KapStone Reports First Operating Quarter

NORTHFIELD, Ill., May 9 /PRNewswire-FirstCall/ -- KapStone Paper and Packaging Corporation (OTC: KPPC) (BULLETIN BOARD: KPPC) today reported first quarter 2007 net income of $7.1 million ($0.28 and $0.21 per basic and diluted shares, respectively).

On January 2, 2007, KapStone Paper and Packaging Corporation (the Company) completed the acquisition of substantially all of the assets and assumed certain liabilities, of the Kraft Papers Business, or KPB, a division of International Paper Company. The assets include an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite(R) Converting, and an inflatable dunnage bag manufacturer located in Fordyce, Arkansas. Prior to the acquisition of KPB, the Company, a special purpose acquisition corporation or "blank check company," had no operations. For periods prior to the acquisition, KPB is deemed to be the predecessor to the Company. Therefore, in this release, the KapStone results for the first quarter of 2007 are compared to KPB's first quarter 2006 results.

Total net sales for the 2007 first quarter were $65.4 million, an increase of 2.2% over the same quarter last year. First quarter 2007 net income increased 52.6% to $7.1 million compared to the same period a year ago. Adjusted EBITDA for the 2007 first quarter was $15.6 million, an increase of $3.0 million, or 23.8%, over the same quarter last year. Adjusted basic and diluted EPS were $0.32 and $0.24, respectively, for the 2007 first quarter. Adjusted EBITDA and adjusted basic and diluted EPS exclude a $1.5 million non-cash purchase accounting adjustment made in connection with the KPB acquisition to reflect the sale of inventory acquired at fair value. -- See "Non-GAAP Financial Measures" below for a further discussion of adjusted EBITDA and adjusted EPS.

Operating Highlights

Operating income for the unbleached kraft paper segment approximated $13.0 million in the first quarter, a 57.2% increase over the prior year. The significant improvement reflected higher revenues from favorable pricing and improved product mix and productivity gains. The 2007 results also reflect the effects of purchase accounting, including lower depreciation charges on the reduced depreciable asset base and a $1.2 million non-cash adjustment to reflect the sale of inventory acquired at fair value. Prior period information has been revised to reflect the retrospective application of a change in accounting for planned major maintenance activities. The manufacturing facility typically shuts down for annual maintenance activities in the second quarter. Current accounting guidance requires these costs to be recorded in the period incurred. The previous period was revised to reflect this change.

Operating income for the dunnage bags segment approximated $1.5 million, in the first quarter, a decrease of $0.3 million from the prior year, reflecting primarily a non-cash purchase accounting adjustment for the sale of inventory acquired at fair value.

Roger Stone, KapStone's chairman and chief executive officer, said, "The operations performed remarkably well as we transitioned into KapStone. Favorable pricing, improving linerboard mix, and productivity gains coupled with great enthusiasm from our workforce contributed momentum for the operations to provide us with an outstanding inaugural quarter."

Cash Flow and Working Capital

Net cash from operating activities for the 2007 first quarter totaled $14.8 million, compared to $7.5 million a year ago. Capital expenditures of $2.1 million in the quarter were primarily spent on equipment upgrades for the unbleached kraft facility. Working capital at March 31, 2007 was $59.9 million including cash and cash equivalents of $35.2 million.

Conference Call

KapStone has scheduled a conference call at 11 a.m. ET, Thursday, May 10, 2007, to discuss the Company's financial results for the 2007 first quarter. The conference call will be available via the Internet by accessing the Company's web site at http://kapstonepaper.com/. A replay of the webcast will be available for 30 days following the call.

About the Company

Headquartered in Northfield, IL, KapStone Paper and Packaging Corporation is a leading North American producer of kraft paper and converter of inflatable dunnage bags. The Company is the parent company of KapStone Kraft Paper Corporation which includes a paper mill in Roanoke Rapids, NC, and Ride Rite(R), an inflatable dunnage bag manufacturer in Fordyce, AR. The business employs approximately 700 people.

Non-GAAP Financial Measures

Investors are cautioned that adjusted EBITDA and adjusted EPS information contained in this press release are not financial measures under U.S. generally accepted accounting principles (GAAP). In addition, they should not be construed as alternatives to any other measures of performance determined in accordance with GAAP. These non-GAAP financial measures are provided to enhance the user's overall understanding of the Company's current financial performance and the Company's prospects for the future. The Company believes that these non-GAAP measures provide useful information to investors because they improve the comparability of the financial results between periods and provide for greater transparency to key measures used to evaluate the performance and liquidity of the Company. Management uses adjusted EBITDA for evaluating the Company's performance against competitors and as a primary measure for employees' incentive programs.

Adjusted EBITDA represents earnings before interest, income taxes, depreciation and amortization, and excludes a non-cash purchase accounting adjustment made in connection with the KPB acquisition to reflect the sale of inventory acquired at fair value. Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered as an alternative to earnings before income taxes (or any other performance measure under GAAP) as a measure of performance or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Adjusted EPS is based on net income excluding the non-cash purchase accounting adjustment made in connection with the KPB acquisition to reflect the sale of inventory acquired at fair value.

Forward-Looking Statements

Statements in this news release that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can often be identified by words such as "may," "will," "should," "would,' "expect," "project," "anticipate," "intend," "plan," "believe," "estimate," "potential," "outlook," or "continue," the negative of these terms or other similar expressions and include, among others, statements under the caption "Operating Highlights." These statements reflect management's current views and are subject to risks, uncertainties and assumptions, many of which are beyond the Company's control that could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ materially include, but are not limited to: (1) industry conditions, including changes in cost, competition, changes in the Company's product mix and demand and pricing for the Company's products; (ii) market and economic factors, including changes in pension and healthcare costs and natural disasters, such as hurricanes; (iii) results of legal proceedings and compliance costs, including unanticipated expenditures related to the cost of compliance with environmental and other governmental regulations; and (iv) the ability to achieve and effectively manage growth; (v) ability to pay the Company's debt obligations; and (vi) ability to carry out the Company's strategic initiatives and manage associated costs. Further information on these and other risks and uncertainties is provided under Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, which is incorporated herein by reference, and elsewhere in reports that the Company files or furnishes with the SEC. These filings can be found on KapStone's Web site at http://www.kapstonepaper.com/ and the SEC's Web site at http://www.sec.gov/. Forward-looking statements included herein speak only as of the date hereof and the Company disclaims any obligation to revise or update such statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or circumstances.

                    KapStone Paper and Packaging Corp
              Condensed Consolidated Statement of Operations
                                Unaudited
                 (In thousands, except per share amounts)

                                                 Predecessor
                                                     KPB         Variance
                                       Three Months Ended         Fav./
                                            March 31,            (Unfav.)
                                       2007        2006 (1)         %

  Net sales                          $65,427       $64,012         2.2%

  Cost and expenses:
    Cost of sales                     48,122        48,296         0.4%
    Depreciation and amortization      2,173         4,731        54.1%
  Gross profit                        15,132        10,985        37.8%
  Selling, general, and
   administrative expenses             3,728         3,094       (20.5%)
  Operating income                    11,404         7,891        44.5%

  Other income (expense):
    Other income                         461           ---           NA
    Interest income                      397           ---           NA
    Interest expense                  (1,156)         (334)     (246.1%)
  Total other income (expense)          (298)         (334)       10.8%
  Income before provision for
   income taxes                       11,106         7,557        47.0%
  Total provision for income taxes     4,028         2,920        37.9%

  Net income                          $7,078        $4,637        52.6%

  Earnings per share:
    Basic                              $0.28           ---
    Diluted                            $0.21           ---

  Weighted-average number of
   shares outstanding:
    Basic                         24,973,333
    Diluted                       33,868,933

  (1) Prior period net income has been revised to reflect the retrospective
      application of a change in accounting for planned major maintenance
      activities.



  OPERATING SEGMENT DATA
  (In thousands)                                 Predecessor
                                                     KPB        Variance
                                   Three Months Ended March 31,   Fav./
                                                                (Unfav.)
                                       2007        2006 (1)         %
  Net sales:
    Unbleached kraft                 $58,481       $55,593         5.2%
    Dunnage bags                       7,768         9,034       (14.0%)
    Intersegment elimination
     from unbleached kraft              (822)         (615)       33.7%
  Total net sales                    $65,427       $64,012         2.2%

  Operating income by operating
   segment:
    Unbleached kraft                 $13,026        $8,284        57.2%
    Dunnage bags                       1,522         1,809       (15.9%)
    Corporate expenses                (3,144)       (2,202)       42.8%
  Total operating income             $11,404        $7,891        44.5%



                    KapStone Paper and Packaging Corp
                   Condensed Consolidated Balance Sheet
                                Unaudited
                              (In thousands)
                                                                Predecessor
                                                                    KPB
                                                  March 31,     December 31,
                                                    2007            2006

  Assets
  Current assets:
    Cash and cash equivalents                      $35,233             $1
    Accounts receivable, net                        31,753         25,824
    Inventories, net                                21,953         24,087
    Prepaid expenses                                 1,920          1,425
  Total current assets                              90,859         51,337


  Plant, property and equipment, net               110,267        201,593
  Deferred income taxes                              1,491            ---
  Deferred acquisition costs                           187            ---
  Other assets                                       3,326          4,452
  Goodwill                                             936            ---

  Total assets                                    $207,066       $257,382

  Liabilities and Stockholders' Equity
  Current liabilities:
    Accounts payable                               $10,243         $7,931
    Accrued expenses                                 2,096          7,144
    Accrued compensation expenses                    4,893            ---
    Accrued income taxes                             2,976            ---
    Accrued taxes other than income                    705            ---
    Deferred income taxes                              566            ---
    Current portion long-term debt                   9,500            ---
  Total current liabilities                         30,979         15,075

  Long-term debt                                    50,500         22,357
  Asset retirement obligations                         268            265
  Pension and post retirement benefits               3,397
  Total liabilities                                 85,144         37,697

  Stockholders' equity:
  Invested capital                                 112,706            ---
  Divisional control                                   ---        219,685
  Retained earnings                                  9,216            ---
  Total stockholders' equity                       121,922            ---
  Total liabilities and stockholders' equity      $207,066       $257,382



  SUPPLEMENTAL INFORMATION
  GAAP to Non-GAAP Reconciliations
  (In thousands, except per share data)                         Predecessor
                                                                    KPB
                                                Three Months Ended March 31,
                                                     2007         2006 (1)
  Net Income (GAAP) to Adjusted EBITDA
   (Non-GAAP):
  Net income (GAAP)                                 $7,078         $4,637
    Interest income                                   (397)           ---
    Interest expense                                 1,156            334
    Tax provision                                    4,028          2,920
    Depreciation and amortization                    2,245          4,731
    Non-cash purchase accounting adjustment
     made to reflect the sale of inventory
     acquired at fair value.                         1,526            ---
  Adjusted EBITDA (Non-GAAP)                       $15,636        $12,622

  Basic EPS (GAAP) to Adjusted Basic EPS
   (Non-GAAP):
  Basic earnings per share (GAAP)                    $0.28             NA
  Adjustment:
    Non-cash purchase accounting adjustment
    made to reflect the sale of inventory
    acquired at fair value.                           0.04             NA
  Adjusted basic earnings per share (Non-GAAP)       $0.32             NA


  Diluted EPS (GAAP) to Adjusted Diluted EPS
   (Non-GAAP):
  Diluted earnings per share (GAAP)                  $0.21             NA
  Adjustment:
    Non-cash purchase accounting adjustment
    made to reflect the sale of inventory
    acquired at fair value.                           0.03             NA
  Adjusted Diluted EPS (Non-GAAP)                    $0.24             NA


  (1) Prior period net income has been revised to reflect retrospective
      application of a change in accounting for planned major maintenance
      activities.