  |   | Germany                |
| Kappa  Packaging Czech, s.r.o., Zimrovice                                                     |   | Czech  Republic        |
| Kappa  Packaging UK Limited, Corby                                                            |   | United  Kingdom        |
| Kappa  Packaging France SAS, Brétigny-sur-Orge                                           |   | France                 |
| Kappa Packaging Sweden AB, Stockholm                                                          |   | Sweden                 |
| Kappa  Packaging España SL, San Vincente del Raspeig (Alicante)                          |   | Spain                  |
| Kappa  Packaging Denmark AS, Kolding                                                          |   | Denmark                |
| Kappa  Corrugated Finland Oy, Pirkkala                                                        |   | Finland                |
| Kappa  Packaging Development Center B.V., Hoogeveen                                           |   | The  Netherlands       |
|                                                                                          |   |                   |
| ***Paper & Board***                                                                       |   |                   |
| *Recovered Paper*                                                                             |   |                   |
| Kappa Paper Recycling B.V., ‘s-Hertogenbosch                                             |   | The Netherlands        |
| Kappa Spaarpapier N.V., Merksem Antwerpen                                                     |   | Belgium                |
| Kappa Levison GmbH, Mülheim a/d Ruhr                                                     |   | Germany                |
| AVR-Rietveld  C.V., Capelle a/d IJssel                                                        |   | The  Netherlands (50%) |
| Kappa Paper  Recycling (UK), Birmingham                                                       |   | United  Kingdom        |
|                                                                                          |   |                   |
| *Containerboard*                                                                              |   |                   |
| Kappa Kraftliner AB, Piteå                                                               |   | Sweden                 |
| Kappa Roermond Papier B.V., Roermond                                                          |   | The Netherlands        |
| Kappa Zülpich Papier GmbH, Zülpich                                                  |   | Germany                |
| Kappa Wiesloch Papier GmbH, Wiesloch                                                          |   | Germany                |
| Kappa SSK  Ltd., Birmingham                                                                   |   | United  Kingdom        |
| Kappa  Packaging SpA (“Kappa Ania Paper”), Ponte all’Ania                      |   | Italy                  |
| Kappa Packaging  Czech, s.r.o. (“Kappa Morava Paper”), Žimrovice               |   | Czech  Republic        |
| Kappa  Mennecy Paper S.A., Mennecy                                                            |   | France                 |
| Kappa  Štúrovo, a.s (“ Kappa Štúrovo Paper”), Štúrovo |   | Slovakia  (98.5%)      |
| Kappa  Containerboard B.V., Roermond                                                          |   | The  Netherlands       |
| Kappa  Containerboard Benelux B.V., Roermond                                                  |   | The  Netherlands       |
| Kappa  Containerboard Ibérica, S.L., Barcelona                                           |   | Spain                  |
| Kappa  Containerboard France SAS, Paris                                                       |   | France                 |
| Kappa  Containerboard Italiana Srl, San Donato Milanese                                       |   | Italy                  |
| Kappa  Containerboard GmbH, Hamburg                                                           |   | Germany                |
| Kappa  Containerboard AG, Basel                                                               |   | Switzerland            |
| Kappa  Containerboard UK Ltd., Newmarket                                                      |   | United  Kingdom        |
|                                                                                          |   |                   |
| *Solid Board*                                                                                 |   |                   |
| Kappa Herzberger Papierfabrik GmbH, Herzberg am Harz                                          |   | Germany                |
| Kappa BADENKARTON GmbH, Gernsbach                                                             |   | Germany                |
| Kappa Triton B.V., Nieuweschans/Coevorden                                                     |   | The Netherlands        |
| Kappa Štúrovo, a.s. (Kappa Štúrovo Solid Board”), Štúrovo  |   | Slovakia (98.5%)       |
| Kappa Attica B.V., Oude Pekela                                                                |   | The  Netherlands       |
| Kappa  Graphic Board B.V., Sappemeer/Hoogezand                                                |   | The  Netherlands       |
| Kappa  Graphic Board S.A., Orly                                                               |   | France                 |

 

F-54

----

 
| Kappa  Graphic Board GmbH, Essen                             |   | Germany                |
|--------------------------------------------------------------|--------|------------------------|
| Kappa  Graphic Board S.r.l., San Donato Milanese, Milan      |   | Italy                  |
| Kappa  Graphic Board S.A., Barcelona                         |   | Spain                  |
| Kappa  Graphic Board (UK) Ltd, Northampton                   |   | United  Kingdom        |
| Kappa  Graphic Board USA B.V., Chesapeake, VA                |   | USA                    |
|                                                         |   |                   |
| ***Packaging***                                              |   |                   |
| *Packaging  Benelux & UK*                                |   |                   |
| Kappa Empee Golfkarton B.V., Eindhoven                       |   | The  Netherlands       |
| Kappa Hermes  N.V., Baarn                                    |   | The  Netherlands       |
| Kappa Oudenbosch Golfkarton B.V., Etten-Leur/Oudenbosch      |   | The Netherlands        |
| Kappa TWINCORR B.V., Hoogeveen/Nieuwe Pekela                 |   | The Netherlands        |
| Kappa De Zeeuw Golfkarton B.V., Eerbeek                      |   | The  Netherlands       |
| Carton  Creations B.V., Eerbeek                              |   | The Netherlands        |
| Kappa Vandra Golfkarton B.V., Oosterhout                     |   | The Netherlands        |
| Kappa Van Dam Golfkarton B.V., Helmond                       |   | The  Netherlands       |
| Kappa Zedek  B.V., Deventer                                  |   | The  Netherlands       |
| Kappa Drogenbos N.V., Drogenbos                              |   | Belgium                |
| Kappa Van Mierlo N.V., Turnhout                              |   | Belgium                |
| Orko-Pak  B.V., Zwolle                                       |   | The  Netherlands (50%) |
| Kappa  Turnhout N.V., Turnhout                               |   | Belgium                |
| Kappa Boxcentre Olen N.V., Olen-Geel                         |   | Belgium                |
| Kappa  Corrugated UK Limited, Northampton                    |   | United  Kingdom        |
| -Kappa Abercarn, Abercarn                                    |   | United  Kingdom        |
| -Kappa Lokfast, Cumbernauld/Purfleet                         |   | United  Kingdom        |
| -Kappa Machine Systems, Yate                                 |   | United Kingdom         |
| -Kappa Northampton, Northampton                              |   | United  Kingdom        |
| -Kappa Stalybridge, Stalybridge                              |   | United  Kingdom        |
| -Kappa Yate, Yate                                            |   | United  Kingdom        |
|                                                         |   |                   |
| *Packaging France*                                           |   |                   |
| Kappa  Central Pac SAS, Brétigny-sur-Orge/Melun/Etampes |   | France                 |
| Kappa Dore  Emballage SAS, La Chapelle Agnon                 |   | France                 |
| Kappa  Graphila S.A.R.L., Pont Saint Martin                  |   | France                 |
| Kappa Maine  Emballages SAS, La Suze sur Sarthe              |   | France                 |
| Kappa SCAO  SAS, Gétigné/Braye enVal               |   | France                 |
| Kappa SIEMCO  SAS, Carquefou                                 |   | France                 |
|                                                         |   |                   |
| *Packaging Germany & Switzerland*                        |   |                   |
| Kappa RapidCorr GmbH, Euskirchen                             |   | Germany                |
| Kappa Paul  Emil Hoesch GmbH & Co.  KG, Euskirchen  |   | Germany                |
| Kappa Herzberger Wellpappe GmbH, Herzberg am Harz            |   | Germany                |
| Kappa Kawell GmbH, Osnabrück                            |   | Germany                |
| Kappa Rheinwelle GmbH, Kreuzau                               |   | Germany                |
| Kappa Topwell Verpackungen GmbH, Velbert                     |   | Germany                |
| Kappa Sieger GmbH:                                           |   |                   |
| -Kappa  Wellpappe Brühl, Brühl                     |   | Germany                |
| -Kappa  Wellpappe Feucht, Feucht                             |   | Germany                |
| -Kappa  Wellpappe Hanau, Hanau                               |   | Germany                |
| -Kappa  Wellpappe Sarstedt, Sarstedt                         |   | Germany                |
| Kappa Wellpappe Lübeck GmbH, Lübeck                |   | Germany                |
| Kappa  Holfelder Werke GmbH & Co. KG:                    |   | Germany                |
| -Kappa Wellpappe Wiesloch, St Leon-Rot                       |   | Germany                |
| -Kappa  Wellpappe Zwiesel, Zwiesel                           |   | Germany                |
| Kappa Swisswell AG, Möhlin                              |   | Switzerland            |

 

F-55

----

 
| *Packaging Italy & Spain*                                                                        |   |             |
|------------------------------------------------------------------------------------------------------|--------|------------------|
| Kappa  Packaging SpA:                                                                                |   |             |
| -Kappa Packaging Lunata, Lunata                                                                      |   | Italy            |
| -Kappa Packaging Badia, Badia Pozzeveri                                                              |   | Italy            |
| -Kappa Packaging Rovigo, Martino di Venezze                                                          |   | Italy            |
| -Kappa Packaging Vignate, Vignate                                                                    |   | Italy            |
| Kappa  Iberoamericana, S.A., San Vicente del Raspeig (Alicante)                                      |   | Spain            |
| Kappa  Iberoamericana Almeria, S.A., Vicar (Almeria)                                                 |   | Spain            |
| Kappa  Iberoamericana Catalunya, S.A., San Vicente dels Horts (Barcelona)                            |   | Spain            |
| Kappa  Iberoamericana Huelva, S.A., La Palma del Condado (Huelva)                                    |   | Spain            |
| Kappa  Iberoamericana Jerez, S.L., Jerez de la Frontera (Cadiz)                                      |   | Spain            |
| Kappa  Iberoamericana, S.A. (“Kappa Iberoamericana Canarias”), Las Palmas de Gran  Canaria |   | Spain            |
|                                                                                                 |   |             |
| *Packaging Nordic & Central Europe*                                                              |   |             |
| Kappa Dansk  Kraftemballage A/S, Kolding                                                             |   | Denmark          |
| Kappa Borup  A/S, Borup                                                                              |   | Denmark          |
| Kappa  Corrpack A/S, Vejen                                                                           |   | Denmark          |
| Kappa  CorrPrint A/S, Vamdrup                                                                        |   | Denmark          |
| Kappa Ejby  A/S, Ejby                                                                                |   | Denmark          |
| Kappa  Emballage A/S, Herfølge                                                                  |   | Denmark          |
| Kappa Støvring A/S, Støvring                                                               |   | Denmark          |
| Kappa Varde A/S, Varde                                                                               |   | Denmark          |
| Kappa  Dyboflex A/S, Vejle                                                                           |   | Denmark          |
| Kappa DieCut  A/S, Kolding                                                                           |   | Denmark          |
| Kappa  ConsumerProducts A/S, Vejen                                                                   |   | Denmark          |
| Kappa Nordwell GmbH, Flensburg                                                                       |   | Germany          |
| Kappa  Packaging Baltic Ltd., Vilnius                                                                |   | Lithuania        |
| Kappa  Förenade Well AB, Eslöv/Torup/Gävle                                            |   | Sweden           |
| Kappa Liquid  Packaging, Eslöv                                                                  |   | Sweden           |
| Kappa  Wellpack, Eslöv                                                                          |   | Sweden           |
| Kappa  Corrugated Equipment, Eslöv                                                              |   | Sweden           |
| Kappa Mittpac AB, Bräcke                                                                        |   | Sweden           |
| Kappa Mälarwell AB, Enköping                                                               |   | Sweden           |
| Kappa Weltillverkaren AB, Arlöv                                                                 |   | Sweden           |
| Kappa Pakite Oy, Espoo                                                                               |   | Finland          |
| Kappa Pirkan Pakkaus Oy, Pirkkala                                                                    |   | Finland          |
| Kappa Seinäjoki Oy, Seinäjoki                                                              |   | Finland          |
| Kappa Drezdenko Sp.z o.o., Drezdenko                                                                 |   | Poland           |
| Kappa Konin Sp.z o.o., Warsaw                                                                        |   | Poland           |
| Kappa Gdansk Sp.z o.o., Pruszcz Gdanski                                                              |   | Poland           |
| Kappa  Warszawa Sp.z o.o., Warsaw                                                                    |   | Poland           |
| Kappa Empack  s.r.o., Olomouc                                                                        |   | Czech  Republic  |
| Kappa  Packaging Czech, s.r.o.                                                                       |   |             |
| -Kappa Žimrovice, Žimrovice                                                                |   | Czech  Republic  |
| -Kappa Brno, Brno                                                                                    |   | Czech  Republic  |
| Kappa Žebrák  s.r.o., Žebrák                                                     |   | Czech  Republic  |
| Kappa Obaly  Štúrovo a.s., Štúrovo                                               |   | Slovakia (98.5%) |
| Kappa Dunatrade Kft, Esztergon                                                                       |   | Hungary  (98.5%) |
| Kappa St.  Petersburg A/O, St. Petersburg                                                            |   | Russia           |

 

F-56

----

 
| *Solid Board Packaging*                              |   |                   |
|------------------------------------------------------|--------|------------------------|
| Kappa “GSF” B.V., Oude Pekela              |   | The Netherlands        |
| Kappa Trimbach B.V., Bergen op Zoom/Poeldijk         |   | The Netherlands        |
| Kappa Quama International B.V., Bergen op Zoom       |   | The Netherlands        |
| Kappa ZON Opzetcentrum B.V., Venlo                   |   | The  Netherlands (80%) |
| Kappa Solid  Board SA (Pty) Ltd., Stellenbosch       |   | South Africa           |
| Kappa Interbox N.V., Hoogstraten                     |   | Belgium                |
| Kappa BADEN PACKAGING GmbH, Gernsbach                |   | Germany                |
| Kappa Herzberger Papierfabrik GmbH, Herzberg am Harz |   | Germany                |
| Kappa Verpackungswerk Neuss GmbH, Neuss              |   | Germany                |
| Kappa Corby,  Corby                                  |   | United  Kingdom        |
| Kappa Rena  AS, Rena                                 |   | Norway                 |
| Kappa Carton  France S.a.r.l., Paris                 |   | France                 |
| Solid Board  Packaging Limited, Migdal Haemek        |   | Israel (50%)           |
| Kappa  Agripack SARL, Verquières                |   | France                 |

 

F-57

----

 

**Signatures**

 

Thisregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to signthis annual report on its behalf.

 
|               | **KAPPA HOLDING B.V.** |
|--------------------|------------------------|
|               |                   |
|               | By:                    | /s/ G.P.F. Beurskens |   |
|               | Name:                  | G.P.F.  Beurskens |
|               | Title:                 | President/Managing Director |
|               |                   |   |
|               |                   |   |
|               | By:                    | /s/ H. Wagter |   |
|               | Name:                  | H.  Wagter |
|               | Title:                 | Chief Financial Officer/Managing Director |
|               |                   |   |
| Dated July 8, 2003 |                   |

 

----

 

I, G.P.F. Beurskens, certify that:

 

1.                                 I have reviewed this annual report on Form 20-Fof Kappa Holding B.V.;

 

2.                                 Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.                                 Based on my knowledge, the financial statements,and other financial information included in this annual report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisannual report;

 

4.                                 The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)                 designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)                evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)                 presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                 The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                 all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                 The registrant’s other certifying officers and Ihave indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:   July 8, 2003 |   |
|---------------------------|--------|
|                      |   |
|                      | By:    | /s/ G.P.F. Beurskens |   |
|                      | Name:  | G.P.F.  Beurskens |
|                      | Title: | President/Managing Director |

 

----

 

I, H. Wagter, certify that:

 

1.                                 I have reviewed this annual report on Form 20-Fof Kappa Holding B.V.;

 

2.                                 Based on my knowledge, this annual report doesnot contain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this annual report;

 

3.                                 Based on my knowledge, the financial statements,and other financial information included in this annual report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisannual report;

 

4.                                 The registrant’s other certifying officers and Iare responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and have:

 

a)                 designed such disclosure controls and proceduresto ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)                evaluated the effectiveness of the registrant’sdisclosure controls and procedures as of a date within 90 days prior to thefiling date of this annual report (the “Evaluation Date”); and

 

c)                 presented in this annual report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.                                 The registrant’s other certifying officers and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)                 all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)                any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.                                 The registrant’s other certifying officers and Ihave indicated in this annual report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of our most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 
| Date:   July 8, 2003 |   |
|---------------------------|--------|
|                      | By:    | /s/ H. Wagter |   |
|                      | Name:  | H.  Wagter |
|                      | Title: | Chief Financial Officer/Managing Director |

 

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**Item19.  Exhibits**

** **
| **Exhibit No.** |   | **Description  of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1             |   | Deed of Incorporation and Articles of Association of Kappa Holding  B.V.  (including English  translation).*                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.1             |   | Indenture dated July 23, 1999 (the “Euro Indenture”) between Kappa  Beheer B.V., Kappa Holding B.V., Kappa Packaging B.V.  and The Bank of New York, London Branch,  as trustee, with respect to €370,000,000 aggregate principal amount of 105/8%  Senior Subordinated Notes due 2009 (the “Euro Notes”) (incorporated by  reference to Exhibit 4.1 of Form F-4 (Registration No.333-11044) of Kappa  Beheer B.V.). |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.2             |   | Supplemental Indenture dated May 17, 2001 to the Euro Indenture  between Kappa Beheer B.V., Kappa Holding B.V., Kappa Packaging B.V. and The  Bank of New York, London Branch, as trustee. *                                                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.3             |   | Form of Euro Note (included as part of Exhibit 2.1).                                                                                                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.4             |   | Form of Guarantee of Euro Note (included as part of Exhibit 2.1).                                                                                                                                                                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.5             |   | Indenture dated July 23, 1999 (the “Dollar Indenture”) between Kappa  Beheer B.V., Kappa Holding B.V., Kappa Packaging B.V. and The Bank of New  York, London Branch, as trustee, with respect to $100,000,000 aggregate  principal amount of 105/8% Senior Subordinated Notes  due 2009 (the “Dollar Notes”) (incorporated by reference to Exhibit 4.4 of  Form F-4 (Registration No. 333-11044) of Kappa Beheer B.V.).       |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.6             |   | Supplemental Indenture dated May 17, 2001 to the Dollar Indenture  between Kappa Beheer B.V., Kappa Holding B.V., Kappa Packaging B.V. and The  Bank of New York, London Branch, as trustee. *                                                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.7             |   | Form of Dollar Note (included as part of Exhibit 2.5)                                                                                                                                                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.8             |   | Form of Guarantee of Dollar Note (included as part of Exhibit 2.5)                                                                                                                                                                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.9             |   | Amendment and Restatement Agreement dated May 17, 2001 relating to a  Facility Agreement (Senior Credit Agreement) dated July 23, 1998, between  Kappa Packaging B.V.  and certain  companies within the Kappa Group, Barclays Capital and Deutsche Bank AG  London, as Senior Joint Mandated Lead Arrangers, and Barclays Bank Plc as  Senior Facility Agent and Security Agent. *                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.10            |   | Investors Loan Agreement dated July 23, 1998 between Kappa Holding  B.V.  as borrower and the CVC  Investors and the Cinven Investors (both as defined therein) as lenders  (incorporated by reference to Exhibit 10.4 of Form F-4 (Registration  No.333-11044) of Kappa Beheer B.V.).                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.11            |   | Amendment Agreement dated July 23, 1999 to the Investors Loan  Agreement dated July 23, 1998 (incorporated by reference to Exhibit 10.5 of  Form F-4 (Registration No.333-11044) of Kappa Beheer B.V.).                                                                                                                                                                                                                                            |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.12            |   | Statement of Eligibility and Qualification under the Trust Indenture  Act of 1939 of The Bank of New York, as trustee (incorporated by reference to  Exhibit 25.1 of Form F-4 (Registration No.333-11-44) of Kappa Beheer B.V.).                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.13            |   | Indenture dated May 18, 2001 between Kappa Beheer B.V., Kappa  Packaging.                                                                                                                                                                                                                                                                                                                                                                          |

 

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|   |   | B.V.  and The Bank of New  York, London Branch, as trustee, with respect to €100,000.00 aggregate  principal amount of 121⁄2% Senior Subordinated Notes due 2009  (the “121⁄2%  Notes”).*                                                                                                                                                                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.14   |   | Form of 121⁄2% Note (included as part of Exhibit 2.17).                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.15   |   | Form of Guarantee of 121⁄2% Note  (included as part of Exhibit 2.17).                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.16   |   | 2001 Shareholder Loan Agreement dated May 17, 2001, between Kappa  Holding B.V. as borrower and the CVC Investors and the Cinven Investors (both  as defined lenders under the Senior Credit Agreement, and the other party  listed therein.**                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.17   |   | Supplemental Indenture dated May 22, 2003 between Kappa Beheer B.V.  and Kappa Packaging B.V. and The Bank of New York, London Branch, as trustee,  with respect to €95,000,000 aggregate principal amount of 105/8%  Notes due 2009.                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.1    |   | Sale and Purchase Agreement dated March 11, 2001 between AssiDomän AB  (Publ), as seller, and Startskottet 20896 AB under change of name to Kappa  Alpha Holdings AB, as buyer. *                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.2    |   | Notice of Assignment dated May 17, 2001 by Kappa Sweden AB (formerly  Startskottet 21006 AB) to AssiDomän AB (Publ) regarding the assignment of the  right to acquire certain AssiDomän shares. *                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Paying, Registrar and Transfer Agency Agreement dated May 18, 2001  between Kappa Beheer B.V., Kappa Packaging B.V., The Bank of New York, London  Branch, as trustee, The Bank of New York, London Branch, as registrar, The  Bank of New York, London Branch, as transfer agent and The Bank of New York,  London Branch as principal paying agent, with respect to the 121⁄2% Notes.*                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Kappa Holding Warrant Agreement dated May 18, 2001 between Kappa  Holding B.V., Packaging Investments Limited, as warrant holder, and The Bank  of New York, New York Branch, as warrant agent. *                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Amendment and Restatement Agreement dated May 17, 2001 relating to a  Supplemental Amended and Restated Intercreditor Agreement dated July 23, 1998  between Kappa Packaging B.V., as borrower and obligor’s agent, the Senior  Finance Parties and Senior Hedge Counterparties, Barclays Bank PLC, as senior  facility agent and security agent and Cinven Limited and CVC Capital Partners  B.V., as investor’s agents.  *                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.6    |   | Amendment and Restatement Deed dated July 23, 1999 relating to an  Intercreditor Agreement dated July 23, 1998, as amended on September 3, 1998,  between Kappa Holding B.V., Kappa Beheer B.V., Kappa Packaging B.V.  and Barclays Bank PLC as senior agent,  mezzanine agent and security agent for the lenders under the Senior Credit Agreement,  and the other parties listed therein (incorporated by reference to Exhibit  4.11 of Form F-4 (Registration No.333-11044) of Kappa Beheer B.V.). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.7    |   | Wood Supply Agreement - Fiber Raw Material, dated May 16, 2001  between Assi Domän Packaging AB, as Purchaser, and Assi Domän Wood Supply AB,  as Seller.**                                                                                                                                                                                                                                                                                                                                      |

 

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| 8.1    |   | Subsidiaries of Kappa Holding B.V., Kappa Beheer B.V.  and Kappa Packaging B.V.  (included as Note 28 to “Item 18.  Financial Statement”).** |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                  |
| 99.1   |   | Certification 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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*****Incorporated by reference to the Issuer’s previously filed Annual Report onForm 20-F dated June 29, 2001.

** Incorporated by reference to the Issuer’s previously filed AnnualReport on Form 20-F dated June 28, 2002.

 

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