Schedule 14A


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(1)

This column includes fees earned or paid in cash, representing annual retainer for board membership, committee chairmanship retainer and for attending board and committee meetings.

(2)

Represents the compensation cost of stock options in accordance with Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment , reflected in the Company's consolidated financial statements. Assumptions used in determining the values can be found in Note 12 in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, disregarding estimates of forfeitures related to service-based vesting conditions.

(3)

On May 26, 2008, Mr. Shapiro, who served as a member of the board of directors since October 27, 2007, passed away. As a result of his death, his stock option awards were forfeited.

Outstanding Equity Awards at 2008 Fiscal Year End


 

 

 

 

 

 

 

 

Name

 

Options

 

Restricted Stock Units

 

Roger W. Stone

 

 

327,321

 

 

107,517

 

Matthew Kaplan

 

 

327,321

 

 

107,517

 

John M. Chapman

 

 

44,581

 

 



 

James Doughan

 

 

44,581

 

 



 

Jonathan R. Furer

 

 

44,581

 

 



 

Ronald J. Gidwitz

 

 



 

 



 

Muhit U. Rahman

 

 

44,581

 

 



 

S. Jay Stewart

 

 

44,581

 

 



 

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REPORT OF THE AUDIT COMMITTEE
        During the year ended December 31, 2008, the Audit Committee held eight meetings. The purpose of the Audit Committee is to assist the Board in its general oversight of KapStone's financial reporting, internal controls and audit functions. The Audit Committee was formed by the Board in January 2007. The Audit Committee operates under a written charter adopted by the Board. The Audit Committee's charter is included on the Company's website at the following address: http://www.kapstonepaper.com and printed copies are available to any stockholder upon request.
        As described in the Audit Committee Charter, the Committee has oversight responsibilities to stockholders, potential stockholders, the investment community, and other stakeholders related to the:


integrity of the Company's financial statements;



financial reporting process;



systems of internal accounting and financial controls;



performance of the Company's internal audit function and independent registered public accountants;



independent registered public accountants' qualifications and independence; and



compliance with ethics policies and legal and regulatory requirements.
        The Audit Committee is composed solely of independent directors as defined by the listing standards of National Association of Securities Dealers, Inc.
        The Audit Committee has reviewed and discussed the consolidated financial statements with management and Ernst & Young LLP, the Company's independent registered public accountants. Management is responsible for the preparation, presentation and integrity of KapStone's financial statements; accounting and financial reporting principles; establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)); establishing and maintaining internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)); evaluating the effectiveness of disclosure controls and procedures; evaluating the effectiveness of internal control over financial reporting; and evaluating any change in internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. Ernst & Young LLP is responsible for performing an independent audit of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting principles generally accepted in the United States of America, as well as expressing an opinion on the effectiveness of internal control over financial reporting.
        The Audit Committee provided oversight and advice to management relating to management's assessment of the adequacy of KapStone's internal control over financial reporting in accordance with the requirements of the Sarbanes Oxley Act of 2002. The Audit Committee held private sessions with Ernst & Young LLP to discuss the annual audit. At the conclusion of the process, the Audit Committee reviewed a report from management on the effectiveness of the Company's internal control over financial reporting. The Committee also reviewed the report of management contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC, as well as Ernst & Young LLP's Report of Independent Registered Public Accounting Firm included in the Company's Annual Report on Form 10-K related to its audit of (i) the consolidated financial statements and financial statement schedule and (ii) the effectiveness of internal control over financial reporting.
        The Audit Committee has discussed with Ernst & Young LLP the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, "Communication with Audit Committees" and PCAOB Auditing Standard No. 2, "An Audit of Internal Control Over Financial Reporting
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Performed in Conjunction with an Audit of Financial Statements." In addition, Ernst & Young LLP has provided the Audit Committee with the written disclosures and the letter required by applicable requirements of the PCAOB regarding the independent accountant's communications with the audit committee regarding independence, and the Audit Committee has discussed with Ernst & Young LLP their firm's independence. In addressing the quality of management's accounting judgments, the Audit Committee asked for management's representations and reviewed certifications prepared by the Chief Executive Officer and Chief Financial Officer that the audited consolidated financial statements of the Company fairly present, in all material respects, the financial condition and results of operations of the Company.
        Based on the review of the consolidated financial statements and discussions with and representations from management and Ernst & Young LLP referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in KapStone's Annual Report on Form 10-K for the year ended December 31, 2008, for filing with the Securities and Exchange Commission.
        In accordance with Audit Committee policy and the requirements of law, the Audit Committee pre-approves all non-audit services to be provided by Ernst & Young LLP. In addition, the Audit Committee pre-approves all audit and audit related services provided by Ernst & Young LLP. A further discussion of the fees paid to Ernst & Young LLP for audit and non-audit expenses is included below under the heading " INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ." Although the Audit Committee has the sole authority to appoint independent auditors, the Audit Committee is recommending that the Board ask the stockholders to ratify the appointment at the Annual Meeting.
AUDIT COMMITTEE

S. Jay Stewart (Chairman)

John M. Chapman

James Doughan

Muhit U. Rahman
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Fees of Independent Registered Public Accounting Firm
        Ernst & Young LLP acted as the independent registered public accounting firm for the Company during the Company's 2006, 2007 and 2008 fiscal years. Ernst & Young LLP also provided certain audit-related and permitted non-audit services. The Board of Director's policy is to approve all audit, audit-related, tax and permitted non-audit services performed by Ernst & Young, LLP, for the Company in accordance with Section 10A(i) of the Securities Exchange Act of 1934, as amended, and the Securities and Exchange Commission's rules adopted hereunder. In 2008, the Audit Committee approved in advance all engagements by Ernst & Young LLP on a specific project-by-project basis, including audit, audit-related, tax and permitted non-audit services. No services were rendered by Ernst & Young LLP to the Company in 2006 pursuant to Rule 2-01(c)(7)(i)(C) of Regulation S-X.
        Ernst & Young LLP fees for services provided for the years ended December 31, 2008 and 2007, respectively, are as follows:

 

 

 

 

 

 

 

 

Type of Fees

 

2008

 

2007

 

Audit fees(1)

 

$

1,935,840

 

$

1,053,177

 

Audit-related fees(2)

 

 

10,453

 

 

196,570

 

Tax fees(3)

 

 

91,000

 

 

43,000

 

All other fees(4)

 

 



 

 

34,165

 

 

 

 

 

 

 

 

 

$

2,037,293

 

$

1,326,912

 

 

 

 

 

 

 

(1)

Consists of fees for the audit of the Company's annual consolidated financial statements and reviews of the condensed consolidated financial statements included in the Quarterly Reports filed on Form 10-Q, fees for the audit of internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002 and fees for consultations on acquisitions.

(2)

Fees incurred for due diligence on acquisitions.

(3)

In 2007, the fees for services related to the tax treatment of certain Kraft Papers Business acquired assets, tax purchase price allocation and inventory capitalization research. In 2008, the fees pertained to the preparation of the Company's 2007 Federal and State income tax returns.

(4)

Fees for consulting on employee benefit programs relating to the Kraft Papers Business acquired by the Company.

Pre-Approval of Independent Registered Public Accountants' Services
        No services were provided to the Company that are specifically prohibited by the Sarbanes-Oxley Act of 2002. Permitted services are pre-approved by the Board of Directors.
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