In 2006, North American corrugating medium production capacity was 11.3 million tons, according to RISI, Inc., or RISI, a wood and paper products research firm. Management estimates Forest’s production capacity to be approximately 131,000 tons or approximately 1.5% of North American corrugating medium capacity. In 2005, U.S. shipments of corrugated packaging totaled 391.4 billion square feet, or $23.7 billion, according to the Fiber Box Association.

In 2006, North American production capacity for this market was 4.7 million tons according to RISI. Forest, with annual production of approximately 30,000 tons, represents less than 1.0% of this capacity. In 2006, management estimates that demand for paper-based flexible packaging totaled approximately $2 billion in the U.S. and estimates that Forest serves less than 1.0% of this market.

Coated recycled board, or CRB, market is a subset of the boxboard segment of the paperboard market. According to RISI, the total North American boxboard production capacity in 2006, including 100% recycled boxboard as well as boxboard made from virgin fiber was 16.96 million tons, while U.S. production capacity of coated recycled board was 2.5 million tons. Industry consolidation and rationalization have been defining characteristics of the CRB market in recent years.

The main driver of folding carton sales is packaging demand by the North American food, beverage and consumer packaged goods industries, which industries are driven primarily by disposable income levels and consumer spending trends. The folding carton industry is highly fragmented with many small, local producers as well as a number of large integrated manufacturers. The Paperboard Packaging Council estimates that there are approximately 340 companies with 543 plants in North America.

Forest, headquartered in Bridgeview, Illinois, is a producer of recycled paper and specialty packaging products. Forest operates from 11 manufacturing facilities located throughout North America, including eight packaging plants in Illinois, California, Pennsylvania, Ohio, Missouri, Georgia, Ontario and Quebec and three paper mills located in Indiana and Illinois. Forest serves a broad range of local, regional and national customers who operate in diverse industrial and consumer markets.

Forest offers a broad portfolio of paper and packaging products to its customers. Packaging products include industrial and specialty packaging and are manufactured from a variety of substrates, including paper, plastic and foil. Industrial paper products include corrugating medium that is produced from 100% recycled paper as well as specialty recycled kraft and crepe papers. Products fall into three major product categories.

CanAmPac, headquartered in Toronto, Ontario, is an integrated manufacturer of recycled paperboard and paperboard packaging. CanAmPac manufactures 100% recycled clay-coated boxboard, a substrate used to make folding cartons, and produces folding cartons primarily for the food packaging industry. CanAmPac operates one manufacturing facility and warehouse in Napanee, Ontario, and one manufacturing facility and a warehouse in Kitchener, Ontario.

CanAmPac manufactures several grades of paperboard and produces folding cartons primarily for food packaging. Paperboard used for the manufacture of folding cartons is called boxboard and can be made from recycled wastepaper fiber or virgin wood pulp fiber. Independent of fiber source, the paperboard must be able to bend and be scored to form folding cartons meant to hold consumer goods ready for the retail shelf. The folding carton is generally designed to be shipped flat and converted to its final structure on a packaging line.

Pangborn, headquartered in Hagerstown, Maryland, designs and markets surface preparation equipment and related aftermarket parts and services used in metal manufacturing processes within a diverse range of industries. The equipment and aftermarket parts Pangborn produces are used in shot-blasting, a process by which the surfaces of targeted objects are cleaned through the propulsion of shot or other abrasive particles in a controlled fashion at the surface of such objects.

Cost of goods sold increased approximately $62.8 million, or 92.5%, from approximately $67.9 million for the year ended December 31, 2005 to approximately $130.7 million for the year ended December 31, 2006.

Operating expenses increased approximately $9.2 million, or 73.6%, from approximately $12.5 million for the year ended December 31, 2005 to approximately $21.7 million for the year ended December 31, 2006.

Interest income increased approximately $245, or 78.5%, from approximately $312 for the year ended December 31, 2005 to approximately $557 for the year ended December 31, 2006.

Interest expense increased approximately $2.6 million or, 76.5%, from approximately $3.4 million for the year ended December 31, 2005 to approximately $6.0 million for the year ended December 31, 2006.

Net income increased approximately $4.7 million from a net loss of approximately $256 for the year ended December 31, 2005 to net income of approximately $4.4 million for the year ended December 31, 2006.