**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

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**(Markone)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commission File No. 333-125750**

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**PQ CORPORATION**

**(Exact name of registrant asspecified in our charter)**

| **Pennsylvania**                                                |   | **23-0972750**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

| **1200 West Swedesford Road  Berwyn, Pennsylvania** |   | **19312**  |
|-----------------------------------------------------|--------|------------|
| (Address of principal executive offices)            |   | (Zip Code) |

 

**(610) 651-4200**

(Registrant’s telephonenumber, including area code)

Securities registered pursuant to Section 12(b) ofthe Act:None

Securities registered pursuant to Section 12(g) ofthe Act:None

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes     o     No     x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes     o     No     x

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes     x     No     o

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer     o     Accelerated filer     o     Non-acceleratedfiler     x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     o     No     x

State the aggregate market value of the voting andnon-voting common equity held by nonaffiliates computed by reference to theprice at which the common equity was last sold, or the average bid and askedprice of such common equity, as of the last business day of the registrant’smost recently completed second fiscal quarter.

No voting stock of PQ Corporation is held bynon-affiliates of PQ Corporation

As of April 2, 2007, the number of sharesoutstanding of the registrant’s common stock, par value $0.50 per share, was 1share.

**DOCUMENTS INCORPORATED BYREFERENCE**

**None***

 

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**PART I**

**ITEM 1.**                BUSINESS

**Overview**

We are a leading globalproducer of inorganic specialty chemicals and engineered glass materials interms of sales. We conduct our operations through two principal businesses: ourChemicals division, which is one of the largest global manufacturers of sodiumsilicate and related high performance silicate-based specialty chemicals,and our Potters division, which is a leading global manufacturer of highlyengineered solid and hollow glass spheres used in highway safety and otherspecialty applications. We believe that we maintain the number one or twomarket positions in most of our major product lines in each of the geographicmarkets we serve. Our products are used in a variety of predominantly nicheapplications in a diverse range of industrial, consumer and governmentalend-markets. We sell our products in over 100 countries to thousands ofcustomers, many of which are leading companies in their respective industries.We maintain long-standing relationships with many of our customers and haveconducted business with our top ten customers for over 30 years. Ourcustomers place significant value on our industry-leading brands, whichhave gained a reputation for quality, reliability, technical performance andinnovation.

**Our History**

We trace our roots to aPhiladelphia soap and candle business founded in 1831. The original companybegan producing and selling “silicate of soda,” or sodium silicate, in 1861 asa builder to replace resin in soap formulations. We entered the engineeredglass materials business in 1977 with the acquisition of Potters Industries, aproducer of glass beads used to increase retroreflectivity in highway pavementmarkings, the largest end-use application for these products, and otherapplications. We expanded our product lines through the acquisitions ofspecialty adsorbents products and Dow Chemical’s magnesium sulfate business aswell as the formation of Zeolyst International, our 50/50 joint venture withCRI International, a Royal Dutch/Shell Group company. We began manufacturingspecialty chemicals products in Europe in 1989 and in Asia in 1992 and havefurther expanded into China with the construction of a sodium silicate facilityin Tianjin, which commenced operations in the fourth quarter of 2005. We continueto grow our business organically as well as through joint ventures and smallcomplementary acquisitions.

***The Transactions***

On February 11, 2005, we were acquired by NiagaraHoldings, Inc. (“Holdings”), a newly formed Delaware corporationaffiliated with J.P. Morgan Partners, LLC and certain affiliated funds (“JPMorganPartners” or “JPMP”); and Peak Investments, LLC, (together with JPMP, the”Sponsors”). Pursuant to the terms of the Agreement and Plan of Merger, dated asof December 15, 2004, among PQ Corporation, Holdings and NiagaraAcquisition, Inc., a wholly owned subsidiary of Holdings; (i) NiagaraAcquisition, Inc. merged with and into PQ Corporation, with PQ Corporationsurviving as a wholly owned subsidiary of Holdings; (ii) PQ Corporationredeemed the outstanding shares of its $16.44 Preferred Stock, Class A inaccordance with the terms thereof; and (iii) the common shareholders of PQCorporation (both Series A and Series B) and holders of options topurchase common stock of PQ Corporation received cash in exchange for theirshares or for the cancellation of their options. We refer to the actions setforth in clauses (i), (ii) and (iii) as the “Merger”.

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In connection withthe Merger, affiliates of JPMorgan Partners and certain members of our seniormanagement contributed approximately $163.6 million in cash to Holdings,which in turn was contributed to the common equity of Niagara Acquisition, Inc.The total merger consideration (including capitalized fees and expenses) paidwas approximately $632.5 million. The merger consideration was funded withthe proceeds from:

·       theinvestment by the Sponsors and certain members of our senior management inHoldings and the subsequent contribution of the cash proceeds from suchinvestment to us as common equity;

·       ourissuance of $275.0 million of 7.5% senior subordinated notes due 2013 (referredto herein as the “Notes”) and the related subsidiary guarantees; and

·       termloan borrowings of $335.0 million under our senior secured credit facilities.

In this report, we referto the Merger and the related financing described above, collectively, as the “Transactions”.For purposes of identification and description, we are sometimes referred to asthe “Predecessor” for the period prior to the Transactions on February 11,2005, and the “Successor” for the period subsequent to the Transactions.

***Our Sponsor***

JPMorgan Partners, LLC is a leading private equityfirm.  Since its inception in 1984, JPMPhas invested over $15 billion worldwide in consumer, media, energy, industrial,financial services, healthcare, hardware and software companies. JPMP is aprivate equity division of JPMorgan Chase & Co. (“JPMorgan”), one ofthe largest financial institutions in the U.S..

As of August 1, 2006,the buyout/growth equity professionals of JPMP separated from JPMorgan to forman independent private equity platform, CCMP Capital Advisors, LLC (“CCMPCapital”). CCMP Capital is providing investment advisory services to JPMP withrespect to the investment in Holdings.

**Our BusinessStrengths**

***DiversifiedEnd-Markets and Customer Base.******  ***We servethousands of customers in a broad range of diverse end-markets worldwide,including consumer products, food and beverage, highway maintenance, industrialand institutional cleaning products, rubber and plastics, and water treatment.Our largest customer represented 9% of our sales for the year ended December 31,2006, and our top ten customers represented 25% of our sales for this period.No single end-market represented more than 20% of our sales for the year ended December 31,2006. In addition, we generated approximately 46% of our sales outside of theU.S. during this period. The diverse end-markets and large number of customerswe serve reduces our exposure to any single market or customer and minimizesthe impact of general economic cycles on our financial results.

***Long-TermRelationships with High-Quality Customers.******  ***We havecultivated a diversified and loyal base of customers, many of which are leadingcompanies in their respective industries. The average length of relationshipwith our largest customers is over 30 years, and we have conductedbusiness for over 100 years with our largest customer by sales.

***Value-AddedProducts and Services.******  ***We offer abroad range of value-added products and services, which are importantfactors in our customers’ purchasing decisions. Our customers rely on ourability to meet or exceed their strict performance standards, short lead timerequirements and technical assistance needs. For example, in our Pottersdivision, we offer consultative sales and marketing support and just-in-timedelivery services that are critical to our customers’ success andprofitability. Our technical service and customer support capabilities alsodifferentiate us. Our ability to collaborate closely with our customers toformulate innovative manufacturing and product solutions provides us with acompetitive advantage. In 

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many of our sole suppliercustomer relationships, we develop and manufacture products that meetcustomized specifications and performance characteristics. In addition, ourproducts provide critical performance functions in the end-products for whichthey are used, and typically represent a small portion of the overall cost ofsuch end-products.

***GlobalManufacturing and Distribution Infrastructure.******  ***Our globalfootprint and proximity to our customers provides us with a distinct cost andcompetitive advantage due to the prohibitively high costs of and long leadtimes for transporting our products. We operate 57 manufacturing sites in 19countries and are one of the only producers in our markets that manufacturesand distributes locally in each of the four major geographic regions of NorthAmerica, Europe, Asia-Pacific and South America. In January 2007, we addedthree additional manufacturing sites as part of our acquisition of Flex-O-Lite.Our proximity to our customers increases our integration with their businessprocesses and supply chains. In addition, through our global manufacturingnetwork, we benefit from best practices as well as economies of scale in ouroperations and procurement of raw materials. Furthermore, our global footprintin manufacturing and distribution also enables us to quickly capitalize ongrowing demand for our products in emerging economies, such as those ofAsia-Pacific and Eastern Europe, where we can effectively service the growth ofnew and existing customers.

***Experienced andMotivated Management Team.******  ***In connectionwith the Transactions, Michael Boyce became our Chairman, Chief ExecutiveOfficer and President. Mr. Boyce has over 36 years of industryexperience with a proven leveraged buyout, or LBO, track record and previouslyserved as President and Chief Operating Officer of Harris Chemical Group fromits leveraged buyout by JP Morgan Partners in 1988 to its successful sale in1998. Our executive team has extensive industry experience in all facets of thespecialty chemicals industry, including strategic management, manufacturing,sales and marketing, new product and applications development, and financialmanagement. Our management team has a significant equity ownership interest inHoldings.

Although we believe thatwe exhibit the business strengths described above, our competitors may havegreater financial and other resources than we do. In addition, we are subjectto a number of risks discussed in “Item 1A. Risk Factors” elsewhere in thisreport. The principal risks facing our business include, among others, the riskof increased costs of raw materials and natural gas, the seasonal nature ofdemand for some of our Potters products, reductions in highway safety spending,on which a large portion of our sales in the Potters division depends, the economic,regulatory, and political risks associated with our international operations,and the risk that we will be required to make material expenditures and changesin our operations to comply with environmental, health and safety laws.

**Our BusinessStrategy**

***Capitalize onStrong Market Positions and Improving Industry Profitability.******  ***Our coresodium silicate and engineered glass materials product lines have experiencedsignificant producer consolidation in North America over the past few years,which has led to the elimination of excess capacity and an increase in capacityutilization. The rationalization of these producers has led to a more stableindustry structure and improved economies of scale for us and other producers.We plan to leverage our size to achieve leading market positions in our coresodium silicate and engineered glass products. We also intend to leverage ourglobal leadership position to increase sales volumes by further penetrating ourexisting markets as well as pursuing new opportunities.

***Enhanced Focus onCost Structure and Processes.******  ***We believethere are significant opportunities to improve the production efficiencies andcost structure of our business. Our management team has a proven track recordof successful growth and cost reduction in the inorganic chemicals industry. Weare currently evaluating and implementing initiatives that will be focused onlowering our operating costs and increasing our productivity through (1) improvingmanufacturing efficiencies, (2) increasing asset 

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utilization, (3) leveragingour scale economies in logistics, procurement, and sales and marketing costs, (4) disciplinedmanagement of our working capital and capital expenditures and (5) utilizingan incentive-based compensation plan for our management team. We believethat the successful execution of these initiatives will have a meaningfulimpact on our operating margins and profitability.

***Leverage TechnologyLeadership in Silicate Chemistry and Engineered Glass Materials.******  ***We are anindustry leader in silicate technology with over 140 years of experience developingsilicate-based chemistries. In addition, we are a market and technologyleader with over 90 years of experience in the engineered glass materialsindustry. We intend to continue to capitalize on our technological leadershippositions and proven research and development competencies by pursuinglow-risk, cost-effective opportunities for developing new products,applications and end-markets for our silicate-based chemicals andengineered glass products platforms. For example, we have leveraged our expertisein silicate chemistry to develop a new potassium silicate application used inwater-based petroleum drilling fluids as a corrosion inhibitor and lubricityenhancer, which does not require remediation. We believe pursuing suchopportunities will result in profitable growth as we leverage our technicalknowledge and existing asset base.

***Selectively PursueGrowth Opportunities.******  ***We have successfully completedseveral acquisitions of niche businesses during the past five years and willcontinue to selectively explore new acquisitions that are complementary to ourexisting businesses. Our acquisition strategy will focus on add-on acquisitionsthat will enable us to expand our customer or geographic reach or to increasepenetration of the markets we serve with new products or extensions to currentproduct applications. In addition, we intend to selectively pursue organicgrowth opportunities by utilizing our existing asset base and product portfolioto expand in certain higher growth regions, such as Asia-Pacific and EasternEurope.

***Focus on Cash Flow Generation.******  ***We willmaintain a disciplined approach to our capital spending and working capitalmanagement in order to optimize cash flow, while continuing to support ourfixed asset base and deliver superior service to our customers. We havehistorically generated substantial cash flow from operations and have fundedour capital expenditure and working capital requirements through internal cashflow generation.

**Business Segments**

***Chemicals division***

Our Chemicals division, which accounted for$486.8 million, or 69%, of our sales for the year ended December 31,2006 has been developing, manufacturing and distributing silicate-basedspecialty chemicals for over 140 years. We are the largest sodiumsilicates producers in North America. We operate 38 manufacturing facilities in14 countries located in North America, Europe and Asia-Pacific. Our principalChemicals division products include solid and liquid sodium silicate andsilicate derivative products and an array of related high performance specialtychemicals, such as zeolite and zeolite-based catalysts, polyolefin catalysts, and silica gels. We are a recognized leaderin silicate technology with strong market positions in North America, Europe,and Asia-Pacific. Sodium silicate and other silicate derivatives products suchas potassium silicate, metasilicate and hydrous silicate are inorganicchemicals primarily used as building blocks to enhance the performance orquality of a diverse range of end products. Significant applications for oursilicate products are (1) additives for downstream chemical manufacturing,(2) bleaching aids for pulp and paper manufacturing, (3) gelling orsetting agents for soil stabilization in the construction industry, (4) corrosioninhibitors and coagulants for municipal water treatment processes, (5) additivesfor water-based petroleum drilling fluids that do not require remediationand (6) cleaning agents in laundry and other household detergents.

We are the largest North American producer, in termsof sales, of detergent zeolites, which is the primary water softener in powderlaundry detergents. North American sales of detergent zeolite products 

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declined over the lastdecade primarily due to declining sales of powder laundry detergent as consumerpreferences shift toward liquid laundry detergent and reformulation of powdereddetergents to reduce zeolites in favor of more soluble builders. However, thistrend of declining sales of zeolite-based powdered detergents has stabilized inNorth America, and with recent bans on phosphates in Asian countries, majorglobal producers of laundry detergents have formulated new phosphate-freeproducts using zeolites for sale in Asian markets. In addition, we have beenactively pursuing other end-use market opportunities for our zeolite chemistry.

We manufacture specialty adsorbents and sell theseproducts globally. We manufacture specialty adsorbents in North America andEurope and sell these products to major breweries, food processors and largechain restaurants. We sell specialty adsorbents primarily for use in beerbrewing and in reprocessing of cooking oil. Specialty adsorbents prevent beerfrom clouding when chilled, by adsorbing unwanted proteins, which are thenfiltered out to produce an additive-free “natural” beer.

We are a leading manufacturer of high-pore volumepolyolefin catalysts. Polyolefin catalysts are used worldwide to make manygrades of high density polyethylene, or HDPE. We manufacture polyolefincatalysts in North America and sell these products globally. Our high-porevolume catalysts exhibit high activity, enhanced melt index potential and lowgel levels. Our polyolefin catalysts enable HDPE producers to manufacture filmsfor grocery bags, blow-molded products, such as plastic containers, wire andcable sheathings, and gas and sewer pipe with increased toughness. We sellpolyolefin catalysts and catalyst supports to HDPE manufacturers globally. Wefocus on the large HDPE manufacturers and licensors of HDPE technology thatneed custom catalysts to produce premium HDPE resins. Polyolefin catalystproducts are developed jointly with the customer to achieve specific properties.We compete with other manufacturers of catalysts in the HDPE sector. We achievea competitive advantage for our polyolefin products through productperformance, service, technology support and reliability.

We are a leading global manufacturer of zeolite-basedcatalysts. We conduct our high performance zeolite catalyst activities throughZeolyst International (“ZI”), our 50/50 joint venture with CRI International, aRoyal Dutch/Shell Group company. We account for our investment in ZI under theequity method and, therefore, do not consolidate its sales in our financialresults. ZI produces high-performance zeolites that are used as key catalystsin the refining process. ZI manufactures and sells zeolite-basedcatalysts primarily to the petroleum refining and petrochemical industries.Many sales are customized for each customer, which is common in the catalystbusiness. ZI sells catalytic zeolitesand zeolite-based catalysts to major petroleum refineries. All sales arecustomized for each customer, which is customary in the catalyst business. ThroughZI, we compete with other refining, petrochemical and chemical companies. ZIachieves a competitive advantage for our catalytic zeolites and zeolite-basedcatalysts products through our research and development capabilities,innovation, quality and price. For example, we have developed high value-addedzeolite-based catalysts used in upstream polyester manufacturingprocesses and automotive emissions control.

Under Rule 3-09 of SEC Regulation S-X,separate financial statements of majority-owned subsidiaries and equityaffiliates not consolidated that meet certain thresholds must be filed as anexhibit to the registrant’s Annual Report on Form 10-K. During 2006,the Company’s 50% joint venture in Zeolyst International met these thresholdsand their financial statements are included as Exhibit 99.2 to the Company’sAnnual Report on Form 10-K. The separate financial statements ofZeolyst International are accounted for on a historical cost basis and do notreflect the results of purchase accounting adjustments recorded in the Company’sconsolidated financial statements for their investment in equity affiliates.

Demand for our Chemicals division products hashistorically remained stable due to the diverse consumer and industrialend-markets we serve as well as the global scale of our business. Our productsare essential building blocks or provide critical performance functions in theend-products for which they are used, yet typically represent a small portionof the overall cost of such end-products. Given the inorganic 

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nature of our products, wehave also benefited from a global trend toward more environmentally friendlychemical solutions. For example, our inorganic sodium silicate products areused in water treatment processes as a replacement for phosphates, whichgenerally requires increased chlorination of municipal water systems.

Certain of our product lines have experiencedsignificant growth due to the proliferation of new product applications, thedevelopment of new silicate formulations with higher performancecharacteristics and the expansion into emerging geographic markets. We havealso leveraged our strong research and development competencies to expand intohigher value-added product and application extensions from our coresilicate products and zeolite platforms.

We sell a majority of ourChemicals product lines through full or partial requirements contracts witheither cost-adjustment or market-adjustment provisions. Cost-adjustmentcontracts are typically long-term and allow for pass-through of variable costs,while market-adjustment contracts are typically short-term and allow forprice changes based on regional merchant market pricing. The remainder of oursales are on a spot pricing basis or covered by customer purchase orders, whichgenerally last one year.

***Potters division***

Our Potters division, which accounted for$221.8 million, or 31%, of our sales for the year ended December 31,2006, is a recognized leader in engineered glass materials with over90 years of industry expertise. We operate 22 manufacturing facilities in11 countries throughout North America, Europe, Asia-Pacific and South Americagiving us close access to and quick delivery capabilities for our customersworldwide. In January 2007, we added three additional manufacturing sitesas part of our acquisition of Flex-O-Lite. Our Potters division manufactureshighly engineered solid and hollow glass spheres used in a variety ofapplications, such as (1) light reflective pavement markings found onhighways and roads worldwide, (2) cost-effective polymer additives andfillers used to improve dimensional stability and reduce shrinkage and warpingof plastic molded products, (3) conductive particles used in a variety ofelectronics and (4) blasting media for cleaning, finishing and peeninghigh performance metals used in automotive, aerospace and other manufacturedproducts and components.

The engineered glassmaterials industry is characterized by the high performance nature of mostengineered glass applications, which often requires producers to providesuperior service and technical support. For example, highway maintenancecontractors require significant sales, marketing, technical assistance andshort delivery lead times in order to meet pavement marking reflectivityperformance requirements and project completion deadlines. These customerdemands have benefited large producers, such as PQ, who have the resources toprovide such customer support and technical service.

**Raw Materials**

***Chemicals division***

The Chemicals division’s major raw materials includesoda ash, industrial sand, aluminum trihydrate (“ATH”), and sodium hydroxide(commonly known as caustic soda). Our raw materials, in general, are widelyavailable. We have long-term supply contracts through 2007 and 2008 for oursoda ash requirements and through 2007 for our ATH requirements. We maintain araw material quality audit and qualification program with our vendors to ensurethat the material purchased satisfies our quality requirements. Furthermore, weare typically able to pass through increases in the price of raw materials toour customers. We have structured the majority of our contracts with our largestChemicals division customers to include adjustments for changes in the price ofraw materials.

Soda ash is the key raw material utilized in theproduction of sodium silicate in terms of cost. Our strategy is to maintainseveral sources of contracted soda ash supply in each region in which weoperate. 

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Our primary globalsuppliers include FMC, General Chemical and Solvay. We purchase our NorthAmerican soda ash requirements through long-term supply contracts. As thesecontracts expire, we cannot provide assurance that we will be able torenegotiate or enter into new long-term supply contracts on terms thatare satisfactory to us. See “Item 1A. Risk Factors—Increased costs of rawmaterials and natural gas may result in increased operating expenses andadversely affect our results of operations and cash flow.”

Although industrial sandand ATH are also key raw materials, each represent a relatively smallpercentage of our total cost of goods sold.

***Potters division***

The key raw material forthe Potters division is cullet, or recycled glass, which is sourced from glassrecyclers around the world. Cullet is generally in ample supply from localrecyclers in the regions in which we operate.

**ManufacturingProcess**

A majority of our products are produced by fusing rawmaterials inputs in a high temperature furnace, and either processing or mixingthese fused compounds with other inputs such as water. Sodium silicate, thecore product for the Chemicals division is created by combining soda ash withsilica, or industrial sand, and applying heat in a furnace to produce a moltenglass which quickly cools and hardens. The liquid sodium silicate issubsequently produced via dissolvers. In our Potters division, glass spheresare produced from cullet that is ground, sifted and furnaced into spheres thatare coated and packaged to meet a variety of specifications. The spheres arethen blended to meet various specifications, coated and packaged.

We purchase natural gas tosupply the energy required in our production processes. We have implemented ahedging program in the U.S. which allows us to mitigate exposure to energyvolatility. Our hedging strategy has mitigated volatility in natural gas priceswhen compared to purchasing at spot market prices. We also make forwardpurchases of natural gas in the U.S., Canada and Europe as a means to mitigateexposure to price volatility.

**Sales and Marketing**

***Chemicals division***

Our Chemicals divisionutilizes both a direct sales force as well as established chemical distributorsto market its various products. For most customers, our direct sales forcecalls on the customer, supported by our experienced technical staff. Our globalsales force and technical staff employ a proactive and consultative approach tothe sales process. In many cases, particularly in specialty products, the salesforce assists with the design and development of new products for a client’sspecific needs.

***Potters division***

Our Potters divisionprimarily utilizes a technically-trained internal sales force to marketits product offerings in each geographic market it serves. In addition, ourPotters division employs distributors for sales in North America and Europe. InNorth America, our internal sales force is organized by our principalend-markets served by our Potters division. For the Potters division’s largestend-market, the highway safety sector, we sell to government agencies throughdirect bid processes and through contractors.

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**Research &Development**

We benefit from the highly-skilledtechnical capabilities of our employees dedicated to research and development.We operate four research and development facilities in four countriesthroughout the world. Our research and development activities are directedtoward the development of new and improved products, processes, systems andapplications for existing product lines. Our research and developmentcompetencies have enabled us to expand into higher value-added productand application extensions from our core silicate and engineered glass productplatforms. We believe we are one of the only producers in the markets we servethat offers product development and technical support services on a globalbasis. We also conduct exploratory research and development of new products fornew business opportunities. Research and development expenses wereapproximately $6.1 million in 2006, $12.0 million for the combinedsuccessor and predecessor periods in 2005, and $9.4 million in 2004. Researchand development expenditures for the combined Successor and Predecessor periodsin 2005 include the write-off of acquired in-process research and developmentof $3.3 million.

**IntellectualProperty**

We own or have rights to alarge number of patents relating to a large number of products and processes. Ona worldwide basis, we own approximately 60 patented inventions, with 207patents issued in countries around the world and over 40 patent applicationspending worldwide. Our patent portfolio in the aggregate, combined with ourextensive manufacturing and product experience and knowledge, provides us witha competitive advantage. We also own approximately 212 trademark registrations,including 61 U.S. trademark registrations and 6 pending trademark applications.

**Employees**

As of December 31,2006 our domestic and international operations consisted of approximately 1,856employees, of which 786 were employed in the U.S. and 280 were employed inCanada, Mexico and Brazil. We also employ 491 throughout Europe. The remaining299 employees were dispersed throughout the Asia-Pacific region, primarily inAustralia, Japan, Thailand and China. At December 31, 2006, approximatelyone-third of our employees were represented by a union or workers council. Webelieve we have good relationships with our employees and their respectiveworkers councils.

**EnvironmentalRegulations**

We are subject to local, state, federal and foreignenvironmental, health and safety laws and regulations concerning, among otherthings; emissions to the air; discharges to land and water; and the generation,handling, treatment and disposal of, or exposure to, hazardous substances. Ourfacilities typically require operating permits that are subject to renewal.Compliance with environmental laws and regulations may require us to makesignificant site or operational modifications at substantial cost. Violationsof environmental laws and regulations, or any permits issued thereunder, mayresult in restrictions on our operating activities, substantial fines, penalties,damages or other costs, any of which could have a material adverse effect onour business, financial condition, results of operations or cash flows.

Under certain environmental laws, liability for thecleanup of contaminated sites can be imposed retroactively and on a joint andseveral basis. We could be held responsible for all cleanup costs at a site,whether currently or formerly owned or operated, and regardless of fault,knowledge, timing or cause of the contamination. We are currently, and may inthe future be, responsible for some or all of the investigation or remediationcosts for certain contaminated property, including those at properties where wehave disposed of our waste and at properties which we no longer own. Thediscovery of currently unknown contaminants or the imposition of additionalcleanup obligations at these or other properties 

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could result insignificant liabilities. We cannot assure you that, as a result of former,current or future operations, that we will not incur significant expendituresrelating to new or existing laws and regulations or additional environmentalremediation or restoration liabilities.

While we have budgeted for future capital andoperating expenditures to maintain compliance with environmental laws andregulations, we cannot assure you that these laws and regulations or theinterpretation of them will not change or become more stringent in the futureor that additional unforeseen expenditures will not be required. Environmentallaws and regulations are complex, and both the laws and regulations and theinterpretation thereof, change frequently and have tended to become morestringent over time. For example, we may be materially impacted by the EUregulation commonly known as REACH (Registration, Evaluation and Authorizationof Chemicals) which was adopted by the European Commission on December 18,2006 and will take effect on June 1, 2007. REACH will expand the EU’sregulation of chemicals and could result in significant costs for our productsmanufactured and imported into Europe.

We are actively engaged in complying withenvironmental protection laws. We anticipate incurring future costs for capitalimprovements and general compliance under environmental laws, including coststo acquire, install, maintain and repair pollution control equipment. Weincurred related capital expenditures of $3.7 million in 2006,$6.6 million for the combined successor and predecessor periods in 2005,and $5.6 million in 2004.

We are involved from timeto time in administrative or legal proceedings relating to environmentalmatters and have incurred in the past and will continue to incur capital costsand other expenditures relating to environmental matters. For a discussion ofrecent proceedings, see “Item 3. Legal Proceedings.”

**ITEM 1A.**        RISKFACTORS

**Risks Relating toOur Business**

***We face substantial competition in the markets inwhich we operate.***

Some of the markets inwhich we operate for the Chemicals and Potters divisions are highlycompetitive, and this competition could harm our business and ourcorresponding, results of operations, cash flow and financial condition. Themarkets in Europe and certain Asia-Pacific regions are particularlycompetitive due to the number of both large international producers and smallerregional competitors as well as producers in China. We believe that the mostsignificant competitive factor for these products is selling price and quality.We could be subject to adverse results caused by our competitors’ pricingdecisions. In addition, current and anticipated future consolidation among ourcompetitors and customers may cause us to lose market share as well as putdownward pressure on pricing. In addition, some of our competitors may belarger, may have greater financial resources and/or may have less debt than wedo. As a result, those competitors may be better able to withstand a change inconditions within the industries in which we compete and throughout the economyas a whole.

***Alternative technology may eliminate the need for ourspecialty chemicals and engineered glass products.***

Our customers may pursuealternative technology that could eliminate the need for specialty chemicalsand engineered glass materials. The potential development and implementation ofnew technology could seriously impair our ability to profitably market some ofour products if we are unable to respond appropriately to such newdevelopments. If we do not compete successfully, our business, financialcondition and results of operations could be adversely affected.

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***Increased costs of raw materials and natural gas mayresult in increased operating expenses and adversely affect our results ofoperations and cash flow.***

To produce basic chemicals and engineered glass, wepurchase significant amounts of raw materials, such as soda ash, cullet,industrial sand, ATH, and sodium hydroxide (commonly known as caustic soda).The cost of these raw materials, in the aggregate, represents a substantialportion of our operating expenses. Our results of operations have been andcould in the future be significantly affected by increases in these costs. Inaddition, if any of the raw materials that we use become unavailable within thegeographic area from which they are now sourced, then we may not be able toobtain suitable and cost effective substitutes. Any interruption of supply orany price increase of raw materials could adversely affect our profitability.

We purchase our North American soda ash requirementsthrough long-term supply contracts and have historically been able to mitigate exposureto increases in market pricing. As these contracts expire, we cannot provideassurance that we will be able to renegotiate or enter into new supplycontracts that will offer protection from market fluctuations or be on termsthat are satisfactory to us. We typically do not enter into any forwardcontracts to hedge raw material price risks that we face. In the event offuture price increases in soda ash or any of the other raw materials necessaryto produce our basic chemicals, we may not be able to match raw material priceincreases with corresponding product price increases. Although in the past wehave entered into long-term supply contracts for certain of our raw materials,we cannot provide assurance that in the future we will enter into such contractsor that any such contracts will be on favorable terms or will adequatelyprotect us against increases in the costs of raw materials.

In addition, we purchasesignificant amounts of natural gas to supply the energy required in ourproduction processes for our products. The cost of natural gas hassignificantly increased in the last few years, and our results of operationshave been affected by these increases. We have attempted to mitigate ourexposure to energy price volatility by implementing a hedging program in theU.S., and entering into forward purchases in the U.S., Canada and Europe,however we cannot provide assurance that our hedging strategy will besuccessful. If energy prices continue to rise, our profitability could beadversely affected.

***Demand for some of our products is seasonal and we mayexperience prolonged depressed market conditions for our products.***

Our Potters division,which accounted for 31% of our sales for the year ended December 31, 2006,typically experiences seasonal fluctuations in sales and profitability, withgenerally lower sales and profit in the first and fourth quarters of our fiscalyear. This seasonality is due to the fact that highway reflectorized stripingprojects typically occur during warmer weather months. As a result, our workingcapital requirements tend to be higher in the first and fourth quarter and,accordingly, can adversely affect our liquidity and cash flow. In addition,sales in our Chemicals division, which accounted for 69% of our sales for the yearended December 31, 2006, reflect the general cyclical pattern of theindustries for the end users of our chemical products. In general, downturns ineconomic conditions can cause fluctuations in demand for our products, productprices, volumes and margins. Future economic conditions may not be favorable toour industry and future growth in demand for our products if any, may not besufficient to alleviate any existing or future conditions of excess industrycapacity. In addition, sales of certain of our products, including asubstantial portion of our Chemicals division’s products, are dependent uponthe continued demand from a number of key customers. A decline in the demandfor our products or a shift to lower-margin products due to deterioratingeconomic conditions could have a material adverse effect on our financialcondition and results of operations and could also result in impairments ofcertain of our assets. We cannot provide assurance that a continuation ofcurrent economic conditions or a further economic downturn in one or more ofthe geographic regions in which we sell our products would not have a materialadverse effect on our results of operations.

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***Reductions in highway safety spending could result ina decline in our sales.***

Approximately 56% of oursales in the Potters division for the year ended December 31, 2006 werederived from highway safety spending. Sales of our Potters division products tothe highway safety end-market is in part dependent upon federal, state, localand foreign government budgets. A decrease in or termination of governmentalbudgeting for new highway safety programs or a significant decrease in the useof our materials in any new highway safety projects could have an adverseeffect on our business, financial condition, results of operations or cashflows by decreasing the profitability of our Potters division. See “Item 1. BusinessSegments—Potters Division.”

***As a global business, we are exposed to local businessrisks in different countries which could have a material adverse effect on ourfinancial condition, results of operations and cash flows.***

We have significantoperations in many countries, including manufacturing sites, research anddevelopment facilities and sales personnel and customer support operations. Currently,we operate 57 sites in 19 countries. In January 2007, we added threeadditional manufacturing sites as part of our acquisition of Flex-O-Lite. Forthe year ended December 31, 2006, our foreign subsidiaries accounted for46% of our sales. Our operations are affected directly and indirectly by globalregulatory, economic and political conditions, including:

·       newand different legal and regulatory requirements in local jurisdictions;

·       exportduties or import quotas;

·       domesticand foreign customs and tariffs or other trade barriers;

·       potentialdifficulties in staffing and labor disputes;

·       managingand obtaining support and distribution for local operations;

·       increasedcosts of, and availability of, transportation or shipping;

·       creditrisk and financial conditions of local customers and distributors;

·       potentialdifficulties in protecting intellectual property;

·       riskof nationalization of private enterprises by foreign governments;

·       potentialimposition of restrictions on investments;

·       potentiallyadverse tax consequences, including imposition or increase of withholding andother taxes on remittances and other payments by subsidiaries;

·       capitalcontrols;

·       potentialdifficulties in obtaining and enforcing legal judgments in jurisdictionsoutside the U.S.;

·       potentialdifficulties in obtaining and enforcing relief in the U.S. against partieslocated outside the U.S.;

·       foreignexchange restrictions and fluctuations; and

·       localpolitical, economic and social conditions, including the possibility ofhyperinflationary conditions and political instability in certain countries.

In addition, ourfacilities may be targets of terrorist activities that could result in full orpartial disruption of the activities of such facilities.

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***If we lose certain key personnel or are unable to hireadditional qualified personnel, our business could be adversely affectedbecause we may not be able to execute our business strategy.***

Our success depends, inpart, upon the continued services of our highly skilled personnel involved inmanagement, research, production and distribution and, in particular, upon theefforts and abilities of our executive management group. Although we believethat we are currently adequately staffed in key positions, we cannot provideassurance that we will be able to retain such personnel on acceptable terms orat all. Michael Boyce became our chief executive officer upon the consummationof the Transactions. If we lose the service of any member of our executivemanagement group, including Mr. Boyce, we may not be able to hirereplacements with the same level of industry experience and knowledge necessaryto execute our business strategy, which in turn could have a material adverseeffect on our business, financial condition, results of operations or cashflows.

***Certain of our businesses are subject to governmentregulation, and could be adversely affected by future governmental regulation.***

In order to obtain regulatory approval of certain ofour new products, we must, among other things, demonstrate to the relevantauthority that the product is safe and effective for its intended uses and thatwe are capable of manufacturing the product in accordance with currentregulations. The process of seeking approvals can be costly, time consuming andsubject to unanticipated and significant delays. Any delay in obtaining, or anyfailure to obtain or maintain, these approvals would adversely affect ourability to introduce new products and to generate sales from those products,and those sales may be important in funding our significant debt serviceobligations.

New laws and regulations,and changes in existing laws and regulations, may be introduced in the futurethat could result in additional compliance costs, seizures, confiscation,recall or monetary fines, any of which could prevent or inhibit thedevelopment, distribution and sale of our products. For example, as discussedin more detail in “Item 1. Business—Environmental Regulations,” we may bematerially impacted by the EU regulation commonly known as REACH. If we fail tocomply with applicable laws and regulations, we may be subject to civilremedies, including fines, injunctions, recalls or seizures, any of which couldhave an adverse effect on our business, financial condition and results ofoperations. In addition, we benefit from certain trade protections, includingantidumping protection. If we were to lose these protections, our results ofoperations could be adversely affected.

***Exchange rate fluctuations could adversely affect ourresults of operations and cash flows.***

As a result of our international operations, for theyear ended December 31, 2006, we generated 46% of our sales and incurred asignificant portion of our expenses in currencies other than U.S. dollars. Tothe extent we are unable to match sales made in foreign currencies with costspaid in the same currency, exchange rate fluctuations could have a negativeimpact on our financial condition, results of operations or cash flows.Additionally, because our consolidated financial results are reported indollars, if we generate sales or earnings in other currencies, the translationof those results into dollars can result in a significant increase or decreasein the amount of those sales or earnings. In addition, our debt servicerequirements are primarily in U.S. dollars even though a significant percentageof our cash flow is generated in foreign currencies. The main currencies towhich we are exposed, besides the U.S. dollar, are the euro, the Canadiandollar, the Mexican peso and the Australian dollar. The exchange rates betweenthese currencies and the U.S. dollar in recent years have fluctuatedsignificantly and may continue to do so in the future. In addition, currencyfluctuations may affect the comparability of our results of operations and cashflows between financial periods.

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In addition to currencytranslation risks, we incur currency transaction risk whenever we or one of oursubsidiaries enter into either a purchase or a sales transaction using acurrency other than the local currency of the transacting entity. It is possiblethat volatility in currency exchange rates will have a material adverse effecton our financial condition or results of operations and cash flows. We have inthe past experienced economic loss and a negative impact on earnings as aresult of foreign currency exchange rate fluctuations. Any future fluctuationsmay have a similar or greater impact on our business since we expect that theamount of our sales denominated in non-dollar currencies may increase in futureperiods. See “Item 7A. Quantitative and Qualitative Disclosures About MarketRisk—Foreign Exchange Risk.”

***We may be liablefor damages based on product liability claims brought against us and ourcustomers in our end-use markets.***

The sale of our productsinvolves the risk of product liability claims. Certain of our products providecritical performance functions to our customers’ end-products. Some of ourproducts are used in and around other chemical manufacturing facilities,highways, airports and other locations where personal injury or property damagemay occur. There can be no assurance that our products will not be the subjectof product liability claims or suits. In addition, if a person brings a productliability claim or suit against one of our customers, this customer may attemptto seek a contribution from us. A successful product liability claim or seriesof claims against us in excess of our insurance coverage for payments for whichwe are not otherwise indemnified could have a material adverse effect on ourfinancial condition, results of operations or cash flows.

***Environmental,health and safety matters could require material expenditures and changes inour operations.***

We are subject to local,state, federal and foreign environmental, health and safety laws andregulations concerning, among other things, emissions to the air, discharges toland and water, the generation, handling, treatment and disposal of, orexposure to, hazardous substances. Our facilities typically require operatingpermits that are subject to renewal. Compliance with environmental laws andregulations may require us to make significant site or operationalmodifications at substantial cost. Environmental laws and regulations arecomplex, and both the laws and regulations and the interpretation thereofchange frequently and have tended to become more stringent over time. We cannotprovide assurance that we have been, or will be at all times, in compliancewith all of these requirements and that the resolution of these environmentalmatters will not have a material adverse effect on our results of operations,financial condition and cash flows in any given period.

Non-compliance with, orclaims arising under, environmental laws and regulations could subject us tomaterial liabilities, such as fines, damages, criminal or civil sanctions andremediation costs, or result in interruptions in our operations. We areinvolved from time to time in administrative or legal proceedings relating toenvironmental matters. For example, as discussed in more detail in “Item 3. LegalProceedings,” we are on probation until May 2007 as a result of ourpleading guilty in 2004 to felony violations of the federal Clean Water Act forunauthorized discharges from three of our facilities.

Under certainenvironmental laws, liability for the cleanup of contaminated sites can beimposed retroactively and on a joint and several basis. We could be heldresponsible for all cleanup costs at a site, whether currently or formerlyowned or operated, and regardless of fault, knowledge, timing or cause of thecontamination. In addition, we may face liability for personal injury, propertydamage, and natural resource damage resulting from environmental conditionsattributable to us. We are currently, and may in the future be, responsible forsome or all of the investigation or remediation costs for certain contaminatedproperty, including property where we have disposed of our waste. The discoveryof currently unknown contaminants or the imposition of additional cleanupobligations at these or other properties could result in significantliabilities. Such environmental liabilities attached to our properties or forwhich we are otherwise responsible could have a material adverse effect on ourresults of operations or financial 

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condition.For further discussion of these and other issues, see “Item 1. Business—EnvironmentalRegulations.”

Further, we are exposed tothe risks and hazards associated with chemical manufacturing and the relateduse, storage and transportation of raw materials, products and wastes in or fromour manufacturing sites or our distribution centers. These hazards could leadto an interruption or suspension of operations, and have an adverse effect onthe productivity and profitability of a particular manufacturing facility or onour company as a whole.

***Acquisitions thatwe pursue may present unforeseen integration obstacles or costs.***

We mayselectively pursue complementary acquisitions and joint ventures, each of whichinherently involve a number of risks and present financial, managerial and operationalchallenges, including:

·       potentialdisruption of our ongoing business and distraction of management;

·       difficultywith integration of personnel and financial and other systems;

·       hiringadditional management and other critical personnel; and

·       increasingthe scope, geographic diversity and complexity of our operations.

In addition, we mayencounter unforeseen obstacles or costs in the integration of acquiredbusinesses. Also, the presence of one or more material liabilities of anacquired company that are unknown to us at the time of acquisition may have amaterial adverse effect on our business. Our acquisition and joint venturestrategy may not be successfully received by customers, and we may not realizeany anticipated benefits from acquisitions or joint ventures.

***Our failure toprotect our intellectual property rights could adversely affect our futureperformance and growth.***

Protection of ourproprietary processes, methods, compounds and other technologies is importantto our business. We depend upon our ability to develop and protect ourintellectual property rights to distinguish our products from those of ourcompetitors. Failure to protect our existing intellectual property rights mayresult in the loss of valuable technologies or having to pay other companiesfor infringing on their intellectual property rights. We rely on a combinationof patent, trade secret, trademark and copyright law as well as judicialenforcement to protect such technologies. We currently own approximately 60patented inventions, with 207 patents issued in countries around the world andover 40 patent applications pending worldwide. Some of these patents arelicensed to others. In addition, we have acquired the rights under patents andinventions of others through licenses.

Measures taken by us toprotect these assets and rights may not provide meaningful protection for ourtrade secrets or proprietary manufacturing expertise and adequate remedies maynot be available in the event of an unauthorized use or disclosure of our tradesecrets or manufacturing expertise. In addition, our patents may be challenged,invalidated, circumvented or rendered unenforceable. Furthermore, we cannotprovide assurance that any pending patent application filed by us will resultin an issued patent or, if patents are issued to us, that those patents willprovide meaningful protection against competitors or against competitivetechnologies. The failure of our patents or other measures to protect ourprocesses, apparatuses, technology, trade secrets and proprietary manufacturingexpertise, methods and compounds could have an adverse effect on our business,financial condition, results of operations and cash flows.

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***Our products mayinfringe the intellectual property rights of others, which may cause us toincur unexpected costs or prevent us from selling our products.***

Although it is our policyand intention not to infringe valid patents, in the future our processes andproducts may inadvertently infringe on issued patents or other intellectualproperty rights of others. For example, our products or our technology mayunintentionally be subject to filed patent applications by third parties thatcover our products or technology. If patents are subsequently issued on theseapplications or if patents that cover our products or technology are already inexistence, we may be liable for infringement. We may also be subject to legalproceedings and claims in the ordinary course of our business, including claimsof alleged infringement of the patents, trademarks and other intellectualproperty rights of third parties by us or our licensees in connection withtheir use of our products. Intellectual property litigation is expensive andtime-consuming, regardless of the merits of any claim, and could divert our management’sattention from operating our business. If we were to discover that ourprocesses or products infringe the valid intellectual property rights ofothers, we might need to obtain licenses from these parties or substantiallyreengineer our products in order to avoid infringement. We may not be able toobtain the necessary licenses on acceptable terms, or at all, or be able toreengineer our products successfully. Moreover, if we are sued for infringementand lose the suit, we could be required to pay substantial damages and/or beenjoined from using or selling the infringing products or technology. Any ofthe foregoing could cause us to incur significant costs and prevent us fromselling our products.

**Risks Relating to Our Indebtedness**

***Our substantialleverage and significant debt service obligations could adversely affect ourability to fulfill our obligations, including the notes, and make it moredifficult for us to fund our operations.***

As of December 31,2006, our total indebtedness was $635.9 million and we had$94.1 million available for additional borrowing under our senior securedcredit facility. In addition, although the terms of our existing indebtednesscontain restrictions on our ability to incur additional indebtedness, theserestrictions are subject to a number of important qualifications andexceptions, and the indebtedness incurred in compliance with these restrictionscould be substantial. Our substantial level of indebtedness could haveimportant negative consequences on our financial condition, including:

·       wemay have difficulty satisfying our obligations with respect to the notes;

·       wemay have difficulty obtaining financing in the future for working capital,capital expenditures, acquisitions or other purposes;

·       wewill need to use a substantial portion of our available cash flow to payinterest and principal on our debt, which will reduce the amount of moneyavailable to finance our operations and other business activities;

·       ourdebt level increases our vulnerability to general economic downturns andadverse industry conditions;

·       ourdebt level could limit our flexibility in planning for, or reacting to, changesin our business and in our industry in general;

·       ourleverage could place us at a competitive disadvantage compared to ourcompetitors that have less debt; and

·       we may not have sufficientfunds available, and our debt level may also restrict us from raising the fundsnecessary, to repurchase all of the notes tendered to us upon the occurrence ofa change in control, which would constitute an event of default under theindenture for the notes.

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***Despite oursubstantial indebtedness, we may still be able to incur significantly moredebt. This could intensify the risks described above.***

The terms of the indenturegoverning the notes and our senior secured credit facility contain restrictionson our ability to incur additional indebtedness. These restrictions are subjectto a number of important qualifications and exceptions, and the indebtednessincurred in compliance with these restrictions could be substantial.Accordingly, we could incur significant additional indebtedness in the future,all of which could constitute senior indebtedness for purposes of the notes. Asof December 31, 2006, we had $94.1 million available for additionalborrowing under our senior secured credit facility. The more we becomeleveraged, the more we, and in turn the holders of the notes, become exposed tothe risks described above under “Item 1A. Risk Factors—Our substantial leverageand significant debt service obligations could adversely affect our ability tofulfill our obligations, including the notes, and make it more difficult for usto fund our operations.”

***We are subject to anumber of restrictive covenants which, if breached, may restrict our businessand financing activities.***

Our senior secured creditfacility and the indenture governing the notes contain, and the terms of anyfuture indebtedness of ours would likely contain, a number of restrictivecovenants that impose significant operating and other restrictions on us. Suchrestrictions affect, and in many respects limit or prohibit, among otherthings, our ability to:

·       incuradditional debt;

·       paydividends and make distributions;

·       issuestock of subsidiaries;

·       makecertain investments;

·       repurchasestock;

·       createliens;

·       enterinto affiliate transactions;

·       enterinto sale-leaseback transactions;

·       mergeor consolidate; and

·       transferand sell assets.

In addition, our seniorsecured credit facility includes other more restrictive covenants and prohibitsus from prepaying our other indebtedness, including the notes, while borrowingsunder our senior secured credit facility are outstanding. Our senior securedcredit facility also requires us to achieve certain financial and operating resultsand maintain compliance with specified financial ratios some of which becomemore restrictive over time. Our ability to comply with these ratios may beaffected by events beyond our control.

Afailure to comply with the covenants contained in the credit agreementgoverning our senior secured credit facility could result in an event ofdefault under the facility, which, if not cured or waived, could have amaterial adverse affect on our business, financial condition and results ofoperations. In the event of any default under our senior secured creditfacility, the lenders thereunder:

·       willnot be required to lend any additional amounts to us;

·       couldelect to declare all of our outstanding borrowings, together with accrued andunpaid interest and fees, to be immediately due and payable;

·       couldeffectively require us to apply all of our available cash to repay theseborrowings even if they do not accelerate the borrowings; and

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·       couldprevent us from making debt service payments on the notes.

These actions could resultin an event of default under the indenture for the notes.

If the indebtedness underour senior secured credit facility or the notes were to be accelerated, therecan be no assurance that our assets would be sufficient to repay such indebtednessin full.

***To service ourindebtedness, we will require a significant amount of cash. Our ability togenerate cash depends on many factors beyond our control.***

Our ability to makepayments on and to refinance our indebtedness, including the notes, and to fundplanned capital expenditures and research and development efforts will dependon our ability to generate cash in the future. This, to a certain extent, issubject to general economic, financial, competitive, legislative, regulatoryand other factors that are beyond our control. The Transactions substantiallyincreased our annual cash interest expense. Interest expense for the year endedDecember 31, 2006, excluding amortization of deferred financing fees, wasapproximately $49.5 million.

Our business may notgenerate sufficient cash flow from operations and future borrowings may not beavailable to us under our senior secured credit facility in an amountsufficient to enable us to pay our indebtedness, including the notes, or tofund our other liquidity needs. We may need to refinance all or a portion ofour indebtedness, including the notes on or before maturity and we may not beable to refinance any of our indebtedness, including our senior secured creditfacility and the notes, on commercially reasonable terms or at all.

Without a refinancing, wecould be forced to sell assets to make up for any shortfall in our paymentobligations under unfavorable circumstances. Furthermore, the Sponsors have nocontinuing obligation to provide us with debt or equity financing. Our seniorsecured credit facility and the indenture governing the notes limit our abilityto sell assets and also restrict the use of proceeds from that sale. Moreover,our senior secured credit facility is secured on a first-priority basis bycertain of our assets, and the notes and the guarantees are unsecured. We maynot be able to sell assets quickly enough or for sufficient amounts to enableus to meet our obligations, including our obligations on the notes.Furthermore, a substantial portion of our assets are, and may continue to be,intangible assets. Therefore, it may be difficult for us to pay our noteholders in the event of an acceleration of the notes.

***We are controlled by an affiliate of JPMP and itsinterests as an equity holder may conflict with those of our creditors.***

Affiliates of JPMP ownsubstantially all of Holdings’ common stock. Accordingly, JPMP and itsaffiliates have the power to control us. The interests of JPMP and itsaffiliates as equity holders may not in all cases be aligned with the interestsof our creditors. For example, our equity holders have an interest in causingus to pay cash dividends and/or to enter into certain financing transactions,even though these transactions might result in our being more highly leveraged.In addition, if we encounter financial difficulties, or we are unable to payour debts as they mature, the interests of our equity holders might conflictwith those of our creditors. In that situation, for example, our creditorsmight want us to raise additional equity from JPMP or other investors to reduceour leverage and pay our debts, while JPMP might not want to increase theirinvestment in us or have their ownership diluted and instead choose to takeother actions, such as selling our assets. Additionally, JPMP and certain ofits affiliates are in the business of making investments in companies andcurrently hold, and may from time to time in the future acquire, controllinginterests in businesses engaged in the chemical or glass industries thatcomplement or directly or indirectly compete with certain portions of ourbusiness. Further, if they pursue such acquisitions in the chemical or glassindustry, those acquisition opportunities may not be available to us. So longas JPMP and its affiliates continue to indirectly own a significant amount ofour equity, even if such amount is less than 50%, they will continue to be ableto strongly influence or effectively control our decisions.

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**Other Risks**

***Efforts to comply with the Sarbanes-Oxley Act willinvolve significant expenditures, and non-compliance with the Sarbanes-OxleyAct may adversely affect us.***

The Sarbanes-Oxley Act of 2002 and the related rulesand regulations promulgated by the Securities and Exchange Commission that arenow applicable to us have increased the scope, complexity and cost of ourcorporate overnance, reporting and disclosure practices.  We expect to experience greater outside andinternal costs as a result of our continuing efforts to comply with theSarbanes-Oxley Act, including provisions that are not currently applicable tous but will become so.

We are currently not required to comply with therequirements of Section 404 of the Sarbanes-Oxley Act of 2002 until we file ourAnnual Report on Form 10-K for our fiscal year ending December 31, 2007, solong as we continue to meet the definition of a non-accelerated filer.  Inour Annual Report on Form 10-K for the year ending December 31, 2007, ourmanagement will be required to provide an assessment as to the effectiveness ofour internal control over financial reporting, which assessment will be deemedfurnished to rather than filed with the Securities and Exchange Commission. In our Annual Report on Form 10-K for the year ending December 31, 2008and for each fiscal year thereafter, our management will be required to providean assessment as to the effectiveness of our internal control over financialreporting and our independent registered public accounting firm will berequired to provide an attestation as to our management’s assessment, whichassessment and attestation will be filed with the Securities and ExchangeCommission. 

We believe that we will beable to timely meet our obligations under Section 404 and that our managementwill be able to certify as to the effectiveness of our internal control overfinancial reporting.  However, we have inthe past identified material weaknesses in our internal control over financialreporting which have since been corrected, and we may identify additionaldeficiencies or material weaknesses that we cannot remedy in a timelymanner.  In such event, we may be unableto receive a positive attestation from our independent registered publicaccounting firm with respect to our internal control over financial reporting.

**ITEM 1B.   UNRESOLVEDSTAFF COMMENTS**

Not Applicable.

**ITEM 2.**                PROPERTIES

Our headquarters are located in Berwyn, Pennsylvania.We are a global company operating 57 manufacturing sites in 19 countries onfive continents, including 38 Chemicals manufacturing facilities in 14countries and 22 Potters manufacturing facilities in 11 countries throughoutthe world. We also have three administrative facilities and four research anddevelopment facilities throughout the world.

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The table below presentssummary information regarding our facilities as of December 31, 2006.

| **CHEMICALS FACILITIES**      | ** ** | ** ** | ** ** | **OWNED/   LEASED** | ** ** |
|------------------------------------|------------|------------|------------|---------------------|------------|
| **North America**                  |       |       |       |                |       |
| Anderson, IN                       |       |       | Owned      |                |       |
| Augusta, GA(1)                     |       |       | Owned      |                |       |
| Baltimore, MD                      |       |       | Owned      |                |       |
| Chester, PA                        |       |       | Owned      |                |       |
| Gurnee, IL                         |       |       | Owned      |                |       |
| Jeffersonville, IN                 |       |       | Owned      |                |       |
| Kansas City, KS                    |       |       | Owned      |                |       |
| Pineville, LA                      |       |       | Owned      |                |       |
| Rahway, NJ                         |       |       | Owned      |                |       |
| South Gate, CA                     |       |       | Owned      |                |       |
| St. Louis, MO                      |       |       | Owned      |                |       |
| Tacoma, WA                         |       |       | Owned      |                |       |
| Utica, IL                          |       |       | Owned      |                |       |
| Parksville, BC                     |       |       | Owned      |                |       |
| Surrey, BC                         |       |       | Owned      |                |       |
| Toronto, ON                        |       |       | Owned      |                |       |
| Valleyfield, ON                    |       |       | Owned      |                |       |
| Whitecourt, AB                     |       |       | Owned      |                |       |
| Altamira, Mexico                   |       |       | Owned      |                |       |
| Guadalajara,  Mexico               |       |       | Owned      |                |       |
| San Martin,  Mexico                |       |       | Owned      |                |       |
| Tlalnepantla,  Mexico(1)           |       |       | Owned      |                |       |
| **Europe**                         |       |       |       |                |       |
| Maastricht,  Netherlands(2)        |       |       | Leased     |                |       |
| Delfzijl,  Netherlands(3)          |       |       | Owned      |                |       |
| Winschoten,  Netherlands           |       |       | Leased     |                |       |
| Glomfjord, Norway(4)               |       |       | Leased     |                |       |
| Karlstad, Sweden                   |       |       | Owned      |                |       |
| Utansjo, Sweden                    |       |       | Leased     |                |       |
| Naantali, Finland                  |       |       | Leased     |                |       |
| Worms, Germany                     |       |       | Owned      |                |       |
| Wurzen, Germany                    |       |       | Owned      |                |       |
| Lamotte, France                    |       |       | Leased     |                |       |
| Livorno, Italy(5)                  |       |       | Leased     |                |       |
| **Asia-Pacific**                   |       |       |       |                |       |
| Melbourne-Dandenong,  Australia(1) |       |       | Owned      |                |       |
| Sydney-New  South Wales, Australia |       |       | Owned      |                |       |
| Bangkok, Thailand                  |       |       | Leased     |                |       |
| Seoul, South  Korea(6)             |       |       | Owned      |                |       |
| Taipei, Taiwan(7)                  |       |       | Owned      |                |       |
| Beijing, China(9)                  |       |       | Leased     |                |       |
| Tianjin, China                     |       |       | Owned      |                |       |

 

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| **POTTERS FACILITIES(8)**     | ** ** | ** ** | ** ** | **OWNED/  LEASED** | ** ** |
|------------------------------------|------------|------------|------------|--------------------|------------|
| **North America**                  |       |       |       |               |       |
| Apex, NC                           |       |       | Owned      |               |       |
| Brownwood, TX                      |       |       | Owned      |               |       |
| Canby, OR                          |       |       | Owned      |               |       |
| Carlstadt, NJ                      |       |       | Owned      |               |       |
| Cleveland, OH                      |       |       | Owned      |               |       |
| Kingman, AZ                        |       |       | Owned      |               |       |
| Potsdam, NY                        |       |       | Owned      |               |       |
| LaPrairie, Quebec                  |       |       | Owned      |               |       |
| Moose Jaw, SK                      |       |       | Owned      |               |       |
| **South America**                  |       |       |       |               |       |
| Rio de Janeiro, Brazil             |       |       | Owned      |               |       |
| **Europe**                         |       |       |       |               |       |
| St. Pourcain-sur-Sioule, France(2) |       |       | Owned      |               |       |
| Kircheimbolanden, Germany          |       |       | Owned      |               |       |
| Barnsley, South Yorkshire, England |       |       | Owned      |               |       |
| Durham, West Auckland, England     |       |       | Owned      |               |       |
| Walbrzych, Poland                  |       |       | Owned      |               |       |
| **Asia-Pacific**                   |       |       |       |               |       |
| Melbourne-Laverton, Australia      |       |       | Owned      |               |       |
| Bangkok, Thailand                  |       |       | Owned      |               |       |
| Tokyo, Japan(9)                    |       |       | Leased     |               |       |
| Tsukuba City, Japan                |       |       | Owned      |               |       |
| Kansai, Japan                      |       |       | Owned      |               |       |

 

| **CORPORATE FACILITIES** | ** ** | ** ** | ** ** | **OWNED/  LEASED** | ** ** |
|-------------------------------|------------|------------|------------|--------------------|------------|
| **North America**             |       |       |       |               |       |
| Berwyn, PA                    |       |       | Leased     |               |       |
| Lenexa, KS                    |       |       | Leased     |               |       |
| **Europe**                    |       |       |       |               |       |
| Amersfoort,  Netherlands      |       |       | Leased     |               |       |

 

| **RESEARCH & DEVELOPMENT FACILITIES** | ** ** | ** ** | ** ** | **OWNED/  LEASED** | ** ** |
|----------------------------------------------------------|------------|------------|------------|--------------------|------------|
| **North America**                                        |       |       |       |               |       |
| Conshohocken, PA                                         |       |       | Owned      |               |       |
| Toronto, ON                                              |       |       | Leased     |               |       |
| **Europe**                                               |       |       |       |               |       |
| Maastricht, Netherlands                                  |       |       | Leased     |               |       |
| St. Pourcain-sur-Sioule,  France                         |       |       | Owned      |               |       |

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(1)          These facilities alsomanufacture our Potters division products.

(2)          These facilities alsoconduct research and development activities.

(3)          Owned by our 50/50 jointventure, Zeolyst C.V.

(4)          Effective January 1,2007, we own the Chemicals division facility located in Glomfjord, Norway.

(5)          Products manufactured onour behalf by Rhodia Italia under a tolling arrangement.

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(6)          Owned by our 50/50 jointventure, Aekyung-PQ Advanced Materials, Co. Ltd.

(7)          Owned by our 50/50 jointventure, PQ Silicates Ltd.

(8)          On January 25,2007, we acquired three additional facilities as part of an acquisition in thePotters division. The newly owned facilities are located in Paris, Texas,Muscatine, Iowa, and St. Thomas, Ontario.

(9)          These facilities aresales offices with no manufacturing operations

We lease six of ourproduction facilities and two of our administrative facilities. These leasesexpire between 2007 and 2021. Substantially all of the leases contain renewalprovisions with automatic rent escalation clauses. The facilities we own aresubject to major encumbrances under our existing senior secured creditfacility. In addition to the facilities that are owned, our fixed assets arecomprised primarily of machinery and equipment, trucks and warehousing,transportation and computer equipment.

**ITEM 3.**                LEGALPROCEEDINGS

We are involved from time to time in administrative orlegal proceedings relating to our operations and facilities.

There is a risk of environmental impact in chemicalmanufacturing operations. Our environmental policies and practices are designedto ensure compliance with existing laws and regulations and to minimize thepossibility of significant environmental impact. We are also subject to variousother lawsuits and claims with respect to matters such as governmentalregulations, labor, and other actions arising out of the normal course ofbusiness. No accrual for these matters currently exists, with the exception ofthose listed below, because we believe that the liabilities resulting from suchlawsuits and claims will not materially affect our results of operations,financial position or cash flow.

We were named as the defendant in a personal injurycase which occurred in 1996. The case was settled in November 2006 for$2.4 million. The claim was covered by our insurance carrier. As settlement ofthis claim, our insurance carrier agreed to pay the plaintiff $2.4 million, ofwhich $1.2 million was paid in December 2006 and $1.2 million was paid in January 2007.

As a result of an incident at our Baltimore, Marylandfacility on March 17, 1999 involving the unauthorized discharge of processwater to a storm sewer, the United States Attorney for the District of Marylandundertook an investigation into environmental compliance at our Baltimoreplant. The investigation later expanded to include two of our other plants inChester, Pennsylvania and St. Louis, Missouri. On March 10, 2004, weresolved the investigation by pleading guilty to three felony violations of theClean Water Act. In addition to paying $0.6 million in fines, restitutionand the funding of a community service project, we are on probation until May 2007.We also agreed to submit documents to the Department of Justice (“DOJ”)describing our Environmental Management System (“EMS”). Several additions tothe EMS have been made based upon discussions with the DOJ and we are inprocess of implementing the EMS. Successfully implementing the EMS is requiredby an action plan that has been incorporated into the plea agreement.

We are subject to various laws and regulationsregarding emissions from our plant locations. These laws and regulations maylimit the amount and types of emissions that can be released into theatmosphere. In 2003, following an incident at the Kansas City, Kansas plant inwhich an emission control device failed, we were issued a draft ConsentAgreement from the Kansas Department of Health and Environment (“KDHE”) foroperating the plant without such emission control device in place. In February 2006,we received a revised Consent Agreement from KDHE and agreed to settle alloutstanding claims. The settlement calls for us to complete the implementationof an ISO 14001 EMS at the Kansas City plant, perform five supplementalenvironmental projects valued at a total of approximately 

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$0.1 million and paya $0.2 million civil penalty. In September 2006, we negotiated theterms of the consent decree that incorporated the aforementioned settlement. Thecivil penalty of $0.2 million was paid in full in October 2006.

We triggered the requirement of New Jersey’sIndustrial Site Recovery Act (“ISRA”) statute as part of the due diligenceperformed in connection with the Transactions in December 2004. Asrequired under ISRA, a General Information Notice with respect to our two NewJersey locations was filed with the New Jersey Department of EnvironmentalProtection (“NJDEP”) in December 2004. Based on a preliminary review ofthe facilities by the NJDEP, we estimated that $0.5 million will be requiredfor contamination assessment and removal work at these facilities, and hadrecorded a reserve for such amount as of December 31, 2005. During theyear ended December 31, 2006, it was determined that additionalassessment, removal and remediation work would be required and the reserve wasincreased by $0.4 million to $0.9 million to cover the estimated costof such work. There may be additional costs related to the remediation of thesetwo facilities, but until further investigation takes place, we cannotreasonably estimate the amount of additional liability that may exist.

In the past five years, wehave been a party to civil litigation matters. These matters have includeddisputes regarding employment matters and product warranty and negligenceclaims. All but two matters have been covered by applicable insurance. The twomatters that have been denied coverage by our insurance carriers relate to theoperations at our Augusta, Georgia facility. The suits, which are pendingagainst numerous industrial and utility defendants, allege that emissions ofmercury from the utility and industrial defendants facilities resulted in harmto the two plaintiffs. We do not believe we have any material exposure to anylitigation liability.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

There are no matters to be reported hereunder.

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**PART II**

**ITEM5.**                MARKETFOR  REGISTRANT’S COMMON EQUITY; RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

**Market Information**

There is no establishedtrading market for our common stock.

**Holders**

One hundred percent of ourcommon stock is held by Holdings.

**Dividends**

During the year ended December 31, 2006 and 2005,we returned $2.3 million and $85.3 million in capital contributions toHoldings, respectively.

Our senior secured credit facility and the indenturefor the notes limit our ability to declare or pay dividends. For more detailedinformation on our senior secured credit facility and the indenture for thenotes, see “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations - Liquidity and Capital Resources” and notes to ourconsolidated financial statements.

Any payment of cashdividends on common stock in the future will be at the discretion of the Boardof Directors and will also depend upon such factors as compliance with debtcovenants, capital requirements, our financial condition and other factorsdeemed relevant by the Board of Directors.

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

We do not have anycompensation plans under which our equity securities are authorized forissuance. There is a restricted stock program at Holdings for which certain ofour senior management and other key employees were offered the opportunity toacquire equity of Holdings under individual restricted stock agreements. Formore detailed information on the Holdings restricted stock program, see “Item13. Certain Relationships and Related Transactions, and Director Independence -Holdings Restricted Stock Program.”

**Sales ofUnregistered Equity Securities**

None.

**Purchases of EquitySecurities by the Issuer and Affiliated Purchasers**

None.

**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing table presents our selected historical consolidated financialinformation. The following information is only a summary and should be read inconjunction with “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” and our audited financial statementsincluded in “Item 8. Financial Statements and Supplementary Data.” For purposesof identification and description, we are referred to as the “Predecessor” forthe periods prior to the consummation of the Transactions on February 11,2005 and the “Successor” for the period subsequent to the Transactions. Theselected historical financial information for the year ended December 31,2006, the six week period ended February 11, 2005, the forty-six weekperiod ended December 31, 2005, and the year ended December 31, 2004and as of December 31, 2006 and 2005 have been derived from our auditedfinancial statements included in “Item 8. Financial Statements andSupplementary Data.”  The selectedhistorical financial 

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information for the years ended December 31, 2002and 2003 and as of December 31, 2004, 2003, and 2002 have been derivedfrom our audited financial statements that are not included herein, withcertain reclassifications to conform to the current presentation of our 2006audited financial statements.

| ** **                                                | ** ** | **Predecessor**       | ** ** | ** ** | **Successor**         | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------|-----------------------|------------|
| ** **                                                | ** ** | ** **            | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | **Six weeks** | ** ** | ** ** | **Forty-six** | ** ** | **Year** | ** ** |
| ** **                                                | ** ** | **Year ended**   | ** ** | ** ** | **ended**             | ** ** | ** ** | **weeks ended** | ** ** | **ended** | ** ** |
| ** **                                                | ** ** | **December 31,** | ** ** | ** ** | **February 11,** | ** ** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                | ** ** | **2002**              | ** ** | **2003**   | ** **            | **2004**   | ** ** | ** ** | **2005** | ** ** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                | ** ** | **(in thousands)**    | ** ** |
| Sales                                                     |       | $                     | 506,421    |       | $                     | 534,823    |   | $ | 606,679 |   |   | $ | 64,195 |   |   | $ | 571,138 |   | $ | 708,589 |   |
| Cost of goods sold(1)                                     |       | 376,165               |       | 404,302    |                  | 454,448    |   |   | 48,576 | ** ** |   | 463,102 |   | 549,927 |   |
| Gross profit                                              |       | 130,256               |       | 130,521    |                  | 152,231    |   |   | 15,619 | ** ** |   | 108,036 |   | 158,662 |   |
| Selling, general and  administrative expense              |       | 79,387                |       | 86,347     |                  | 96,235     |   |   | 11,221 | ** ** |   | 77,317 |   | 86,903 |   |
| Other operating  expense(2)                               |       | 3,034                 |       | 5,093      |                  | 6,375      |   |   | 12,267 | ** ** |   | 22,558 |   | 12,486 |   |
| Operating income (loss)                                   |       | 47,835                |       | 39,081     |                  | 49,621     |   |   | (7,869 | ) |   | 8,161 |   | 59,273 |   |
| Equity in net income  (loss) from affiliated companies(3) |       | 6,646                 |       | 3,212      |                  | 10,249     |   |   | (265 | ) |   | 3,108 |   | 21,341 |   |
| Interest expense, net                                     |       | 8,055                 |       | 7,386      |                  | 6,541      |   |   | 771 |   |   | 37,529 |   | 51,894 |   |
| Other (income) expense(4)                                 |       | (790                  | )          | 2,015      |                  | 1,684      |   |   | 356 |   |   | 8,218 |   | (141 | ) |
| Income (loss)  before taxes and minority interest         |       | 47,216                |       | 32,892     |                  | 51,645     |   |   | (9,261 | ) |   | (34,478 | ) | 28,861 |   |
| Provision (benefit) for  income taxes                     |       | 15,484                |       | (1,700     | )                     | 12,926     |   |   | (2,522 | ) |   | 361 |   | 13,997 |   |
| Minority interest(5)                                      |       | 876                   |       | 587        |                  | 546        |   |   | 59 |   |   | 307 |   | 708 |   |
| Net income (loss)                                         |       | $                     | 30,856     |       | $                     | 34,005     |   | $ | 38,173 |   |   | $ | (6,798 | ) |   | $ | (35,146 | ) | $ | 14,156 |   |
| **Statement  of cash flows data:**                        |       |                  |       |       |                  |       |   |   |   | ** ** |   | ** ** |   | ** ** |   |
| Net cash from:                                            |       |                  |       |       |                  |       |   |   |   | ** ** |   | ** ** |   | ** ** |   |
| Operating activities                                      |       | $                     | 62,523     |       | $                     | 67,478     |   | $ | 87,927 |   |   | $ | (6,965 | ) |   | $ | 18,719 |   | $ | 59,664 |   |
| Investment activities                                     |       | (28,833               | )          | (44,967    | )                     | (33,308    | ) |   | (2,358 | ) |   | (658,218 | ) | (32,059 | ) |
| Financing activities                                      |       | (42,033               | )          | (18,454    | )                     | (53,163    | ) |   | 45,971 |   |   | 613,640 |   | (35,608 | ) |
| **Other  financial data:**                                |       |                  |       |       |                  |       |   |   |   | ** ** |   | ** ** |   | ** ** |   |
| Capital expenditures                                      |       | $                     | 28,670     |       | $                     | 30,518     |   | $ | 35,509 |   |   | $ | 2,358 | ** ** |   | $ | 25,733 |   | $ | 31,645 |   |
| Depreciation and  amortization(6)                         |       | 39,951                |       | 36,456     |                  | 36,097     |   |   | 4,436 | ** ** |   | 40,174 |   | 46,810 |   |
| Cash interest expense                                     |       | 9,802                 |       | 8,287      |                  | 7,304      |   |   | 183 | ** ** |   | 30,429 |   | 50,133 |   |
| Ratio of earnings to  fixed charges(7)                    |       | 4.98                  | x          | 4.03       | x                     | 6.31       | x |   | — | ** ** |   | — |   | 1.41 | x |
| **Balance  Sheet Data (at end of period):**               |       |                  |       |       |                  |       |   |   |   | ** ** |   | ** ** |   | ** ** |   |
| Cash and cash equivalents                                 |       | $                     | 6,282      |       | $                     | 10,784     |   | $ | 12,809 |   |   | $ | 48,757 | ** ** |   | $ | 22,972 |   | $ | 15,878 |   |
| Working capital(8)                                        |       | 54,638                |       | 48,028     |                  | 66,710     |   |   | 95,078 | ** ** |   | 94,332 |   | 102,541 |   |
| Property, plant and  equipment, net                       |       | 224,384               |       | 227,218    |                  | 233,986    |   |   | 229,198 | ** ** |   | 318,337 |   | 319,469 |   |
| Total assets                                              |       | 461,583               |       | 510,080    |                  | 509,513    |   |   | 548,065 | ** ** |   | 1,029,873 |   | 988,279 |   |
| Total debt                                                |       | 111,650               |       | 105,774    |                  | 71,064     |   |   | 115,921 | ** ** |   | 660,510 |   | 635,891 |   |
| Capital stock subject to  redemption                      |       | 2,612                 |       | 2,747      |                  | 6,361      |   |   | 6,661 | ** ** |   | — |   | — |   |
| Total stockholders’  equity                          |       | 206,717               |       | 248,101    |                  | 273,930    |   |   | 266,545 | ** ** |   | 46,559 |   | 57,633 |   |

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(1)             Cost of goods sold includes a charge of $10,935 forinventory purchase accounting adjustments to eliminate manufacturer’s profitfor the forty-six week period ended December 31, 2005.

(2)             Other operating expense generally consists of costsrelated to the Merger, asset impairment charges, gains and losses on the saleof assets, restructuring costs and amortization of intangible assets. Theamounts for the six week period ended February 11, 2005 and the forty-sixweek period ended December 31, 2005, consists primarily of costs relatedto the Transactions.

(3)             Equity in net income (loss) from affiliated companiesrepresents our share of net income in our 50/50 joint ventures. Included in theamount for the year ended December 31, 2006 and the forty-six week periodended December 31, 2005 is amortization of purchase accounting fair valueadjustments related to our joint ventures of $1,190 and $6,144, respectively.

(4)             Other (income) expense consists of the amortization ofdeferred financing fees, the impact of gains or losses on foreign currencytransactions denominated in currencies other than the functional currency ofthe relevant operations, and other non-operating income and expenses. Includedin the amount for the forty-six week period ended December 31, 2005 is “make-whole”fees and bridge financing fees of $­­­­­7,579.

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(5)             Minority interest represents the portion of net incomeattributed to ownership interests of third parties in our subsidiaries that arenot wholly owned by us, principally our Chemicals subsidiary in Mexico.

(6)             Included in depreciation and amortizationexpense for the year ended December 31, 2006 and the forty-six week periodended December 31, 2005 is $5,860 and $5,295, respectively, of additionalintangible amortization related to purchase accounting fair value adjustments.

(7)             The ratio of earnings to fixed charges iscomputed by dividing earnings by fixed charges. Earnings include net income(loss) before taxes less equity in net income (loss) from affiliated companiesplus dividends received from affiliated companies and fixed charges. Fixedcharges include interest expense (plus capitalized interest cost), amortizationof debt expense and the implied interest component of operating lease expense.Our earnings would have been insufficient to cover our fixed charges by $8,996and $31,086 for the six weeks ended February 11, 2005 and for theforty-six weeks ended December 31, 2005, respectively.

(8)             Working capital represents current assetsless current liabilities.

**ITEM7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

*The following discussion and analysis of our financialcondition and results of operations covers periods both prior to and subsequentto the Transactions. Accordingly, the discussion and analysis of historicalperiods may not be comparable with the periods presented after the Transactions.Statements in this discussion, other than those based on historical facts,which address activities, events or developments that we expect or anticipatemay occur in the future are forward-looking statements, which are basedupon a number of assumptions concerning future conditions that may ultimatelyprove to be inaccurate. Such forward-looking statements are and will be,as the case may be, subject to many risks, uncertainties and factors relatingto our operations and business environment which may cause our actual resultsto be materially different from any future results, express or implied, by suchforward-looking statements.*

**Overview**

We are a global producerof inorganic specialty chemicals and engineered glass materials in terms ofsales. We conduct our operations through two principal businesses: ourChemicals division, which develops, manufactures and distributes sodiumsilicate and related high performance silicate-based specialty chemicals,and our Potters division, which manufactures highly engineered solid and hollowglass spheres used in highway safety and other specialty applications. Ourproducts are used in a variety of predominantly niche applications in a diverserange of industrial, consumer and municipal end-markets. Our Chemicals divisionaccounted for $486.8 million, or 69%, of our sales, and our Pottersdivision accounted for $221.8 million, or 31%, of our sales for the yearended December 31, 2006. We generated approximately 54% of our sales fromour domestic subsidiaries and approximately 46% of our sales from our foreignsubsidiaries for the year ended December 31, 2006.

On February 11, 2005,we were acquired by Niagara Holdings, Inc. (“Holdings”), a newly formedDelaware corporation affiliated with J.P. Morgan Partners, LLC and certainaffiliated funds (“JPMorgan Partners” or “JPMP”); and Peak Investments, LLC,(together with JPMP, the” Sponsors”). Pursuant to the terms of the Agreementand Plan of Merger, dated as of December 15, 2004, among PQ Corporation,Holdings and Niagara Acquisition, Inc., a wholly owned subsidiary ofHoldings; (i) Niagara Acquisition, Inc. merged with and into PQCorporation, with PQ Corporation surviving as a wholly owned subsidiary ofHoldings; (ii) PQ Corporation redeemed the outstanding shares of its$16.44 Preferred Stock, Class A in accordance with the terms thereof; and (iii) thecommon shareholders of PQ Corporation (both Series A and Series B)and holders of options to purchase common stock of PQ Corporation received cashin exchange for their shares or for the cancellation of their options. We referto the actions set forth in clauses (i), (ii) and (iii) as the “Merger”.

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In connection withthe Merger, affiliates of JPMorgan Partners and certain members of our seniormanagement contributed approximately $163.6 million in cash to Holdings,which in turn was contributed to the common equity of Niagara Acquisition, Inc.The total merger consideration (including capitalized fees and expenses) paidwas approximately $632.5 million. The merger consideration was funded withthe proceeds from:

·       theinvestment by the Sponsors and certain members of our senior management inHoldings and the subsequent contribution of the cash proceeds from suchinvestment to us as common equity;

·       ourissuance of $275.0 million of 7.5% senior subordinated notes due 2013 (referredto herein as the “Notes”) and the related subsidiary guarantees; and

·       termloan borrowings of $335.0 million under our senior secured credit facilities.

In this report, we referto the Merger and the related financing described above, collectively, as the “Transactions”.For purposes of identification and description, we are sometimes referred to asthe “Predecessor” for the period prior to the Transactions on February 11,2005, and the “Successor” for the period subsequent to the Transactions.

***Sales***

Chemicals division sales have grown consistently dueto overall growth in our industry and in the end-markets in which we operate.Share gains in certain of our markets as well as expansion into new marketshave also added to the growth. We have historically experienced relativelystable demand for our Chemicals division products due to our diverse consumerand industrial end-markets. Sales of Chemicals division products are made onboth a purchase order basis and pursuant to long-term contracts.

Potters division saleshave been driven by the growth of spending on repair, maintenance and upgradeof existing highways and the construction of new highways and roads bygovernments around the world. Sales of Potters division products are madeprincipally on a purchase order basis. Within the Potters division, sales tothe highway safety sector have historically experienced seasonal fluctuations,particularly in North America and Europe.

***Costs of Goods Sold***

Cost of goods soldconsists of variable product costs, fixed manufacturing expenses, depreciationexpense and freight expenses. Variable product costs include all raw materials,energy and packaging costs that are directly related to the manufacturingprocess. Fixed manufacturing expenses include all plant employment costs,manufacturing overhead and periodic maintenance costs. The three primary rawmaterials used in the manufacture of Chemicals division products are soda ash,industrial sand, and ATH. We have structured the majority of our contracts withour largest Chemical division customers to include adjustments for changes inthe price of raw materials and natural gas. Under these contracts, theregenerally is a time lag of three to nine months on the pass-through, dependingon the magnitude of the cost change and market dynamics. The key raw materialfor the Potters division is cullet, or recycled glass.

***Joint Ventures***

We account for ourinvestments in our four 50/50 equity joint ventures under the equity method.Our largest joint venture, Zeolyst International (“ZI”), manufactures highperformance catalytic zeolites and zeolite-based catalysts for thepetroleum industry. We share equally with our joint venture partners in themanagement of ZI and our other equity affiliates.

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***Restructuring***

During the second quarter2005, we implemented restructuring efforts with reductions in workforce inorder to  generate annual savings to theCompany estimated between $4.0 and $5.0 million. These savings have been usedto service existing debt, working capital requirements, as well as to reinvestin growth areas of the business. Employees terminated under this plan wereentitled to receive severance pay and benefits totaling approximately$5.2 million. Substantially all payments have been made as of December 31,2006.

***Curtailment of Defined Benefit Pension and RetireeMedical Plans***

During the third quarter2005, our Board of Directors approved plan amendments to our U.S. and Canadiandefined benefit pension plans. As a result, all future accruals will be frozenin the U.S. and credited service as of December 31, 2006 will be frozen inCanada, and employees under both plans will instead receive a new discretionaryCompany contribution based on a percentage of pay to a defined contributionplan. The change to the plans qualified as curtailments under SFAS No. 88 “Employers’Accounting for Settlement and Curtailments of Defined Benefit Pension Plans andfor Termination Benefits.”  Accordingly,a pretax curtailment gain of $6.3 million was recognized in 2005. Inaddition, our Board of Directors approved an amendment to our U.S. and Canadianretiree health plans which will eliminate postretirement benefits for employeesretiring after December 31, 2006.

***Income taxes***

Management of the Successor considers earnings innon-U.S. subsidiaries to be available for repatriation in the future. Theresulting taxes associated with repatriation of all non-U.S. subsidiaryearnings at the opening balance sheet date have been accounted for as deferredtax liabilities in purchase accounting. The tax cost associated with non-U.S.subsidiary earnings and distributions of the Successor for the year ended December 31,2006 and the forty-six weeks ended December 31, 2005 have been recorded astax expense for the period. In this regard the Company expects to deduct,rather than credit, foreign tax expense in computing the U.S. tax effects ofrepatriation from non-U.S. subsidiaries in 2006 and 2005 due to the limits onthe availability of crediting foreign taxes arising from its domestic tax lossfor the year.

We expect the effectivetax rate to exceed the U.S. statutory rate in future years due to the U.S. taxcosts of foreign subsidiary earnings and distributions that would not be fullyoffset by foreign tax credits.

**Results ofOperations**

The period from February 12, 2005 to December 31,2006 is referred to herein as the “Successor” period. The financial informationfor the six weeks ended February 11, 2005 and for the years ended December 31,2004 is prior to the consummation of the Transactions and referred to herein asthe “Predecessor” period. As a result of the Transactions and the resultingchange in ownership, we are required to separately present our operatingresults for the Predecessor and the Successor in the twelve months ended December 31,2005 under Generally Accepted Accounting Principles (“GAAP”). In the followingdiscussion, the 2005 results are adjusted to reflect the pro forma effect ofthe Transactions as if they had occurred on January 1, 2005. See thehistorical results of operations table below and exhibit 99.1 attached to thisreport for the pro forma basis results. The pro forma basis amounts for thecombined twelve months ended December 31, 2005 are compared to the twelvemonths ended December 31, 2006 and 2004 on an historical basis. Managementbelieves this is the most meaningful and practical way to comment on ourresults of operations.

Theresults of operations below include adjustment for the effects of purchaseaccounting adjustments for the Successor only and therefore are not comparable.Refer to the discussions below for detail regarding the effects of purchaseaccounting adjustments in regard to comparability. The following table 

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sets forth our consolidated statements of operationsdata in dollar amounts for the Predecessor and Successor periods indicated:

| ** **                                             | ** ** | **Successor**          | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Year**               | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                                             | ** ** | **ended**              | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                                             | ** ** | **December 31,**  | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                                             | ** ** | **2006**               | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(in millions)** | ** ** |
| Sales                                                  |       |                   | $          | 708.6                 |       |   |   | $ | 571.1 |   |   |   | $ | 64.2 |   |   |   | $ | 606.7 |   |   |
| Cost of goods  sold                                    |       |                   | 549.9      |                  |       |   | 463.1 |   |   |   | 48.6 |   |   |   | 454.5 |   |   |
| Gross profit                                           |       |                   | 158.7      |                  |       |   | 108.0 |   |   |   | 15.6 |   |   |   | 152.2 |   |   |
| Selling, general and administrative expense            |       |                   | 86.9       |                  |       |   | 77.3 |   |   |   | 11.2 |   |   |   | 96.2 |   |   |
| Other operating  expense                               |       |                   | 12.5       |                  |       |   | 22.6 |   |   |   | 12.3 |   |   |   | 6.4 |   |   |
| Operating income (loss)                                |       |                   | 59.3       |                  |       |   | 8.1 |   |   |   | (7.9 | ) |   |   | 49.6 |   |   |
| Equity in net  (loss) income from affiliated companies |       |                   | 21.3       |                  |       |   | 3.1 |   |   |   | (0.3 | ) |   |   | 10.2 |   |   |
| Interest expense,  net                                 |       |                   | 51.9       |                  |       |   | 37.5 |   |   |   | 0.8 |   |   |   | 6.5 |   |   |
| Other (income)  expense                                |       |                   | (0.2       | )                     |       |   | 8.2 |   |   |   | 0.3 |   |   |   | 1.7 |   |   |
| Income (loss) before taxes and minority interest       |       |                   | 28.9       |                  |       |   | (34.5 | ) |   |   | (9.3 | ) |   |   | 51.6 |   |   |
| Provision  (benefit) for income taxes                  |       |                   | 14.0       |                  |       |   | 0.4 |   |   |   | (2.5 | ) |   |   | 12.9 |   |   |
| Minority interest                                      |       |                   | 0.7        |                  |       |   | 0.3 |   |   |   | — |   |   |   | 0.5 |   |   |
| Net income (loss)                                      |       |                   | $          | 14.2                  |       |   |   | $ | (35.2 | ) |   |   | $ | (6.8 | ) |   |   | $ | 38.2 |   |   |

 

***2006 vs. 2005***

***Sales***

Sales were $708.6 million for the year ended December 31,2006, an overall increase of $73.3 million, or 12%, compared to sales of$571.1 million for the forty-six weeks ended December 31, 2005 and$64.2 million for the six weeks ended February 11, 2005. The increasein sales in 2006 was primarily attributable to pricing increases implemented inresponse to higher energy, raw material, and transportation costs. On aconsolidated basis, the benefit of price increases and changes in product mixcontributed $60.5 million to the increase, while higher sales volume inthe amount of $6.4 million and the favorable impact of foreign currencyexchange rate fluctuations of $6.4 million also contributed to the increase.

*Chemicalsdivision.**  *Salesof the Chemicals division were $486.8 million for the year ended December 31,2006, a total increase of $64.8 million, or 15%, compared to$373.7 million for the forty-six weeks ended December 31, 2005 and$48.3 million for the six weeks ended February 11, 2005. The growthin sales was attributable to a net increase of $54.7 million from higheraverage selling prices and changes in product mix, an increase of$4.1 million due to higher sales volume, and an increase of$6.0 million from the favorable effect of changes in foreign currencyexchange rates compared to the prior year. Average selling prices increasedprimarily in response to the higher cost of natural gas, transportation and rawmaterials. The increase in sales volume in drilling additives and laundrydetergents were the primary reason for the positive volume impact on salesversus the prior year. The favorable exchange rate fluctuations compared to2005 occurred primarily as a result of the strengthening Canadian dollar inrelation to the U.S. dollar.

*Potters division.**  *Sales of the Potters division were$221.8 million for the year ended December 31, 2006, a total increase of$8.5 million, or 4%, compared to $197.4 million for the forty-six weeksended December 31, 2005 and $15.9 million for the six weeks ended February 11,2005. The growth in sales was attributable to a net increase of$5.8 million due to higher average selling prices and changes in product 

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mix, an increase of$2.3 million due to higher sales volume, and an increase of $0.4million from the favorable effect of changes in foreign currency exchangerates. Higher average selling prices were implemented in response to theescalating cost of transportation, energy and raw materials. The increase involume was driven by increased demand from North American engineered glassmaterial and highway safety beads. The favorable exchange rate fluctuations incomparison to 2005 occurred primarily as a result of the strengthening Canadiandollar in relation to the U.S. dollar.

***Gross profit***

Gross profit was $158.7 million for the year ended December 31,2006, compared to gross profit of $108.0 million for the forty-six weeksended December 31, 2005 and $15.6 million for the six weeks ended February 11,2005. Assuming the Transactions had occurred on January 1, 2005, pro formagross profit for the year ended December 31, 2005 would have been $130.5million, or $6.9 million higher. Gross profit in 2006 increased $28.2 million,or 22%, compared to the pro forma gross profit in 2005. Net purchase accountingadjustments increased cost of goods sold by $14.1 million in 2006 and pro formacost of goods sold by $22.7 million in 2005, primarily consisting ofamortization of favorable raw material supply contracts. Excluding the effectof the net purchase accounting adjustments, gross profit for the year ended December 31,2006 and 2005 would have been $172.8 million and $153.2 million, respectively,an increase of $19.6 million, or 13%. The favorable effects of higher sellingprices and changes in product mix and the impact of increased sales volumescontributed $60.3 million, and $2.3 million, respectively, to theyear-over-year increase in gross profit. These increases were offset by the netimpact of higher manufacturing costs of $42.6 million due to higher energy, rawmaterial and transportation costs and increased depreciation expense of $2.6million. Favorable foreign currency exchange rates increased gross profit by$2.2 million.

*Chemicalsdivision.**  *Grossprofit was $100.6 million for the year ended December 31, 2006, compared togross profit of $58.4 million for the forty-six weeks ended December 31,2005 and $11.4 million for the six weeks ended February 11, 2005. Assumingthe Transactions had occurred on January 1, 2005, pro forma gross profitfor the year ended December 31, 2005 would have been $71.1 million, or$1.3 million higher. Gross profit in 2006 increased $29.5 million, or 41%,compared to the pro forma gross profit in 2005. Net purchase accountingadjustments increased cost of goods sold by $14.1 million in 2006 and pro formacost of goods sold by $22.3 million in 2005, primarily consisting ofamortization of favorable raw material supply contracts. Excluding the effectof the net purchase accounting adjustments, gross profit for the year ended December 31,2006 and 2005 would have been $114.7 million and $93.4 million, respectively,an increase of $21.3 million, or 23%. The favorable effects of higher sellingprices and changes in product mix and the impact of increased sales volumescontributed $54.0 million, and $1.2 million, respectively, to theyear-over-year increase in gross profit. These increases were offset by the netimpact of higher manufacturing costs of $34.4 million due to higher energy, rawmaterial and transportation costs and increased depreciation expense of $1.1million. Favorable foreign currency exchange rates increased gross profit by$1.6 million.

*Potters division.*   Grossprofit was $58.1 million for the year ended December 31, 2006, compared togross profit of $49.6 million for the forty-six weeks ended December 31,2005 and $4.2 million for the six weeks ended February 11, 2005. Assumingthe Transactions had occurred on January 1, 2005, pro forma gross profitfor the year ended December 31, 2005 would have been $59.4 million, or$5.6 million higher. Gross profit in 2006 decreased $1.3 million, or 2%,compared to the pro forma gross profit in 2005. Net purchase accountingadjustments did not impact cost of goods sold in 2006, but increased pro formacost of goods sold by $0.4 million in 2005, primarily consisting ofamortization of favorable raw material supply contracts and depreciationexpense on revalued property, plant, and equipment. Excluding the effect of thenet purchase accounting adjustments, gross profit for the year ended December 31,2005 would have been $59.8 million, a decrease of $1.7 million, or 3%. Thefavorable effects of higher selling prices and changes 

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in product mix andthe impact of increased sales volumes contributed $6.3 million, and $1.1million, respectively, to the year-over-year increase in gross profit. Theseincreases were offset by the net impact of higher manufacturing costs of $8.2million due to higher energy, raw material and transportation costs andincreased depreciation expense of $1.5 million. Favorable foreign currencyexchange rates increased gross profit by $0.6 million.

***Selling, general and administrative expense***

Selling, general andadministrative expenses (“SG&A”), were $86.9 million for the year ended December 31,2006 compared to $77.3 million for the forty-six weeks ended December 31,2005 and $11.2 million for the six weeks ended February 11, 2005. Assumingthe Transactions had occurred on January 1, 2005, pro forma SG&A forthe year ended December 31, 2005 would have been $82.3 million. SG&Ain 2006 increased $4.6 million, or 6%, compared to the pro forma SG&A in2005. The increase in expense was primarily due to higher compensation expensesrelating to performance-based bonuses and professional fees.

***Other operating expense***

Other operating expensewas $12.5 million for the year ended December 31, 2006 compared to$22.6 million for the forty-six weeks ended December 31, 2005 and$12.3 million for the six weeks ended February 11, 2005. Assuming theTransactions had occurred on January 1, 2005 pro forma other operatingexpense for the year ended December 31, 2005 would have been $7.6 million.Other operating expense in 2006 increased $4.9 million, or 64%, compared to thepro forma other operating expense in 2005. The increase was primarily due tothe 2005 net pension curtailment gain of $6.3 million, partially offset bydecreased severance and environmental costs.

***Operating (loss) income***

As a result of the factorsdiscussed above, operating income for the year ended December 31, 2006 was$59.3 million compared to $8.1 million in operating income for the forty-sixweeks ended December 31, 2005 and a $7.9 million loss for the sixweeks ended February 11, 2005. On a pro forma adjusted basis, operatingincome would have been $40.6 million for the year ended December 31, 2005.Operating income in 2006 increased $18.7 million, or 46%, compared to the proforma operating income in 2005.

***Equity in net income from affiliated companies***

Equity in net income fromaffiliated companies was $21.3 million for the year ended December 31,2006 compared to $3.1 million income for the forty-six weeks ended December 31,2005 and $0.3 million loss for the six weeks ended February 11, 2005. Assumingthe Transactions had occurred on January 1, 2005, pro forma equity in netincome from affiliated companies would have been $7.8 million for the yearended December 31, 2005. Equity in net income from affiliated companies in2006 increased $13.5 million, compared to the pro forma equity in net incomefrom affiliated companies in 2005. This increase was primarily due to higher2006 earnings of ZI due to the increased volume of hydrocracking catalystssales.

***Interest expense, net***

Interest expense, net was$51.9 million for the year ended December 31, 2006 compared to$37.5 million for the forty-six weeks ended December 31, 2005 and$0.8 million for the six weeks ended February 11, 2005. On a proforma basis, interest expense would have been $43.1 million for the year ended December 31,2005. Interest expense increased $8.8 million, or 20%, compared to the proforma 

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interestexpense in 2005. Interest expense was higher versus the pro forma prior yearamount due to higher interest rates and increased debt levels.

***Other (income) expense***

Other (income) expense was income of $0.2 million forthe year ended December 31, 2006 compared to expense of $8.2 millionfor the forty-six weeks ended December 31, 2005 and $0.3 million forthe six weeks ended February 11, 2005. Other non-operating expense for theforty-six weeks ended December 31, 2005 included costs incurred as aresult of the Transactions. Adjustments to arrive at pro forma othernon-operating expense include those corresponding to $5.2 million in “make-whole”payments for the early payment of the Predecessor’s debt and $2.3 millionin financing fees for access to a bridge credit facility during theTransactions. On a pro forma basis, other non-operating expenses for the twelvemonths ended December 31, 2005 would have been $1.0 million. Othernon-operating expense decreased $1.2 million compared to the pro forma othernon-operating expense in 2005. Other non-operating expenses for 2006 and 2005consisted primarily of foreign currency gains and losses, miscellaneousfinancing fees and various other non-operating income and expenses.

***Provision (benefit) for income taxes***

The provision (benefit)for income taxes was a provision of $14.0 million on income before taxes of $28.9million for the year ended December 31, 2006 compared to a provision of$0.4 million for the forty-six weeks ended December 31, 2005 and abenefit of $2.5 million for the six weeks ended February 11, 2005. Ona pro forma adjusted basis, the tax provision would have been $9.0 million onincome before taxes of $4.3 million for the year ended December 31, 2005.The effective tax rate for 2006 was affected by the limitation on the use offoreign tax credits to offset the U.S. tax on expected dividends from foreignaffiliate.

***Net income (loss)***

For the foregoing reasons,net income for the year ended December 31, 2006 was $14.2 million comparedto a net loss for the forty-six weeks ended December 31, 2005 and the sixweeks ended February 11, 2005 of $35.2 million and $6.8 million,respectively. Pro forma net loss for the year ended December 31, 2005 was$5.0 million.

***2005 vs. 2004***

***Sales***

Sales were $571.1 million for the forty-six weeksended December 31, 2005 and $64.2 million for the six weeks ended February 11,2005, an overall increase of $28.6 million, or 5%, compared to$606.7 million for the year ended December 31, 2004. The majority ofthe sales growth was attributable to pricing increases implemented in responseto higher energy and raw material costs. Overall, the benefit of priceincreases and changes in product mix contributed $28.5 million to theincrease, while the favorable impact of foreign currency exchange ratefluctuations of $7.0 million were partially offset by lower sales volume in theamount of $6.9 million. The majority of this lower sales volume impact wasdue to the reduced volume of detergent zeolite products as a result of adecline in North American consumer demand for powder versus liquid laundrydetergent, competition and a customer reformulation resulting in lower zeolitecontent per unit.

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*Chemicalsdivision.**  *Salesof the Chemicals division were $373.7 million for the forty-six weeksended December 31, 2005 and $48.3 million for the six weeks ended February 11,2005, a total increase of $23.2 million, or 6%, compared to $398.8 millionfor the year ended December 31, 2004. The growth in sales was attributableto a net increase of $22.5 million from higher average selling prices andchanges in product mix, and an increase of $5.3 million from the favorableeffect of changes in foreign currency exchange rates. These increases werepartially offset by a decrease of $4.6 million due to lower sales volumecompared to the prior year. Average selling prices increased primarily inresponse to the escalating cost of natural gas, transportation and raw materials.The favorable exchange rate fluctuations compared to 2004 occurred primarily asa result of the strengthening Canadian dollar and Mexican peso in relation tothe U.S. dollar. The decline in detergent Zeolite sales volume was the primaryreason for the negative volume impact on sales versus the prior year.

*Potters division.**  *Sales of the Potters division were$197.4 million for the forty-six weeks ended December 31, 2005 and$15.9 million for the six weeks ended February 11, 2005, a totalincrease of $5.4 million, or 3%, compared with sales of$207.9 million for the year ended December 31, 2004. The growth insales was attributable to a net increase of $5.9 million due to higheraverage selling prices and changes in product mix, and an increase of $1.7million from the favorable effect of changes in foreign currency exchangerates, partially offset by a decrease of $2.2 million due to lower salesvolume. Higher average selling prices were implemented in response to theescalating cost of transportation, energy and raw materials. The favorableexchange rate fluctuations in comparison to 2004 occurred primarily as a resultof the strengthening Canadian dollar in relation to the U.S. dollar.

***Gross profit***

Gross profit was $108.0 million for the forty-sixweeks ended December 31, 2005 and $15.6 million for the six weeksended February 11, 2005. Assuming the Transactions had occurred on January 1,2005, pro forma gross profit for the year ended December 31, 2005 wouldhave been $130.5 million, a decrease of $21.7 million, or 14% compared to$152.2 million on a historical basis for the year ended December 31, 2004.Net purchase accounting adjustments increased pro forma cost of goods sold by$22.7 million in 2005, primarily consisting of amortization of favorable rawmaterial supply contracts. Excluding the effect of the net purchase accountingadjustments, gross profit for the year ended December 31, 2005 would havebeen $153.2 million, an increase of $1.0 million, or 1% compared to the yearended December 31, 2004. The favorable effects of higher selling pricesand changes in product mix and the impact of favorable foreign currencyexchange rates contributed $29.2 million, and $2.6 million, respectively, tothe year-over-year increase in gross profit. These increases were offset by thenet impact of higher manufacturing costs of $29.7 million due to higher energy,raw material and transportation costs and increased depreciation expense. Lowersales volume reduced gross profit by $1.1 million.

*Chemicalsdivision.**  *Grossprofit was $58.4 million for the forty-six weeks ended December 31,2005 and $11.4 million for the six weeks ended February 11, 2005. Assumingthe Transactions had occurred on January 1, 2005, pro forma gross profitfor the year ended December 31, 2005 would have been $71.1 million, adecrease of $23.5 million, or 25% compared to $94.6 million on a historicalbasis for the year ended December 31, 2004. Net purchase accountingadjustments increased pro forma cost of goods sold by $22.3 million in 2005,primarily consisting of amortization of favorable raw material supply contracts.Excluding the effect of the net purchase accounting adjustments, gross profitfor the year ended December 31, 2005 would have been $93.4 million, adecrease of $1.2 million, or 1% compared to the year ended December 31,2004. The favorable effects of higher selling prices and changes in product mixand the impact of favorable foreign currency exchange rates contributed $23.2million, and $1.6 million, respectively, to year-over-year gross profit. Theseincreases were offset by the net impact of higher manufacturing costs of $25.7million due to higher energy, raw material and transportation costs and 

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increased depreciationexpense. Lower sales volume reduced gross profit by $0.3 million, which wasprimarily related to U.S. detergent zeolite sales.

*Potters division.**  *Gross profit was $49.6 million forthe forty-six weeks ended December 31, 2005 and $4.2 million for thesix weeks ended February 11, 2005. Assuming the Transactions had occurredon January 1, 2005, pro forma gross profit for the year ended December 31,2005 would have been $59.4 million, an increase of $1.8 million, or 3% comparedto $57.6 million on a historical basis for the year ended December 31,2004. Net purchase accounting adjustments increased pro forma cost of goodssold by $0.4 million in 2005, primarily consisting of amortization of favorableraw material supply contracts and depreciation expense on revalued property,plant and equipment. Excluding the effect of the net purchase accountingadjustments, gross profit for the year ended December 31, 2005 would havebeen $59.8 million, an increase of $2.2 million, or 4% compared to the yearended December 31, 2004. The favorable effects of higher selling prices andchanges in product mix and the impact of favorable foreign currency exchangerates contributed $6.0 million, and $0.9 million, respectively, toyear-over-year gross profit. These increases were partially offset by the netimpact of higher manufacturing costs of $4.0 million due to higher energy, rawmaterial and transportation costs and an overall decline in sales volume of$0.7 million.

***Selling, general and administrative expense***

Selling, general andadministrative expenses, or SG&A, were $77.3 million for the forty-sixweeks ended December 31, 2005 and $11.2 million for the six weeksended February 11, 2005. Assuming the Transactions had occurred on January 1,2005, pro forma SG&A for the year ended December 31, 2005 would havebeen $82.3 million, a decrease of $13.9 million, or 14% compared to the $96.2million on a historical basis for the year ended December 31, 2004.  The decrease in expense was due to lowercompensation and overhead expenses primarily related to corporaterestructuring, and reduced 2005 pension expense of $3.0 million as aresult of purchase accounting. In 2004 there was $4.1 million of expenserelated to accretion of shares subject to mandatory redemption, as well asone-time professional fees incurred for regulatory compliance.

***Other operating expense***

Other operating expensewas $22.6 million for the forty-six weeks ended December 31, 2005 and$12.3 million for the six weeks ended February 11, 2005. Assuming theTransactions had occurred on January 1, 2005, pro forma other operatingexpense for the year ended December 31, 2005 would have been $7.6 million,an increase of $1.2 million compared to the $6.4 million on a historical basisfor the year ended December 31, 2004. The increase was the result ofincremental amortization expense due to the recognition of intangible assets inpurchase accounting and costs for professional fees and environmental costs,partially offset by a 2005 net pension curtailment gain.

***Operating (loss) income***

As a result of the factorsdiscussed above, the Company recorded $8.1 million operating income for theforty-six weeks ended December 31, 2005 and a $7.9 million loss forthe six weeks ended February 11, 2005. On a pro forma adjusted basis,operating income would have been $40.6 million for the year ended December 31,2005, an overall decrease of $9.0 million compared to historical basisoperating income of $49.6 million for the twelve months ended December 31,2004.

***Equity in net income (loss) from affiliated companies***

Equity in net income(loss) from affiliated companies was $3.1 million income for the forty-sixweeks ended December 31, 2005 and $0.3 million loss for the six weeksended February 11, 2005. Assuming the Transactions had occurred on January 1,2005, pro forma equity in net income from affiliated companies 

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wouldhave been $7.8 million for the year ended December 31, 2005, a decrease of$2.4 million compared to $10.2 million on a historical basis for the year endedDecember 31, 2004. This decrease was due to $1.2 million of amortizationof intangible assets that resulted from fair market value purchase accountingadjustments as well as lower 2005 earnings of Zeolyst International due to thetiming of hydrocracking catalysts sales.

***Interest expense, net***

Interest expense, net was$37.5 million for the forty-six weeks ended December 31, 2005 and$0.8 million for the six weeks ended February 11, 2005. On a proforma basis, interest expense would have $43.1 million for the year ended December 31,2005. Interest expense was significantly higher versus the prior year amount of$6.5 million due to the increase in debt incurred as a result of theTransactions.

***Other (income) expense***

Other (income) expense was$8.2 million for the forty-six weeks ended December 31, 2005 and$0.3 million for the six weeks ended February 11, 2005. Other(income) expense for the forty-six weeks ended December 31, 2005 includescosts incurred as a result of the Transactions. Adjustments to arrive at proforma other non-operating expense include those corresponding to$5.2 million in “make-whole” payments for the early payment of thePredecessor’s debt and $2.3 million in financing fees for access to abridge credit facility during the Transactions. On a pro forma basis, othernon-operating expenses for the twelve months ended December 31, 2005 was$1.0 million compared to $1.7 million on a historical basis for the twelvemonths ended December 31, 2004. Other non-operating expenses for 2005 and2004 consisted primarily of foreign currency gains and losses, miscellaneousfinancing fees and various other non-operating income and expenses.

***Provision (benefit) for income taxes***

The provision (benefit)for income taxes was a provision of $0.4 million for the forty-six weeksended December 31, 2005 and a benefit of $2.5 million for the sixweeks ended February 11, 2005. On a pro forma adjusted basis, the taxprovision would have been $9.0 million on income before taxes of $4.3 millionfor the year ended December 31, 2005 compared with a tax provision of$12.9 million on income before taxes of $51.6 million on a historical basis forthe year ended December 31, 2004. The high effective tax rate for 2005 wasaffected by certain non-deductible expenses incurred in connection with theTransactions, as well as the limitation on the use of foreign tax credits tooffset the U.S. tax on expected dividends from foreign affiliates.

***Net income (loss)***

For the foregoing reasons,net loss for the forty-six weeks ended December 31, 2005 and the six weeksended February 11, 2005 was $35.2 million and $6.8 million, respectively. Proforma net loss for the year ended December 31, 2005 was $5.0 millioncompared to $38.2 million in the year ended December 31, 2004.

**Liquidity andCapital Resources**

***Overview***

Our primary sources of liquidity are cash flow fromoperations and borrowings under our revolving credit facility. We expect thatongoing requirements for debt service and capital expenditures will be fundedfrom operations.

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In connection with the Transactions in 2005, weincurred increased indebtedness. As of December 31, 2006, our total debtwas $635.9 million. As part of the Transactions, we issued$275.0 million of senior subordinated notes and entered into a seniorsecured credit facility consisting of a term loan in the principal amount of$335.0 million and a revolving credit facility in an aggregate amount ofup to $100.0 million. We will borrow under the revolving credit facility,as needed, for working capital requirements, capital expenditures and for othergeneral corporate purposes. Borrowings under the term loan are due and payablein quarterly installments of $0.9 million. The remaining balance of theterm loan is due and payable in full in 2012. The revolving credit facility isavailable until 2011. In addition to paying interest on outstanding principalamounts under our credit facility, we are required to pay a commitment fee tothe lenders for the unused portion of our revolving credit facility. We alsohave letters of credit of $5.9 million outstanding as of December 31,2006, which reduce available borrowings under the revolving credit facility bysuch amount.

In October 2005, we negotiated an amendment toour senior secured credit facility, the primary purpose of which was to permitthe payment of a dividend to Holdings of $85.3 million. Funding of the dividendconsisted of approximately $30.3 million of cash on hand, $30.0 million ofadditional term loan borrowings and approximately $25.0 million of revolvingloan borrowings under the senior secured credit facility. The requisiteconsents for the amendment were received on November 7, 2005, and theamendment expanded the senior secured credit facility to provide for anadditional $30.0 million of term loan borrowings and also permits us todividend up to an additional $4.0 million per year to Holdings for the purposeof servicing the interest expense on the Holdings debt instrument issued in theamount of $23.0 million. In addition, the amendment provides for an increase tothe effective interest rate on our senior secured credit facility by 25 basispoints in the event our debt rating is downgraded and stipulates a prepaymentfee equal to 1.0% of certain voluntary prepayments made within one year of theeffective date of the amendment with the proceeds of certain types ofindebtedness and based on certain other conditions. The amendment does notchange any of the other existing covenants in the senior secured creditfacility.

The senior secured credit facility contains variousrestrictive covenants. It prohibits us from prepaying other indebtedness, includingthe notes, and requires us to maintain a specified minimum interest coverageratio of 2.00, and a maximum total leverage ratio of 6.50, at December 31,2006. In addition, our senior secured credit facility restricts our ability toincur indebtedness or liens, make investments or declare or pay dividends andlimits our annual capital spending. The indenture governing the subordinatednotes among other things: (i) limits our ability and the ability of oursubsidiaries to incur additional indebtedness, incur liens, pay dividends ormake certain other restricted payments and enter into certain transactions withaffiliates; (ii) places restrictions on the ability of certain of oursubsidiaries to pay dividends or make certain payments to us; and (iii) placesrestrictions on our ability and the ability of our subsidiaries to merge orconsolidate with any other person or sell, assign, transfer, convey orotherwise dispose of all or substantially all of our assets. At December 31,2006, we were in compliance with all of our loan covenants. However, as aresult of missing the deadline for having our registration statement on Form S-4with respect to the notes declared effective by the SEC, the interest rate onthe notes was increased 25 basis points to 7.75% on January 10, 2006 andby an additional 25 basis points to 8.0% on April 10, 2006. The interestrate on the notes returned to 7.5% on May 12, 2006, when our registrationstatement on Form S-4 was declared effective by the SEC.

Our substantial leverage and significant debt serviceobligations could adversely affect our ability to fulfill our obligations,including the notes, and make it more difficult for us to fund our operations.Our ability to make scheduled principal payments of, to pay the interest on, orto refinance our indebtedness, including the notes, or to fund planned capitalexpenditures will depend on our ability to generate cash in the future. This,to a certain extent, is subject to general economic, financial, competitive,legislative, regulatory and other factors that are beyond our control. Based onour current level of operations, we 

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believe that cash flowfrom operations and available cash, together with available borrowings underour senior secured credit facility, will be adequate to service our existingdebt and meet our capital expenditure and working capital requirements in thenear term.

We repatriated cash balances and earnings generated byour non-U.S. operations in order to help service our debt and provide forgeneral corporate purposes. We utilized a provision of the American JobsCreation Act of 2004 which allowed U.S. companies to repatriate foreignearnings at a substantially reduced tax rate in 2005 under what is termed theHomeland Investment Act (“HIA”). The amount of foreign earnings that wererepatriated under the provision totaled $34.3 million. The U.S. tax benefit ofelecting HIA with respect to dividends received was $9.8 million. We considerearnings in non-U.S. subsidiaries to be available for repatriation and will continueto repatriate earnings generated by our non-U.S. operations as needed in thefuture.

We reported coveragedeficiencies in our calculation of the ratio of earnings to fixed charges forthe six weeks ended February 11, 2005 and the forty-six weeks ended December 31,2005. See exhibit 12.1 provided as an exhibit hereto. The coverage deficienciesin the respective periods were primarily caused by non-cash chargesassociated with purchase accounting fair value adjustments and Transactionrelated expenditures with regard to the 2005 periods. These expenditures werefunded with cash on hand at the acquisition date as well as with proceeds fromdebt issuances as part of the Transactions. We had sufficient cash flow tocover fixed costs. For the foregoing reasons, we do not consider the ratio ofearnings to fixed charges to be a representative measure of our liquidity.

***Year Ended December 31, 2006***

At December 31, 2006, we had cash and cashequivalents of $15.9 million, which was a decrease of $7.1 millionfrom December 31, 2005.

Net cash provided by operating activities was$59.7 million for the year ended December 31, 2006, and was more thansufficient to fund working capital requirements. Receivables increased by$3.9 million due to strong sales growth in the latter part of the year. Inventoriesincreased by $12.3 million primarily due to the increase in production tobuild inventory of our glass beads prior to the North American and Europeanhighway striping season and the increase in production related to expectedfurnace rebuild activity in our Chemicals division. Also contributing to thecash provided by operating activities was a dividend paid by our equityaffiliates of $16.1 million.

Net cash used in investing activities was$32.1 million, which is net of proceeds of approximately $1.3 millionprimarily from the sale of real property at one of our Mexican operatingfacilities. Cash used for investing in property, plant and equipment totaled$31.6 million, primarily for routine replacement of operating machineryand equipment; health, safety and environment projects; and costs associatedwith the expansion projects in our both our Chemicals and Potters divisions. Inaddition, the Company used cash for the acquisition of certain intangibles,consisting primarily of customer lists, in June 2006.

Net cash used in financingactivities was $35.6 million. We paid cash dividends of $2.3 millionto Holdings, paid down $20.2 million of our revolver, and made principalpayments of $4.5 million for long-term debt during the year ended December 31,2006.

***Year Ended December 31, 2005***

Cash and cash equivalents at December 31, 2005were $23.0 million, which was an increase of $10.2 million from December 31,2004.

Net cash provided by operating activities was$11.8 million for the combined predecessor and successor periods duringthe year ended December 31, 2005 compared to net cash provided byoperating activities of $87.9 million 2004. The main contributor to thereduction from the prior year is $44.2 million 

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of costs related to theTransactions, including employee change in control provisions, severancepayments, success bonuses, early debt retirement and other financing fees. Inaddition, there was $6.1 million in payments for shares subject to mandatoryredemption under our Profit Sharing Plan in 2005. Also contributing wereincreased interest payments of approximately $23.3 million in 2005compared with the prior year as a result of the new financing. Working capitalincreased approximately $1.4 million due to higher levels of sales andproduction activity in the fourth quarter of 2005 versus prior year.

Net cash used in investing activities was$660.6 million for the year ended December 31, 2005 compared to$33.3 million during the same period in 2004. The increase was mainly dueto $632.5 million in consideration paid to effect the Transactions.Purchases of property, plant and equipment decreased $7.4 million mainlydue to containment of capital spending in 2005. Purchases of property, plantand equipment in 2005 totaled $28.1 million primarily for routinereplacement of operating machinery and equipment; health, safety andenvironment projects; and costs associated with the construction of a silicateplant in Asia.

Net cash provided byfinancing activities was $659.6 million for the combined predecessor andsuccessor periods during the year ended December 31, 2005 compared to netcash used of $53.2 million during the same period in 2004. The amount forthe year ended December 31, 2005 includes $163.6 million in net equitycontributions, $660.0 million of proceeds from the issuance of new debtlargely used to finance the Transactions and increased cash overdrafts of $5.3million. Outflows include $85.3 million in dividends paid to Holdings,$17.6 million of capitalized debt acquisition costs and debt repayments of$116.8 million, including $114.3 million of principal due on thePredecessor’s debt. Partially offsetting the $114.3 million wasapproximately $44.9 million that the Predecessor had drawn on the existingcredit facility prior to the Transactions.

***Year Ended December 31, 2004***

At December 31, 2004, we had cash and cashequivalents of $12.8 million, working capital of approximately$66.7 million and total debt of $71.1 million. Historically we havefunded our operations primarily through cash flows generated by operatingactivities. Cash provided by operating and financing activities was more thansufficient to meet working capital requirements, fund purchases of property,plant and equipment, repay short and long-term debt, repurchase treasury stockand make dividend payments during the year ended December 31, 2004.

Net cash provided by operating activities was$87.9 million for the year ended December 31, 2004, and was more thansufficient to fund working capital requirements. Receivables increased by$4.1 million due to strong sales growth in the latter part of the year,inventories increased by $0.4 million and accounts payable and accruedliabilities increased by $14.3 million primarily due to the increase inproduction to build inventory of our glass beads prior to the highway stripingseason and timing of vendor payments. Also contributing to the cash provided byoperating activities was a dividend paid by our Zeolyst International jointventure of $7.2 million.

Net cash used in investing activities was$33.3 million, which is net of proceeds of approximately $2.2 millionprimarily from the sale of a portion of land at one of our U.S. operatingfacilities. Cash used for investing in property, plant and equipment totaled$35.5 million. Major projects include a new manufacturing facility in Asiathat will manufacture sodium silicate.

Net cash used in financingactivities was $53.2 million. We paid cash dividends of$13.4 million, made principal payments of $29.0 million for long-termdebt and repurchased shares at a cost of $4.9 million during the yearended December 31, 2004.

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**Off-Balance SheetArrangements**

We have no off-balancesheet arrangements or financing arrangements involving variable interest entities.

**ContractualObligations and Commitments**

Thefollowing table reflects our contractual obligations, commercial commitmentsand long-term debt obligations as of December 31, 2006:

| ** **                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**                                 | ** ** | **Less than   1 year** | ** ** | **1–3 years** | ** ** | **3–5 years** | ** ** | **More than  5 years** | ** ** |
| ** **                     | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt                 |       | $                                         | 635,891    |   |   | $ | 5,782 |   |   | $ | 7,304 |   | $ | 7,304 |   | $ | 615,501 |   |
| Interest  payments(a)          |       | 269,397                                   |       |   | 49,257 |   |   | 97,698 |   | 96,610 |   | 25,832 |   |
| Operating leases               |       | 34,839                                    |       |   | 8,285 |   |   | 12,639 |   | 7,989 |   | 5,926 |   |
| Purchase  obligations(b)       |       | 37,957                                    |       |   | 15,534 |   |   | 12,361 |   | 7,149 |   | 2,913 |   |
| Other  obligations(c)          |       | 18,981                                    |       |   | 5,955 |   |   | 3,840 |   | 3,821 |   | 5,365 |   |
| Total contractual  obligations |       | $                                         | 997,065    |   |   | $ | 84,813 |   |   | $ | 133,842 |   | $ | 122,873 |   | $ | 655,537 |   |

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(a)           Represents minimuminterest payments on the senior subordinated notes and senior secured creditfacility per the respective credit agreements. The calculation of the intereston the term loans assumes an interest rate of 7.37%, which is the interest ratein effect for the first quarter of 2007.

(b)          Purchase obligationsinclude agreements to purchase goods and services that are enforceable andlegally binding and that specify all significant terms, including: fixed andminimum quantities to be purchased; fixed, minimum or variable provisions; andthe approximate timing of the transaction. Purchase obligations excludeagreements that are cancelable without penalty.

(c)           Other obligationsrepresent payments related to our pension plans, supplemental retirement plans,and other post retirement benefit plans. Included in these amounts are expectedpension plan and supplemental retirement plan contributions of$3.9 million in 2007. Contributions to the pension plan and supplementalretirement plan beyond 2007 cannot be reasonably estimated and are notreflected in this table.

We are subject to a cash deficiency agreement relatedto the $15.0 million revolving credit agreement of one of our equityaffiliates, in which we are a 50/50 joint partner. This agreement requires thepartners to make certain contributions in order to ensure the affiliate’scompliance with debt covenants. At December 31, 2006, the affiliate had$10.0 million outstanding under their revolving credit agreement and was incompliance with all covenants.

We have cross-currency interest rate swapagreements denominated in euros that mature in 2009 and in Canadian dollarsthat mature in 2010. These swap agreements are designated as a hedge of the netinvestment in our European and Canadian operations. The fair value of the netliability was recorded in other long-term liabilities of $16.7 million and $6.8million as of December 31, 2006 and 2005, respectively, with acorresponding amount, net of tax, recorded to foreign currency translationadjustments of $10.3 million and $4.2 million at December 31, 2006 and2005, respectively. In the event the euro or Canadian dollar strengthensagainst the U.S. dollar the fair value of the liability will increase.

We are exposed to risks inenergy costs due to fluctuations in energy prices, particularly natural gas. Wehave a hedging program in the United States which allows us to mitigateexposure to natural gas volatility with futures contracts. The futurescontracts had a fair value of $2.2 million and $30.9 million at December 31,2006 and 2005, respectively. Fair value is determined based on estimatedamounts that 

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would bereceived or paid to terminate the contracts at the reporting date based onquoted market prices of comparable contracts. The respective current andnon-current balances are recorded in prepaid and other current assets and otherlong-term assets. The related gains or losses are recorded in stockholders’equity as a component of other comprehensive income (loss), net of tax.Realized gains and losses on natural gas hedges are included in production costand subsequently charged to cost of goods sold in the consolidated statementsof income in the period in which inventory is sold.

**Critical AccountingPolicies**

We have identified ourmost important and pervasive accounting policies that can have a significantimpact on the presentation of our financial condition and results of operationsand require management’s judgments and estimates. Actual results may differmaterially from these estimates because of the uncertainty inherent in suchestimates.

***Revenue Recognition and Accounts Receivable***

Revenue, net of related discounts and allowances, isrecognized when both title and risk of loss of the product have beentransferred to the customer (generally upon shipment), the seller’s price tothe buyer is fixed or determinable, collectibility is reasonably assured, andpersuasive evidence of an arrangement exists. Customers take title and assumeall the risks of ownership upon shipment (if terms are “FOB shipping point”) orupon delivery (if terms are “FOB destination”). Any deviation from the standardterms and arrangements are reviewed for the proper accounting treatment, andrevenue recognition is revised accordingly.

The Company recognizes rebates given to customers as areduction of revenue based on a rational allocation of the cost of honoringrebates earned and claimed to each of the underlying revenue transactions thatresult in progress by the customer toward earning the rebate. The Companymeasures the rebate obligation based on the estimated amount of sales that willresult in a rebate at the adjusted sales price per the respective salesagreement.

Amounts billed to customers for shipping and handlingare classified as sales and the corresponding expense is reflected in cost ofgoods sold.

We make certain assumptions and estimates whenaccruing for allowances for doubtful accounts. The allowance for doubtfulaccounts is our best estimate of the amount of probable credit losses for tradereceivables. Account balances are charged off against the allowance when webelieve that recoverability is not probable. A specific reserve for bad debtsis recorded against the amount due from these customers. For all othercustomers, we recognize reserves for bad debts based on the length of timereceivables are past due and historical write off experience. Our estimates maychange based on our customers’ financial condition. As a result, we may berequired to increase our reserves, which could have an unfavorable impact onour results of operations. The allowance for possible losses on receivables at December 31,2006 was $1.5 million.

Our estimates andassumptions made under the revenue recognition policy have been applied on aconsistent basis. The amounts accrued for allowances and returns have not had amaterial impact on our financial condition or operating performance.

***Property, Plant and Equipment (PP&E), IntangibleAssets and Goodwill***

We perform an impairment review of PP&E when factsand circumstances indicate the carrying value may not be recoverable from itsundiscounted cash flows. Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,if the carrying amount of an asset or asset group is evaluated and found not tobe recoverable, then an impairment loss must be recognized. Any impairment 

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loss is measured bycomparing the carrying amount of the asset to its fair value. Fair value isdetermined using discounted cash flows or quoted market prices, if available.Our estimates of future cash flows involve assumptions concerning futureoperating performance, economic conditions, and technological changes that mayaffect the future useful lives of the assets.

We amortizeintangible assets with finite useful lives over the expected economic life withrequired evaluations of their recoverability when necessary for changes infacts and circumstances as provided under SFAS No. 144. Goodwill andintangible assets with indefinite lives are evaluated in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets.” Goodwill and indefinite-livedintangible assets are reviewed for impairment in the third quarter of each yearor when facts and circumstances indicate possible impairment. We compare theassets’ fair value, which is determined based on analyses of future discountedcash flows, to its carrying value in order to determine if an impairment chargeis warranted. The estimates of future cash flows involve considerablemanagement judgment and are based upon assumptions concerning expected futureoperating performance and economic conditions. Assumptions used in theseforecasts are consistent with internal planning. We completed our analysis ofindefinite lived intangibles, including goodwill, as of September 30, 2006and no impairment was noted.

We determined the value of our formulations andproduct technology intangible assets using the relief from royalty method. Thismethod utilizes calculations of the present value of after tax cash flowaccruing to us to derive fair values. The pre-tax cash flow is determinedby applying a royalty rate to projected revenues for the next several years.The royalty rates were based on the estimated royalties that would be chargedto a third party to license our trademarks, trade names, technology andpatents, and on independent studies performed by a third party service firm ofrates used to value similar transactions. The fair values of trademarks andtradenames were appraised based upon the present value of the estimated netafter-tax royalty cash flow. The values of other intangible assetsincluding non-compete agreements, raw material contracts and railcarleases were valued at acquisition through independent appraisals wherematerial, or through other valuation techniques involving discounted cashflows. The significant assumptions used in the calculations include discountrates, royalty rates and estimated periods of future cash flows.

The amortization periodfor definite lived intangibles represents our estimate of the economic life ofthese assets. The estimated lives for raw material contracts, non-competeagreements and rail car leases represent the term of the underlying contracts.The estimated life of Technical Know-how intangibles represents theweighted average remaining life of our patents. The lives of Tradenameintangible assets were determined to be indefinite due to the perpetual natureof the trademarked names of the underlying products.

***Pensions and Postretirement Benefits***

We maintain defined benefit pension plans coveringsubstantially all domestic and Canadian employees as well as certain employeesin Europe and Asia Pacific. Benefits for a majority of the plans are based onaverage final pay and years of service. Our funding policy, consistent withstatutory requirements, is based on actuarial computations utilizing theprojected unit credit method of calculation. Not all defined benefit pensionplans are funded. In the U.S. and Canada, the pension plans’ assets includeequity, and fixed income securities. Certain assumptions are made regarding theoccurrence of future events affecting pension costs, such as mortality,withdrawal, disablement and retirement, changes in compensation and benefits,and discount rates to reflect the time value of money.

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The major elements in determining our pension incomeand expense are pension liability discount rates and the expected return onplan assets. We reference rates of return on high-quality, fixed incomeinvestments when estimating the discount rate, and the expected period overwhich payments will be made based upon historical experience. The long-termrate of return used to calculate the expected return on plan assets is theaverage rate of return estimated to be earned on invested funds for providingpension benefits.

In addition to pension benefits, certain health carebenefits are provided to retired employees. SFAS No. 106, “Employers’ Accounting for PostretirementBenefits other than Pensions,” requires the use of explicit assumptionsusing the best estimates available of the plan’s future experience. Principalactuarial assumptions include: discount rates, present value factors,retirement age, participation rates, mortality rates, cost trend rates,Medicare reimbursement rates and per capita claims cost by age. Currentinterest rates, as of the measurement date, are used for discount rates inpresent value calculations.

Minor changes in the assumptions discussed above wouldnot cause a material impact to our obligations or expense amounts. For example,a 1% increase in the assumed health care cost trend rate would increase theaccumulated postretirement benefit obligation by approximately$0.03 million and increase the periodic postretirement benefit cost byapproximately $0.03 million.

EffectiveDecember 31, 2006, the Company recognizes the overfunded or underfundedstatus of its defined benefit pension and postretirement plans as an asset orliability in the balance sheet and recognizes changes in that funded status inthe year in which the changes occur through other comprehensive income inaccordance with SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans.” The adoption of SFAS No. 158resulted in an increase in stockholder’s equity of $9,126 at December 31, 2006.The following table indicates the adoption impact of SFAS No. 158 onindividual balance sheet line items:

| ** **                                          | ** ** | **Asset (liability)**       | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **Prior to SFAS  158** | ** ** | **Adjustments** | ** ** | **After adoption  of SFAS 158** | ** ** |
| Deferred income  taxes                              |       |                             | (94,479    | ) |   |   | (5,536 | ) |   |   | (100,015 | ) |   |
| Liability for  benefit plans—current           |       |                             | (1,994     | ) |   |   | (1,296 | ) |   |   | (3,290 | ) |   |
| Liability for  benefit plans—noncurrent        |       |                             | (61,628    | ) |   |   | 15,958 |   |   |   | (45,670 | ) |   |
| Accumulated other  comprehensive income, net of tax |       |                             | 6,181      |   |   |   | (9,126 | ) |   |   | (2,945 | ) |   |

 

***Income Taxes***

The objective of accounting for income taxes is torecognize the amount of taxes payable or refundable for the current year anddeferred tax liabilities and assets for the future tax consequences of eventsthat have been recognized in our financial statements or tax returns.

In the determination of our current year taxprovision, we have provided deferred income taxes on income from foreignsubsidiaries which have not been reinvested abroad permanently as uponremittance to the U.S. such earnings are taxable. In addition, we operatewithin multiple taxing jurisdictions and are subject to audit within thesejurisdictions. We record accruals for the estimated outcomes of these audits.We adjust these accruals, if necessary, upon the completion of tax audits orchanges in tax law. Since significant judgment is required to assess the futuretax consequences of events that have been recognized in our financialstatements or tax returns, the ultimate resolution of these events could resultin adjustments to our financial statements and such adjustments could bematerial. Therefore, we consider such estimates to be critical to thepreparation of our financial statements.

We have net operating losscarryforwards in various jurisdictions, the majority of which do not have correspondingvaluation allowances. For these jurisdictions without valuation allowances, itis our determination that it is more likely than not that we will utilize ourdeferred tax assets before the 

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expirationof the net operating loss carryforward period. This determination is based uponour estimation of projected book and taxable income and expense over the nextseveral years. These assumptions will be reviewed at least annually andadjustments to the valuation allowance may be made accordingly. To the extentour projections vary significantly from actual results, a portion of ourdeferred tax benefits may not be realizable, resulting in a charge to incometax expense.

**Recently IssuedAccounting Standards**

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes-anInterpretation of FASB Statement No. 109.” FIN No. 48 clarifies what criteria must be met prior torecognition of the financial statement benefit of a position taken in a taxreturn. FIN No. 48 will require companies to include additionalqualitative and quantitative disclosures within their financial statements. Thedisclosures will include potential tax benefits from positions taken for taxreturn purposes that have not been recognized for financial reporting purposesand a tabular presentation of significant changes during each period. Thedisclosures will also include a discussion of the nature of uncertainties,factors which could cause a change, and an estimated range of reasonably possiblechanges in tax uncertainties. FIN No. 48 will also require a companyto recognize a financial statement benefit for a position taken for tax returnpurposes when it will be more-likely-than-not that the position will besustained. FIN No. 48 will be effective for fiscal years beginningafter December 15, 2006. The Company is currently evaluating the impact onthe consolidated financial statements for uncertain tax positions taken underFIN No. 48.

In September 2006, the SEC staff issued StaffAccounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements.”  SAB No. 108was issued to provide interpretive guidance on how the effects of the carryoveror reversal of prior year misstatements should be considered in quantifying acurrent year misstatement. We adopted the provisions of SAB No. 108effective December 31, 2006. The adoption of SAB No. 108 did nothave an impact on the consolidated financial statements.

In November 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—anamendment of ARB No. 43, Chapter 4.” SFAS No. 151 is the result of efforts to converge U.S. accountingstandards for inventories with International Accounting Standards. SFAS No. 151requires abnormal amounts of idle facility expense, freight, handling costs andspoilage to be recognized as current-period charges. It also requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of the production facilities. SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after June 15,2005. Therefore, SFAS No. 151 is effective for the Company for the yearended December 31, 2006. The adoption of SFAS No. 151 did not have amaterial impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements.”  SFAS No. 157addresses how companies should measure fair value when they are required to usea fair value measure for recognition and disclosure purposes under generallyaccepted accounting principles. SFAS No. 157 will require the fairvalue of an asset or liability to be based on a market based measure which willreflect the credit risk of the company. SFAS No. 157 will alsorequire expanded disclosure requirements which will include the methods andassumptions used to measure fair value and the effect of fair value measures onearnings. SFAS No. 157 will be applied prospectively and will beeffective for fiscal years beginning after November 15, 2007 and tointerim periods within those fiscal years. The Company is currently evaluatingthe new statement and does not believe that it will have a significant impacton the determination or reporting of our financial results.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans.”  SFAS No. 158 requiresan employer that sponsors one or more 

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defined benefit pensionplans or other postretirement plans to 1) recognize the funded status of aplan, measured as the difference between plan assets at fair value and thebenefit obligation, in the balance sheet; 2) recognize in stockholders’equity as a component of accumulated other comprehensive income, net of tax,the gains or losses and prior service costs or credits that arise during theperiod but are not yet recognized as components of net periodic benefit cost;3) measure defined benefit plan assets and obligations as of the date ofthe employer’s fiscal year-end balance sheet; and 4) disclose in the notesto the financial statements additional information about the effects on netperiodic benefit cost for the next fiscal year that arise from delayed recognitionof the gains or losses, prior service costs or credits, and transition asset orobligation. We adopted SFAS No. 158 effective December 31, 2006.The impact of the adoption of SFAS No. 158 resulted in an increase instockholder’s equity of $9,126 at December 31, 2006.

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities,Including an amendment of FASB Statement No. 115.” SFAS No. 159provides companies with an option to report selected financial assets andliabilities at fair value. The statement requires the fair value of the assetsand liabilities that the company has chosen to fair value be shown on the faceof the balance sheet. The standard also requires companies to provide additionalinformation to enable users of the financial statements to understand thecompany’s reasons for electing the fair value option and how changes in thefair values affect earnings for the period. SFAS No. 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities. This statement is effective for fiscal yearsbeginning on or before November 15, 2007. The Company is currentlyevaluating the potential impact this statement may have on the consolidatedfinancial statements.

In September 2006,the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, “Accountingfor Planned Major Maintenance Activities.”  The FSP prohibits companiesfrom accruing the cost of planned major maintenance in advance of theactivities actually occurring. This FSP is effective for fiscal years beginningafter December 15, 2006. The adoption of FSP No. AUG AIR-1 isnot expected to have a significant impact on the consolidated financialstatements.

**SPECIAL NOTE ABOUTFORWARD-LOOKING STATEMENTS**

Our disclosure andanalysis in this report contain some forward-looking statements. Forward-lookingstatements give our current expectations or forecasts of future events. Readerscan identify these statements by the fact that they do not relate strictly tohistorical or current events. Such statements may include words such as “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other wordsand terms of similar meaning in connection with any discussion of futureoperating or financial performance. In particular, these statements include,among other things, statements relating to:

·       ourbusiness strategies and implementation of our business plans as discussed under“Item 1. Business—Our Business Strategy.”

·       ourleverage and ability to service debt;

·       changesin demand for our products;

·       competition;

·       fluctuationsin interest rates, exchange rates and currency values;

·       availabilityand pricing of raw materials;

·       fluctuationsin energy prices;

·       changesin the end-use markets in which our products are sold;

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·       changesin the general economic conditions in North America and Europe and in otherlocations in which we currently do business;

·       technologicalchanges affecting production of our materials; and

·       governmentaland environmental laws and regulations and changes in those laws andregulations.

There are a number of variables that could cause ouractual results to differ materially from the forward-looking statementsin this report. Forward-looking statements can be affected by assumptionswe might make or by known or unknown risks and uncertainties. Many factorsmentioned in our discussion in this report will be important in determiningfuture results. Consequently, we cannot provide assurance that our expectationsor forecasts expressed in such forward-looking statements will beachieved. Actual future results may vary materially.

Except as required by law,we undertake no obligation to publicly update any forward-lookingstatements, whether as a result of new information, future events or otherwise.Also, please note that we provide a cautionary discussion of risks anduncertainties under the caption “Item 1A. Risk Factors” in this report. Theseare factors that we think could cause our actual results to differ materiallyfrom expected results. Other factors besides those listed here could adverselyaffect our business and results of operations.

**ITEM 7A.   QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our major market riskexposure is potential losses arising from changing rates and prices regardingforeign currency exchange rate risk, interest rate risk, commodity price riskand credit risk. The audit committee of our Board of Directors regularlyreviews foreign exchange, interest rate and commodity hedging activity andmonitors compliance with our hedging policy. We do not use financialinstruments for speculative purposes and we limit our hedging activity to theunderlying economic exposure.

**Foreign ExchangeRisk**

Our financial results are subject to the impact ofgains and losses on currency translations, which occur when the financialstatements of foreign operations are translated into U.S. dollars. We operate ageographically diverse business with approximately 46% of our sales during thetwelve months ended December 31, 2006 coming from our internationaloperations in currencies other than the U.S. dollar. Because consolidatedfinancial results are reported in dollars, sales or earnings generated incurrencies other than the U.S. dollar can result in a significant increase ordecrease in the amount of those sales and earnings when translated to U.S.dollars. The financial statements of our operations outside the U.S., where thelocal currency is considered to be the functional currency, are translated intoU.S. dollars using the exchange rate in effect at each balance sheet date forassets and liabilities and the average exchange rate for each period for sales,expenses, gains, losses and cash flows. The exchange rates between thesecurrencies and the U.S. dollar in recent years have fluctuated significantlyand may continue to do so in the future. The foreign currencies to which wehave the most significant exchange rate exposure include the Canadian dollarand the euro. The effect of translating foreign subsidiaries’ balance sheetsinto U.S. dollars is included in other comprehensive income. The impact ofgains and losses on transactions denominated in currencies other than thefunctional currency of the relevant operations are included in othernon-operating expense and have historically not been material.

We hedge our significant net investments denominatedin foreign currencies through cross-country interest rate swapagreements. We record these agreements at fair value as assets or liabilitiesand the related gains or losses are deferred in stockholders’ equity as acomponent of foreign currency translation adjustments, net of tax. Fair valueis determined based on estimated amounts that would be received or 

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paid to terminate thecontracts at the reporting date based on quoted market prices. There was nohedge ineffectiveness related to our currency swap agreements in 2006 or 2005.

We have cross-currencyinterest rate swap agreements denominated in euros that mature in 2009 and inCanadian dollars that mature in 2010. These swap agreements are designated as ahedge of the net investment in our European and Canadian operations. The fairvalue of the net liability was recorded in other long-term liabilities of $16.7million and $6.8 million as of December 31, 2006 and 2005, respectively,with a corresponding amount, net of tax, recorded to foreign currencytranslation adjustments of $10.3 million and $4.2 million at December 31,2006 and 2005, respectively. In the event the euro or Canadian dollarstrengthens against the U.S. dollar the fair value of the liability willincrease.

**Interest Rate Risk**

We are exposed tofluctuations in interest rates on our long-term senior secured term loan andrevolving credit facility. Changes in interest rates will not affect the marketvalue of such debt but will affect the amount of our interest payments over theterm of the loans. Likewise, an increase in interest rates could have a materialimpact on our cash flow. As of December 31, 2006, a 100 basis pointincrease in interest rates on our variable term loan under our senior securedcredit facility would have an estimated impact on pre-tax earnings ofapproximately $3.6 million. The interest rate on the notes are fixed at7.5%.

**Commodity Risk**

We purchase significant amounts of natural gas tosupply the energy required in our production processes for our products in eachof our divisions. Since we are a producer of inorganic chemicals, natural gasprovides an energy source for us but is not a direct feedstock of our products.Therefore, exposure to the volatility in energy prices is less than that ofmany producers of organic petrochemicals. We have implemented a hedging programin the U.S. which allows us to mitigate exposure to natural gas volatility withfutures contracts. Forward purchases of natural gas are also made in regard toour production at certain other subsidiary locations.

The futures contracts hada fair value of $2.2 million and $30.9 million at December 31, 2006 and2005, respectively. Fair value is determined based on estimated amounts thatwould be received or paid to terminate the contracts at the reporting datebased on quoted market prices of comparable contracts. The respective currentand non-current balances are recorded in prepaid and other current assets andother long-term assets. The related gains or losses are recorded instockholders’ equity as a component of other comprehensive income (loss), netof tax. Realized gains and losses on natural gas hedges are included inproduction cost and subsequently charged to cost of goods sold in theconsolidated statements of income in the period in which inventory is sold.

**Credit Risk**

We are exposed to credit risk on financial instrumentsto the extent our counterparty fails to perform certain duties as requiredunder the provisions of an agreement. We only transact with counterpartieshaving an appropriate credit rating for the risk involved. Credit exposure ismanaged through credit approval and monitoring procedures.

Concentration of creditrisk can result primarily from trade receivables, for example, with certaincustomers operating in the same industry or customer groups located in the samegeographic region. Credit risk related to these types of receivables is managedthrough credit approval and monitoring procedures.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsPQ Corporation and Subsidiaries:

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations, stockholder’sequity and cash flows present fairly, in all material respects, the financialposition of PQ Corporation and its subsidiaries (the “Company”) at December 31,2006 and 2005 and the results of their operations and their cash flows for theyear ended December 31, 2006 and for the period from February 12,2005 to December 31, 2005 (“Successor” as defined in Note 1) inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

As discussed in Note 18 to the consolidated financialstatements, the Company changed the manner in which it accounts for its definedbenefit pension and other postretirement plans effective December 31,2006.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PennsylvaniaMarch 26, 2007

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**Report ofIndependent Registered Public Accounting Firm**

To the Board of DirectorsPQ Corporation and Subsidiaries:

In our opinion, the accompanying consolidatedstatements of operations, stockholders’ equity and cash flows present fairly,in all material respects, the results of the operations and the cash flows ofPQ Corporation and its subsidiaries (the “Company”) for the period from January 1,2005 to February 11, 2005, and the year ended December 31, 2004 (“Predecessor”as defined in Note 1) in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits. We conducted ouraudits of these statements in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

/s/ PricewaterhouseCoopers LLP

Philadelphia, PennsylvaniaMarch 31, 2006

48

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**PQ CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| ASSETS                                                            |       |                  |       |                  |       |   |   |   |   |
| Cash and cash  equivalents                                        |       |                  | $          | 15,878                |       |   |   | $ | 22,972 |   |   |
| Receivables, net                                                  |       |                  | 98,418     |                  |       |   | 90,714 |   |   |
| Inventories                                                       |       |                  | 98,911     |                  |       |   | 84,239 |   |   |
| Prepaid and other  current assets                                 |       |                  | 9,960      |                  |       |   | 38,333 |   |   |
| Total current assets                                              |       |                  | 223,167    |                  |       |   | 236,258 |   |   |
| Investments in  affiliated companies                              |       |                  | 70,185     |                  |       |   | 64,417 |   |   |
| Property, plant  and equipment, net                               |       |                  | 319,469    |                  |       |   | 318,337 |   |   |
| Goodwill                                                          |       |                  | 229,904    |                  |       |   | 234,483 |   |   |
| Tradenames                                                        |       |                  | 53,000     |                  |       |   | 53,000 |   |   |
| Other intangible  assets, net                                     |       |                  | 59,003     |                  |       |   | 77,709 |   |   |
| Other long-term  assets                                           |       |                  | 33,551     |                  |       |   | 45,669 |   |   |
| Total assets                                                      |       |                  | $          | 988,279               |       |   |   | $ | 1,029,873 |   |   |
| LIABILITIES                                                       |       |                  |       |                  |       |   |   |   |   |
| Revolver, notes  payable and current maturities of long-term debt |       |                  | $          | 5,782                 |       |   |   | $ | 26,689 |   |   |
| Cash overdraft                                                    |       |                  | 1,915      |                  |       |   | 9,957 |   |   |
| Accounts payable                                                  |       |                  | 53,238     |                  |       |   | 51,302 |   |   |
| Accrued  liabilities                                              |       |                  | 59,691     |                  |       |   | 53,978 |   |   |
| Total current liabilities                                         |       |                  | 120,626    |                  |       |   | 141,926 |   |   |
| Long-term debt                                                    |       |                  | 630,109    |                  |       |   | 633,821 |   |   |
| Deferred income  taxes                                            |       |                  | 104,964    |                  |       |   | 127,806 |   |   |
| Other long-term  liabilities                                      |       |                  | 69,973     |                  |       |   | 74,714 |   |   |
| Total liabilities                                                 |       |                  | 925,672    |                  |       |   | 978,267 |   |   |
| Minority interest  in equity of subsidiaries                      |       |                  | 4,974      |                  |       |   | 5,047 |   |   |
| Commitments and  contingencies                                    |       |                  |       |                  |       |   |   |   |   |
| STOCKHOLDER’S EQUITY                                         |       |                  |       |                  |       |   |   |   |   |
| Common stock,  Series A                                      |       |                  | —     |                  |       |   | — |   |   |
| Additional  paid-in capital                                       |       |                  | 75,398     |                  |       |   | 78,369 |   |   |
| Accumulated  deficit                                              |       |                  | (20,990    | )                     |       |   | (35,146 | ) |   |
| Accumulated other  comprehensive income                           |       |                  | 3,225      |                  |       |   | 3,336 |   |   |
| Total stockholder’s equity                                   |       |                  | 57,633     |                  |       |   | 46,559 |   |   |
| Total liabilities  and stockholder’s equity                  |       |                  | $          | 988,279               |       |   |   | $ | 1,029,873 |   |   |

 

See accompanying notes to consolidated financial statements.

49

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**PQ CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)**

| ** **                                             | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                             | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                                             | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                                             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Sales                                                  |       |                  | $          | 708,589               |       |   |   | $ | 571,138 |   |   |   | $ | 64,195 |   |   |   | $ | 606,679 |   |   |
| Cost of goods  sold                                    |       |                  | 549,927    |                  |       |   | 463,102 |   |   |   | 48,576 |   |   |   | 454,448 |   |   |
| Gross profit                                           |       |                  | 158,662    |                  |       |   | 108,036 |   |   |   | 15,619 |   |   |   | 152,231 |   |   |
| Selling, general  and administrative expenses          |       |                  | 86,903     |                  |       |   | 77,317 |   |   |   | 11,221 |   |   |   | 96,235 |   |   |
| Other operating  expense                               |       |                  | 12,486     |                  |       |   | 22,558 |   |   |   | 12,267 |   |   |   | 6,375 |   |   |
| Operating income (loss)                                |       |                  | 59,273     |                  |       |   | 8,161 |   |   |   | (7,869 | ) |   |   | 49,621 |   |   |
| Equity in net  income (loss) from affiliated companies |       |                  | 21,341     |                  |       |   | 3,108 |   |   |   | (265 | ) |   |   | 10,249 |   |   |
| Interest expense,  net                                 |       |                  | 51,894     |                  |       |   | 37,529 |   |   |   | 771 |   |   |   | 6,541 |   |   |
| Other (income)  expense                                |       |                  | (141       | )                     |       |   | 8,218 |   |   |   | 356 |   |   |   | 1,684 |   |   |
| Income (loss) before taxes and minority interest       |       |                  | 28,861     |                  |       |   | (34,478 | ) |   |   | (9,261 | ) |   |   | 51,645 |   |   |
| Provision  (benefit) for income taxes                  |       |                  | 13,997     |                  |       |   | 361 |   |   |   | (2,522 | ) |   |   | 12,926 |   |   |
| Minority interest                                      |       |                  | 708        |                  |       |   | 307 |   |   |   | 59 |   |   |   | 546 |   |   |
| Net income (loss)                                      |       |                  | $          | 14,156                |       |   |   | $ | (35,146 | ) |   |   | $ | (6,798 | ) |   |   | $ | 38,173 |   |   |

 

See accompanying notes to consolidated financial statements.

50

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**PQ CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                                                                          | ** ** | **Capital  stock** | ** ** | **Additional  paid-in  capital** | ** ** | **Retained  earnings  (accumulated  deficit)** | ** ** | **Accumulated  other  comprehensive  (loss) gain** | ** ** | **Treasury  stock, at cost** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|----------------------------------|------------|------------------------------------------------|------------|---------------------------------------------------------|------------|----------------------------------------|------------|-----------|------------|
| **Predeccessor**                                                                                    |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Balance,  January 1, 2004                                                                      |       |               | $          | 6,729                            |       |                                           |       | $                                                       | 21,045     |                                   |       |      | $          | 247,075 |   |   |   | $ | (10,990 | ) |   |   | $ | (15,758 | ) |   | $ | 248,101 |   |
| Net income                                                                                          |       |               |       |                             |       |                                           |       |                                                    |       |                                   | 38,173     |      |       |   |   |   |   |   |   |   |   | 38,173 |   |
| Minimum pension  liability adjustment, net of tax of $(10,248)                                      |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (16,703 | ) |   |   |   |   |   | (16,703 | ) |
| Changes in fair values of  derivatives:                                                             |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized hedging  gains, net of tax of $2,340                                                     |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 4,346 |   |   |   |   |   |   | 4,346 |   |
| Reclassification  adjustment for net realized (gains) included in net income, net of tax of  ($134) |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (249 | ) |   |   |   |   |   | (249 | ) |
| Foreign currency  translation adjustments, net of tax of $1,030                                     |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 12,413 |   |   |   |   |   |   | 12,413 |   |
| Total  comprehensive income                                                                         |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 37,980 |   |
| Treasury shares  issued for exercise of stock options and awards                                    |       |               |       |                             |       |                                           | (859       | )                                                       |       |                                   |       |      |       |   |   |   |   |   | 4,782 |   |   | 3,923 |   |
| Purchases of  treasury common shares                                                                |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   | (4,168 | ) |   | (4,168 | ) |
| Stock compensation  for stock options and awards                                                    |       |               |       |                             |       |                                           | 1,205      |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 1,205 |   |
| Tax benefit of  stock option exercises                                                              |       |               |       |                             |       |                                           | 451        |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 451 |   |
| Dividends and  distributions to stockholders                                                        |       |               |       |                             |       |                                           |       |                                                    |       |                                   | (13,562    | )         |       |   |   |   |   |   |   |   |   | (13,562 | ) |
| Balance,  December 31, 2004                                                                    |       |               | $          | 6,729                            |       |                                           |       | $                                                       | 21,842     |                                   |       |      | $          | 271,686 |   |   |   | $ | (11,183 | ) |   |   | $ | (15,144 | ) |   | $ | 273,930 |   |
| Net loss                                                                                            |       |               |       |                             |       |                                           |       |                                                    |       |                                   | (6,798     | )         |       |   |   |   |   |   |   |   |   | (6,798 | ) |
| Changes in fair values of  derivatives:                                                             |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized hedging  gains, net of tax of $527                                                       |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 980 |   |   |   |   |   |   | 980 |   |
| Reclassification  adjustment for net realized gains included in net income, net of tax of  ($120)   |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (195 | ) |   |   |   |   |   | (195 | ) |
| Foreign currency  translation adjustments, net of tax of $(987)                                     |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (4,676 | ) |   |   |   |   |   | (4,676 | ) |
| Total  comprehensive loss                                                                           |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | (10,689 | ) |
| Treasury shares  issued for exercise of stock options and awards                                    |       |               |       |                             |       |                                           | (358       | )                                                       |       |                                   |       |      |       |   |   |   |   |   | 1,161 |   |   | 803 |   |
| Stock compensation  for stock options and awards                                                    |       |               |       |                             |       |                                           | 2,499      |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 2,499 |   |
| Balance,  February 11, 2005                                                                    |       |               | $          | 6,729                            |       |                                           |       | $                                                       | 23,983     |                                   |       |      | $          | 264,888 |   |   |   | $ | (15,074 | ) |   |   | $ | (13,983 | ) |   | $ | 266,543 |   |
| **Successor**                                                                                       |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Balance,  February 12, 2005                                                                    |       |               | $          | —                           |       |                                           |       | $                                                       | 163,600    |                                   |       |      | $          | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 163,600 |   |
| Net loss                                                                                            |       |               |       |                             |       |                                           |       |                                                    |       |                                   | (35,146    | )         |       |   |   |   |   |   |   |   |   | (35,146 | ) |
| Minimum pension  liability adjustment, net of tax of ($184)                                         |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (352 | ) |   |   |   |   |   | (352 | ) |
| Changes in fair values of  derivatives:                                                             |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized hedging  gains, net of tax of $9,939                                                     |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 16,046 |   |   |   |   |   |   | 16,046 |   |
| Reclassification  adjustment for net realized gains included in net income, net of tax of  ($1,011) |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (1,631 | ) |   |   |   |   |   | (1,631 | ) |
| Foreign currency  translation adjustments, net of tax of ($16)                                      |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (10,727 | ) |   |   |   |   |   | (10,727 | ) |
| Total  comprehensive loss                                                                           |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | (31,810 | ) |
| Stock compensation  for stock awards                                                                |       |               |       |                             |       |                                           | 94         |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 94 |   |
| Dividend  distribution                                                                              |       |               |       |                             |       |                                           | (85,325    | )                                                       |       |                                   |       |      |       |   |   |   |   |   |   |   |   | (85,325 | ) |
| Balance,  December 31, 2005                                                                    |       |               | $          | —                           |       |                                           |       | $                                                       | 78,369     |                                   |       |      | $          | (35,146 | ) |   |   | $ | 3,336 |   |   |   | $ | — |   |   | $ | 46,559 |   |
| Net income                                                                                          |       |               |       |                             |       |                                           |       |                                                    |       |                                   | 14,156     |      |       |   |   |   |   |   |   |   |   | 14,156 |   |
| Additional pension  liability, net of tax of ($340)                                                 |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (457 | ) |   |   |   |   |   | (457 | ) |
| Changes in fair values of  derivatives:                                                             |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   |   |   |
| Unrealized hedging  gains (losses), net of tax of ($3,894)                                          |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (6,345 | ) |   |   |   |   |   | (6,345 | ) |
| Reclassification  adjustment for net realized gains included in net income, net of tax of ($7,098)  |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | (11,461 | ) |   |   |   |   |   | (11,461 | ) |
| Foreign currency  translation adjustments, net of tax of $3,450                                     |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 9,026 |   |   |   |   |   |   | 9,026 |   |
| Total  comprehensive income                                                                         |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 4,919 |   |
| Adjustment to  initially apply SFAS No. 158, net of tax of $5,536                              |       |               |       |                             |       |                                           |       |                                                    |       |                                   |       |      |       |   | 9,126 |   |   |   |   |   |   | 9,126 |   |
| Stock compensation  for stock options and awards                                                    |       |               |       |                             |       |                                           | 108        |                                                    |       |                                   |       |      |       |   |   |   |   |   |   |   |   | 108 |   |
| Dividends and  distributions                                                                        |       |               |       |                             |       |                                           | (3,079     | )                                                       |       |                                   |       |      |       |   |   |   |   |   |   |   |   | (3,079 | ) |
| Balance,  December 31, 2006                                                                    |       |               | $          | —                           |       |                                           |       | $                                                       | 75,398     |                                   |       |      | $          | (20,990 | ) |   |   | $ | 3,225 |   |   |   | $ | — |   |   | $ | 57,633 |   |

 

51

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**PQ CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                         | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                                                                         | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                                                                         | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                                                                         | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Cash flows from operating  activities:                                             |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                  |       |                  | $          | 14,156                |       |   |   | $ | (35,146 | ) |   |   | $ | (6,798 | ) |   |   | $ | 38,173 |   |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation and amortization                                                      |       |                  | 46,810     |                  |       |   | 40,174 |   |   |   | 4,436 |   |   |   | 36,097 |   |   |
| Amortization of deferred financing costs                                           |       |                  | 2,440      |                  |       |   | 2,012 |   |   |   | 29 |   |   |   | 388 |   |   |
| Postretirement healthcare benefits                                                 |       |                  | (1,413     | )                     |       |   | (963 | ) |   |   | (138 | ) |   |   | (567 | ) |   |
| Pension funding (greater) less than expense                                        |       |                  | (987       | )                     |       |   | 212 |   |   |   | 30 |   |   |   | 4,630 |   |   |
| Net gain on benefit plan curtailments                                              |       |                  | —     |                  |       |   | (6,253 | ) |   |   | — |   |   |   | — |   |   |
| Deferred income taxes                                                              |       |                  | (1,379     | )                     |       |   | (13,286 | ) |   |   | (2,855 | ) |   |   | (5,918 | ) |   |
| Net loss on asset disposals                                                        |       |                  | 192        |                  |       |   | 341 |   |   |   | — |   |   |   | (373 | ) |   |
| Write-off of acquired in-process research and  development                         |       |                  | —     |                  |       |   | 3,338 |   |   |   | — |   |   |   | — |   |   |
| Charges related to purchase accounting fair value  adjustments                     |       |                  | 15,167     |                  |       |   | 35,532 |   |   |   | — |   |   |   | — |   |   |
| Stock compensation                                                                 |       |                  | 108        |                  |       |   | 94 |   |   |   | 2,499 |   |   |   | 1,205 |   |   |
| Accretion of shares subject to mandatory redemption                                |       |                  | —     |                  |       |   | — |   |   |   | 330 |   |   |   | 4,069 |   |   |
| Equity in net (income) loss from affiliated companies                              |       |                  | (22,532    | )                     |       |   | (9,252 | ) |   |   | 265 |   |   |   | (10,249 | ) |   |
| Dividends received from affiliated companies                                       |       |                  | 16,070     |                  |       |   | 6,500 |   |   |   | — |   |   |   | 7,189 |   |   |
| Minority interest in earnings of subsidiaries                                      |       |                  | 708        |                  |       |   | 307 |   |   |   | 59 |   |   |   | 546 |   |   |
| Working  capital changes that (used) provided cash:                                |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables                                                                        |       |                  | (3,896     | )                     |       |   | (4,744 | ) |   |   | (2,482 | ) |   |   | (4,081 | ) |   |
| Inventories                                                                        |       |                  | (12,286    | )                     |       |   | 4,431 |   |   |   | (9,000 | ) |   |   | (367 | ) |   |
| Prepaids and other current assets                                                  |       |                  | 280        |                  |       |   | 1,600 |   |   |   | (467 | ) |   |   | 2,675 |   |   |
| Accounts payable and accrued liabilities                                           |       |                  | 7,967      |                  |       |   | (7,768 | ) |   |   | 7,858 |   |   |   | 14,309 |   |   |
| Other, net                                                                         |       |                  | (1,741     | )                     |       |   | 1,590 |   |   |   | (731 | ) |   |   | 201 |   |   |
| Net cash provided by (used in) operating activities                                |       |                  | 59,664     |                  |       |   | 18,719 |   |   |   | (6,965 | ) |   |   | 87,927 |   |   |
| Cash flows from investing  activities:                                             |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Proceeds from sale of capital assets                                               |       |                  | 1,302      |                  |       |   | — |   |   |   | — |   |   |   | 2,201 |   |   |
| Purchases of property, plant and equipment                                         |       |                  | (31,645    | )                     |       |   | (25,733 | ) |   |   | (2,358 | ) |   |   | (35,509 | ) |   |
| Purchase of other intangible assets                                                |       |                  | (1,716     | )                     |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Merger consideration                                                               |       |                  | —     |                  |       |   | (626,000 | ) |   |   | — |   |   |   | — |   |   |
| Merger costs, capitalized                                                          |       |                  | —     |                  |       |   | (6,485 | ) |   |   | — |   |   |   | — |   |   |
| Net cash used in investing activities                                              |       |                  | (32,059    | )                     |       |   | (658,218 | ) |   |   | (2,358 | ) |   |   | (33,308 | ) |   |
| Cash flows from financing  activities:                                             |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revolver and notes payable                                                         |       |                  | (20,174    | )                     |       |   | 23,938 |   |   |   | 46,108 |   |   |   | (6,555 | ) |   |
| Cash overdrafts                                                                    |       |                  | (8,205     | )                     |       |   | 6,549 |   |   |   | (1,251 | ) |   |   | (697 | ) |   |
| Issuance of long-term debt                                                         |       |                  | —     |                  |       |   | 365,000 |   |   |   | — |   |   |   | — |   |   |
| Issuance of senior subordinated notes                                              |       |                  | —     |                  |       |   | 275,000 |   |   |   | — |   |   |   | — |   |   |
| Debt acquisition costs                                                             |       |                  | —     |                  |       |   | (17,631 | ) |   |   | — |   |   |   | — |   |   |
| Repayments of long-term debt                                                       |       |                  | (4,482     | )                     |       |   | (2,588 | ) |   |   | — |   |   |   | (29,007 | ) |   |
| Repayment of Predecessor debt                                                      |       |                  | —     |                  |       |   | (114,274 | ) |   |   | — |   |   |   | — |   |   |
| Proceeds from issuances of treasury stock                                          |       |                  | —     |                  |       |   | — |   |   |   | 1,161 |   |   |   | 2,061 |   |   |
| Purchases of stock                                                                 |       |                  | —     |                  |       |   | — |   |   |   | (47 | ) |   |   | (4,924 | ) |   |
| Equity contribution                                                                |       |                  | —     |                  |       |   | 163,600 |   |   |   | — |   |   |   | — |   |   |
| Distributions to minority shareholders                                             |       |                  | (401       | )                     |       |   | (629 | ) |   |   | — |   |   |   | (561 | ) |   |
| Dividend distribution                                                              |       |                  | (2,346     | )                     |       |   | (85,325 | ) |   |   | — |   |   |   | (13,480 | ) |   |
| Net cash (used in) provided by financing activities                                |       |                  | (35,608    | )                     |       |   | 613,640 |   |   |   | 45,971 |   |   |   | (53,163 | ) |   |
| Effect of exchange rate changes on cash                                            |       |                  | 909        |                  |       |   | 74 |   |   |   | (700 | ) |   |   | 569 |   |   |
| Net change in cash and cash equivalents                                            |       |                  | (7,094     | )                     |       |   | (25,785 | ) |   |   | 35,948 |   |   |   | 2,025 |   |   |
| Cash and cash equivalents at beginning of year                                     |       |                  | 22,972     |                  |       |   | 48,757 |   |   |   | 12,809 |   |   |   | 10,784 |   |   |
| Cash and cash  equivalents at end of year                                          |       |                  | $          | 15,878                |       |   |   | $ | 22,972 |   |   |   | $ | 48,757 |   |   |   | $ | 12,809 |   |   |

 

See accompanying notes to consolidated financial statements.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

**1.   Backgroundand Basis of Presentation:**

The Company conducts operations through two principalbusinesses: our Chemicals division, which develops, manufactures anddistributes sodium silicate and related high performance silicate-basedspecialty chemicals, and our Potters division, which manufactures highlyengineered solid and hollow glass spheres used in highway safety and otherspecialty applications. The Company’s products are used in a variety ofpredominantly niche applications in a diverse range of industrial, consumer andmunicipal end-markets.

On December 15, 2004, PQ Corporation (“Company”)and Niagara Acquisition, Inc. and its parent company, NiagaraHoldings, Inc. (“Holdings”), entered into an Agreement and Plan of Merger,pursuant to which Niagara Acquisition, Inc. merged with and into PQCorporation, with PQ Corporation continuing as the surviving entity and awholly-owned subsidiary of Holdings (the “Merger”). Holdings is aDelaware corporation, a substantial majority of the outstanding capital stockof which is owned by JPMorgan Partners LP and certain affiliated funds(“Sponsors”). The Merger was consummated on February 11, 2005. The totalmerger consideration paid, excluding fees and expenses, consists of the statedpurchase price of $626,000 and capitalized acquisition costs of $6,485.

In connection with the Merger, substantially allexisting debt of the Company, $120,849 as of February 11, 2005, wasrepaid, including interest and make-whole payments of $5,185 for the earlyretirement of debt. The Merger was financed through borrowings under a $335,000term loan, the issuance of $275,000 of senior subordinated notes, a $163,600equity contribution from the Sponsors and existing cash on hand.

The Company refers to theMerger and the related financings described above, collectively, as theTransactions. For purposes of identification and description, the Company issometimes referred to as the Predecessor for the period prior to theTransactions on February 11, 2005, and the Successor for the periodsubsequent to the Transactions.

**2.   Summary ofSignificant Accounting Policies:**

*Principlesof Consolidation.**  *Theconsolidated financial statements include the accounts of the Company and itsmajority-owned subsidiaries. Investments in affiliated companies arerecorded at cost plus the Company’s equity in their undistributed earnings. Allintercompany transactions have been eliminated.

All assets and liabilities of foreign subsidiaries andaffiliated companies are translated to U.S. dollars using exchange rates ineffect at the balance sheet date. Adjustments resulting from translation of thebalance sheets and certain intercompany transactions are included inStockholders’ equity as part of accumulated other comprehensive income (loss).Income and expense items are translated at average exchange rates during theyear. Net foreign exchange losses included in other expense were $628, $169,and $949 in 2006, 2005, and 2004, respectively.

*Cashand Cash Equivalents.**  *Cashand cash equivalents include investments with original terms to maturity of 90 daysor less from the time of purchase.

*AccountsReceivable and Allowance for Doubtful Accounts.**  *Trade accounts receivable arerecorded at the invoiced amount and do not bear interest. The allowance fordoubtful accounts is the Company’s best 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

estimate of the amount ofprobable credit losses in its existing accounts receivable. A specific reservefor bad debts is recorded for known or suspected doubtful accounts receivable.For all other accounts, the Company recognizes a general reserve for bad debtsbased on the length of time receivables are past due and historical write-offexperience. Account balances are charged off against the allowance when theCompany believes it is probable the receivable will not be recovered. If thefinancial condition of the Company’s customers were to deteriorate, resultingin an impairment of their ability to make payments, additional allowances wouldbe required. The Company does not have any off-balance-sheet creditexposure related to its customers.

*Inventories.**  *All inventories are stated at thelower of cost or market. Substantially all domestic inventories are valued onthe last-in, first-out (“LIFO”) method, and all other inventories are valued onthe average cost and first-in, first-out (“FIFO”) methods. When necessary, theCompany provides allowances to adjust the carrying value of its inventory tothe lower of cost or net realizable value, including any costs to sell ordispose. Appropriate consideration is given to obsolescence, excessiveinventory levels, product deterioration and other factors in evaluating netrealizable value.

*Prepaidand Other Current Assets.**  *A significant component of prepaid and other currentassets is the current portion of the fair value of our gas hedge derivatives of$1,045 and $17,251 and current portion of deferred taxes of $1,700 and $11,270as of December 31, 2006 and 2005, respectively.

*Property,Plant, and Equipment.**  *Property,plant and equipment are carried at cost and include expenditures for newfacilities and major renewals and betterments. Plant and equipment undercapital leases are carried at the present value of minimum lease payments.Maintenance, repairs and minor renewals are charged to expense. The Companycapitalizes internal costs associated with the implementation of purchasedsoftware. When property, plant and equipment is retired or otherwise disposedof, the net carrying amount is eliminated with any gain or loss on dispositionrecognized in earnings at that time.

Depreciation is generally provided on thestraight-line method based on estimated useful lives of the assets, ranging upto 33 years for buildings, 10 to 12 years for machinery andequipment, and 3 to 7 years for computer hardware and software.

*Goodwilland Intangible Assets.**  *Definitelived intangibles are amortized over their estimated useful life. Goodwill andintangibles with indefinite lives are not amortized, but are tested forimpairment annually or more frequently if events occur or circumstances changethat would more likely than not reduce the fair value of the reporting unitbelow it’s carrying amount. A write-down occurs in periods in which it isdetermined that a reporting unit’s fair value is less than book value.

When evaluating goodwill for impairment, the Companyfirst compares a reporting unit’s book value of net assets, including goodwill,to its fair value. Fair value is estimated based upon discounted cash flowanalyses. To the extent that the book value exceeds fair value, the Companywould be required to perform a second step to measure the amount of theimpairment loss. The Company performs its impairment test onSeptember 30th of each year.

*OtherLong-term Assets.**  *Otherlong-term assets include net deferred financing costs of $13,179 and $15,618 asof December 31, 2006 and 2005, respectively, related to the notes, seniorterm loan, and revolving credit facility entered into in conjunction with theTransactions. Such deferred financing costs are amortized over the terms of therelated agreements. Amortization of deferred costs of $2,440 for the 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

year endedDecember 31, 2006, $2,012 for the forty-six weeks ended December 31,2005, $29 for the six weeks ended February 11, 2005, and $388 for the yearended December 31, 2004 was included in interest expense. Also included inother long-term assets is the long-term portion of the fair value of our gashedge derivatives of $1,107 and $13,699 as of December 31, 2006 and 2005,respectively.

*Valuationof Long-Lived Assets.**  *Weperform an impairment review of PP&E and definite lived intangibles whenfacts and circumstances indicate the carrying value may not be recoverable fromits undiscounted cash flows. Under Statement of Financial Accounting Standards(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-livedAssets”, if the carrying amount of an asset or asset group is evaluated andfound not to be recoverable, then an impairment loss must be recognized. Any impairmentloss is measured by comparing the carrying amount of the asset to its fairvalue. Fair value is determined using quoted market prices where available, orother techniques including discounted cash flows. The Company’s estimates offuture cash flows involve assumptions concerning future operating performance,economic conditions, and technological changes that may affect the futureuseful lives of the assets.

*DerivativeFinancial Instruments.**  *TheCompany utilizes certain derivative financial instruments to enhance itsability to manage risk, including exposures to interest rates, foreigncurrencies and natural gas prices that exist as part of ongoing businessoperations. Derivative instruments are entered into for periods consistent withthe related underlying exposures and do not constitute positions independent ofthose exposures.

All derivatives are recognized on the balance sheet atfair value. On the date a derivative contract is entered into, the Companydesignates the derivative as either a hedge of the fair value of a recognizedasset or liability or of an unrecognized firm commitment (fair value hedge), ahedge of a forecasted transaction or the variability of cash flows to bereceived or paid related to a recognized asset or liability (cash flow hedge),a foreign-currency fair-value or cash-flow hedge (foreign currencyhedge), or a hedge of a net investment in a foreign operation. Changes in thefair value of a derivative that is highly effective and that is designated andqualifies as a fair-value hedge, along with the loss or gain on the hedgedasset or liability or unrecognized firm commitment of the hedged item that isattributable to the hedged risk, are recorded in earnings. Changes in the fairvalue of a derivative that is highly effective and that is designated andqualifies as a cash-flow hedge are recorded in other comprehensive income tothe extent that the derivative is effective as a hedge, until earnings areaffected by the variability in cash flows of the designated hedged item. Changesin the fair value of derivatives that are highly effective as hedges and thatare designated and qualify as foreign-currency hedges are recorded ineither earnings or other comprehensive income, depending on whether the hedgetransaction is a fair-value hedge or a cash-flow hedge. However, if aderivative is used as a hedge of a net investment in a foreign operation, itschanges in fair value, to the extent effective as a hedge, are recorded in theforeign currency translation adjustment account within accumulated othercomprehensive income. Any changes in the fair value of derivatives that are notdesignated as hedges would be recorded in other operating expenses immediately.

The Company formally documents all relationshipsbetween hedging instruments and hedged items, as well as its risk managementobjective and strategy for undertaking various hedge transactions. This processincludes relating all derivatives that are designated cash flow hedges tospecific forecasted transactions. The Company also formally assesses both atthe inception of the hedge and on an ongoing basis, whether each derivative ishighly effective in offsetting changes in fair values or cash flows of the 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

hedged item. If it isdetermined that a derivative is not highly effective as a hedge, or if aderivative ceases to be a highly effective hedge, hedge accounting would bediscontinued with respect to that derivative prospectively.

*FairValue of Financial Instruments.**  *The carrying values of cash,accounts receivable, accounts payable and accrued liabilities approximate fairvalue due to the short-term nature of these items. See Note 14 to thesefinancial statements regarding the fair value of debt and Note 16regarding other financial instruments.

*RevenueRecognition.**  *Revenue,net of related discounts and allowances, is recognized when both title and riskof loss of the product have been transferred to the customer (generally uponshipment), the seller’s price to the buyer is fixed or determinable,collectibility is reasonably assured, and persuasive evidence of an arrangementexists. Customers take title and assume all the risks of ownership uponshipment (if terms are “FOB shipping point”) or upon delivery (if terms are“FOB destination”). Any deviation from the standard terms and arrangements arereviewed for the proper accounting treatment, and revenue recognition isrevised accordingly.

The Company recognizes rebates given to customers as areduction of revenue based on a rational allocation of the cost of honoringrebates earned and claimed to each of the underlying revenue transactions thatresult in progress by the customer toward earning the rebate. The Companymeasures the rebate obligation based on the estimated amount of sales that willresult in a rebate at the adjusted sales price per the respective salesagreement.

*Shippingand Handling Costs.**  *Inaccordance with the Emerging Issues Task Force (“EITF”) No. 00-10“Accounting for Shipping and Handling Revenues and Costs,” costs related toshipping and handling of products shipped to customers is classified as cost ofgoods sold.

*Researchand Development.**  *Researchand development costs of $6,083 for the year ended December 31, 2006,$11,185 for the forty-six weeks ended December 31, 2005, $800 for the sixweeks ended February 11, 2005, and $9,392 for the year endedDecember 31, 2004 were expensed as incurred and reported in selling,general and administrative expenses in the Consolidated Statements ofOperations. Research and development expense for the forty-six weeks endedDecember 31, 2005 includes the write-off of acquired in-process researchand development of $3,338.

*IncomeTaxes.**  *TheCompany uses the asset and liability method in accounting for income taxesas required by SFAS No. 109, “Accounting for Income Taxes”. Deferred taxassets and liabilities are recorded for temporary differences between the taxbasis of assets and liabilities and their reported amounts in the financialstatements, using statutory tax rates in effect for the year in which thedifferences are expected to reverse. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the results of operationsin the period that includes the enactment date. A valuation allowance isrecorded to reduce the carrying amounts of deferred tax assets unless it ismore likely than not that those assets will be realized.

In determining the provision for income taxes, theCompany provides deferred income taxes on income from foreign subsidiaries asupon remittance to the United States such earnings are taxable. In addition,the Company operates within multiple taxing jurisdictions and is subject to taxfiling requirements and audit within these jurisdictions. In accordance withSFAS No. 5, “Accounting for Contingencies,” the Company records accrualsfor loss contingencies when it is probable that a liability will 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

be incurred and the amountof loss can be reasonably estimated. Likewise, the Company establishescontingent liabilities for possible assessments by taxing authorities resultingfrom uncertain tax positions including, but not limited to, transfer pricing,deductibility of certain expenses and other state, local, and foreign taxmatters. Tax examinations are often complex as tax authorities may disagreewith the treatment of items reported by the Company and may require severalyears to resolve. These accrued liabilities represent a provision for taxesthat are reasonably expected to be incurred on the basis of availableinformation but which are not certain.

*AssetRetirement Obligation.**  *SFASNo. 143, “Accounting for Asset Retirement Obligations”, requires entitiesto record the fair value of a liability for a legal obligation to retire anasset in the period in which the liability is incurred. FASB InterpretationNo. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN47”), requires entities to record the fair value of a liability regarding alegal obligation to perform asset retirement activity in which the timing and(or) method of settlement are conditional on a future event that may or may notbe within the control of the entity. The Company records a liability when weare able to reasonably estimate the fair value of any future obligation toretire a long-lived asset as a result of an existing or enacted law, statute,ordinance or contract. The Company also records a liability for the fair valueof a conditional asset retirement obligation if the fair value can bereasonably estimated. When the liability is initially recorded, the Companycapitalizes a cost by increasing the amount of the related long-lived asset.Over time, the Company adjusts the liability to its present value byrecognizing accretion expense as an operating expense in the income statementeach period, and the capitalized cost is depreciated over the useful life ofthe related asset. Upon settlement of the liability, the Company records a gainor loss if the actual costs differ from the accrued amount.

In accordance with SFAS No. 143 and FIN 47, theCompany has recorded asset retirement obligations (“ARO”) in order to recognizelegal obligations associated with the retirement of tangible long-lived assets.The most significant of these are primarily attributable to environmentalremediation liabilities associated with current operations that were incurredduring the course of normal operations. The Company has AROs that areconditional in nature. As required by FIN 47, the Company identified certainconditional AROs upon which it was able to reasonably estimate their fair valueand recorded a liability of $317 and $301 as of December 31, 2006 and2005, respectively. These AROs were triggered upon commitments by the Companyto comply with local, state, and national laws to remove environmentallyhazardous materials. The AROs have been recognized on a discounted basis usinga credit-adjusted risk free rate. Accretion of the AROs is recorded inother operating expense.

*EnvironmentalExpenditures.**  *Environmentalexpenditures that pertain to current operations or to future revenues areexpensed or capitalized consistent with the Company’s capitalization policy forproperty, plant and equipment. Expenditures that result from the remediation ofan existing condition caused by past operations and that do not contribute tocurrent or future revenues are expensed. Liabilities are recognized forremedial activities when the remediation is probable and the cost can bereasonably estimated. Recoveries of expenditures for environmental remediationare recognized as assets only when recovery is deemed probable.

*Stock-BasedCompensation.**  *TheCompany applies the fair value based method to account for stock options andawards prescribed by SFAS No. 123(R). The Company adopted the provisionsof SFAS No. 123(R) as of January 1, 2006 and for the year endedDecember 31, 2006. The adoption of SFAS No. 123(R) did not havean impact on the consolidated financial statements.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

*Pensionsand Postretirement Benefits.**  *The Company maintains qualified and non-qualifieddefined benefit pension plans that cover substantially all of the Company’sdomestic and Canadian employees and certain of its international employees. TheCompany follows the accounting guidance as specified in SFAS No. 87,“Employers’ Accounting for Pensions,” for the recognition of net periodicpension cost. The Company accounts for defined benefit plan curtailments underSFAS No. 88, “Employers’ Accounting for Settlement and Curtailments ofDefined Benefit Pension Plans and for Termination Benefits.”  Effective December 31, 2006, the Companyrecognizes the overfunded or underfunded status of its defined benefit pensionand postretirement plans as an asset or liability in the balance sheet andrecognizes changes in that funded status in the year in which the changes occurthrough other comprehensive income in accordance with SFAS No. 158, “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans.”

In addition to pension benefits, the Company providescertain health care benefits for employees who meet age, participation andlength of service requirements at retirement. The Company follows theaccounting guidance as specified in SFAS No. 106, “Employers’ Accountingfor Postretirement Benefits Other Than Pensions,” for the recognition ofpostretirement benefits.

*Contingencies.**  *Certain conditions may exist as ofthe date the financial statements are issued, which may result in a loss to theCompany but which will only be resolved when one or more future events occur orfail to occur. The Company’s management and its legal counsel assess suchcontingent liabilities, and such assessment inherently involves an exercise ofjudgment. In assessing loss contingencies related to legal proceedings that arepending against the Company or unasserted claims that may result in suchproceedings, the Company’s legal counsel evaluates the perceived merits of anylegal proceedings or unasserted claims as well as the perceived merits of theamount of relief sought or expected to be sought therein. If the assessment ofa contingency indicates that it is probable that a loss has been incurred andthe amount of the liability can be estimated, then the estimated liabilitywould be accrued in the Company’s financial statements. If the assessmentindicates that a loss contingency is not probable, but is reasonably possible,or is probable but cannot be estimated, then the nature of the contingentliability, together with an estimate of the range of possible loss ifdeterminable and material, would be disclosed. Loss contingencies consideredremote are generally not disclosed unless they involve guarantees, in whichcase the nature of the guarantee would be disclosed, including the approximateterm, how the guarantee arose, and the events or circumstances that wouldrequire the guarantor to perform under the guarantee.

*Useof Estimates.**  *Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

*Reclassifications.**  *Certain amounts in the prior yearconsolidated financial statements and footnotes have been reclassified toconform to the current year’s presentation.

**3.   RecentlyIssued Accounting Standards:**

In July 2006, the FASB issued FASB Interpretation(“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes-anInterpretation of FASB Statement No. 109.” FIN No. 48 clarifies what criteria must be met prior torecognition of the financial statement benefit of a position taken in a tax return.FIN No. 48 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

will require companies toinclude additional qualitative and quantitative disclosures within theirfinancial statements. The disclosures will include potential tax benefits frompositions taken for tax return purposes that have not been recognized forfinancial reporting purposes and a tabular presentation of significant changesduring each period. The disclosures will also include a discussion of thenature of uncertainties, factors which could cause a change, and an estimatedrange of reasonably possible changes in tax uncertainties. FIN No. 48will also require a company to recognize a financial statement benefit for aposition taken for tax return purposes when it will be more-likely-than-notthat the position will be sustained. FIN No. 48 will be effective forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact on the consolidated financial statements for uncertaintax positions taken under FIN No. 48.

In September 2006, the SEC staff issued StaffAccounting Bulletin (“SAB”) No. 108, “Considering the Effects ofPrior Year Misstatements when Quantifying Misstatements in Current YearFinancial Statements.” SAB No. 108 was issued to provide interpretive guidance on howthe effects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. We adopted theprovisions of SAB No. 108 effective December 31, 2006. Theadoption of SAB No. 108 did not have an impact on the consolidatedfinancial statements.

In November 2004, the FASB issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—anamendment of ARB No. 43, Chapter 4.” SFAS No. 151 is the result of efforts to converge U.S. accountingstandards for inventories with International Accounting Standards. SFASNo. 151 requires abnormal amounts of idle facility expense, freight,handling costs and spoilage to be recognized as current-period charges. It alsorequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFASNo. 151 is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. Therefore, SFAS No. 151 is effectivefor the Company for the year ended December 31, 2006. The adoption of SFASNo. 151 did not have a material impact on the consolidated financialstatements.

In September 2006, the FASB issued SFASNo. 157, “Fair Value Measurements.” SFAS No. 157 addresses how companies should measure fair valuewhen they are required to use a fair value measure for recognition anddisclosure purposes under generally accepted accounting principles.SFAS No. 157 will require the fair value of an asset or liability tobe based on a market based measure which will reflect the credit risk of the company.SFAS No. 157 will also require expanded disclosure requirements whichwill include the methods and assumptions used to measure fair value and theeffect of fair value measures on earnings. SFAS No. 157 will beapplied prospectively and will be effective for fiscal years beginning afterNovember 15, 2007 and to interim periods within those fiscal years. TheCompany is currently evaluating the new statement and does not believe that itwill have a significant impact on the determination or reporting of our financialresults.

In September 2006, the FASB issued SFASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans.” SFAS No. 158 requires an employer that sponsors one or more definedbenefit pension plans or other postretirement plans to 1) recognize thefunded status of a plan, measured as the difference between plan assets at fairvalue and the benefit obligation, in the balance sheet; 2) recognize instockholders’ equity as a component of accumulated other comprehensive income,net of tax, the gains or losses and prior service costs or credits that ariseduring the period but are not yet recognized as components of net periodicbenefit cost; 3) measure defined benefit plan assets and 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

obligations as of the dateof the employer’s fiscal year-end balance sheet; and 4) disclose in thenotes to the financial statements additional information about the effects onnet periodic benefit cost for the next fiscal year that arise from delayedrecognition of the gains or losses, prior service costs or credits, andtransition asset or obligation. We adopted SFAS No. 158 effectiveDecember 31, 2006. The impact of the adoption of SFAS No. 158resulted in an increase in stockholder’s equity of $9,126 at December 31,2006.

In February 2007, the FASB issued SFASNo. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities, Including an amendment of FASB Statement No. 115.” SFASNo. 159 provides companies with an option to report selected financialassets and liabilities at fair value. The statement requires the fair value ofthe assets and liabilities that the company has chosen to fair value be shownon the face of the balance sheet. The standard also requires companies toprovide additional information to enable users of the financial statements tounderstand the company’s reasons for electing the fair value option and howchanges in the fair values affect earnings for the period. SFAS No. 159also establishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. This statement is effective for fiscalyears beginning on or before November 15, 2007. The Company is currentlyevaluating the potential impact this statement may have on the consolidatedfinancial statements.

In September 2006,the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1,“Accounting for Planned Major Maintenance Activities.”  The FSP prohibitscompanies from accruing the cost of planned major maintenance in advance of theactivities actually occurring. This FSP is effective for fiscal years beginningafter December 15, 2006. The adoption of FSP No. AUG AIR-1 isnot expected to have a significant impact on the consolidated financialstatements.

**4.   BusinessCombinations:**

The Company has accounted for the Transactions inaccordance with SFAS No. 141, “Business Combinations”. The Merger is beingtreated as a purchase with Holdings, whose sole asset is its investment in thecommon stock of the Company, as the accounting acquirer.

The table below summarizes the allocation of the totalcost of the Merger to the assets acquired and liabilities assumed. The purchaseprice was allocated first to tangible and identifiable intangible assetsacquired and liabilities assumed based upon their estimated fair values. Theremaining excess of the purchase price over the fair value of assets acquiredand liabilities assumed was then recorded as goodwill.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

| Fair value of the assets  acquired and liabilities assumed: |   |      |    |
|-------------------------------------------------------------|--------|-----------|---------|
| Net cash paid to  acquire stock                             |   | $         | 626,000 |   |
| Transaction  costs, capitalized                             |   | 6,485     |    |
| Total purchase price                                        |   | $         | 632,485 |   |
| The purchase  price was allocated as follows:               |   |      |    |
| Cash                                                        |   | $         | 48,757  |   |
| Receivables                                                 |   | 91,813    |    |
| Inventories                                                 |   | 98,298    |    |
| Prepaid and other current assets                            |   | 16,385    |    |
| Property, plant and equipment                               |   | 336,349   |    |
| Investments in affiliated companies                         |   | 68,719    |    |
| Goodwill                                                    |   | 229,904   |    |
| Other intangible assets                                     |   | 157,595   |    |
| Other assets                                                |   | 30,805    |    |
| Fair value of assets acquired                               |   | 1,078,625 |    |
| Current liabilities                                         |   | (174,889  | )       |
| Long-term debt                                              |   | (80,665   | )       |
| Deferred income taxes                                       |   | (99,162   | )       |
| Other liabilities                                           |   | (91,424   | )       |
| Purchase price                                              |   | $         | 632,485 |   |

 

The Company believes that its leading market positionsand diverse range of industrial, consumer and governmental applications inwhich its products are used were the primary reasons that contributed to atotal purchase price that resulted in the recognition of goodwill. The totalother intangible assets amounted to $157,595, of which $53,000 was assigned totrade names that are not subject to amortization. In addition, other intangibleassets included $3,338 of capitalized in-process research and development thatwas immediately written off to selling, general and administrative expenses inthe Successor’s Statement of Operations.

In accordance with the requirements of the purchasemethod of accounting for acquisitions, inventories as of February 11, 2005were recorded at net realizable value (which is defined as estimated sellingprices less the sum of (a) costs of disposal and (b) a reasonableprofit allowance for the selling effort of the acquiring entity) which, in thecase of finished products, was $24,555 higher than the Predecessor’s historicalmanufacturing cost. The Successor’s cost of products sold includes a pre-taxcharge of $9,992 for the forty-six weeks ended December 31, 2005 relatingto this step-up. The remaining fair value step-up relates to domestic inventoryaccounted for under the LIFO method and, as such, did not result in a charge toearnings.

In addition, certain raw material inventory purchasedunder favorable supply agreements was revalued to fair market value, which was$2,473 higher than historical cost. The Successor’s cost of products soldincluded a pre-tax charge of $942 for the forty-six weeks endedDecember 31, 2005 relating to this step-up. The remaining fair valuestep-up relates to domestic inventory accounted for under the LIFO method and,as such, did not result in a charge to earnings.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

The Company recorded a liability of $4,456 forbuilding leases that were above fair market value at the date of theTransactions. The liability was determined by comparing our lease terms tothose currently available for similar properties. The Successor’s Statement ofOperations includes amortization of the unfavorable leases of $421 for the yearended December 31, 2006 and $434 for the forty-six weeks endedDecember 31, 2005.

In May 2005, management finalized plans toterminate certain employees in the United States and at certain foreignsubsidiaries. Employees terminated under this plan were entitled to receiveseverance pay and benefits totaling approximately $5,200 which was included inaccrued liabilities in the opening balance sheet of the Successor. Cashexpenditures toward this program of $3,212 were made through December 31,2005 and charged against the reserve. Substantially all remaining payments havebeen made as of December 31, 2006.

The closing of the Transactions represented a changein control under certain executives’ employment agreements. As a result, theCompany recorded a charge in other operating expense of approximately $5,600for severance provided to certain executives terminated before the closing ofthe Transactions in the Predecessor’s Statement of Operations for the six weeksended February 11, 2005. In addition, the Successor was required to pay$3,929 pursuant to these agreements to executives who resigned subsequent tothe Transactions and recorded a charge for such amount in other operatingexpense in the Successor’s Statement of Operations for the forty-six weeksended December 31, 2005.

The Company incurred other costs relating to theTransactions, primarily for sponsor fees, broker fees, legal and consulting ofapproximately $522, $13,751, and $6,158 that were recorded in other operatingexpense in the Consolidated Statements of Operations for the year endedDecember 31, 2006, the forty-six weeks ended December 31, 2005, andthe six weeks ended February 11, 2005, respectively. In addition, theCompany incurred early debt repayment fees of $7,579 that were recorded inother non-operating expense in the fort-six weeks ended December 31, 2005.

During the year endedDecember 31, 2006, goodwill and deferred taxes were reduced by $1,479 toreflect the correction of a 2005 error in the calculation of deferred taxes onundistributed earnings of non-U.S. subsidiaries that was attributable to theopening balance sheet. In the fourth quarter of 2006, the deferred pension liabilitywas increased by $1,446 with an offsetting increase to goodwill of $866 andreduction to deferred taxes of $580 to reflect the correction of a prior perioderror in accounting for our supplemental executive retirement plan. Inaddition, goodwill, deferred taxes, and the provision for income taxes werereduced by $331, $1,212, and $202, respectively, with an offsetting increase toaccrued taxes of $679 to reflect the correction of an overstatement of deferredtaxes, partially attributable to the 2005 results of operations and partiallyattributable to the opening balance sheet. These error corrections are notmaterial to the financial position of the Company as of December 31, 2006or December 31, 2005. Accordingly, prior period financial statements have notbeen restated.

**5.   UnauditedPro Forma Information:**

The following schedule includes unaudited statementsof operations data as if the Transactions had occurred as of January 1 ofeach respective year. The unaudited pro forma information includes the actualresults with adjustments for the pro forma effect of the change in interestexpense related to the changes in capital structure resulting from thefinancings discussed in Note 14, purchase accounting adjustments resultingin changes to depreciation and amortization expenses, the revaluation ofinventory to fair market 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

value, amortization of thestep up of investment in affiliates and the reduction in pension andpostretirement benefit expense resulting from the elimination of theunamortized actuarial losses and prior service costs and the unamortizedtransition obligation.

Theunaudited pro forma information is provided for illustrative purposes only. Itdoes not purport to represent what the results of operations would have beenhad the Transactions occurred on the dates indicated above, nor does it purportto project the results of operations for any future period.

| ** ** | ** ** | **Pro forma twelve months ended  December 31,** | ** ** |
|------------|------------|--------------------------------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                                                 | ** ** | **2004** | ** ** |
| Net sales  |       | $                                                                        | 635,333    |   | $ | 606,679 |   |
| Net loss   |       | (15,968                                                                  | )          | (10,371 | ) |
|            |            |                                                                          |            |  |  |  |  |

 

Included in the net lossfor the pro forma twelve months ended December 31, 2005 and 2004 werepre-tax charges of $10,935 for the amortization of inventory revalued inpurchase accounting, $3,338 for the write-off of acquired in-process researchand development and $5,251 for the amortization of inventory of our equityaffiliates that was revalued in purchase accounting.

**6.   AccumulatedOther Comprehensive Income:**

Followingare cumulative changes in accumulated other comprehensive income, net of tax:

| ** **                                                                | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Adjustment to  initially apply SFAS No. 158, net of tax of $5,536    |       | $                     | 9,126      |   | $ | — |   |
| Minimum pension  liability adjustments, net of tax of ($524) and ($184)   |       | (809                  | )          | (352 | ) |
| Changes in fair  values of derivatives, net of tax of ($2,064) and $8,928 |       | (3,391                | )          | 14,415 |   |
| Foreign currency  translation adjustments, net of tax of $3,434 and ($16) |       | (1,701                | )          | (10,727 | ) |
|                                                                      |       | $                     | 3,225      |   | $ | 3,336 |   |

 

See Note 18 fordetails regarding the impact of the adoption of SFAS No. 158.

**7.   OtherOperating Expense:**

Asummary of significant other operating expense is as follows:

| ** **                             | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                             | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                             | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Amortization  expense                  |       |                  | $          | 5,762                 |       |   |   | $ | 5,154 |   |   |   | $ | 146 |   |   |   | $ | 949 |   |   |
| Merger related  costs and sponsor fees |       |                  | 522        |                  |       |   | 13,751 |   |   |   | 6,158 |   |   |   | 3,662 |   |   |
| Management  advisory fee               |       |                  | 2,000      |                  |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Severance costs                        |       |                  | 2,013      |                  |       |   | 4,387 |   |   |   | 5,604 |   |   |   | 1,154 |   |   |
| Benefit plan  curtailment              |       |                  | —     |                  |       |   | (6,253 | ) |   |   | — |   |   |   | — |   |   |
| Other                                  |       |                  | 2,189      |                  |       |   | 5,519 |   |   |   | 359 |   |   |   | 610 |   |   |
|                                   |       |                  | $          | 12,486                |       |   |   | $ | 22,558 |   |   |   | $ | 12,267 |   |   |   | $ | 6,375 |   |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

**8.   AccountsReceivable and Allowance for Doubtful Accounts:**

Thecomponents of accounts receivable are presented as follows:

| ** **                       | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Trade accounts  receivable       |       |                  | $          | 95,904                |       |   |   | $ | 90,560 |   |   |
| Receivable from  affiliates      |       |                  | 2,538      |                  |       |   | 248 |   |   |
| Other receivables                |       |                  | 1,448      |                  |       |   | 1,532 |   |   |
|                             |       |                  | 99,890     |                  |       |   | 92,340 |   |   |
| Allowance for  doubtful accounts |       |                  | (1,472     | )                     |       |   | (1,626 | ) |   |
|                             |       |                  | $          | 98,418                |       |   |   | $ | 90,714 |   |   |

 

Followingare changes in the allowance for doubtful accounts during the year endedDecember 31, 2006, the forty-six weeks ended December 31, 2005, thesix weeks ended February 11, 2005, and the year ended December 31,2004:

| ** **                                    | ** ** | **Beginning  Balance** | ** ** | **Additions** | ** ** | **Write-offs,  net of  recoveries** | ** ** | **Ending  Balance** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|---------------|------------|------------------------------------------|------------|---------------------|------------|
| **Successor**                                 |       |                   |       |          |       |                                     |       |                |       |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2006            |       |                   | 1,626      |          |       |                                     | 346        |                |       |   | (500 | ) |   |   | 1,472 |   |   |
| Forty-six weeks  ended December 31, 2005 |       |                   | 2,015      |          |       |                                     | 185        |                |       |   | (574 | ) |   |   | 1,626 |   |   |
| **Predecessor**                               |       |                   |       |          |       |                                     |       |                |       |   |   |   |   |   |   |   |   |
| Six weeks ended  February 11, 2005       |       |                   | 2,003      |          |       |                                     | 97         |                |       |   | (85 | ) |   |   | 2,015 |   |   |
| Year ended  December 31, 2004            |       |                   | 1,744      |          |       |                                     | 649        |                |       |   | (390 | ) |   |   | 2,003 |   |   |

 

**9.   Inventories:**

Inventorieswere classified and valued as follows:

| ** **                             | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Finished products  and work in process |       |                  | $          | 74,842                |       |   |   | $ | 64,436 |   |   |
| Raw materials                          |       |                  | 24,069     |                  |       |   | 19,803 |   |   |
|                                   |       |                  | $          | 98,911                |       |   |   | $ | 84,239 |   |   |
| Valued at lower of  cost or market:    |       |                  |       |                  |       |   |   |   |   |
| LIFO basis                             |       |                  | 57,348     |                  |       |   | 50,864 |   |   |
| FIFO basis                             |       |                  | 9,982      |                  |       |   | 5,997 |   |   |
| Average cost basis                     |       |                  | 31,581     |                  |       |   | 27,378 |   |   |
|                                   |       |                  | $          | 98,911                |       |   |   | $ | 84,239 |   |   |

 

If all inventories hadbeen valued using the FIFO or average cost methods, inventories would have been$5,544 and $11,215 lower than reported at December 31, 2006 and 2005,respectively. As a result of revaluing inventory for purchase accounting, thepredecessor’s LIFO reserve was written off to goodwill and a LIFO asset wasrecorded in the opening balance sheet.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

**10.   Investmentsin Affiliated Companies:**

TheCompany accounts for investments in affiliated companies under the equitymethod. Affiliated companies accounted for on the equity basis as ofDecember 31, 2006 are as follows:

| ** **                                | ** ** | **Percent**  | ** ** | ** **  | ** ** |
|-------------------------------------------|------------|--------------|------------|-------------|------------|
| **Company**                               | ** ** | ** **   | ** ** | **Country** | ** ** | **Ownership** | ** ** |
| PQ Silicates Ltd.                         |       | Taiwan       |       |        | 50         | % |   |
| Zeolyst  International                    |       | USA          |       |        | 50         | % |   |
| Aekyung-PQ  Advanced Materials, Co., Ltd. |       | South  Korea |       |        | 50         | % |   |
| Zeolyst C.V.                              |       | Netherlands  |       |        | 50         | % |   |
|                                           |            |              |            |             |            |  |  |  |  |

 

Followingis summarized information of the combined investments:

| ** **             | ** ** | **December 31,** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current assets         |       | $                     | 91,488     |   | $ | 58,762 |   |
| Noncurrent assets      |       | 25,589                |       | 25,826 |   |
| Current  liabilities   |       | 43,202                |       | 24,548 |   |
| Noncurrent liabilities |       | 2,225                 |       | 2,276 |   |
|                        |            |                       |            |  |  |  |  |

 

| ** **       | ** ** | **Year ended December 31,** | ** ** |
|------------------|------------|--------------------------------------------|------------|
| ** **       | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales        |       | $                                          | 148,447    |   | $ | 115,258 |   | $ | 113,100 |   |
| Gross profit     |       | 65,489                                     |       | 37,273 |   | 39,605 |   |
| Operating income |       | 45,541                                     |       | 18,402 |   | 20,017 |   |
| Net income       |       | 44,900                                     |       | 17,637 |   | 19,669 |   |
|                  |            |                                            |            |  |  |  |  |  |  |  |

 

The Company’s investment in affiliates balance as ofDecember 31, 2006 and 2005 includes net purchase accounting fair valueadjustments of $34,335 and $35,525, respectively, consisting primarily ofintangible assets such as customer lists, technology usage rights, tradenamesand goodwill. Consolidated equity in net income from affiliates is net of$1,190 and $6,144 of amortization expense related to purchase accounting fairvalue adjustments for the years ended December 31, 2006 and 2005,respectively.

The Company had net receivables due from affiliates of$2,538 and $248 as of December 31, 2006 and 2005, respectively. Sales toand purchases from affiliates were not material for the years presented.

Under Rule 3-09of SEC Regulation S-X, separate financial statements of majority-ownedsubsidiaries and equity affiliates not consolidated that meet certainthresholds must be filed as an exhibit to the registrant’s Annual Report onForm 10-K. During 2006, the Company’s 50% joint venture in ZeolystInternational met these thresholds and their financial statements are includedas Exhibit 99.2 to the Company’s Annual Report on Form 10-K.The separate financial statements of Zeolyst International are accounted for ona historical cost basis and do not reflect the results of purchase accountingadjustments recorded in the Company’s consolidated financial statements fortheir investment in equity affiliates.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

**11.   Property,Plant and Equipment:**

Asummary of property, plant and equipment, at cost, and related accumulateddepreciation is as follows:

| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Land                            |       |                  | $          | 57,521                |       |   |   | $ | 57,148 |   |   |
| Buildings                       |       |                  | 102,109    |                  |       |   | 96,485 |   |   |
| Machinery and  equipment        |       |                  | 216,773    |                  |       |   | 184,448 |   |   |
| Construction in  progress       |       |                  | 19,044     |                  |       |   | 15,435 |   |   |
|                            |       |                  | 395,447    |                  |       |   | 353,516 |   |   |
| Less: accumulated  depreciation |       |                  | 75,978     |                  |       |   | 35,179 |   |   |
|                            |       |                  | $          | 319,469               |       |   |   | $ | 318,337 |   |   |

 

Depreciation expense was $41,371 for the year endedDecember 31, 2006, $35,486 for the forty-six weeks ended December 31,2005, $4,290 for the six weeks ended February 11, 2005, and $35,148 forthe year ended December 31, 2004.

Property, plant, andequipment includes gross assets acquired under capital leases of approximately$3,604 and $3,330 at December 31, 2006 and 2005, respectively. Relatedamortization included in accumulated depreciation was $1,045 and $453 atDecember 31, 2006 and 2005, respectively. Capital leases are included as acomponent of machinery and equipment. Amortization of assets under capitalleases is included in depreciation expense.

**12.   Goodwilland Other Intangible Assets:**

The allocation of the Transaction purchase priceresulted in goodwill being allocated $163,591 to the Chemicals segment and $66,313to the Potters segment. The Company has not generated any new tax deductiblegoodwill related to the Transaction. In addition, as part of the allocation ofthe Transaction purchase price, $53,000 was assigned to trade names that arenot subject to amortization. The Company completed its annual impairmentassessments as of September 30, 2006 and 2005 and no impairment charge waswarranted.

Grosscarrying amounts and accumulated amortization for intangible assets withestimable useful lives are as follows:

| ** **                           | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Gross**                       | ** ** | **Accumulated**                 | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                           | ** ** | **Amounts**                     | ** ** | **Amortization**                | ** ** | **Balance** | ** ** | **Amounts** | ** ** | **Amortization** | ** ** | **Balance** | ** ** |
| Formulations and  product technology |       | $                               | 53,200     |                            |       | $ | (8,313 | ) |   | $ | 44,887 |   | $ | 53,200 |   |   | $ | (3,880 | ) |   | $ | 49,320 |   |
| Non compete  agreements              |       | 4,131                           |       |                            | (2,412     | ) |   | 1,719 |   | 3,900 |   |   | (1,121 | ) |   | 2,779 |   |
| Raw material  contracts              |       | 43,648                          |       |                            | (32,431    | ) |   | 11,217 |   | 43,648 |   |   | (18,453 | ) |   | 25,195 |   |
| Railcar leases                       |       | 509                             |       |                            | (197       | ) |   | 312 |   | 509 |   |   | (94 | ) |   | 415 |   |
| Customer lists  and rights to sell   |       | 900                             |       |                            | (32        | ) |   | 868 |   | — |   |   | — |   |   | — |   |
| Total                                |       | $                               | 102,388    |                            |       | $ | (43,385 | ) |   | $ | 59,003 |   | $ | 101,257 |   |   | $ | (23,548 | ) |   | $ | 77,709 |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

The amortization periods for formulations and producttechnology, railcar leases, and customers lists and rights to sell are twelveyears, five years, and fifteen years, respectively. The amortization period forthe non-compete agreements range from three to five years. The amortizationperiod for raw material contracts is based on the terms of the contracts; thelongest of which is three years in duration.

On June 20, 2006, the Company acquired certainintangible assets in the United States for a total purchase price of $1,131.The Company allocated $900 of the purchase price to customer lists acquired andrights to sell and approximately $231 to a non-compete agreement contained inthe asset purchase agreement.

Total amortization of intangibles was $19,837 for theyear ended December 31, 2006, $23,548 for the forty-six weeks endedDecember 31, 2005, $146 for the six weeks ended February 11, 2005,and $949 for the year ended December 31, 2004. Total amortization ofintangibles included $13,978 and $18,453 related to raw material contracts thatwas recorded to cost of goods sold in the Consolidated Statements of Operationsfor the year ended December 31, 2006 and the forty-six weeks endedDecember 31, 2005, respectively.

Estimatedaggregate amortization expense of intangible assets for each of the fivesucceeding years is as follows:

| **Year** | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|------------|------------|
| 2007     |       | $          | 15,627     |       |
| 2008     |       | 6,370      |       |
| 2009     |       | 4,643      |       |
| 2010     |       | 4,540      |       |
| 2011     |       | 4,515      |       |
|          |            |            |            |            |            |  |

 

**13.   AccruedLiabilities:**

Asummary of accrued liabilities is as follows:
|                                 | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Accrued  compensation and bonus |       |                  | $          | 22,623                |       |   |   | $ | 14,647 |   |   |
| Accrued interest  expense       |       |                  | 8,314      |                  |       |   | 8,001 |   |   |
| Post retirement  benefits       |       |                  | 2,977      |                  |       |   | 2,204 |   |   |
| Accrued severance               |       |                  | 1,657      |                  |       |   | 2,269 |   |   |
| Accrued freight                 |       |                  | 3,573      |                  |       |   | 3,759 |   |   |
| Accrued income  taxes           |       |                  | 11,315     |                  |       |   | 12,884 |   |   |
| Other                           |       |                  | 9,232      |                  |       |   | 10,214 |   |   |
| Total                           |       |                  | $          | 59,691                |       |   |   | $ | 53,978 |   |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

 

**14.   Long-termDebt:**

Thesummary of long-term debt is as follows:
|                                                                                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                     | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Senior secured  term loans with interest at 7.37% as of December 31, 2006 |       |                  | $          | 358,761               |       |   |   | $ | 362,412 |   |   |
| 7.50% Senior  subordinated notes due 2013                                      |       |                  | 275,000    |                  |       |   | 275,000 |   |   |
| Revolving credit  agreements                                                   |       |                  | —     |                  |       |   | 20,000 |   |   |
| Other                                                                          |       |                  | 2,130      |                  |       |   | 3,098 |   |   |
|                                                                           |       |                  | 635,891    |                  |       |   | 660,510 |   |   |
| Less: current portion                                                          |       |                  | (5,782     | )                     |       |   | (26,689 | ) |   |
|                                                                           |       |                  | $          | 630,109               |       |   |   | $ | 633,821 |   |   |

 

In connection with the Transactions, substantially allexisting debt as of February 11, 2005 was repaid in the amount of$120,849, including make-whole payments of $5,185 and interest.

On February 11, 2005, the Company issued $275,000of 7.5% senior subordinated notes due 2013 in transactions exempt from or notsubject to registration under the Securities Act pursuant to Rule 144Aunder the Securities Act and received cash proceeds of $267,781 after deductinginitial purchases discounts and expenses. The notes are senior subordinatedobligations of the Company and rank junior to all other senior indebtedness ofthe Company that does not contain similar subordination provisions. Theindenture relating to the notes contains various limitations on the Company’sability to incur additional indebtedness, pay dividends, sell assets and createliens, among other things. Interest on the notes is payable on February 15and August 15 of each year. No principal payments are required withrespect to the notes prior to their final maturity. Pursuant to a registrationrights agreement for the benefit of the holders of the notes, the Company fileda registration statement with the Securities and Exchange Commission (“SEC”)relating to an offer to exchange the notes for registered notes havingsubstantially identical terms. The registration statement has been declaredeffective on May 12, 2006.

As a result of missing the deadline for having ourregistration statement on Form S-4 with respect to the notesdeclared effective by the SEC, the interest rate on the notes was increased 25basis points to 7.75% on January 10, 2006 and by an additional 25 basispoints to 8.0% on April 10, 2006. The interest rate on the notes returnedto 7.5% on May 12, 2006, when our registration statement on Form S-4was declared effective by the SEC.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

If anyevent of default shall occur and be continuing, the holders of at least 25% inprincipal amount of outstanding notes under the indenture may declare theprincipal of and accrued interest on such notes to be due and payable and thesame shall become immediately due and payable upon the acceleration under thecredit agreement. On or after February 15, 2009, the notes shall besubject to redemption at any time at the option of the Company at theredemption prices set forth below plus accrued and unpaid interest.

| **Year**            | ** ** | ** ** | ** ** | **Percentage** | ** ** |
|---------------------|------------|------------|------------|----------------|------------|
| 2009                |       |       | 103.75     | %              |       |
| 2010                |       |       | 101.88     | %              |       |
| 2011 and thereafter |       |       | 100.00     | %              |       |

 

At any time prior to February 15, 2008, theCompany may on any one or more occasions redeem in the aggregate up to 35% ofthe aggregate principal amount of the notes at a redemption price equal to107.5% of the principal amount thereof, plus accrued and unpaid interest;provided, however, that at least 65% of the aggregate principal amount of notesissued under the indenture remains outstanding immediately after the occurrenceof each such redemption.

On February 11, 2005, the Company entered into asenior secured credit facility (“Senior Credit Facility”) having a term loan inthe amount of $335,000 with a maturity date of February 11, 2012, andreceived cash proceeds of approximately $324,950 after deducting underwritingfees and expenses. In November 2005, the loan was increased by $30,000 inconnection with the dividend distribution to Holdings, which is discussedbelow. Interest on the term loan is variable and is equal to LIBOR plus amargin of 2.0%. The Senior Credit Facility requires minimum quarterly principalpayments of $913 on the term loan, as well as prepayments from all “netproceeds” received and “excess cash flow,” if applicable. In accordance withthe Senior Credit Facility, net proceeds generally relate to proceeds receivedfrom the issuance or incurrence of certain indebtedness or proceeds received onthe disposition of assets, adjusted for certain costs and expenses, and arepayable promptly upon receipt subject, in the case of net proceeds from assetdispositions, to meeting the thresholds described below. Net proceedsprepayments in respect of asset dispositions are not payable unless they are inexcess of certain minimum amounts, both on an individual basis for any givendisposition and in the aggregate for dispositions that, individually, would notmeet the threshold. Excess cash flow is to be calculated annually and isdefined as earnings before interest, taxes, depreciation and amortization (“EBITDA”)adjusted for various expenditures and/or proceeds commencing with the 2005fiscal year. Prepayments with respect to excess cash flow, if any, are to bemade on an annual basis, with the first payment due March 31, 2006. Thedetailed calculations supporting those two prepayments are defined in thecredit agreement. The Company has performed the calculation for fiscal years2006 and 2005 and determined that no excess payment is required. The remainingprincipal balance of the term loan is due upon maturity.

The Senior Credit Facility also provides for up to$100,000 in revolving credit borrowings. Borrowings under the revolvingfacility bear interest at a rate equal to the base or LIBOR rate elected by theCompany at the time of borrowing plus a margin which can range from 0.75% to2.25%, based on the rate elected and the consolidated leverage ratio of theCompany. In addition, there is an annual commitment fee equal to 0.5% of theunused revolving credit borrowings available under the Senior Credit Facility.Revolving credit borrowings are payable at the option of the Company throughoutthe term of the Senior Credit 

69

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Facility with the balancedue February 11, 2011. As of December 31, 2006, there were nooutstanding revolving credit borrowings under the Senior Credit Facility. Therewere outstanding revolving credit borrowings under the Senior Credit Facilityof $20,000 with an effective interest rate of 6.63% as of December 31,2005.

The senior secured credit facility contains variousrestrictive covenants. It prohibits the Company from prepaying otherindebtedness, including the notes, and requires the Company to maintain aspecified minimum interest coverage ratio, currently 2.00, and a maximum totalleverage ratio, currently 6.50. In addition, the senior secured credit facilityrestricts the ability to incur indebtedness or liens, make investments ordeclare or pay dividends and limits annual capital spending. The indenturegoverning the subordinated notes among other things: (i) limits theability and the ability of the Company’s subsidiaries to incur additionalindebtedness, incur liens, pay dividends or make certain other restrictedpayments and enter into certain transactions with affiliates; (ii) placesrestrictions on the ability of certain of the subsidiaries to pay dividends ormake certain payments to the Company; and (iii) places restrictions on theCompany’s ability and the ability of its subsidiaries to merge or consolidatewith any other person or sell, assign, transfer, convey or otherwise dispose ofall or substantially all of its assets. At December 31, 2006 and 2005, theCompany was in compliance with the loan covenants.

In October 2005, the Company announced that itwas seeking an amendment to its Senior Credit Facility, the primary purpose ofwhich was to permit the payment of a dividend to Holdings of $85,325. Fundingof the dividend consisted of approximately $30,325 of cash on hand, $30,000 ofadditional term loan borrowings and approximately $25,000 of revolving loanborrowings under the Senior Credit Facility. The requisite consents for theamendment were received on November 7, 2005, and the amendment expandedthe Senior Credit facility to provide for an additional $30,000 of term loanborrowings and also permits the Company to dividend up to an additional $4,000per year to Holdings, at the Company’s option, for the purpose of servicing theinterest expense on the Holdings debt instrument issued in the amount of$23,000. In addition, the amendment provides for an increase to the effectiveinterest rate on our Senior Credit Facility by 25 basis points in the event ourdebt rating is downgraded and stipulates a prepayment fee equal to 1.0% ofcertain voluntary prepayments made within one year of the effective date of theamendment with the proceeds of certain types of indebtedness and based oncertain other conditions. The amendment does not change any of the otherexisting covenants in the Senior Credit Facility. Upon receipt of the dividendfrom the Company and the funding of the new Holdings debt instrument, Holdingspaid a dividend to its stockholders in an aggregate amount of $110,000. SeeNote 23 for details regarding the notes issued by Holdings.

The Company also has two one-year note payableagreements denominated in Japanese Yen which currently enables the Company toborrow up to a total of 250,000 Japanese Yen. Borrowings bear interest at TIBORplus a margin and were 0.92% and 0.61% as of December 31, 2006 and 2005,respectively. The terms of the agreements are for one year and are renewable annuallywith the balances due April 27, 2007 and June 27, 2007, respectively.Borrowings under the agreement are payable at the option of the Companythroughout the term of the agreements. Borrowings outstanding under theseagreements were $2,101 and $2,120 as of December 31, 2006 and 2005,respectively.

The Company has letters of credit outstanding of $5,940and  $1,475 as of December 31, 2006and 2005, respectively, which reduce available borrowings under the revolvingcredit facility by such amounts.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

The fair value of afinancial instrument is the amount at which the instrument could be exchangedin a current transaction. The carrying amounts of the Company’s current bankterm loans and the lines of credit approximate fair value because they havevariable interest rates based on either the prime rate or the interbankoffering rate of the currency in which the Company borrows. The book value ofthe senior notes at December 31, 2006 and 2005 exceeded fair value by$4,125 and $17,875, respectively. The fair value of the senior notes wasderived from trading prices at December 31, 2006 and 2005.

Theaggregate long-term debt maturities are:

| **Year**   | ** ** | ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|------------|------------|
| 2007       |       | $          | 5,782      |       |
| 2008       |       | 3,652      |       |
| 2009       |       | 3,652      |       |
| 2010       |       | 3,652      |       |
| 2011       |       | 3,652      |       |
| Thereafter |       | 615,501    |       |
|       |       | $          | 635,891    |       |

 

Cashpayments for interest were $50,133 for the year ended December 31, 2006,$30,429 for the forty-six weeks ended December 31, 2005, $183 for the sixweeks ended February 11, 2005, and $7,304 for the year ended December 31,2004.

**15.   Other Long-term Liabilities:**

Otherlong-term liabilities consist of the following:
|                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Pension benefits                  |       |                  | $          | 35,084                |       |   |   | $ | 41,594 |   |   |
| Post retirement  medical benefits |       |                  | 11,587     |                  |       |   | 18,235 |   |   |
| Office lease liability            |       |                  | 4,344      |                  |       |   | 5,166 |   |   |
| Currency swaps                    |       |                  | 16,687     |                  |       |   | 6,753 |   |   |
| Other                             |       |                  | 2,271      |                  |       |   | 2,966 |   |   |
| Total                             |       |                  | $          | 69,973                |       |   |   | $ | 74,714 |   |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

**16.   FinancialInstruments:**

*Useof Derivative Financial Instruments to Manage Currency Risk.**  *We have significant operations incountries outside the United States where the local currency is considered tobe the functional currency. We hedge our significant net investmentsdenominated in foreign currencies through cross-country interest rateswap agreements. We record these agreements at fair value as assets orliabilities and the related gains or losses are deferred in stockholders’equity as a component of foreign currency translation adjustments, net of tax.Fair value is determined based on estimated amounts that would be received orpaid to terminate the contracts at the reporting date based on quoted marketprices. There was no hedge ineffectiveness related to our currency swapagreements in 2006 or 2005.

We have cross-currency interest rate swapagreements denominated in euros that mature in 2009 and in Canadian dollarsthat mature in 2010. These swap agreements are designated as a hedge of the netinvestment in our European and Canadian operations. The fair value of the netliability was recorded in other long-term liabilities of $16,687 and $6,753 asof December 31, 2006 and 2005, respectively, with a corresponding amount,net of tax, recorded to foreign currency translation adjustments of $10,304 and$4,170 at December 31, 2006 and 2005, respectively. In the event the euroor Canadian dollar strengthens against the U.S. dollar the fair value of theliability will increase.

*Commodity Price Risk.**  *We are exposed to risks in energycosts due to fluctuations in energy prices, particularly natural gas. We have ahedging program in the United States which allows us to mitigate exposure tonatural gas volatility with futures contracts. The futures contracts had a fairvalue asset of $2,152 and $30,950 at December 31, 2006 and 2005,respectively. Fair value is determined based on estimated amounts that would bereceived or paid to terminate the contracts at the reporting date based onquoted market prices of comparable contracts. The respective current andnon-current balances are recorded in prepaid and other current assets and otherlong-term assets. The related gains or losses are recorded in stockholders’equity as a component of other comprehensive income (loss), net of tax.Realized gains and losses on natural gas hedges are included in production costand subsequently charged to cost of goods sold in the consolidated statementsof income in the period in which inventory is sold.

**17.   IncomeTaxes:**

Earningsfrom continuing operations before income taxes and minority interest within oroutside the United States are shown below:
|            | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|------------|------------|-----------------------|------------|-----------------------|------------|
| ** ** | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** ** | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** ** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** ** | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Domestic   |       |                  | $          | 1,965                 |       |   |   | $ | (45,651 | ) |   |   | $ | (12,888 | ) |   |   | $ | 13,018 |   |   |
| Foreign    |       |                  | 26,896     |                  |       |   | 11,173 |   |   |   | 3,627 |   |   |   | 38,627 |   |   |
| Total      |       |                  | $          | 28,861                |       |   |   | $ | (34,478 | ) |   |   | $ | (9,261 | ) |   |   | $ | 51,645 |   |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

The provision (benefit)for income taxes as shown in the accompanying Consolidated Statements ofOperations consisted of the following:

| ** **                            | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                            | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                            | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current:                              |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                               |       |                  | $          | 1,666                 |       |   |   | $ | 1,892 |   |   |   | $ | — |   |   |   | $ | 8,775 |   |   |
| Foreign                               |       |                  | 11,978     |                  |       |   | 11,200 |   |   |   | 763 |   |   |   | 8,616 |   |   |
| State                                 |       |                  | 1,732      |                  |       |   | 555 |   |   |   | (430 | ) |   |   | 1,453 |   |   |
|                                  |       |                  | 15,376     |                  |       |   | 13,647 |   |   |   | 333 |   |   |   | 18,844 |   |   |
| Deferred:                             |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                               |       |                  | 1,147      |                  |       |   | (4,262 | ) |   |   | (3,111 | ) |   |   | (3,221 | ) |   |
| Foreign                               |       |                  | (700       | )                     |       |   | (6,378 | ) |   |   | 244 |   |   |   | (2,217 | ) |   |
| State                                 |       |                  | (1,826     | )                     |       |   | (2,646 | ) |   |   | 12 |   |   |   | (480 | ) |   |
|                                  |       |                  | (1,379     | )                     |       |   | (13,286 | ) |   |   | (2,855 | ) |   |   | (5,918 | ) |   |
| Provision (benefit) for  income taxes |       |                  | $          | 13,997                |       |   |   | $ | 361 |   |   |   | $ | (2,522 | ) |   |   | $ | 12,926 |   |   |

 

Deferredtax assets (liabilities) are comprised of the following:

| ** **                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Net deferred tax assets:                          |       |                  |       |                  |       |   |   |   |   |
| Net operating loss carryforwards                  |       |                  | $          | 16,655                |       |   |   | $ | 22,878 |   |   |
| Foreign tax credit carryforwards                  |       |                  | 3,319      |                  |       |   | 3,319 |   |   |
| Pension                                           |       |                  | 9,728      |                  |       |   | 13,392 |   |   |
| Postretirement health                             |       |                  | 5,205      |                  |       |   | 7,400 |   |   |
| Transaction costs                                 |       |                  | 4,915      |                  |       |   | 5,042 |   |   |
| Other accruals                                    |       |                  | 8,288      |                  |       |   | 1,743 |   |   |
| Valuation allowance                               |       |                  | (6,550     | )                     |       |   | (6,314 | ) |   |
|                                              |       |                  | $          | 41,560                |       |   |   | $ | 47,460 |   |   |
| Net deferred tax  liabilities:                    |       |                  |       |                  |       |   |   |   |   |
| Depreciation                                      |       |                  | $          | (47,920               | )          |   |   | $ | (43,338 | ) |   |
| Undistributed earnings of non-US subsidiaries     |       |                  | (26,202    | )                     |       |   | (32,454 | ) |   |
| LIFO reserve - purchase accounting                |       |                  | (1,940     | )                     |       |   | (4,069 | ) |   |
| Natural gas contracts                             |       |                  | (838       | )                     |       |   | (11,837 | ) |   |
| Other accruals                                    |       |                  | (10,902    | )                     |       |   | (12,060 | ) |   |
| Intangible assets recorded in purchase accounting |       |                  | (55,194    | )                     |       |   | (60,238 | ) |   |
|                                              |       |                  | $          | (142,996              | )          |   |   | $ | (163,996 | ) |   |
| Net deferred tax  liabilities                     |       |                  | $          | (101,436              | )          |   |   | $ | (116,536 | ) |   |

 

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Of the $41,560 and $47,460 in deferred tax assets at December 31,2006 and 2005, $1,700 and $11,270, respectively, are current deferred taxes.There are no current deferred tax liabilities at December 31, 2006 or2005.

The change in net deferred tax assets (liabilities)for the year ended December 31, 2006 was primarily related to thereduction of  deferred tax liabilities onundistributed earnings of non-US subsidiaries and natural gas contracts.  The change in net deferred tax assets(liabilities) for the year ended December 31, 2005 was primarily relatedto the addition of net deferred tax liabilities on intangible assets and fairvalue adjustments to assets and liabilities in purchase accounting. SeeNote 4 to these financial statements for an analysis of the fair value ofassets acquired and liabilities assumed on February 11, 2005.

Areconciliation of income tax expense at the U.S. federal statutory income taxrate of 35% to actual income tax expense is as follows:

| ** **                                                               | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                                                               | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                                                               | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| U.S. statutory  income tax rate                                          |       |                  | 35.0       | %                     |       |   | 35.0 | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income  taxes, net of federal income tax benefit                   |       |                  | -0.2       | %                     |       |   | 3.5 | % |   |   | 4.5 | % |   |   | 1.3 | % |   |
| Non-deductible  transaction costs                                        |       |                  | —     |                  |       |   | -6.3 | % |   |   | -15.1 | % |   |   | — |   |   |
| Repatriation of  non-US earnings                                         |       |                  | 28.8       | %                     |       |   | -25.8 | % |   |   | — |   |   |   | — |   |   |
| U.S. benefit on  Canadian intercompany debt                              |       |                  | -9.4       | %                     |       |   | 3.4 | % |   |   | 1.6 | % |   |   | -3.1 | % |   |
| Reversal of  valuation allowance on German tax loss carryforwards        |       |                  | —     |                  |       |   | — |   |   |   | — |   |   |   | -7.9 | % |   |
| Export sales  resulting in an increase in foreign tax credit utilization |       |                  | —     |                  |       |   | — |   |   |   | — |   |   |   | -1.5 | % |   |
| Other foreign  income taxes at different rates                           |       |                  | -6.0       | %                     |       |   | 3.3 | % |   |   | 1.6 | % |   |   | -3.3 | % |   |
| Non-deductible  accretion of shares subject tomandatory redemption       |       |                  | —     |                  |       |   | — |   |   |   | — |   |   |   | 2.8 | % |   |
| Other, net                                                               |       |                  | 0.3        | %                     |       |   | -14.1 | % |   |   | -0.4 | % |   |   | 1.7 | % |   |
| Effective income tax  rate                                               |       |                  | 48.5       | %                     |       |   | -1.0 | % |   |   | 27.2 | % |   |   | 25.0 | % |   |

 

The effective tax rate of 48.5% for the year ended December 31,2006 on the Company’s consolidated pre-tax income for the period differs fromthe U.S. statutory tax rate of 35% principally due to the U.S tax effects ofthe Company’s receipt of dividends and earnings from non-U.S. subsidiariespartially offset by non-taxable interest income from disregarded foreign subsidiaries.

The effective tax rate of (1%) for the forty-six weeksended December 31, 2005 on the Company’s consolidated pre-tax loss for theperiod differed from the U.S. statutory tax rate of 35% principally due tonon-deductible and partially deductible costs of the Transactions and the U.S.tax effects of the Company’s receipt of dividends and earnings from non-U.S.subsidiaries.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Included in Other, net in the reconciliation above forthe forty-six weeks ended December 31, 2005, is $4,586 related toincreases in tax reserves for contingencies related to the deductibility ofcosts of the Transactions and for tax contingencies of its foreignsubsidiaries. The majority of this increase in tax reserves related to costsincurred in connection with the Transactions. Tax reserves for transactioncosts were recognized as a result of uncertainties concerning the U.S. federalincome tax characterization of certain costs for professional and consultingservices in connection with the Transactions, namely, whether such costs aredeductible costs or are costs that generate non-deductible intangiblesfor tax purposes. Increases in tax contingencies of the Company’s foreignsubsidiaries relate to uncertain tax positions on intercompany transfer pricingdecisions for routine transactions made during the Successor forty-sixweeks ended December 31, 2005. Foreign subsidiaries subject to reservesfor tax contingencies have open tax years beginning with the year endedDecember 31, 2000. A portion of these transfer pricing reserves relate tosubsidiaries currently under audit by the respective tax authorities. TheCompany estimates that the underlying tax exposures for which its accrued taxreserves relate are reasonably expected to be incurred based upon availableinformation. See Note 2 to these financial statements for the Company’saccounting policy on income taxes including tax contingencies and uncertain taxpositions.

The effective tax rate of 27% for the six weeks endedFebruary 11, 2005 on the Company’s consolidated pre-tax loss for theperiod differed from the U.S. statutory rate of 35% principally due tonon-deductible and partially deductible costs of the Transactions. ThePredecessor did not provide deferred tax on undistributed earnings of non-U.S.subsidiaries as such earnings were permanently reinvested and, in addition, didnot receive any dividends from its non-U.S. subsidiaries in the Predecessorperiod.

Followingare changes in the deferred tax valuation allowance during the year ended December 31,2006, 2005, and 2004:

| ** **                         | ** ** | **Beginning  Balance** | ** ** | **Additions** | ** ** | **Reductions** | ** ** | **Ending  Balance** | ** ** |
|------------------------------------|------------|------------------------|------------|---------------|------------|----------------|------------|---------------------|------------|
| Year ended  December 31, 2006 |       |                   | 6,314      |          |       |           | 455        |                |       |   | (219 | ) |   |   | 6,550 |   |   |
| Year ended  December 31, 2005 |       |                   | 8,272      |          |       |           | 408        |                |       |   | (2,366 | ) |   |   | 6,314 |   |   |
| Year ended  December 31, 2004 |       |                   | 11,614     |          |       |           | 807        |                |       |   | (4,149 | ) |   |   | 8,272 |   |   |

 

The American Jobs Creation Act of 2004 (the “Act”) wassigned into law in October 2004. A provision of the Act allows U.S.companies to repatriate earnings of non-U.S. subsidiaries at a substantiallyreduced tax rate in 2005 under what is termed the Homeland Investment Act (“HIA”).The Company anticipated electing HIA for $27,654 of dividends from non-U.S.subsidiaries in 2005. The U.S. tax benefit of electing HIA with respect todividends received in the Successor period was $8,227. Of this amount $6,564was recognized in the opening balance sheet in purchase accounting and $1,663was recognized in the Successor period. The filing of the 2005 tax return in2006 included $34,349 of dividends qualifying for the HIA election, resultingin an additional $1,550 tax benefit recorded in 2006. These amounts have beenrecognized in the repatriation of non-US earnings line item in the ratereconciliation above.

Management of the Successor considers earnings innon-U.S. subsidiaries to be available for repatriation in the future. Theresulting taxes associated with repatriation of all non-U.S. subsidiaryearnings at the opening balance sheet date have been accounted for as deferredtax liabilities in purchase accounting. The tax cost associated with non-U.S.subsidiary earnings and distributions of the Successor for the year ended December 31,2006 and the forty-six weeks ended December 31, 2005 have been recorded 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

as tax expense for theperiod. In this regard the Company expects to deduct, rather than credit,foreign tax expense in computing the U.S. tax effects of repatriation fromnon-U.S. subsidiaries in 2006 and 2005 due to the limits on the availability ofcrediting foreign taxes arising from its domestic tax loss for the year.

In the year ended December 31, 2006, theforty-six weeks ended December 31, 2005, and the six weeks ended February 11,2005, the Company recorded a tax benefit of $2,719, $1,158 and $151,respectively, from interest received on intercompany debt from its Canadaholding company that owns non-U.S. subsidiaries in Europe, Latin America andthe Asia-Pacific region.

In August 2003, the Company’s German silicatescompany, which had tax loss carryforwards, was merged into its German glassbeads business. This merger allowed the loss for the silicates business tooffset the income for the glass beads business, resulting in a tax benefit of$1,585. The Company also reduced the valuation allowance on the German tax losscarryforwards, recognizing a deferred tax asset of $2,926 with respect to suchlosses. The deferred tax asset relating to the German net operating losses wasrecognized due to the projected utilization of the losses against the Company’sprojected taxable income in Germany in future years. The Company’s projectionof future taxable income in Germany is based on various assumptions andestimates. These assumptions will be reviewed annually and adjustments to thevaluation allowance will be made accordingly. In August 2004, the Companyreversed the remaining valuation allowance on German tax loss carryforwards inthe amount of $4,063 due to higher expectations of future profitability. In2006, the German entity continued to generate taxable income and utilized itsnet operating loss carryforwards.

For federal income tax purposes the Predecessorincurred a net operating loss of $27,845 for 2005 that it had elected to carryforward to reduce future federal taxes payable. The federal carry forwardperiod is 20 years. The Transactions fell within change in controllimitations on the amount of net operating loss that can be used in a futureyear. These limitations did not affect the future use of the federal netoperating loss. The provisions of the alternative minimum tax (“AMT”) limitedthe amount of taxable income that may be offset with net operating losscarryforwards. The AMT had a minor effect on the use of the net operating lossin the future. The Successor had a current federal income tax liability in 2005notwithstanding the net operating loss carried from the Predecessor. Thecurrent liability related to dividends subject to the HIA provisions and AMT.The HIA dividends were subject to a reduced rate of tax; however, the lower taxliability was not offset with tax loss carryforwards. The Successor alsoincurred a minor AMT tax liability.

For state income tax purposes the Company incurred anet operating loss of $15,945 for 2006 that may be carried forward at carryforward periods ranging from seven to 20 years among the states in whichthe Company is subject to tax to reduce future state income taxes payable. Thestate net operating losses carrying forward into 2007 is $66,959. No valuationallowance has been applied for the state net operating loss since the Companyhas reversing taxable temporary differences that will offset the net operatingloss in the applicable state carry forward periods. The Company’s domesticsubsidiary, Potters Industries, Inc., files separate state income taxreturns and has taxable income for state income tax purposes that is not offsetby the Company’s state net operating loss.

Foreign net operating losses of $31,352, the majorityof which may be carried forward indefinitely, are available to reduce futureforeign taxes payable. A valuation allowance of $3,231 has been applied to$10,513 of foreign net operating loss carryforwards, leaving foreign netoperating losses of $20,839 that have been recognized for financial accountingpurposes. The Company has established a valuation 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

allowance of $3,319 forforeign tax credit carryforwards expiring during fiscal years 2006 through2015. The Transactions fall within change in control limitations on the amountof certain excess credits that can be used in a future year. These limitationsshould not affect the future use of foreign tax credits. Any reversal ofvaluation allowances for foreign net operating losses and foreign tax creditcarryforwards existing at the acquisition date would be recorded as anadjustment to goodwill.

The unremitted earnings of non-U.S. subsidiaries andaffiliates that have not been reinvested abroad indefinitely amount to $82,514at December 31, 2006. The deferred U.S. income tax liability and deferredforeign withholding tax liability on these undistributed earnings is estimatedto be $26,185.

Cashpayments for income taxes were $18,199, $2,657, and $18,688 in 2006, 2005, and2004, respectively.

**18.   Benefit Plans:**

The Company sponsors defined benefit pension planscovering substantially all employees in the U.S. and Canada and certainemployees at its subsidiaries outside of North America (“Other”). Benefits fora majority of the Plans are based on average final pay and years of service.The Company’s funding policy, consistent with statutory requirements, is basedon actuarial computations utilizing the projected unit credit method ofcalculation. The Company uses a December 31 measurement date for itsdefined benefit plans.

As a result of an amendment approved in 2004,employees hired after July 1, 2004 are not eligible to participate in theU.S. defined benefit plan but instead are enrolled into a defined contributionplan. During the quarter ended September 30, 2005, the Company’s Board ofDirectors approved amendments to the U.S. and Canadian defined benefit pensionplans. As a result, all future accruals were frozen in the U.S. and creditedservice as of December 31, 2006 were frozen in Canada, and employees underboth plans will instead receive a new discretionary Company contribution basedon a percentage of pay to a defined contribution plan. The change to the plansqualified as curtailments under SFAS No. 88 “Employers’ Accounting forSettlement and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.” Accordingly, a pretax curtailment gain of $6,253 wasrecognized in other operating expense in the Consolidated Statements ofOperations for the forty-six weeks ended December 31, 2005.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans.”  We adopted SFAS No. 158effective December 31, 2006. The impact of the adoption of SFAS No. 158has been reflected within our consolidated financial statements as of December 31,2006.

Theadoption of SFAS No. 158 resulted in an increase in stockholder’s equityof $9,126 at December 31, 2006. The following table indicates the adoptionimpact of SFAS No. 158 on individual balance sheet line items:

| ** **                                         | ** ** | **Asset (liability)**       | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **Prior to  SFAS 158** | ** ** | **Adjustments** | ** ** | **After adoption  of SFAS 158** | ** ** |
| Deferred income taxes                              |       |                             | (94,479    | ) |   |   | (5,536 | ) |   |   | (100,015 | ) |   |
| Liability for benefit  plans—current          |       |                             | (1,994     | ) |   |   | (1,296 | ) |   |   | (3,290 | ) |   |
| Liability for benefit  plans—noncurrent       |       |                             | (61,628    | ) |   |   | 15,958 |   |   |   | (45,670 | ) |   |
| Accumulated other comprehensive income, net of tax |       |                             | 6,181      |   |   |   | (9,126 | ) |   |   | (2,945 | ) |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Thefollowing tables summarize changes in the benefit obligation, the plan assetsand the funded status of our pension plans as well as the components of netperiodic benefit costs, including key assumptions.

| ** **                                           | ** ** | **U.S. and Canada** | ** ** | **Other**             | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **Successor**                 | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                           | ** ** | ** **                    | ** ** | **Forty-six**         | ** ** | ** ** | ** ** | ** ** | ** ** | **Forty-six** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Year**                      | ** ** | **weeks**             | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                           | ** ** | **ended**                     | ** ** | **ended**             | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                                           | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                                           | ** ** | **2006**                      | ** ** | **2005**              | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
| **Change  in benefit obligation:**                   |       |                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Benefit obligation at beginning of the period        |       |                          | $          | 132,444               |       |   |   | $ | 132,439 |   |   |   | $ | 128,032 |   |   |   | $ | 36,706 |   |   |   | $ | 32,113 |   |   |   | $ | 31,107 |   |   |
| Service cost                                         |       |                          | 3,191      |                  |       |   | 3,288 |   |   |   | 385 |   |   |   | 2,584 |   |   |   | 2,966 |   |   |   | 377 |   |   |
| Interest cost                                        |       |                          | 7,389      |                  |       |   | 6,343 |   |   |   | 830 |   |   |   | 1,594 |   |   |   | 1,361 |   |   |   | 167 |   |   |
| Participant contributions                            |       |                          | —     |                  |       |   | — |   |   |   | — |   |   |   | 266 |   |   |   | 324 |   |   |   | 35 |   |   |
| Actuarial (gain)/losses                              |       |                          | (2,569     | )                     |       |   | 581 |   |   |   | 4,135 |   |   |   | (1,645 | ) |   |   | 4,421 |   |   |   | 1,864 |   |   |
| Benefits paid                                        |       |                          | (6,865     | )                     |       |   | (4,578 | ) |   |   | (661 | ) |   |   | (1,726 | ) |   |   | (1,592 | ) |   |   | (76 | ) |   |
| Plan amendment                                       |       |                          | —     |                  |       |   | (6,279 | ) |   |   | — |   |   |   | (697 | ) |   |   | — |   |   |   | — |   |   |
| Translation adjustment                               |       |                          | (54        | )                     |       |   | 650 |   |   |   | (282 | ) |   |   | 4,132 |   |   |   | (2,887 | ) |   |   | (1,361 | ) |   |
| Benefit obligation at end of the period              |       |                          | $          | 133,536               |       |   |   | $ | 132,444 |   |   |   | $ | 132,439 |   |   |   | $ | 41,214 |   |   |   | $ | 36,706 |   |   |   | $ | 32,113 |   |   |
| **Change in plan assets:**                           |       |                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of plan assets at beginning of the period |       |                          | $          | 120,520               |       |   |   | $ | 115,173 |   |   |   | $ | 116,067 |   |   |   | $ | 17,150 |   |   |   | $ | 15,409 |   |   |   | $ | 12,190 |   |   |
| Actual return on plan assets                         |       |                          | 15,912     |                  |       |   | 9,627 |   |   |   | 64 |   |   |   | 749 |   |   |   | 1,112 |   |   |   | 370 |   |   |
| Employers contributions                              |       |                          | 529        |                  |       |   | 454 |   |   |   | 41 |   |   |   | 4,793 |   |   |   | 3,463 |   |   |   | 154 |   |   |
| Employee contributions                               |       |                          | —     |                  |       |   | — |   |   |   | — |   |   |   | 266 |   |   |   | 324 |   |   |   | 35 |   |   |
| Actuarial (loss) gain                                |       |                          | —     |                  |       |   | — |   |   |   | — |   |   |   | (122 | ) |   |   | — |   |   |   | — |   |   |
| Benefits paid                                        |       |                          | (6,865     | )                     |       |   | (4,578 | ) |   |   | (661 | ) |   |   | (1,726 | ) |   |   | (1,192 | ) |   |   | (100 | ) |   |
| Administrative expenses                              |       |                          | (950       | )                     |       |   | (690 | ) |   |   | (99 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Translation adjustment                               |       |                          | (62        | )                     |       |   | 534 |   |   |   | (239 | ) |   |   | 2,219 |   |   |   | (1,966 | ) |   |   | (536 | ) |   |
| Fair value of plan assets at end of the period       |       |                          | $          | 129,084               |       |   |   | $ | 120,520 |   |   |   | $ | 115,173 |   |   |   | $ | 23,329 |   |   |   | $ | 17,150 |   |   |   | $ | 12,113 |   |   |
| **Funded status of the plans (underfunded)**         |       |                          | $          | (4,452                | )          |   |   | $ | (11,924 | ) |   |   | $ | (17,266 | ) |   |   | $ | (17,885 | ) |   |   | $ | (19,556 | ) |   |   | $ | (20,000 | ) |   |
| Unrecognized items  in funded status:                |       |                          |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Actuarial losses                                     |       |                          |       |                  |       |   | (324 | ) |   |   | — |   |   |   |   |   |   |   | 1,488 |   |   |   | 2,522 |   |   |
| Prior service costs                                  |       |                          |       |                  |       |   | — |   |   |   | — |   |   |   |   |   |   |   | — |   |   |   | 1,742 |   |   |
| **Net  amount recognized**                           |       |                          |       |                  |       |   | $ | (12,248 | ) |   |   | $ | (17,266 | ) |   |   |   |   |   |   | $ | (18,068 | ) |   |   | $ | (15,736 | ) |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Amountsrecognized in the consolidated balance sheets consists of:

| ** **                             | ** ** | **U.S. and Canada** | ** ** | **Other**             | ** ** |
|----------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **Successor**                 | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                             | ** ** | **Year**                      | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **Forty-six** | ** ** | **Six weeks** | ** ** |
| ** **                             | ** ** | **ended**                     | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** | **weeks ended** | ** ** | **ended** | ** ** |
| ** **                             | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                             | ** ** | **2006**                      | ** ** | **2005**              | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
| Current liability                      |       |                          | $          | —                |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (248 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Noncurrent liability                   |       |                          | (4,452     | )                     |       |   | (12,248 | ) |   |   | (17,266 | ) |   |   | (17,637 | ) |   |   | (18,133 | ) |   |   | (15,736 | ) |   |
| Accumulated other comprehensive income |       |                          | —     |                  |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 65 |   |   |   | — |   |   |
| **Net  amount recognized**             |       |                          | $          | (4,452                | )          |   |   | $ | (12,248 | ) |   |   | $ | (17,266 | ) |   |   | $ | (17,885 | ) |   |   | $ | (18,068 | ) |   |   | $ | (15,736 | ) |   |

 

Amountsrecognized in accumulated other comprehensive income consists of:

| ** **                  | ** ** | **U.S. and Canada** | ** ** | **Other**             | ** ** |
|-----------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **Successor**                 | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                  | ** ** | **Year**                      | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **Forty-six** | ** ** | **Six weeks** | ** ** |
| ** **                  | ** ** | **ended**                     | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** | **weeks ended** | ** ** | **ended** | ** ** |
| ** **                  | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                  | ** ** | **2006**                      | ** ** | **2005**              | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
| Prior service cost (credit) |       |                          | $          | —                |       |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (643 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Net loss (gain)             |       |                          | (8,449     | )                     |       |   | — |   |   |   | — |   |   |   | (62 | ) |   |   | — |   |   |   | — |   |   |
| **Gross amount recognized** |       |                          | (8,449     | )                     |       |   | — |   |   |   | — |   |   |   | (705 | ) |   |   | — |   |   |   | — |   |   |
| Deferred income taxes       |       |                          | 3,321      |                  |       |   | — |   |   |   | — |   |   |   | 102 |   |   |   | — |   |   |   | — |   |   |
| **Net  amount recognized**  |       |                          | $          | (5,128                | )          |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | (603 | ) |   |   | $ | — |   |   |   | $ | — |   |   |

 

Componentsof net periodic benefit cost consists of:

| ** **                         | ** ** | **U.S. and Canada** | ** ** | **Other**             | ** ** |
|------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **Successor**                 | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                         | ** ** | **Year**                      | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **Year** | ** ** | **Forty-six** | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                         | ** ** | **ended**                     | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** | **weeks ended** | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                         | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2006**                      | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                       |       |                          | $          | (3,191                | )          |   |   | $ | (3,288 | ) |   |   | $ | (385 | ) |   |   | $ | (2,971 | ) |   |   | $ | (2,584 | ) |   |   | $ | (2,966 | ) |   |   | $ | (377 | ) |   |   | $ | (3,082 | ) |   |
| Interest cost                      |       |                          | (7,389     | )                     |       |   | (6,343 | ) |   |   | (830 | ) |   |   | (7,025 | ) |   |   | (1,594 | ) |   |   | (1,361 | ) |   |   | (167 | ) |   |   | (1,136 | ) |   |
| Expected return on plan assets     |       |                          | 9,393      |                  |       |   | 8,013 |   |   |   | 1,016 |   |   |   | 8,722 |   |   |   | 868 |   |   |   | 687 |   |   |   | 79 |   |   |   | 471 |   |   |
| Amortization of net obligation     |       |                          | —     |                  |       |   | — |   |   |   | (5 | ) |   |   | (45 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |   | (113 | ) |   |
| Amortization of prior service cost |       |                          | —     |                  |       |   | — |   |   |   | — |   |   |   | (21 | ) |   |   | 54 |   |   |   | — |   |   |   | (29 | ) |   |   | (168 | ) |   |
| Amortization of net loss           |       |                          | —     |                  |       |   | — |   |   |   | (283 | ) |   |   | (2,633 | ) |   |   | (5 | ) |   |   | — |   |   |   | (30 | ) |   |   | (253 | ) |   |
| Curtailment (gain)/loss recognized |       |                          | —     |                  |       |   | 6,253 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Net periodic  expense              |       |                          | $          | (1,187                | )          |   |   | $ | 4,635 |   |   |   | $ | (487 | ) |   |   | $ | (3,973 | ) |   |   | $ | (3,261 | ) |   |   | $ | (3,640 | ) |   |   | $ | (524 | ) |   |   | $ | (4,281 | ) |   |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

The estimated prior service cost and net actuarialgain for the pension plans that will be amortized from accumulated othercomprehensive income into benefits cost in 2007 are zero in our U.S. and Canadapension plans and  $57 and $32,respectively for our Other pension plans.

The changes recognized in accumulated othercomprehensive income relates to the effect of adoption of SFAS No. 158 andwere $5,128 for our U.S. and Canada pension plans and $603 for our Otherpension plans.

The following tablepresents selected information about our pension plans with accumulated benefit obligationsin excess of plan assets:

| ** **                      | ** ** | **U.S. and Canada**          | ** ** | **Other**                              | ** ** |
|---------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Year ended  December 31,** | ** ** | **Year ended  December 31,** | ** ** |
| ** **                      | ** ** | **2006**                               | ** ** | **2005**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Projected benefit  obligation   |       | $                                      | 133,536    |                                   | $          | 132,444 |   | $ | 41,214 |   | $ | 36,706 |   |
| Accumulated  benefit obligation |       | 131,573                                |       | 128,843                                |       | 38,770 |   | 34,398 |   |
| Fair value of plan  assets      |       | 129,084                                |       | 120,520                                |       | 23,329 |   | 17,150 |   |
|                                 |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |

 

Significantassumptions used in determining the pension obligations include the following:

| ** **                     | ** ** | **U.S. and Canada** | ** ** | **Other**             | ** ** |
|--------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **Successor**                 | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                     | ** ** | **Year**                      | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **Forty-six** | ** ** | **Six weeks** | ** ** |
| ** **                     | ** ** | **ended**                     | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** | **weeks ended** | ** ** | **ended** | ** ** |
| ** **                     | ** ** | **December 31,**         | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                     | ** ** | **2006**                      | ** ** | **2005**              | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** |
| Discount rate                  |       |                          | 5.84       | %                     |       |   | 5.57 | % |   |   | 5.75 | % |   |   | 4.44 | % |   |   | 4.19 | % |   |   | 4.58 | % |   |
| Rate of  compensation increase |       |                          | 0.37       | %                     |       |   | 4.36 | % |   |   | 4.36 | % |   |   | 2.66 | % |   |   | 2.64 | % |   |   | 2.68 | % |   |

 

Significantassumptions used in determining net periodic benefit cost include thefollowing:

| ** **                    | ** ** | **U.S. and Canada**   | ** ** | **Other**             | ** ** |
|-------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                    | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** | **Year** | ** ** | **Forty-six** | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                    | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** | **weeks ended** | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                    | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                 |       |                  | 5.57       | %                     |       |   | 5.48 | % |   |   | 6.21 | % |   |   | 6.25 | % |   |   | 4.44 | % |   |   | 4.19 | % |   |   | 4.58 | % |   |   | 4.75 | % |   |
| Rate of compensation increase |       |                  | 0.37       | %                     |       |   | 4.36 | % |   |   | 4.36 | % |   |   | 4.36 | % |   |   | 2.66 | % |   |   | 2.64 | % |   |   | 2.68 | % |   |   | 2.83 | % |   |
| Long-term rate of  return     |       |                  | 7.95       | %                     |       |   | 7.96 | % |   |   | 8.41 | % |   |   | 8.43 | % |   |   | 3.53 | % |   |   | 3.43 | % |   |   | 3.72 | % |   |   | 3.73 | % |   |

 

In determining the expected return on plan assets, weconsider the relative weighting of plan assets, the historical performance oftotal plan assets and individual asset classes, and economic and otherindicators of future performance. In addition, we may consult with and considerthe opinions of our external advisors in developing appropriate returnbenchmarks. The weighted average rate of compensation increase for the fiscalyear ended December 31, 2006 decreased to 0.37% as all future accrualswere frozen in the U.S. as of December 31, 2006 in accordance with theplan amendment 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

approved in 2005. The rateof compensation increase on the Canadian plan was 4.00% for the year ended December 31,2006.

The investment objective for the U.S. and Canadianplans is to generate returns sufficient to meet future obligations. Thestrategy to meet the objective includes generating attractive returns usinghigher returning assets such as equity securities and balancing risk using lessvolatile assets such as fixed income securities. Of the remaining plans, someare unfunded and those that are funded have varying investment strategies. Thetarget and investment allocations for the other plans are not included becausethe varying investment strategies and mix of funded and unfunded plans make theinformation not useful.

TheU.S. and Canadian pension plans’ target allocation for 2007 and weightedaverage asset allocations for all plans at each year end, by asset category,are as follows:

| ** **        | ** ** | **U.S. and Canada** | ** ** |
|-------------------|------------|-------------------------------|------------|
| ** **        | ** ** | **Target**                    | ** ** | **2006** | ** ** | **2005** | ** ** |
| Equity securities |       |                          | 60         | % |   |   | 60 | % |   |   | 67 | % |   |
| Debt securities   |       |                          | 40         | % |   |   | 35 | % |   |   | 32 | % |   |
| Cash equivalents  |       |                          | 0          | % |   |   | 5 | % |   |   | 1 | % |   |
| Other             |       |                          | 0          | % |   |   | 0 | % |   |   | 0 | % |   |
| Total             |       |                          | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

The Company does not expect to contribute to the U.S.and Canada pension plans in 2007 and expects to contribute $3,180 to the Otherpension plans in 2007.

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid:

| **Year**             | ** ** | ** ** | ** ** | **U.S. and Canada** | ** ** | **Other** | ** ** |
|----------------------|------------|------------|------------|-------------------------------|------------|-----------|------------|
| 2007                 |       |       | $          | 6,166                         |       |      | $          | 1,219 |   |
| 2008                 |       |       | 6,424      |                          |       | 1,154     |       |
| 2009                 |       |       | 6,752      |                          |       | 2,801     |       |
| 2010                 |       |       | 7,078      |                          |       | 1,740     |       |
| 2011                 |       |       | 7,480      |                          |       | 3,610     |       |
| Years 2012–2016 |       |       | 43,086     |                          |       | 9,080     |       |
|                      |            |            |            |                               |            |           |            |  |  |  |  |

 

Certain of the Company’sforeign subsidiaries maintain other defined benefit plans that are consistentwith statutory practices and are not significant to the consolidated financialstatements.

*SupplementalRetirement Plans*

In addition, the Company has defined benefitsupplementary retirement plans which includes benefits, for certain U.S.employees, in excess of qualified plan limitations. The plans are unfunded andobligations are paid out of the Company’s general assets, including assets heldin a trust.

81

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Thefollowing tables summarize changes in the benefit obligation, the plan assetsand the funded status of our defined benefit supplementary retirement plans aswell as the components of net periodic benefit costs, including keyassumptions.
|                                                | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| **Change in benefit obligation:**              |       |                                       |       |   |   |
| Benefit obligation at  January 1          |       | $                                          | 12,330     |   | $ | 12,165 |   |
| Service cost                                   |       | 111                                        |       | 90 |   |
| Interest cost                                  |       | 718                                        |       | 588 |   |
| Actuarial (gain)/losses                        |       | 888                                        |       | 466 |   |
| Benefits paid                                  |       | (1,004                                     | )          | (979 | ) |
| Benefit obligation at  December 31        |       | $                                          | 13,043     |   | $ | 12,330 |   |
| **Change in plan assets:**                     |       |                                       |       |   |   |
| Fair value of plan assets at  January 1   |       | $                                          | —     |   | $ | — |   |
| Employers contributions                        |       | 1,004                                      |       | 978 |   |
| Benefits paid                                  |       | (1,004                                     | )          | (978 | ) |
| Fair value of plan assets at  December 31 |       | $                                          | —     |   | $ | — |   |
| **Funded status of the plans  (underfunded)**  |       | $                                          | (13,043    | ) | $ | (12,330 | ) |
| Unrecognized items in funded status:           |       |                                       |       |   |   |
| Actuarial losses                               |       |                                       |       | (810 | ) |
| Prior service costs                            |       |                                       |       | — |   |
| **Net amount recognized**                      |       |                                       |       | $ | (13,140 | ) |

 

Amountsrecognized in the consolidated balance sheets consists of:

| ** **                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------|------------|--------------------------------------------|------------|
| ** **                | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Current liability         |       | $                                          | (1,049     | ) | $ | — |   |
| Noncurrent liability      |       | (11,994                                    | )          | (13,714 | ) |
| **Net amount recognized** |       | $                                          | (13,043    | ) | $ | (13,714 | ) |

 

Amountsrecognized in accumulated other comprehensive income consists of:

| ** **                                                | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| Additonal minimum liability (before  adoption of FAS 158) |       | $                                          | 1,334      |   | $ | 480 |   |
| Net loss (gain)                                           |       | (42                                        | )          | — |   |
| **Gross amount recognized**                               |       | 1,292                                      |       | 480 |   |
| Deferred income taxes                                     |       | (508                                       | )          | (184 | ) |
| **Net amount recognized**                                 |       | $                                          | 784        |   | $ | 296 |   |

 

82

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Componentsof net periodic benefit cost consists of:

| ** **                      | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                      | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                    |       |                  | $          | (111                  | )          |   |   | $ | (90 | ) |   |   | $ | (35 | ) |   |   | $ | (161 | ) |   |
| Interest cost                   |       |                  | (718       | )                     |       |   | (588 | ) |   |   | (67 | ) |   |   | (534 | ) |   |
| Amortization of net loss (gain) |       |                  | (63        | )                     |       |   | — |   |   |   | (45 | ) |   |   | (352 | ) |   |
| **Net periodic expense**        |       |                  | $          | (892                  | )          |   |   | $ | (678 | ) |   |   | $ | (147 | ) |   |   | $ | (1,047 | ) |   |

 

The estimated netactuarial gain for the pension plans that will be amortized from accumulatedother comprehensive income into benefits cost in 2007 is $43 for our definedbenefit supplementary retirement plans.

A change of $25 wasrecognized in accumulated other comprehensive income related to the effect ofadoption of SFAS No. 158 for our defined benefit supplementary retirementplans.

The accumulated benefit obligation of our definedbenefit supplemental retirement plans for the years ended December 31,2006 and 2005 was $10,684 and $9,762, respectively.

Significantassumptions used in determining the pension obligations include the following:

| ** **                     | ** ** | **Year ended  December 31,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Discount rate                  |       | 5.90                                   | %          | 5.60 | % |
| Rate  of compensation increase |       | 0.00                                   | %          | 4.39 | % |

 

Significantassumptions used in determining net periodic benefit cost include thefollowing:

| ** **                     | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|--------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                     | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                     | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Discount rate                  |       |                  | 5.60       | %                     |       |   | 5.50 | % |   |   | 6.25 | % |   |   | 6.25 | % |   |
| Rate  of compensation increase |       |                  | 0.00       | %                     |       |   | 4.39 | % |   |   | 4.39 | % |   |   | 4.39 | % |   |

 

Therate of compensation increase for the fiscal year ended December 31, 2006decreased to 0.00% as all future accruals were frozen for the definedsupplemental retirement plans as of December 31, 2006 in accordance withthe plan amendment approved in 2005.

The Company expects to contribute $1,049 to thedefined benefit supplementary retirement plans in 2007.

83

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid:

| **Year**              | ** ** | ** ** | ** ** | **Amount** | ** ** |
|-----------------------|------------|------------|------------|------------|------------|
| 2007                  |       |       | $          | 1,049      |       |   |
| 2008                  |       |       | 1,066      |       |       |
| 2009                  |       |       | 1,117      |       |       |
| 2010                  |       |       | 1,139      |       |       |
| 2011                  |       |       | 1,148      |       |       |
| Years  2012–2016 |       |       | 5,821      |       |       |

 

*Other Postretirement Benefit Plans*

The Company sponsors unfunded plans to provide certainhealth care benefits to retired employees. These plans cover substantially allemployees in the U.S. and Canada. Generally, the plans pay a stated percentageof medical expenses reduced by deductibles and other coverage. Effective January 1,2003, the Company changed its retiree medical plan in the U.S. These changeswere adopted at the beginning of 2003 and are fully reflected in the valuationfor each year presented. These changes created a new indemnity plan for allparticipants retiring after 2003 and all bonus-eligible participants retiringduring the period beginning 1995 and ending in 2003. All other retirees aregrandfathered under their current plans. In addition, all employees hired on orafter January 1, 2003 will not be eligible for medical benefits when theyretire. This plan change created a prior service credit that eliminated theunrecognized prior service cost and part of the unrecognized transitionobligation. In 2005, the Company’s Board of Directors approved an amendment tothe U.S. and Canadian retiree health plans which will eliminate postretirementbenefits for employees retiring after December 31, 2006. This amendmentwas accounted for as a curtailment and negative plan amendment which werereflected in the prior year valuation.

The following tables summarize changes in the benefitobligation, the plan assets and the funded status of our pension plans as wellas the components of net periodic benefit costs, including key assumptions.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

| ** **                                     | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** |
| ** **                                     | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** |
| ** **                                     | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                                     | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** |
| **Change in benefit obligation:**              |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Benefit  obligation at Beginning of Period     |       |                  | $          | 13,178                |       |   |   | $ | 21,229 |   |   |   | $ | 20,822 |   |   |
| Service cost                                   |       |                  | —     |                  |       |   | 300 |   |   |   | 51 |   |   |
| Interest cost                                  |       |                  | 731        |                  |       |   | 800 |   |   |   | 127 |   |   |
| Actuarial  (gain)/losses                       |       |                  | 1,355      |                  |       |   | (303 | ) |   |   | 404 |   |   |
| Employee  contributions                        |       |                  | 293        |                  |       |   | 222 |   |   |   | — |   |   |
| Benefits paid                                  |       |                  | (1,973     | )                     |       |   | (2,082 | ) |   |   | (228 | ) |   |
| Plan amendment                                 |       |                  | —     |                  |       |   | (6,957 | ) |   |   | — |   |   |
| Translation  adjustment                        |       |                  | (3         | )                     |       |   | (31 | ) |   |   | 53 |   |   |
| Benefit  obligation at end of the period       |       |                  | $          | 13,581                |       |   |   | $ | 13,178 |   |   |   | $ | 21,229 |   |   |
| **Change  in plan assets:**                    |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Fair value of  plan assets at January 1   |       |                  | $          | —                |       |   |   | $ | — |   |   |   | $ | — |   |   |
| Employers  contributions                       |       |                  | 1,680      |                  |       |   | 1,860 |   |   |   | 228 |   |   |
| Employee  contributions                        |       |                  | 293        |                  |       |   | 222 |   |   |   | — |   |   |
| Benefits paid                                  |       |                  | (1,973     | )                     |       |   | (2,082 | ) |   |   | (228 | ) |   |
| Fair value of  plan assets at December 31 |       |                  | $          | —                |       |   |   | $ | — |   |   |   | $ | — |   |   |
| **Funded  status of the plans**                |       |                  | $          | (13,581               | )          |   |   | $ | (13,178 | ) |   |   | $ | (21,229 | ) |   |
| Unrecognized items in  funded status:          |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Actuarial losses                               |       |                  |       |                  |       |   | (297 | ) |   |   |   |   |   |
| Prior service costs                            |       |                  |       |                  |       |   | (6,923 | ) |   |   |   |   |   |
| **Net amount recognized**                      |       |                  |       |                  |       |   | $ | (20,398 | ) |   |   |   |   |   |

 

Amountsrecognized in the consolidated balance sheets consists of:

| ** **                | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** |
| ** **                | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** |
| ** **                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** |
| Current liability         |       |                  | $          | (1,994                | )          |   |   | $ | (2,204 | ) |   |   | $ | (2,152 | ) |   |
| Noncurrent  liability     |       |                  | (11,587    | )                     |       |   | (18,194 | ) |   |   | (19,077 | ) |   |
| **Net amount recognized** |       |                  | $          | (13,581               | )          |   |   | $ | (20,398 | ) |   |   | $ | (21,229 | ) |   |

 

85

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Amountsrecognized in accumulated other comprehensive income consists of:

| ** **                   | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** |
| ** **                   | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** |
| ** **                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                   | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** |
| Prior service  cost (credit) |       |                  | $          | (6,482                | )          |   |   | $ | — |   |   |   | $ | — |   |   |
| Net loss (gain)              |       |                  | 1,017      |                  |       |   | — |   |   |   | — |   |   |
| **Gross  amount recognized** |       |                  | (5,465     | )                     |       |   | — |   |   |   | — |   |   |
| Deferred income  taxes       |       |                  | 2,095      |                  |       |   | — |   |   |   | — |   |   |
| **Net amount recognized**    |       |                  | $          | (3,370                | )          |   |   | $ | — |   |   |   | $ | — |   |   |

 

Componentsof net periodic benefit cost consists of:

| ** **                          | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                          | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                          | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       |                  | $          | —                |       |   |   | $ | (302 | ) |   |   | $ | (51 | ) |   |   | $ | (396 | ) |   |
| Interest cost                       |       |                  | (731       | )                     |       |   | (815 | ) |   |   | (127 | ) |   |   | (1,178 | ) |   |
| Amortization of  prior service cost |       |                  | 468        |                  |       |   | 116 |   |   |   | (28 | ) |   |   | (171 | ) |   |
| Amortization of  net loss           |       |                  | (3         | )                     |       |   | — |   |   |   | — |   |   |   | — |   |   |
| **Net periodic expense**            |       |                  | $          | (266                  | )          |   |   | $ | (1,001 | ) |   |   | $ | (206 | ) |   |   | $ | (1,745 | ) |   |

 

The estimated prior service cost and net actuarialgain for the pension plans that will be amortized from accumulated othercomprehensive income into benefits cost in 2007 are $468 and $3, respectivelyfor our retiree health plans.

The changes recognized in accumulated othercomprehensive income relates to the effect of adoption of SFAS No. 158 andwere $3,370 for our retiree health plans.

Significantassumptions used in determining the net periodic benefit cost, the pensionobligations, and trend rate include the following:

| ** **                          | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** |
| ** **                          | ** ** | **ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** |
| ** **                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** |
| ** **                          | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** |
| Discount rate  (benefit cost)       |       |                  | 5.25       | %                     |       |   | 5.25 | % |   |   | 5.25 | % |   |
| Discount rate  (benefit obligation) |       |                  | 5.48       | %                     |       |   | 5.25 | % |   |   | 5.25 | % |   |
| Trend rate                          |       |                  | 10.28      | %                     |       |   | 9.82 | % |   |   | 9.82 | % |   |

 

86

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

A 1%change in the assumed health care cost trend would have increased (decreased)the accumulated postretirement benefit obligation at December 31, 2006 andthe periodic postretirement benefit cost for the year ended as follows:

| ** **                                     | ** ** | **1% Increase** | ** ** | **1% Decrease** | ** ** |
|------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Accumulated  postretirement benefit obligation |       |                 | 28         |                 |       |   | (391 | ) |   |
| Periodic postretirement benefit cost           |       |                 | 29         |                 |       |   | (255 | ) |   |

 

The Company expects to contribute $2,039 to theretiree health plans in 2007.

Thefollowing benefit payments, which reflect expected future service, asappropriate, are expected to be paid:

| **Year**             | ** ** | ** ** | ** ** | **Amount** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| 2007                 |       |       | $          | 2,039      |       |   |
| 2008                 |       |       | 1,919      |       |       |
| 2009                 |       |       | 1,921      |       |       |
| 2010                 |       |       | 1,924      |       |       |
| 2011                 |       |       | 1,897      |       |       |
| Years 2012–2016 |       |       | 5,365      |       |       |

 

*Profit Sharing and Defined Contribution Plans*

The Company and certainsubsidiaries have profit sharing plans covering eligible employees. Profitsharing expense was $1,381, $1,496, and $1,671 in 2006, 2005, and 2004,respectively.

The Company also hasdefined contribution plans covering domestic employees of the Company andcertain subsidiaries. The Company expensed $1,873, $1,504, and $1,280 relatedto these plans in  2006, 2005, and 2004,respectively.

**19.   Stock-BasedCompensation:**

*Successor*

The Company applies thefair value based method to account for stock options and awards prescribed bySFAS No. 123(R). The Company adopted the provisions of SFAS No. 123(R) asof January 1, 2006 and for the year ended December 31, 2006. Theadoption of SFAS No. 123(R) did not have an impact on theconsolidated financial statements.

Holdings has adopted arestricted stock plan for which 19,800 shares of Holding’s Class A commonstock were awarded in 2005. The restricted stock vest as follows: 10% of eachgrant vests on February 11 in each year 2006-2010, subject to theexecutive’s continued service with Holdings and its subsidiaries on such dateand subject to 100% vesting upon the earlier of an initial public offering ofstock by, or change in control of, Holdings, and subject to accelerated vestingupon certain specified events of termination of service; and the vesting of 50%of each grant is based on performance measures at the time of an initial publicoffering of stock by, or earlier change in control of Holdings. The fair valueof the awards was determined using multiples of EBITDA and the income approach,based on discounted free cashflow. Compensation expense for these awards was$108 for the year ended December 31, 2006 and $94 the forty-six weekperiod ended December 31, 2005 commensurate with the estimated vesting ofthe underlying awards.

87

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

*Predecessor*

The PQ Corporation 1995Stock Option Plan provided for granting a maximum of 225,000 stock options toselected officers and key employees. The exercise price of these stock optionsis equal to the fair market value of the Company’s stock at the grant date, andthe maximum term may not exceed ten years. One-third of the options vest on thethird anniversary of the date of grant. The other two-thirds vest uponattainment of specified performance measurements at specified anniversary datesif plan participants meet minimum share holding requirements.

In 2002, the Companyadopted the PQ Corporation 2002 Stock Option and Stock Award Plan. This planreplaces the 1995 Stock Option Plan, which continues in effect only withrespect to stock options previously issued. The Stock Option and Stock AwardPlan provides for granting a maximum of 180,000 stock options and stock awardshares to officers and key employees, as selected by the Board of Directors. Theexercise price of the stock options is equal to the fair market value of theCompany’s stock at the grant date and the term may not exceed ten years.Options vest ratably over four years.

Stock awards also have afour-year vesting period subject to attainment of specific performancemeasurements at anniversary dates. Vesting for both stock options and awards iscontingent on minimum share holding requirements by plan participants.

Immediately prior toclosing, pursuant to their original terms, all of the Predecessor’s outstandingstock options and awards vested and the Predecessor exercised its option topurchase, at fair value, all of the shares of common stock to be acquired byexercise of options and awards held by employees pursuant to the Stock Optionand Award Plan. As a result, immediately before the Transactions, compensationexpense of approximately $2,400 was recorded in selling, general andadministrative expenses in the Statement of Operations for the six weeks ended February 11,2005 for the unvested portion of the options and awards.

During 2004, 10,299 shareswere awarded to plan participants in accordance with the provisions of thestock award plan. On January 1, 2005, there were 7,654 shares that vested.The fair value of each stock award is equal to the Company’s stock price at thedate of grant. The fair value of stock awards granted in 2004 was $139. TheCompany recognized compensation expense for the stock award plan of $1,031 in2004. This compensation expense is based on the fair value of the shares at thegrant date and was recognized ratably over the vesting period.

The Company recorded compensation expense for fixedand performance-based stock option awards granted after January 1,1996 using the fair value of the options at the grant date. The fair value ofeach option under the 2002 Stock Option and Stock Award Plan was estimatedbased on the minimum value method. The fair value of options granted in 2004was $8.25. Expense for options and awards is recognized ratably over the optionvesting period. Total compensation expense for stock options recorded by theCompany was $174 in 2004.

88

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Thefollowing table summarizes activity for the 1995 Stock Option Plan and 2002Stock Option and Stock Award Plan:

| ** **                      | ** ** | **Shares Under** | ** ** | **Weighted Average** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **Option**            | ** ** | **Exercise Price**   | ** ** |
| Balance, January 1,  2004  |       |                  | 171,665    |                      |       |   | $ | 117.45 |   |   |
| Granted                         |       |                  | 34,059     |                      |       |   | 139.00 |   |   |
| Exercised                       |       |                  | (17,091    | )                         |       |   | 95.84 |   |   |
| Forfeited                       |       |                  | (5,691     | )                         |       |   | 140.97 |   |   |
| Balance, December 31, 2004 |       |                  | 182,942    |                      |       |   | $ | 122.71 |   |   |

 

**20.   SharesSubject to Mandatory Redemption:**

*Successor*

All shares subject tomandatory redemption were redeemed in connection with the Transactions.

The Company and thecommittee that administers the Company’s Profit Sharing Plan were advised thatcertain transactions under the Plan involving the Predecessor’s common stock,series B, previously held by the Plan may have violated certain ERISAguidelines which govern sales of securities to the Company. Prior to December 31,2004, the value of common stock, series B was calculated based on aformula as defined in the Trust agreement. In 2005, it was determined that thecalculated value, which was used as the basis for any stock fund transactionsbetween the Company and the Plan, was not a sufficient basis to represent fairvalue. The Company has taken corrective action which required an additionalcash contribution to the Plan and payments of excise taxes, interest andpenalties under ERISA and the Internal Revenue Code. As a result, the Companyincreased its reserve for contingent liabilities from $328 at December 31,2004 to $6,100 as of September 30, 2005. This incremental amount, net ofapplicable taxes, was accounted for as an adjustment to goodwill. The Companymade the corrective payment to the Plan and filed the applicable excise taxreturns in the fourth quarter of 2005. Based upon the advice from legalcounsel, we believe $6,100 was adequate to fund all required contributions tothe Plan and settle any penalties and accrued interest under ERISA and theInternal Revenue Code.

*Predecessor*

During 1984, the Companyauthorized the issuance of up to 200,000 shares of Common stock, Series Bwith a par value of $.50. In prior years, the Company has made certaincontributions to its defined contribution plan for U.S. employees, as directed bythe Board of Directors, in PQ Corporation Common stock, Series B under theprovisions of the PQ Corporation Profit Sharing Plan and Trust. Common stock, Series Bcarries no voting rights unless cash dividends are not declared for twoconsecutive fiscal years, in which case its holders are entitled to vote untilcash dividends are restored. As of December 31, 2004, there were 52,072Common stock, Series B shares issued and 28,372 shares held by the Trust.

Subject to legalavailability of funds, the shares of Common stock, Series B are redeemableby the Trustee for cash as provided for in the Trust Agreement between PQCorporation and Wilmington Trust Company dated July 18, 1988. As such, Series Bshares held by the Company’s Profit Sharing Plan are sold to the Company by theTrustee from time to time as necessary to fund participant withdrawals from theprofit sharing plan. Shares in an amount up to 20% of the number held by theProfit Sharing Plan, not to exceed 30% annually on a cumulative basis, may be tenderedin any particular year by the Trustee. During the years ended December 31,2004, redemptions amounted to $457. The Company accounts for these 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

purchasesof shares as reductions to the balance of shares subject to mandatoryredemption. Each period end, the balance of shares subject to mandatoryredemption is accreted based upon the number of issued and outstanding sharesmultiplied by the value per share. As of December 31, 2004, the value pershare was increased to reflect the expected merger consideration per share lessa discount for illiquidity. For the year ended December 31, 2004, $4,069was charged to selling, general and administrative expenses related to theaccretion of shares subject to mandatory redemption.

Cash dividends declaredtotaled $151 on Common stock, Series B or $5.18 per share for 2004.

**21.   CapitalStock:**

*Successor*

As of December 31,2006, the Company has 100 shares of Class A common stock authorized andone share outstanding. The Company’s common shares have a par value of $0.50 pershare. In conjunction with the Transaction, Holdings contributed $163,600 ofcapital to the Company. During the year ended December 31, 2006 and 2005,the Company returned $2,346 and $85,325 in capital contributions to Holdings,respectively.

*Predecessor*

As of December 31,2004, the Company had 8,800,000 shares of Common Stock, Series Aauthorized at a par value of $0.50 per share. All common shares were purchasedand cancelled as part of the Transactions.

As of December 31,2004, the Company had 54,224 shares of preferred stock authorized with a statedvalue of $137 per share. Preferred stock is nonvoting and has priority overCommon stock as to dividends and distribution on liquidation. Dividends arecumulative at $16.44 per share annually. The Company may redeem any part of thePreferred stock at the stated value, plus accrued dividends. All preferredshares were purchased and cancelled as part of the Transactions.

Dividends declared aggregated to $550 preferred and$12,861 Common stock, Series A or $16.44 and $5.18 per share, respectivelyfor 2004. There were no dividends declared or other capital stock transactionsin the six week predecessor period ended February 11, 2005.

In2004, the majority of purchases of treasury stock related to non-employee redemptions.Capital stock activity in 2004 was as follows:

| ** **                      | ** ** | **Preferred** | ** ** | **Common stock** | ** ** | **Treasury stock** | ** ** |
|---------------------------------|------------|---------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **stock**     | ** ** | **Series A**     | ** ** | **Preferred**           | ** ** | **Common** | ** ** |
| Balance, Janaury 1, 2004        |       |          | 39,672     |                  |       |                    | 2,589,712  |   |   |   | 6,246 |   |   | 117,572 |   |
| Issuances                       |       |          | —     |                  |       |                    | —     |   |   |   | — |   |   | (39,853 | ) |
| Purchases                       |       |          | —     |                  |       |                    | —     |   |   |   | — |   |   | 29,382 |   |
| Balance, December 31, 2004 |       |          | 39,672     |                  |       |                    | 2,589,712  |   |   |   | 6,246 |   |   | 107,101 |   |

 

**22.   Commitmentsand Contingent Liabilities:**

There is a risk ofenvironmental impact in chemical manufacturing operations. The Company’senvironmental policies and practices are designed to ensure compliance withexisting laws and regulations and to minimize the possibility of significantenvironmental impact. The Company is also subject to various other lawsuits andclaims with respect to matters such as governmental regulations, labor, andother 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

actionsarising out of the normal course of business. No accrual for these matterscurrently exists, with the exception of those listed below, because managementbelieves that the liabilities resulting from such lawsuits and claims will notmaterially affect the results of operations, financial position or cash flow ofthe Company.

The Company was named asthe defendant in a personal injury case which occurred in 1996. The case wassettled in November 2006 for $2,400. The claim was covered by the Company’sinsurance carrier. As settlement of this claim, the Company’s insurance carrieragreed to pay the plaintiff $2,400, of which $1,200 was paid in December 2006and $1,200 was paid in January 2007.

The Company is subject tovarious laws and regulations regarding emissions from its plant locations.These laws and regulations may limit the amount and types of emissions that canbe released into the atmosphere. In 2003, following an incident at the KansasCity, Kansas plant in which an emission control device failed, the Company wasissued a draft Consent Agreement from the Kansas Department of Health andEnvironment (“KDHE”) for operating the plant without such emission controldevice in place. In February 2006, we received a revised Consent Agreementfrom KDHE and agreed to settle all outstanding claims. The settlement calls forus to complete the implementation of an ISO 14001 Environmental ManagementSystem at the Kansas City plant, perform five supplemental environmentalprojects valued at a total of approximately $100 and pay a $150 civil penalty. InSeptember 2006, the Company negotiated the terms of the consent decreethat incorporated the aforementioned settlement. The civil penalty of $150 waspaid in full in October 2006.

The Company triggered therequirement of New Jersey’s Industrial Site Recovery Act (“ISRA”) statute aspart of the due diligence performed in connection with the Transactions in December 2004.As required under ISRA, a General Information Notice with respect to our twoNew Jersey locations was filed with the New Jersey Department of EnvironmentalProtection (“NJDEP”) in December 2004. Based on a preliminary review ofthe facilities by the NJDEP, the Company estimated that $500 will be requiredfor contamination assessment and removal work at these facilities, and hadrecorded a reserve for such amount as of December 31, 2005. During theyear ended December 31, 2006, it was determined that additionalassessment, removal and remediation work would be required and the reserve wasincreased by $400 to $900 to cover the estimated cost of such work. There maybe additional costs related to the remediation of these two facilities, butuntil further investigation takes place, the Company cannot reasonably estimatethe amount of additional liability that may exist.

The Company is subject toa cash deficiency agreement related to the $15,000 revolving credit agreementof one of its equity affiliates, in which it is a joint partner. This agreementrequires the Company to make certain contributions in order to ensure theaffiliate’s compliance with debt covenants. At December 31, 2006, theaffiliate had a $10,000 outstanding balance under its revolving creditagreement and was in compliance with all covenants.

The Company and its subsidiaries have entered intovarious lease agreements for the rental of office and plant facilities andequipment, substantially all of which are classified as operating leases. Totalrental expense under these agreements was $8,670, $6,917, and $6,591 in 2006,2005, and 2004, respectively.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Totalrental due under noncancelable operating lease commitments are:

| **Year**   | ** ** | ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|------------|------------|
| 2007       |       | $          | 8,285      |       |
| 2008       |       | 7,024      |       |
| 2009       |       | 5,615      |       |
| 2010       |       | 4,673      |       |
| 2011       |       | 3,316      |       |
| Thereafter |       | 5,926      |       |
|       |       | $          | 34,839     |       |

 

The Company has enteredinto short and long-term purchase commitments for various key raw materials andenergy requirements. The purchase obligations include agreements to purchasegoods that are enforceable and legally binding and that specify all significantterms. The purchase commitments covered by these agreements are with varioussuppliers and total approximately $37,957 for the period 2007 to 2016.Purchases under these agreements are expected to be $15,534, $8,597, $3,764,$3,554, $3,595 and $2,913 for 2007, 2008, 2009, 2010, 2011 and thereafter,respectively.

The Company rents itscorporate office under a long-term operating lease agreement, which contains aprovision for a mid-term rent increase. The Company records monthly rent expenseequal to the total of the payments due over the lease term, divided by thenumber of months of the lease term. The difference between rent expenserecorded and the amount paid is credited or charged to deferred rent liability,which is reflected in the Balance Sheet.

**23.   RelatedParty Transactions:**

The Company maintainscertain policies and procedures for the review, approval, and ratification ofrelated party transactions to ensure that all transactions with selectedparties are fair, reasonable and in our best interest. All significantrelationships and transactions are separately identified by management if theymeet the definition of a related party or a related party transaction. Relatedparty transactions include transactions that occurred during the year, or arecurrently proposed, in which the Company was or will be a participant and whichany related person had or will have a direct or indirect material interest. Allrelated party transactions are reviewed, approved and documented by the appropriatelevel of the Company’s management in accordance with these policies andprocedures.

The Company, J.P. MorganPartners (BHCA), L.P. and its affiliates and Peak Investments, LLC, (referredto collectively as, the “Sponsors”) and Holdings entered into managementagreements relating to the provision of certain financial and strategicadvisory services and consulting services. The Company paid the Sponsors aone-time fee in the amount of $10,000 on February 11, 2005 for structuringthe Transactions. In addition, the Company agreed to pay to the Sponsors anannual monitoring fee equal to $2,000 commencing in 2006. The managementagreement will also provide for reimbursement of fees payable by Holdings forthe maintenance of its corporate existence, corporate overhead expenses and forsalaries and other compensation of certain employees who perform services forboth Holdings and the Company.

Mr. Boyce, ourChairman, Chief Executive Officer, President and a member of our CompensationCommittee, is also Chairman and Chief Executive Officer and 99% stockholder ofPeak Investments, LLC, one of our Sponsors.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

In December 2005, theCompany paid a dividend to Holdings of $85,325, and in turn, Holdings paid adividend to its stockholders in an aggregate amount of $110,000 and paidcertain expenses. Holdings issued $23,000 of 12.75% Senior Notes due March 15,2013 in order to fund the difference between amounts received from PQ and thedividend distribution to stockholders. These notes require quarterly interestpayments with payment in kind provisions, allowing Holdings to defer the entirepayment, or a portion thereof, at Holdings’ option. The amount of any deferredinterest payment shall become additional principal. The Company’s seniorsecured credit facility allows for dividends of up to $4,000 per year toHoldings for the purpose of servicing the interest expense on the Holdingsnotes. The Holdings notes are not guaranteed by the Company. See Note 14to these financial statements for additional details on the dividend toHoldings. During the year ended December 31, 2006, the Company returned$2,346 in capital contributions to Holdings as dividends.

**24.   BusinessSegments and Geographic Information:**

The Company’s reportablesegments are organized based on the operating divisions within the Company:Chemicals and Potters. Chemicals develops, manufactures and distributessilicate-based specialty chemicals primarily to large industrial andconsumer product companies. Potters manufactures highly engineered solid andhollow glass spheres that are mainly sold to contractors, governmental agenciesand manufacturing companies.

Thetable below presents information about the reported segments:

| ** **               | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|--------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **               | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **               | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **               | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales:               |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Chemicals                |       |                  | $          | 486,768               |       |   |   | $ | 373,712 |   |   |   | $ | 48,264 |   |   |   | $ | 398,790 |   |   |
| Potters                  |       |                  | 221,821    |                  |       |   | 197,426 |   |   |   | 15,931 |   |   |   | 207,889 |   |   |
| Total                    |       |                  | $          | 708,589               |       |   |   | $ | 571,138 |   |   |   | $ | 64,195 |   |   |   | $ | 606,679 |   |   |
| Adjusted EBITDA(1):      |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Chemicals                |       |                  | $          | 134,048               |       |   |   | $ | 86,270 |   |   |   | $ | 10,188 |   |   |   | $ | 93,287 |   |   |
| Potters                  |       |                  | 44,318     |                  |       |   | 40,280 |   |   |   | 2,992 |   |   |   | 40,318 |   |   |
| Segments adjusted EBITDA |       |                  | $          | 178,366               |       |   |   | $ | 126,550 |   |   |   | $ | 13,180 |   |   |   | $ | 133,605 |   |   |

----

(1)          Adjusted earnings beforeinterest, income taxes, depreciation and amortization (“Adjusted EBITDA”)consists of EBITDA adjusted for items such as impairment charges, environmentaland other expenses, purchase accounting impacts, severance and merger relatedcosts. Management evaluates the performance of its segments and allocatesresources based on several factors, of which the primary measure is AdjustedEBITDA. Adjusted EBITDA does not represent cash flow for periods presented andshould not be considered as an alternative to net income as an indicator of theCompany’s operating performance or as an alternative to cash flows as a sourceof liquidity. Adjusted EBITDA as defined by the Company may not be comparablewith EBITDA or Adjusted EBITDA as defined by other companies.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Areconciliation from Segments Adjusted EBITDA to net income (loss) follows:

| ** **                                          | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                                          | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                                          | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segments adjusted  EBITDA                           |       |                  | $          | 178,366               |       |   |   | $ | 126,550 |   |   |   | $ | 13,180 |   |   |   | $ | 133,605 |   |   |
| Less:                                               |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Provision  (benefit) for income taxes               |       |                  | 13,997     |                  |       |   | 361 |   |   |   | (2,522 | ) |   |   | 12,926 |   |   |
| Interest expense                                    |       |                  | 51,894     |                  |       |   | 37,529 |   |   |   | 771 |   |   |   | 6,541 |   |   |
| Depreciation and  amortization                      |       |                  | 46,810     |                  |       |   | 40,174 |   |   |   | 4,436 |   |   |   | 36,097 |   |   |
| Impairment/disposal  of long-lived assets           |       |                  | 192        |                  |       |   | 341 |   |   |   | — |   |   |   | 1,089 |   |   |
| Unallocated  corporate expenses                     |       |                  | 29,259     |                  |       |   | 20,580 |   |   |   | 2,976 |   |   |   | 29,937 |   |   |
| Merger related  costs                               |       |                  | 543        |                  |       |   | 21,181 |   |   |   | 8,713 |   |   |   | 3,663 |   |   |
| Write off of  in-process R&D                    |       |                  | —     |                  |       |   | 3,338 |   |   |   | — |   |   |   | — |   |   |
| Raw material  contracts                             |       |                  | 13,977     |                  |       |   | 18,453 |   |   |   | — |   |   |   | — |   |   |
| Investment in  affiliates step-up                   |       |                  | 1,190      |                  |       |   | 6,144 |   |   |   | — |   |   |   | — |   |   |
| Inventory step-up                                   |       |                  | —     |                  |       |   | 10,935 |   |   |   | — |   |   |   | 562 |   |   |
| Benefit plan  curtailments                          |       |                  | —     |                  |       |   | (6,253 | ) |   |   | — |   |   |   | — |   |   |
| Operational  restructuring charges                  |       |                  | 4,361      |                  |       |   | 7,031 |   |   |   | 5,604 |   |   |   | 1,154 |   |   |
| Non-recurring  environmental, legal and other costs |       |                  | (13        | )                     |       |   | 1,882 |   |   |   | — |   |   |   | 3,463 |   |   |
| Management  advisory fees                           |       |                  | 2,000      |                  |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Net income (loss)                                   |       |                  | $          | 14,156                |       |   |   | $ | (35,146 | ) |   |   | $ | (6,798 | ) |   |   | $ | 38,173 |   |   |

 

Includedin the Chemicals segment Adjusted EBITDA is equity income from affiliates of$22,532 for the year ended December 31, 2006, $9,252 for the forty-sixweeks ended December 31, 2005, ($265) for the six weeks ended February 11,2005, and $10,249 for the year ended December 31, 2004.

| ** **                      | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **                      | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **                      | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Depreciation and  amortization: |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Chemicals                       |       |                  | $          | 29,566                |       |   |   | $ | 25,268 |   |   |   | $ | 3,138 |   |   |   | $ | 25,101 |   |   |
| Potters                         |       |                  | 9,968      |                  |       |   | 8,325 |   |   |   | 906 |   |   |   | 7,806 |   |   |
| Total                           |       |                  | $          | 39,534                |       |   |   | $ | 33,593 |   |   |   | $ | 4,044 |   |   |   | $ | 32,907 |   |   |

 

Revenues from external customers by product are notaggregated by the Company because it is impractical to do so. Therefore, thisinformation is not presented in the following tables.

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

Businesssegment information about the Company’s operations by geographic area is asfollows:

| ** **    | ** ** | **Successor**         | ** ** | **Predecessor**       | ** ** |
|---------------|------------|-----------------------|------------|-----------------------|------------|
| ** **    | ** ** | **Year**              | ** ** | **Forty-six**         | ** ** | **Six weeks** | ** ** | **Year** | ** ** |
| ** **    | ** ** | **Ended**             | ** ** | **weeks ended**  | ** ** | **ended** | ** ** | **Ended** | ** ** |
| ** **    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **February 11,** | ** ** | **December 31,** | ** ** |
| ** **    | ** ** | **2006**              | ** ** | **2005**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales:    |       |                  |       |                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| United States |       |                  | $          | 381,574               |       |   |   | $ | 306,315 |   |   |   | $ | 31,411 |   |   |   | $ | 327,691 |   |   |
| Europe        |       |                  | 138,118    |                  |       |   | 112,215 |   |   |   | 21,051 |   |   |   | 132,196 |   |   |
| Other         |       |                  | 188,897    |                  |       |   | 152,608 |   |   |   | 11,733 |   |   |   | 146,792 |   |   |
| Total         |       |                  | $          | 708,589               |       |   |   | $ | 571,138 |   |   |   | $ | 64,195 |   |   |   | $ | 606,679 |   |   |

 

| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|-----------------------|------------|
| ** **         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Long-lived assets: |       |                  |       |   |   |
| United States      |       | $                     | 573,166    |   | $ | 606,979 |   |
| Europe             |       | 89,902                |       | 87,647 |   |
| Other              |       | 101,764               |       | 98,989 |   |
| Total              |       | $                     | 764,832    |   | $ | 793,615 |   |

 

**25.**          CustomerConcentration:

One North Americancustomer represents 9%, 8%, and 9% of consolidated sales and 10%, 11%, and 10%of accounts receivable as of and for the year ended December 31, 2006,2005, and 2004, respectively. There were no other individually significantcustomers in above mentioned years.

**26.**          SubsequentEvent:

On January 25, 2007,the Company acquired certain assets of Flex-O-Lite Inc., a leading manufacturerof highway safety marketing spheres, metal finishing glass beads, and highrefractive index glass beads. Flex-O-Lite has been a leading manufacturer ofglass spheres used for a variety of reflective and industrial applications forover 65 years. The newly acquired manufacturing facilities are located inParis, Texas; Muscatine, Iowa; and St. Thomas, Ontario. Flex-O-Lite will beincluded as part of the Potters division of the Company.

**27.**          QuarterlyResults (unaudited):

Selectedresults of operations for each of the fiscal quarters during the years ended December 31,2006, 2005 and 2004 are presented below. The fiscal quarters during the yearended December 31, 2004 reflect the results of Predecessor operations. Thefiscal quarters during 2005 include Predecessor operations through February 11,2005 and Successor operations from February 12, 2005 to December 31,2005. The first quarter of 2005 presents the results for the Predecessor andSuccessor separately since they were not prepared on a comparable basis ofaccounting.

| ** **        | ** ** | **Three months ended** | ** ** |
|-------------------|------------|------------------------|------------|
| **2006:**         | ** ** | ** **             | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31** | ** ** |
| Net sales         |       | $                      | 166,742    |   | $ | 189,127 |   |   | $ | 191,999 |   |   |   | $ | 160,721 |   |   |
| Gross profit      |       | 35,176                 |       | 45,150 |   |   | 44,776 |   |   |   | 33,560 |   |   |
| Operating income  |       | 11,814                 |       | 21,441 |   |   | 21,200 |   |   |   | 4,818 |   |   |
| Net income (loss) |       | 702                    |       | 3,393 |   |   | 7,481 |   |   |   | 2,580 |   |   |
|                   |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PQ CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except share amounts)**

 

|                          | ** ** | **Six weeks** | ** ** | **Seven weeks**  | ** ** | ** **                       | ** ** | ** **        | ** ** | ** **             | ** ** |                  |
|--------------------------|------------|--------------------|------------|-----------------------|------------|----------------------------------|------------|-------------------|------------|------------------------|------------|-----------------------|
| ** **               | ** ** | **ended**          | ** ** | **ended**             | ** ** | **Three months ended** | ** ** |              |
| **2005:**                | ** ** | ** **         | ** ** | **February 11,** | ** ** | **March 31,**               | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |   |
| Net sales                |       |               | $          | 64,195                |       |                             |       | $                 | 75,213     |                   |       | $                     | 176,095 |   |   | $ | 170,974 |   |   |   | $ | 148,856 |   |   |   |
| Gross profit             |       |               | 15,619     |                  |       |                             | 9,032      |              |       | 38,280                 |       |                  | 35,171 |   |   |   | 25,553 |   |   |   |
| Operating (loss)  income |       |               | (7,869     | )                     |       |                             | (24,270    | )                 |       | 15,961                 |       |                  | 17,426 |   |   |   | (956 | ) |   |   |
| Net (loss) income        |       |               | (6,798     | )                     |       |                             | (28,157    | )                 |       | 2,427                  |       |                  | (1,194 | ) |   |   | (8,222 | ) |   |   |
|                          |            |                    |            |                       |            |                                  |            |                   |            |                        |            |                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

|                  | ** ** | Three months ended | ** ** |
|------------------|------------|------------------------------|------------|
| **2004:**        | ** ** | ** **                   | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales        |       | $                            | 139,044    |   | $ | 163,923 |   |   | $ | 163,655 |   |   |   | $ | 140,057 |   |   |
| Gross profit     |       | 34,520                       |       | 41,230 |   |   | 44,872 |   |   |   | 31,609 |   |   |
| Operating income |       | 11,313                       |       | 19,505 |   |   | 18,391 |   |   |   | 412 |   |   |
| Net income       |       | 7,149                        |       | 12,793 |   |   | 17,052 |   |   |   | 1,179 |   |   |
|                  |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**28.**          Guarantorand Nonguarantor Statements:

In connection with theTransactions described in Note 1 and as a part of the related financings,the Company issued $275,000 of 7.5% senior subordinated notes due 2013 intransactions exempt from or not subject to the Securities Act pursuant to Rule 144Aand Regulation S under the Securities Act. The notes are general unsecuredobligations of the Company, subordinated in right of payment to all existingand future senior indebtedness of the Company that does not contain similarsubordination provisions, and guaranteed on a full, unconditional, joint andseveral basis by the Company’s 100% owned domestic subsidiaries.

Thefollowing consolidating financial information presents:

·       Consolidatingbalance sheets as of December 31, 2006 and 2005 for the Successor,Consolidated Statements of Operations for the year ended December 31, 2006and the forty-six weeks ended December 31, 2005 for the Successor and thesix weeks ended February 11, 2005 and the year ended December 31,2004 for the Predecessor, and Consolidated Statements of Cash Flows for theyear ended December 31, 2006 and the forty-six weeks ended December 31,2005 for the Successor and the six weeks ended February 11, 2005 and theyear ended December 31, 2004 for the Predecessor.

·       Eliminationentries necessary to consolidate the Predecessor and Successor, with theirrespective guarantor subsidiaries and nonguarantor subsidiaries. The principalelimination entries eliminate investments in subsidiaries and intercompanybalances and transactions.

96

----

**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEET—SUCCESSORDecember 31, 2006(in thousands)**
|                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                        | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| ASSETS                                                            |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                        |       | $           | 76         |             |       | $                | 276        |             |       |             | $          | 15,526 |   |   |   | $ | — |   |   |   | $ | 15,878 |   |   |
| Receivables, net                                                  |       | 30,894      |       |             | 12,699     |             |       |             | 54,825     |             |       |   | — |   |   |   | 98,418 |   |   |
| Intercompany  receivable                                          |       | —      |       |             | 140,174    |             |       |             | —     |             |       |   | (140,174 | ) |   |   | — |   |   |
| Inventories                                                       |       | 29,968      |       |             | 27,298     |             |       |             | 41,645     |             |       |   | — |   |   |   | 98,911 |   |   |
| Prepaid and other  current assets                                 |       | 4,273       |       |             | 430        |             |       |             | 5,257      |             |       |   | — |   |   |   | 9,960 |   |   |
| Total current assets                                              |       | 65,211      |       |             | 180,877    |             |       |             | 117,253    |             |       |   | (140,174 | ) |   |   | 223,167 |   |   |
| Investments in subsidiaries                                       |       | 428,889     |       |             | 138,055    |             |       |             | —     |             |       |   | (566,944 | ) |   |   | — |   |   |
| Investments in  affiliated  companies                             |       | 63,298      |       |             | 3,043      |             |       |             | 3,844      |             |       |   | — |   |   |   | 70,185 |   |   |
| Property, plant  and equipment,  net                              |       | 111,569     |       |             | 40,207     |             |       |             | 167,693    |             |       |   | — |   |   |   | 319,469 |   |   |
| Goodwill                                                          |       | 163,591     |       |             | 65,213     |             |       |             | 1,100      |             |       |   | — |   |   |   | 229,904 |   |   |
| Tradenames                                                        |       | 32,400      |       |             | 20,600     |             |       |             | —     |             |       |   | — |   |   |   | 53,000 |   |   |
| Other intangible  assets, net                                     |       | 38,299      |       |             | 20,365     |             |       |             | 339        |             |       |   | — |   |   |   | 59,003 |   |   |
| Other long-term  assets                                           |       | 26,820      |       |             | 1,252      |             |       |             | 5,479      |             |       |   | — |   |   |   | 33,551 |   |   |
| Total assets                                                      |       | $           | 930,077    |             |       | $                | 469,612    |             |       |             | $          | 295,708 |   |   |   | $ | (707,118 | ) |   |   | $ | 988,279 |   |   |
| LIABILITIES AND STOCKHOLDER’S EQUITY                         |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |
| Revolver, notes  payable and current maturities of long-term debt |       | $           | 3,652      |             |       | $                | —     |             |       |             | $          | 2,130 |   |   |   | $ | — |   |   |   | $ | 5,782 |   |   |
| Cash overdraft                                                    |       | 635         |       |             | 1,071      |             |       |             | 209        |             |       |   | — |   |   |   | 1,915 |   |   |
| Accounts payable                                                  |       | 17,940      |       |             | 6,090      |             |       |             | 29,208     |             |       |   | — |   |   |   | 53,238 |   |   |
| Intercompany  payable                                             |       | 70,064      |       |             | —     |             |       |             | 70,110     |             |       |   | (140,174 | ) |   |   | — |   |   |
| Accrued  liabilities                                              |       | 33,589      |       |             | 10,157     |             |       |             | 15,945     |             |       |   | — |   |   |   | 59,691 |   |   |
| Total current liabilities                                         |       | 125,880     |       |             | 17,318     |             |       |             | 117,602    |             |       |   | (140,174 | ) |   |   | 120,626 |   |   |
| Long-term debt                                                    |       | 630,109     |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 630,109 |   |   |
| Deferred income  taxes                                            |       | 68,490      |       |             | 23,405     |             |       |             | 13,069     |             |       |   | — |   |   |   | 104,964 |   |   |
| Other long-term  liabilities                                      |       | 47,965      |       |             | —     |             |       |             | 22,008     |             |       |   | — |   |   |   | 69,973 |   |   |
| Minority interest  in equity of subsidiaries                 |       | —      |       |             | —     |             |       |             | 4,974      |             |       |   | — |   |   |   | 4,974 |   |   |
| Commitments and  contingencies                                    |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Stockholder’s  equity                                        |       | 57,633      |       |             | 428,889    |             |       |             | 138,055    |             |       |   | (566,944 | ) |   |   | 57,633 |   |   |
| Total liabilities  and stockholder’s equity                  |       | $           | 930,077    |             |       | $                | 469,612    |             |       |             | $          | 295,708 |   |   |   | $ | (707,118 | ) |   |   | $ | 988,279 |   |   |

 

97

----

**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEET—SUCCESSORDecember 31, 2005(in thousands)(unaudited)**

| ** **                                                         | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| ASSETS                                                             |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                         |       | $           | 4,542      |             |       | $                | 268        |             |       |             | $          | 18,162 |   |   |   | $ | — |   |   |   | $ | 22,972 |   |   |
| Receivables, net                                                   |       | 30,344      |       |             | 10,182     |             |       |             | 50,188     |             |       |   | — |   |   |   | 90,714 |   |   |
| Intercompany  receivable                                           |       | —      |       |             | 109,874    |             |       |             | —     |             |       |   | (109,874 | ) |   |   | — |   |   |
| Inventories                                                        |       | 26,462      |       |             | 25,700     |             |       |             | 32,077     |             |       |   | — |   |   |   | 84,239 |   |   |
| Prepaid and other  current assets                                  |       | 33,408      |       |             | 198        |             |       |             | 4,727      |             |       |   | — |   |   |   | 38,333 |   |   |
| Total current assets                                               |       | 94,756      |       |             | 146,222    |             |       |             | 105,154    |             |       |   | (109,874 | ) |   |   | 236,258 |   |   |
| Investments in subsidiaries                                        |       | 369,053     |       |             | 109,719    |             |       |             | —     |             |       |   | (478,772 | ) |   |   | — |   |   |
| Investments in  affiliated companies                               |       | 61,432      |       |             | 2,985      |             |       |             | —     |             |       |   | — |   |   |   | 64,417 |   |   |
| Property, plant  and equipment,  net                               |       | 116,924     |       |             | 34,547     |             |       |             | 166,866    |             |       |   | — |   |   |   | 318,337 |   |   |
| Goodwill                                                           |       | 167,880     |       |             | 66,603     |             |       |             | —     |             |       |   | — |   |   |   | 234,483 |   |   |
| Tradenames                                                         |       | 32,400      |       |             | 20,600     |             |       |             | —     |             |       |   | — |   |   |   | 53,000 |   |   |
| Other intangible  assets, net                                      |       | 53,016      |       |             | 22,458     |             |       |             | 2,235      |             |       |   | — |   |   |   | 77,709 |   |   |
| Other long-term  assets                                            |       | 41,898      |       |             | 378        |             |       |             | 3,393      |             |       |   | — |   |   |   | 45,669 |   |   |
| Total assets                                                       |       | $           | 937,359    |             |       | $                | 403,512    |             |       |             | $          | 277,648 |   |   |   | $ | (588,646 | ) |   |   | $ | 1,029,873 |   |   |
| LIABILITIES AND STOCKHOLDER’S EQUITY                          |       |        |       |             |       |             |       |             |       |             |       |   |   |   |
| Revolvers, notes  payable and current maturities of long-term debt |       | $           | 23,652     |             |       | $                | —     |             |       |             | $          | 3,037 |   |   |   | $ | — |   |   |   | $ | 26,689 |   |   |
| Cash overdraft                                                     |       | 5,829       |       |             | 1,641      |             |       |             | 2,487      |             |       |   | — |   |   |   | 9,957 |   |   |
| Accounts payable                                                   |       | 20,199      |       |             | 6,447      |             |       |             | 24,656     |             |       |   | — |   |   |   | 51,302 |   |   |
| Intercompany  payable                                              |       | 26,642      |       |             | —     |             |       |             | 83,232     |             |       |   | (109,874 | ) |   |   | — |   |   |
| Accrued  liabilities                                               |       | 36,234      |       |             | 2,966      |             |       |             | 14,778     |             |       |   | — |   |   |   | 53,978 |   |   |
| Total current liabilities                                          |       | 112,556     |       |             | 11,054     |             |       |             | 128,190    |             |       |   | (109,874 | ) |   |   | 141,926 |   |   |
| Long-term debt                                                     |       | 633,761     |       |             | —     |             |       |             | 60         |             |       |   | — |   |   |   | 633,821 |   |   |
| Deferred income  taxes                                             |       | 93,508      |       |             | 23,405     |             |       |             | 10,893     |             |       |   | — |   |   |   | 127,806 |   |   |
| Other long-term  liabilities                                       |       | 50,975      |       |             | —     |             |       |             | 23,739     |             |       |   | — |   |   |   | 74,714 |   |   |
| Minority interest  in equity of subsidiaries                       |       | —      |       |             | —     |             |       |             | 5,047      |             |       |   | — |   |   |   | 5,047 |   |   |
| Commitments and  contingencies                                     |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Stockholder’s  equity                                         |       | 46,559      |       |             | 369,053    |             |       |             | 109,719    |             |       |   | (478,772 | ) |   |   | 46,559 |   |   |
| Total liabilities  and stockholder’s equity                   |       | $           | 937,359    |             |       | $                | 403,512    |             |       |             | $          | 277,648 |   |   |   | $ | (588,646 | ) |   |   | $ | 1,029,873 |   |   |

 

98

----

**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the twelve months ended December 31, 2006(in thousands)**

| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Sales                                            |       | $           | 261,927    |             |       | $                | 137,932    |             |       |             | $          | 308,730 |   |   |   | $ | — |   |   |   | $ | 708,589 |   |   |
| Cost of goods  sold                              |       | 204,013     |       |             | 102,678    |             |       |             | 243,236    |             |       |   | — |   |   |   | 549,927 |   |   |
| Gross profit                                     |       | 57,914      |       |             | 35,254     |             |       |             | 65,494     |             |       |   | — |   |   |   | 158,662 |   |   |
| Selling, general and administative expenses      |       | 45,112      |       |             | 10,629     |             |       |             | 31,162     |             |       |   | — |   |   |   | 86,903 |   |   |
| Other operating  expense                         |       | 10,378      |       |             | 2,684      |             |       |             | (576       | )                |       |   | — |   |   |   | 12,486 |   |   |
| Operating income                                 |       | 2,424       |       |             | 21,941     |             |       |             | 34,908     |             |       |   | — |   |   |   | 59,273 |   |   |
| Equity in net income of affiliated companies     |       | 60,245      |       |             | 15,820     |             |       |             | 451        |             |       |   | (55,175 | ) |   |   | 21,341 |   |   |
| Interest expense  (income), net                  |       | 56,359      |       |             | (11,401    | )                |       |             | 6,936      |             |       |   | — |   |   |   | 51,894 |   |   |
| Other (income)  expense                          |       | (1,083      | )          |             | (861       | )                |       |             | 1,803      |             |       |   | — |   |   |   | (141 | ) |   |
| Income (loss) before taxes and minority interest |       | 7,393       |       |             | 50,023     |             |       |             | 26,620     |             |       |   | (55,175 | ) |   |   | 28,861 |   |   |
| Provision (benefit) for income taxes             |       | (6,763      | )          |             | 10,763     |             |       |             | 9,997      |             |       |   | — |   |   |   | 13,997 |   |   |
| Minority interest                                |       | —      |       |             | —     |             |       |             | 708        |             |       |   | — |   |   |   | 708 |   |   |
| Net income                                       |       | $           | 14,156     |             |       | $                | 39,260     |             |       |             | $          | 15,915 |   |   |   | $ | (55,175 | ) |   |   | $ | 14,156 |   |   |

 

99

----

**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the forty-six weeks ended December 31, 2005(in thousands)**

| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Sales                                               |       | $           | 220,430    |             |       | $                | 101,596    |             |       |             | $          | 249,112 |   |   |   | $ | — |   |   | $ | 571,138 |   |
| Cost of goods  sold                                 |       | 177,558     |       |             | 75,673     |             |       |             | 209,871    |             |       |   | — |   |   | 463,102 |   |
| Gross profit                                        |       | 42,872      |       |             | 25,923     |             |       |             | 39,241     |             |       |   | — |   |   | 108,036 |   |
| Selling, general and administative expenses         |       | 36,143      |       |             | 13,679     |             |       |             | 27,495     |             |       |   | — |   |   | 77,317 |   |
| Other operating  expense (income)                   |       | 20,724      |       |             | 2,030      |             |       |             | (196       | )                |       |   | — |   |   | 22,558 |   |
| Operating (loss) income                             |       | (13,995     | )          |             | 10,214     |             |       |             | 11,942     |             |       |   | — |   |   | 8,161 |   |
| Equity in net income (loss) of affiliated companies |       | 15,304      |       |             | (3,463     | )                |       |             | 308        |             |       |   | (9,041 | ) |   | 3,108 |   |
| Interest expense  (income), net                     |       | 39,134      |       |             | (7,548     | )                |       |             | 5,943      |             |       |   | — |   |   | 37,529 |   |
| Other expense  (income)                             |       | 7,251       |       |             | (5,872     | )                |       |             | 6,839      |             |       |   | — |   |   | 8,218 |   |
| Income (loss) before taxes and minority interest    |       | (45,076     | )          |             | 20,171     |             |       |             | (532       | )                |       |   | (9,041 | ) |   | (34,478 | ) |
| Provision (benefit) for income taxes                |       | (9,930      | )          |             | 7,582      |             |       |             | 2,709      |             |       |   | — |   |   | 361 |   |
| Minority interest                                   |       | —      |       |             | —     |             |       |             | 307        |             |       |   | — |   |   | 307 |   |
| Net (loss) income                                   |       | $           | (35,146    | )                |       | $                | 12,589     |             |       |             | $          | (3,548 | ) |   |   | $ | (9,041 | ) |   | $ | (35,146 | ) |

 

100

----

**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - PREDECESSORFor the six weeks ended February 11, 2005(in thousands)**

| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Sales                                            |       | $           | 25,193     |             |       | $                | 7,445      |             |       |             | $          | 31,557 |   |   |   | $ | — |   |   |   | $ | 64,195 |   |   |
| Cost of goods  sold                              |       | 19,177      |       |             | 5,526      |             |       |             | 23,873     |             |       |   | — |   |   |   | 48,576 |   |   |
| Gross profit                                     |       | 6,016       |       |             | 1,919      |             |       |             | 7,684      |             |       |   | — |   |   |   | 15,619 |   |   |
| Selling, general and administative expenses      |       | 5,740       |       |             | 1,689      |             |       |             | 3,792      |             |       |   | — |   |   |   | 11,221 |   |   |
| Other operating  expense                         |       | 12,142      |       |             | 12         |             |       |             | 113        |             |       |   | — |   |   |   | 12,267 |   |   |
| Operating (loss) income                          |       | (11,866     | )          |             | 218        |             |       |             | 3,779      |             |       |   | — |   |   |   | (7,869 | ) |   |
| Equity in net income of affiliated companies     |       | 2,127       |       |             | 3,980      |             |       |             | 75         |             |       |   | (6,447 | ) |   |   | (265 | ) |   |
| Interest expense,  net                           |       | 615         |       |             | (930       | )                |       |             | 1,086      |             |       |   | — |   |   |   | 771 |   |   |
| Other expense  (income)                          |       | 131         |       |             | 2,462      |             |       |             | (2,237     | )                |       |   | — |   |   |   | 356 |   |   |
| Income (loss) before taxes and minority interest |       | (10,485     | )          |             | 2,666      |             |       |             | 5,005      |             |       |   | (6,447 | ) |   |   | (9,261 | ) |   |
| Provision (benefit) for income taxes             |       | (3,687      | )          |             | 204        |             |       |             | 961        |             |       |   | — |   |   |   | (2,522 | ) |   |
| Minority interest                                |       | —      |       |             | —     |             |       |             | 59         |             |       |   | — |   |   |   | 59 |   |   |
| Net (loss) income                                |       | $           | (6,798     | )                |       | $                | 2,462      |             |       |             | $          | 3,985 |   |   |   | $ | (6,447 | ) |   |   | $ | (6,798 | ) |   |

 

101

----

**PQ CORPORATION AND SUBSIDIARIESCONSOLIDATING STATEMENT OF INCOME—PREDECESSORFor the year ended December 31, 2004(in thousands)**

| ** **                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** | ** ** |    |
|----------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|---------|
| ** **                                   | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** | ** ** |
| Sales                                        |       | $           | 236,188    |             |       | $                | 101,468    |             |       |             | $          | 269,023    |    |   |   | $ | — |   |   |   | $ | 606,679 |   |   |   |   |
| Cost of goods  sold                          |       | 180,084     |       |             | 77,729     |             |       |             | 196,635    |             |       |       | —  |   |   |   | 454,448 |   |   |   |   |
| Gross profit                                 |       | 56,104      |       |             | 23,739     |             |       |             | 72,388     |             |       |       | —  |   |   |   | 152,231 |   |   |   |   |
| Selling, general and administative expenses  |       | 49,591      |       |             | 14,489     |             |       |             | 32,155     |             |       |       | —  |   |   |   | 96,235 |   |   |   |   |
| Other operating  expense                     |       | 4,900       |       |             | 233        |             |       |             | 1,242      |             |       |       | —  |   |   |   | 6,375 |   |   |   |   |
| Operating income                             |       | 1,613       |       |             | 9,017      |             |       |             | 38,991     |             |       |       | —  |   |   |   | 49,621 |   |   |   |   |
| Equity in net income of affiliated companies |       | 46,699      |       |             | 18,938     |             |       |             | 602        |             |       |       | (55,990 | ) |   |   | 10,249 |   |   |   |   |
| Interest expense,  net                       |       | 6,185       |       |             | 2          |             |       |             | 354        |             |       |       | —  |   |   |   | 6,541 |   |   |   |   |
| Other expense  (income)                      |       | 1,316       |       |             | (14,186    | )                |       |             | 14,554     |             |       |       | —  |   |   |   | 1,684 |   |   |   |   |
| Income before taxes and minority interest    |       | 40,811      |       |             | 42,139     |             |       |             | 24,685     |             |       |       | (55,990 | ) |   |   | 51,645 |   |   |   |   |
| Provision for income taxes                   |       | 2,638       |       |             | 4,795      |             |       |             | 5,493      |             |       |       | —  |   |   |   | 12,926 |   |   |   |   |
| Minority interest                            |       | —      |       |             | —     |             |       |             | 546        |             |       |       | —  |   |   |   | 546 |   |   |   |   |
| Net income (loss)                            |       | $           | 38,173     |             |       | $                | 37,344     |             |       |             | $          | 18,646     |    |   |   | $ | (55,990 | ) |   |   | $ | 38,173 |   |   |   |   |
|                                              |            |             |            |                  |            |                  |            |                  |            |                  |            |            |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—SUCCESSORDecember 31, 2006(in thousands)**

| ** **                                      | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash provided  by operating activities      |       | $           | 46,062     |             |       | $                | 7,664      |             |       |             | $          | 5,938 |   |   |   | $ | — |   |   |   | $ | 59,664 |   |   |
| Cash flows from  investing activities:          |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Proceeds from sale of capital assets            |       | —      |       |             | —     |             |       |             | 1,302      |             |       |   | — |   |   |   | 1,302 |   |   |
| Purchases of property, plant and equipment      |       | (13,732     | )          |             | (6,501     | )                |       |             | (11,412    | )                |       |   | — |   |   |   | (31,645 | ) |   |
| Purchase of other intangible assets             |       | (1,131      | )          |             | (585       | )                |       |             | —     |             |       |   | — |   |   |   | (1,716 | ) |   |
| Net cash used in investing activities           |       | (14,863     | )          |             | (7,086     | )                |       |             | (10,110    | )                |       |   | — |   |   |   | (32,059 | ) |   |
| Cash flows from  financing activities:          |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Revolver and notes payable                      |       | (20,001     | )          |             | —     |             |       |             | (173       | )                |       |   | — |   |   |   | (20,174 | ) |   |
| Cash overdrafts                                 |       | (5,194      | )          |             | (570       | )                |       |             | (2,441     | )                |       |   | — |   |   |   | (8,205 | ) |   |
| Issuance of long-term debt                      |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Issuance of senior subordinated notes           |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Debt acquisition costs                          |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Repayments of long-term debt                    |       | (3,652      | )          |             | —     |             |       |             | (830       | )                |       |   | — |   |   |   | (4,482 | ) |   |
| Repayments of Predecessor debt                  |       | —      |       |             |       |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Proceeds from issuance of treasury stock        |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Purchase of stock                               |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Equity contribution                             |       | —      |       |             | —     |             |       |             | —     |             |       |   |   |   |   |   | — |   |   |
| Distributions to minority shareholders          |       | —      |       |             | —     |             |       |             | (401       | )                |       |   | — |   |   |   | (401 | ) |   |
| Dividend distribution                           |       | (2,346      | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (2,346 | ) |   |
| Net cash used in financing activities           |       | (31,193     | )          |             | (570       | )                |       |             | (3,845     | )                |       |   | — |   |   |   | (35,608 | ) |   |
| Effect of  exchange rate changes on cash        |       | —      |       |             | —     |             |       |             | 909        |             |       |   | — |   |   |   | 909 |   |   |
| Net change in  cash and cash equivalents        |       | 6           |       |             | 8          |             |       |             | (7,108     | )                |       |   | — |   |   |   | (7,094 | ) |   |
| Cash and cash  equivalents at beginning of year |       | 70          |       |             | 268        |             |       |             | 22,634     |             |       |   | — |   |   |   | 22,972 |   |   |
| Cash and cash  equivalents at end of year       |       | $           | 76         |             |       | $                | 276        |             |       |             | $          | 15,526 |   |   |   | $ | — |   |   |   | $ | 15,878 |   |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—SUCCESSORFor the forty-six weeks ended December 31, 2005(in thousands)**

| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash provided  by operating activities        |       | $           | 4,572      |             |       | $                | 2,011      |             |       |             | $          | 12,136 |   |   |   | $ | — |   |   |   | $ | 18,719 |   |   |
| Cash flows from  investing activities:            |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Investment in affiliates                          |       | —      |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | — |   |   |
| Purchases of property, plant and equipment        |       | (12,134     | )          |             | (3,100     | )                |       |             | (10,499    | )                |       |   | — |   |   |   | (25,733 | ) |   |
| Merger consideration                              |       | (626,000    | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (626,000 | ) |   |
| Merger costs                                      |       | (6,485      | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (6,485 | ) |   |
| Net cash used for investing activities            |       | (644,619    | )          |             | (3,100     | )                |       |             | (10,499    | )                |       |   | — |   |   |   | (658,218 | ) |   |
| Cash flows from  financing activities:            |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Revolver and notes payable                        |       | 23,822      |       |             | —     |             |       |             | 116        |             |       |   | — |   |   |   | 23,938 |   |   |
| Cash overdrafts                                   |       | 3,058       |       |             | 1,011      |             |       |             | 2,480      |             |       |   |   |   |   |   | 6,549 |   |   |
| Issuance of long-term debt                        |       | 365,000     |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 365,000 |   |   |
| Issuance of senior subordinated notes             |       | 275,000     |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 275,000 |   |   |
| Debt acquisition costs                            |       | (17,631     | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (17,631 | ) |   |
| Repayments of long-term debt                      |       | (1,875      | )          |             | —     |             |       |             | (713       | )                |       |   | — |   |   |   | (2,588 | ) |   |
| Repayments of Predecessor debt                    |       | (114,274    | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (114,274 | ) |   |
| Equity contribution                               |       | 163,600     |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 163,600 |   |   |
| Distributions to minority shareholders            |       | —      |       |             | —     |             |       |             | (629       | )                |       |   | — |   |   |   | (629 | ) |   |
| Dividend distribution                             |       | (85,325     | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (85,325 | ) |   |
| Net cash provided by financing activities         |       | 611,375     |       |             | 1,011      |             |       |             | 1,254      |             |       |   | — |   |   |   | 613,640 |   |   |
| Effect of  exchange rate changes on cash          |       | —      |       |             | —     |             |       |             | 74         |             |       |   | — |   |   |   | 74 |   |   |
| Net change in  cash and cash equivalents          |       | (28,672     | )          |             | (78        | )                |       |             | 2,965      |             |       |   | — |   |   |   | (25,785 | ) |   |
| Cash and cash  equivalents at beginning of period |       | 33,214      |       |             | 346        |             |       |             | 15,197     |             |       |   | — |   |   |   | 48,757 |   |   |
| Cash and cash  equivalents at end of period       |       | $           | 4,542      |             |       | $                | 268        |             |       |             | $          | 18,162 |   |   |   | $ | — |   |   |   | $ | 22,972 |   |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—PREDECESSORFor the six weeks ended February 11, 2005(in thousands)**

| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash (used)  provided by operating activities |       | $           | (13,974    | )                |       | $                | 418        |             |       |             | $          | 6,591 |   |   |   | $ | — |   |   |   | $ | (6,965 | ) |   |
| Cash flows from  investing activities:            |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Purchases of property, plant and equipment        |       | (1,165      | )          |             | (73        | )                |       |             | (1,120     | )                |       |   | — |   |   |   | (2,358 | ) |   |
| Net cash used for investing activities            |       | (1,165      | )          |             | (73        | )                |       |             | (1,120     | )                |       |   | — |   |   |   | (2,358 | ) |   |
| Cash flows from  financing activities:            |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Revolver and notes payable                        |       | 46,108      |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 46,108 |   |   |
| Cash overdrafts                                   |       | (904        | )          |             | (347       | )                |       |             | —     |             |       |   | — |   |   |   | (1,251 | ) |   |
| Proceeds from issuance of treasury stock          |       | 1,161       |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 1,161 |   |   |
| Purchase of stock                                 |       | (47         | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (47 | ) |   |
| Net cash provided by financing activities         |       | 46,318      |       |             | (347       | )                |       |             | —     |             |       |   | — |   |   |   | 45,971 |   |   |
| Effect of exchange rate changes on cash           |       | —      |       |             | —     |             |       |             | (700       | )                |       |   | — |   |   |   | (700 | ) |   |
| Net change in  cash and cash equivalents          |       | 31,179      |       |             | (2         | )                |       |             | 4,771      |             |       |   | — |   |   |   | 35,948 |   |   |
| Cash and cash  equivalents at beginning of period |       | 2,035       |       |             | 348        |             |       |             | 10,426     |             |       |   | — |   |   |   | 12,809 |   |   |
| Cash and cash  equivalents at end of period       |       | $           | 33,214     |             |       | $                | 346        |             |       |             | $          | 15,197 |   |   |   | $ | — |   |   |   | $ | 48,757 |   |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—PREDECESSORFor the year ended December 31, 2004(in thousands)**

| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash provided by operating activities           |       | $           | 63,469     |             |       | $                | 2,473      |             |       |             | $          | 21,985 |   |   |   | $ | — |   |   |   | $ | 87,927 |   |   |
| Cash flows from  investing activities:              |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Proceeds from sale of capital assets                |       | 2,153       |       |             | —     |             |       |             | 48         |             |       |   | — |   |   |   | 2,201 |   |   |
| Purchases of property, plant and equipment          |       | (14,779     | )          |             | (2,527     | )                |       |             | (18,203    | )                |       |   | — |   |   |   | (35,509 | ) |   |
| Net cash used for investing activities              |       | (12,626     | )          |             | (2,527     | )                |       |             | (18,155    | )                |       |   | — |   |   |   | (33,308 | ) |   |
| Cash flows from  financing activities:              |       |        |       |             |       |             |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Notes payable                                       |       | (6,500      | )          |             | —     |             |       |             | (55        | )                |       |   | — |   |   |   | (6,555 | ) |   |
| Cash overdrafts                                     |       | (1,027      | )          |             | 330        |             |       |             | —     |             |       |   | — |   |   |   | (697 | ) |   |
| Repayments of long-term debt                        |       | (26,233     | )          |             | —     |             |       |             | (2,774     | )                |       |   | — |   |   |   | (29,007 | ) |   |
| Proceeds from issuance of treasury stock            |       | 2,061       |       |             | —     |             |       |             | —     |             |       |   | — |   |   |   | 2,061 |   |   |
| Purchase of stock                                   |       | (4,924      | )          |             | —     |             |       |             | —     |             |       |   | — |   |   |   | (4,924 | ) |   |
| Distributions to minority interest                  |       | —      |       |             | —     |             |       |             | (561       | )                |       |   | — |   |   |   | (561 | ) |   |
| Cash dividends                                      |       | (13,562     | )          |             | —     |             |       |             | 82         |             |       |   | — |   |   |   | (13,480 | ) |   |
| Net cash (used in) provided by financing activities |       | (50,185     | )          |             | 330        |             |       |             | (3,308     | )                |       |   | — |   |   |   | (53,163 | ) |   |
| Effect of exchange rate changes on cash             |       | —      |       |             | 8          |             |       |             | 561        |             |       |   | — |   |   |   | 569 |   |   |
| Net change in  cash and cash equivalents            |       | 658         |       |             | 284        |             |       |             | 1,083      |             |       |   | — |   |   |   | 2,025 |   |   |
| Cash and cash  equivalents at beginning of year     |       | 1,377       |       |             | 64         |             |       |             | 9,343      |             |       |   | — |   |   |   | 10,784 |   |   |
| Cash and cash  equivalents at end of year           |       | $           | 2,035      |             |       | $                | 348        |             |       |             | $          | 10,426 |   |   |   | $ | — |   |   |   | $ | 12,809 |   |   |

 

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**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**(a) Evaluationof Disclosure Controls and Procedures**

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(a) and 15d-15(e) promulgatedunder the Securities and Exchange Act of 1934, or the “Exchange Act”) that aredesigned to ensure that information required to be disclosed in Exchange Actreports is recorded, processed, summarized, and reported within the timeperiods specified in the rules and forms of the SEC and that suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. Any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the design and operation of our disclosure controls and procedures as of December 31,2006. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere functioning effectively to accomplish their objectives as of December 31,2006.

In connection withthe preparation of the Company’s annual financial statements for the year endedDecember 31, 2005, management identified and reported to the AuditCommittee of the Board of Directors two control deficiencies that constitutedmaterial weaknesses in internal control over financial reporting. A materialweakness is a deficiency, or combination of deficiencies, that results in morethan a remote likelihood that a material misstatement of the annual or interimfinancial statements will not be prevented or detected. Had we performed anevaluation of our internal control over financial reporting in accordance withthe provisions of the Sarbanes-Oxley Act, additional control deficiencies mayhave been identified and those control deficiencies could have also representedone or more material weaknesses. We communicated to our Audit Committee of theBoard of Directors the following material weaknesses:

1.                Insufficient taxexpertise to properly prepare the accounting required under SFAS No. 109, “Accountingfor Income Taxes”

2.                Insufficientcontrols over accounting for LIFO inventory in a business combination

**(b) Changes inInternal Control over Financial Reporting**

The Company hastaken the following measures to strengthen our internal control over financialreporting in order to remediate the two material weaknesses described above.

1.                *Insufficient tax expertise to properly prepare the accounting requiredunder SFAS No. 109, “Accounting for Income Taxes.”*  The following actions were implemented in aneffort to remediate the control deficiencies that contributed to the materialweakness related to our insufficient tax expertise to properly prepare theaccounting required under SFAS No. 109, “Accounting for Income Taxes.”

·        Theengagement of outside tax experts to assist with the preparation of the taxprovision in accordance with SFAS No. 109 and to supplement our overalllevel of tax expertise.

·        Re-designand implementation of controls surrounding the preparation and review of thetax provision and related disclosures.

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·        Initiatedsearches for internal resources with the goal of hiring additional accountingand tax personnel to augment our existing finance staff.

As a result,management has concluded that this material weakness has been remediated.

2.                *Insufficient controls over accounting for LIFO inventory in a businesscombination.*The following actions were implemented in an effort toremediate the control deficiencies that contributed to the material weaknessrelated to our insufficient controls over accounting for LIFO inventory in abusiness combination.

·        Re-designand implementation of controls surrounding the accounting for LIFO inventory ina business combination and related disclosures.

·        Thehiring of additional accounting and financial reporting personnel to augmentour existing finance staff.

As a result, management has concluded that thismaterial weakness has been remediated.

There have been no otherchanges in our internal control over financial reporting during the year ended December 31,2006, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

None.

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**Part III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

**Directors andExecutive Officers**

Thefollowing table provides the names and position of our directors and executiveofficers and their ages as of April 2, 2007:

| **Name**                     | ** ** | **Age** | ** ** | **Position(s)**                                                                    |
|------------------------------|------------|---------|------------|------------------------------------------------------------------------------------|
| Michael R. Boyce             |       | 59      |       | Chairman of the Board of  Directors, Chief Executive Officer and President         |
| James P. Cox                 |       | 53      |       | Chief Financial Officer,  Treasurer and Vice President                             |
| William J.  Sichko, Jr. |       | 53      |       | Chief Administrative  Officer, Secretary and Vice President                        |
| Erwin J. Goede               |       | 49      |       | Vice President and  President—Chemicals Europe, Asia and Australia            |
| Paul Ferrall                 |       | 50      |       | Vice President and  President—Chemicals for the Americas                      |
| John Lau                     |       | 52      |       | Vice President and  General Manager—Silica Catalyst and Zeolyst International |
| Scott Randolph               |       | 44      |       | Vice President and  President—Potters division                                |
| Arnold L. Chavkin            |       | 55      |       | Director                                                                           |
| Barry Goldstein              |       | 64      |       | Director                                                                           |
| Stephen V. McKenna           |       | 38      |       | Director                                                                           |
| Peter Savage                 |       | 63      |       | Director                                                                           |
| Timothy J. Walsh             |       | 43      |       | Director                                                                           |

 

*MichaelR. Boyce* became the Chairman of our Board ofDirectors, Chief Executive Officer and President following the consummation ofthe Transactions. Pursuant to our employment agreement with Mr. Boyce hewill serve as our Chief Executive Officer for an initial five year term. From1998 to 2004, Mr. Boyce was the Chairman and Chief Executive Officer ofPeak Investments, LLC. Prior to April 1998; he was President &Chief Operating Officer of Harris Chemical Group and Chief Executive Officer ofPenrice Soda Products Pty. Ltd. in Australia. Before joining HarrisChemical Group, he was with General Chemical, where he spent two years as VicePresident and General Manager of its Industrial Chemicals division. Prior tothat, he was President of Catalyst Resources, Inc., a subsidiary ofPhillips Petroleum Company which manufactures polypropylene and polyethylenepolymerization catalysts. From 1983 through 1986, he was Vice President andGeneral Manager of Sylvachem Corporation, a wholly owned subsidiary of SCMCorporation, a company active in specialty chemicals. Earlier in his career, hewas with Union Carbide, where he held a variety of positions in businessmanagement, sales & marketing, and manufacturing. Mr. Boyce alsoserves as a director on the boards of several private companies.

*JamesP. Cox* became Chief Financial Officer, Treasurer andVice President in April 2005. In 2003, Mr. Cox was appointed Directorof Finance. Mr. Cox assumed responsibility for all of PQ’s financialreporting, as Manager of Corporate Financial Reporting in December 1994,with the consolidation of Potters and PQ’s corporate finance departments inValley Forge. Prior to assuming these responsibilities, Mr. Cox held anumber of increasingly responsible financial management positions within the Pottersorganization, beginning in 1975, leading to his appointment as Controller in1989.

*WilliamJ. Sichko, Jr.* became Chief AdministrativeOfficer, Secretary and Vice President responsible for Legal, Health, Safety andEnvironmental compliance and Human Resources following the consummation of theTransactions. Prior to that, Mr. Sichko was Chief Administrative Officerwith Peak Investments, LLC. From 1991 through 1998, he held managementpositions with Harris Chemical Group and IMC Global (following IMC Global’sacquisition of Harris Chemical) including serving as Senior Vice 

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President of HumanResources from 1996 to 1998. From 1987 to 1991, Mr. Sichko was a managerwith General Chemical.

*ErwinJ. Goede* became Vice President and President ofChemicals Europe, Asia and Australia in November 2006. Mr. Goedejoined PQ in August 2001 as President of PQ Europe. In 1995, Mr. Goedejoined Akzo Nobel’s Polymer Chemicals Unit. Mr. Goede held roles ofincreasing responsibility with Akzo’s Polymer Chemicals Unit, includingEuropean Business Manager for Peroxides and Global Business Manager forSpecialty Monomers. In 1990, Mr. Goede became Finance Director for Akzo-PQSilica, a joint venture between us and Akzo Nobel that produced and marketedsilica-based products in Europe. From 1986 to 1990, Mr. Goede held avariety of senior level financial positions with Akzo Nobel.

*PaulFerrall* became Vice President and President ofChemicals for the Americas in November 2006. Mr. Ferrall had joinedPQ in August 2005 as Senior Vice President of Global Plan Operations forthe Chemicals division. Before joining PQ, Mr. Ferrall had been Presidentof Peak Chemical and Sulfur. From 1995 to 2000, Mr. Ferrall held severalmanagement positions with Harris Chemical and IMC Global, including VicePresident of its Soda Products business. From 1978 to 1995, Mr. Ferrallheld various positions of responsibility in engineering, operations, finance,sales and business management with Allied Chemical.

*JohnLau* became Vice President and General Manager ofSilica Catalyst and Zeolyst International in November 2006. Dr. Lauhad joined PQ in July 1996 to lead its Exploratory Research departmentwith the mission to develop new growth opportunities. Dr. Lau wasappointed Vice President of Research and Development in 1998 and Vice Presidentof Strategic Planning in 2005. Prior to joining PQ, Dr. Lau held variousresearch and management positions at W.R. Grace & Co. from 1984 to1996. From 1982 to 1984, Dr. Lau was a research fellow at the Universityof California Los Angeles.

*ScottRandolph*became Vice President and President of thePotters division in April of 2005 after joining PQ as Senior VicePresident Strategic Planning. From 2000 to 2005, Mr. Randolph held theposition of Chief Financial Officer with Peak Investments, LLC. From 1990 to2000, Mr. Randolph held a number of management positions with HarrisChemical Group and IMC Global Inc. following IMC Global’s acquisition ofHarris. Mr. Randolph’s last position with IMC Global was General Managerof the Worldwide Boron Business.

*ArnoldL. Chavkin* became a director following theconsummation of the Transactions and is serving a three year term. Mr. Chavkinwas a Partner and Chief Investment Officer of J.P. Morgan Partners, LLC and itspredecessor firms from 1990 until his retirement from J.P. Morgan Partners, LLCin July 2006. From 1985 to 1990, Mr. Chavkin was a member of ChemicalBank’s merchant banking group and a generalist in its corporate finance groupspecializing in mergers and acquisitions and private placements. Mr. Chavkinis currently a director of Noble Environmental Power, LLC.

*BarryGoldstein* became a director in September 2005 andis serving an initial three year term. He is serving as Chairman of the AuditCommittee. From 1987 to 2000, Mr. Goldstein was Chief Financial Officer ofOffice Depot, Inc. Before joining Office Depot, Mr. Goldstein was apartner at Grant Thornton. Mr. Goldstein also serves on the board ofdirectors of Interline Brands, Inc.

*StephenV. McKenna* became a director following theconsummation of the Transactions and is serving a three year term. Mr. McKennais currently a Managing Director of CCMP Capital Advisors, LLC, a privateequity firm formed in August 2006 by the former buyout/growth equityinvestment team of J.P. Morgan Partners, LLC, a private equity division ofJPMorgan Chase & Co. Mr. McKenna had been a Partner with J.P.Morgan Partners since 2005. Prior to joining J.P. Morgan Partners in 2000, Mr. McKennaworked in the Investment Banking Group of Morgan Stanley & Co.,Incorporated from 1999 to 2000 and in the Mergers & Acquisitions Groupof J.P. Morgan & Co. Incorporated from 1996 to 1999. 

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Mr. McKenna serves onthe board of directors of Pliant Corporation, Jetro JMDH Holdings, Inc.,and Generac Power Systems, Inc.

*PeterSavage* became a director in September 2005 and isserving an initial three year term. He is serving as Chairman of the Health,Safety and Environment Committee. From 1987 to 1994, Mr. Savage was adirector of Harrisons & Crosfield, plc and Managing Director ofHarcros Chemical Group. Mr. Savage also held the position of EuropeanBusiness Director for Rohm & Haas Co. from 1985 to 1987. Beforejoining Rohm & Haas, Mr. Savage held various internationalleadership positions with Esso (Exxon) Chemical including serving on the UnitedKingdom board of directors responsible for United Kingdom manufacturingoperations from 1980 to 1984. Mr. Savage currently serves as chairman onthe board of directors of Harcros Chemicals Inc. and was chairman ofAlbion Chemicals Group from 2001 until its sale in June 2006.

*Timothy J. Walsh*became a director following the consummation of the Transactions and is servinga three year term. He will serve as Chairman of the Compensation Committee. Mr. Walshis a Managing Director of CCMP Capital Advisors, LLC, a private equity firmformed in August 2006 by the former buyout/growth equity investment teamof J.P. Morgan Partners, LLC, a private equity division of JPMorgan Chase &Co. Mr. Walsh had been a Partner with J.P. Morgan Partners since 2000.From 1993 to 1999, Mr. Walsh held various positions with a predecessor ofJ.P. Morgan Partners in Europe and North America. Prior to 1993, he was a VicePresident of The Chase Manhattan Corporation. Mr. Walsh is also a directorof Better Minerals & Aggregates Company, Metokote Corporation, PliantCorporation, and Generac Power Systems, Inc.

**Committees of theBoard of Directors**

Our Board of Directors hasan Audit Committee, Health, Safety and Environment Committee and CompensationCommittee. Each committee operates under charters that have been adopted by theBoard of Directors.

***Audit Committee***

The duties and responsibilities of the Audit Committeeinclude recommending the appointment or termination of the engagement ofindependent registered public accounting firms, otherwise overseeing theindependent auditor relationship and reviewing significant accounting policiesand controls. The Board of Directors has selected Mr. Goldstein aschairman of the Audit Committee and has determined that he qualifies as anAudit Committee “financial expert” within the meaning of SEC rules andregulations. Mr. Goldstein and Mr. McKenna served as members of theAudit Committee during 2006.

The Audit Committee has reviewed and discussedthe audited financial statements for the year ended December 31, 2006 withmanagement. The Audit Committee hasdiscussed with the independent registered public accounting firm the mattersrequired to be discussed by the statement on Auditing Standards No. 61, asamended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T.The Audit Committee has received thewritten disclosures and the letter from the independent registered publicaccounting firm required by Independence Standards Board Standard No. 1,as adopted by the Public Company Accounting Oversight Board in Rule 3600T,and has discussed with the independent registered public accounting firm the independentregistered public accounting firm’s independence. Based on the review anddiscussions referred to above, the AuditCommittee recommended to the Board ofDirectors that the audited financial statements be included in thecompany’s annual report on Form 10-K for the year ended December 31,2006.

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***Health, Safety and Environment Committee***

The purpose of the Health,Safety and Environment (HS&E) Committee is to assist the Board of Directorsin fulfilling its responsibilities to provide global oversight and support ofCompany’s health, safety and environment policies, programs and initiatives.The Board of Directors has selected Mr. Savage as chairman of the HS&ECommittee. Mr. Savage and Mr. Boyce served as members of the HS&ECommittee during 2006.

***Compensation Committee***

The duties and responsibilities of the CompensationCommittee include reviewing and approving the compensation of officers anddirectors except that the compensation of officers serving on any suchcommittee will be determined by the full Board of Directors. The Board ofDirectors has selected Mr. Walsh as chairman of the CompensationCommittee. Mr. Walsh and Mr. Boyce served as members of theCompensation Committee during 2006. The compensation of all officers other thanour President, Mr. Boyce, is approved by the board of directors based onrecommendations by Mr. Boyce and the Compensation Committee. Mr. Boyce’scompensation is determined by the Board of Directors upon the recommendation ofthe Compensation Committee.

JPMorgan Partners controlsthe majority of our common stock and, therefore, has the power to control ouraffairs and policies and the election of our directors and the appointment ofour management.

**Board Structure andCompensation**

The Board of Directors iscurrently comprised of five directors and the chairman, Mr. Boyce. Themembers of the board of directors are reimbursed for their out-of-pocketexpenses. We pay each non-employee director that is not an affiliate ofJPMorgan Partners an annual retainer of $40,000 paid in advance in quarterly installmentsfor their services on our Board of Directors. In addition, we pay the chairmanof the Audit Committee and Health, Safety and Environment Committee anadditional $10,000 per year for their services on their respective committees.

**Compensation CommitteeInterlocks and Insider Participation**

Mr. Boyce and Mr. Walshserved as members of the Compensation Committee during 2006. During 2006, noneof the executive officers or Directors of the Company were members of the boardof directors, or any committee thereof, of any other entity such that therelationship would be construed to constitute a committee interlock within themeaning of the rules of the Securities and Exchange Commission.

**Code of Conduct**

We have adopted a business conduct policy that appliesto all employees and non-employee directors, which includes the code of ethicsof our chief executive officer, our chief financial officer, and principalaccounting officer. Our code of conduct, which includes our code of ethics, hasbeen designed to communicate our commitment to ethical business conduct and toprovide guidance to employees so that they may apply these principles in thedaily performance of their job responsibilities. Our code of conduct is postedon our website at www.pqcorp.com.

Copies of our business conduct policy are alsoavailable at no cost to any person upon request. Any such request shouldinclude the name and mailing address of the person making the request, whichshould be directed to:

PQ CorporationP.O. Box 840

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Valley Forge, PA 19482-0840Attention:  Vice President of HumanResources

**ITEM 11.**         EXECUTIVECOMPENSATION

**CompensationDiscussion and Analysis**

***Overview***

The Company’s management and the CompensationCommittee of the Board of Directors have developed an executive compensationprogram to attract, motivate, and retain key executives and to rewardexecutives with the goal of creating stockholder value. Our program outlinescertain principles and guidelines to foster a performance-oriented environmentby aligning a significant portion of each executive’s compensation to theachievement of performance targets that are important to the Company and to itsstockholders.

Embodied in the Compensation Committee charter arespecific guiding principles related to executive compensation. Specifically,executive compensation programs should be equitable, effective, and alignedwith corporate strategy to create stockholder value through superior corporateperformance; focused on promoting competitive levels of compensation so as tobetter ensure retention of valued management expertise required to lead thebusiness; and designed to reward our executives for positive financialperformance.

The Compensation Committee charter allows theCompensation Committee, when appropriate, to seek advice from professionalsources with expertise in executive compensation practices in order to obtainan independent view of current market trends and best-in-class practices, whichmay be considered appropriate to further support the achievement of the Company’soverall executive compensation strategy.

The Company’s executivecompensation program has the following primary elements: base salary, incentivecash bonus, and equity awards. The base salary is targeted to ensure that wecan attract and retain the right level of talent to sustain the continuedgrowth of the Company. Base salary is reviewed annually and adjusted based onthe individual’s performance in their specific job as well as the achievementof their annual key goals. The incentive cash bonus program addresses theannual, shorter-term goals related to Company performance. It is linked to thekey metrics used to judge the overall performance of the Company: Adjustedearnings before income tax, depreciation, and amortization (“Adjusted EBITDA”).To further ensure line-of-sight connectivity to each participantsresponsibilities, the Adjusted EBITDA metric has a portion associated with theperformance of individual’s business unit. This dual focus aligns the successof the overall Company with their more immediate business goals. Finally, theequity awards of the compensation program add in the balance of long-term valuecreation and growth focus. The equity realization has two levels, time andoverall performance. The combination of these three elements reinforce theoverall performance based theme which is the goal of our executive compensationprogram.

***Base Salary***

We establish base salaries for our executivescommensurate with the scope of their responsibilities and consider competitivemarket compensation paid by companies in our competitive peer group for similarpositions. Generally, we target executive base salaries to be at or near themedian range for salaries of executives in comparative companies, industriesand with similar compensation philosophies as ours.

We have established aprocess within the Compensation Committee for the review and approval ofexecutive base salaries and make appropriate adjustments, as required. Factorsused in making those decisions for adjustment include:  performance of the individual executive,scope of responsibility and/or 

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changes,overall salary budget set for the Company for the given year, and the overallpotential cash compensation of the executive when combined with their incentiveplan opportunity.

***Incentive Cash Bonus***

The Company implemented an incentive cash bonus planwhich provides our executives, along with other key employees, the opportunityto earn additional performance based cash compensation each year. We believethat our executive compensation reflects our overall compensation philosophy,which is to provide opportunity to earn significant cash compensation in a yearwhen there is significant stockholder value created and positive financialperformance is achieved.

For 2006, the incentivecash bonus targets for executives ranged from 30% to 50%, with the ChiefExecutive Officer targeted at 100%. These targets are aligned to an AdjustedEBITDA metric that is specific, from a line of sight perspective, to the partof the business for which the executive has responsibility. The currentincentive cash bonus plan is designed so the results and payout mechanics arealmost exclusively quantitative, making the plan clear for the participants tounderstand and simple for the Company to administer.

***Equity Awards***

Our general compensation philosophy is based oncreating a feeling of personal ownership for our executive management team. Toencourage this perspective and balance the short-term focus of the incentivecash bonus plan, certain of our executive officers have been offered restrictedshare opportunities by our sole stockholder, Holdings.

Similar to the range of target percentages used in theincentive cash bonus plan, restricted share grants are of differing quantities,dependent on the executive’s roles and responsibilities.

The restricted share grants have a time-vestingcomponent (half of the shares vest in equal 20% increments over 5 years) withan accelerator trigger in the event of a change in control or initial publicoffering of stock. They also have a second vesting element based on performancehurdles. These performance based shares also have a similar change in controlor initial public offering of stock trigger.

The restricted sharegrants have a time-vesting component equal to 50% of the grant: 20% of thistime-vesting component of the grant vests annually, subject to the executive’scontinued service with the Company and subject to 100% vesting upon the earlierof an initial public offering of stock or change in control, and subject toaccelerated vesting upon certain specified events of termination of service;and the vesting of 50% of each grant is based on performance measures at thetime of an initial public offering of stock or change in control. Dividends, ifany, declared on the restricted stock will be payable to the executive whetheror not the stock is then vested.

***Defined Benefit Plans***

The Company sponsors defined benefit pension planscovering substantially all employees in the U.S. and Canada and certainemployees at its subsidiaries outside of North America. Benefits for a majorityof the Plans are based on average final pay and years of service. The Company’sfunding policy, consistent with statutory requirements, is based on actuarialcomputations utilizing the projected unit credit method of calculation. As aresult of an amendment approved in 2004, employees hired after July 1,2004 are not eligible to participate in the U.S. defined benefit plan butinstead are enrolled into a defined contribution plan. In 2005, the Company’sBoard of Directors approved amendments to the U.S. and Canada defined benefitpension plans. As a result, all future accruals were frozen in the U.S. andcredited service as of January 1, 2007 was frozen in Canada, and employeesunder both plans will instead receive a new discretionary Company contributionbased on a percentage of pay to the defined contribution plan.

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The Company has defined benefit supplementaryretirement plans which includes benefits, for certain U.S. employees, in excessof qualified plan limitations. The plans are unfunded and obligations are paidout of the Company’s general assets, including assets held in a trust.

The Company sponsors unfunded plans to provide certainhealth care benefits to retired employees. These plans cover substantially allemployees in the U.S. and Canada. Generally, the plans pay a stated percentageof medical expenses reduced by deductibles and other coverage. Effective January 1,2004, the Company changed its retiree medical plan in the U.S. These changeswere adopted at the beginning of 2003. These changes created a new indemnityplan for all participants retiring after 2003 and all bonus—eligibleparticipants retiring during the period beginning 1995 and ending in 2003. Allother retirees are grandfathered under their current plans. In addition, allemployees hired on or after January 1, 2003 will not be eligible formedical benefits when they retire. In 2005, the Company’s Board of Directorsapproved an amendment to the U.S. and Canada retiree health plans which willeliminate postretirement benefits for employees retiring after January 1,2007.

***Profit Sharing and Defined Contribution Plans***

The Company has certain profit sharing plans to covereligible employees of the Company and certain subsidiaries. The profit sharingplans are qualified plans and they provide annual discretionary companycontributions, subject to Board of Directors approval, based on the Company’sprevious year’s financial performance. Discretionary company contributionscliff vest over 3 years. In 2005, the Company’s Board of Directors approved anamendment to the U.S. and Canadian profit sharing plans to indefinitely suspendCompany contributions effective January 1, 2007.

The Company has a Section 401(k) SavingsPlan (the “401(k) Plan”) to cover eligible employees of the Company andcertain subsidiaries. The 401(k) Plan permits eligible employees of theCompany to defer up to 15% of their annual base salary, subject to certainlimitations imposed by the Internal Revenue Code. The employees’ electivedeferrals are immediately vested and non-forfeitable upon contribution to the401(k) Plan. The Company currently makes matching contributions to the401(k) Plan in an amount equal to $.50 for each dollar of participantdeferrals, up to a maximum of 3% of the participant’s annual salary and subjectto certain other limits. Plan participants vest over a 3 year period in theamounts contributed by the Company. Employees are eligible to participate inthe 401(k) Plan immediately upon employment with the Company.

The Company hasestablished a personal retirement account under the Company’s 401(k) plan.The personal retirement account is a separate account under which eligibleparticipants are credited with a Company contribution of 3% of eligibleearnings. In 2005, the Company’s Board of Directors approved an amendment tothe personal retirement account to increase the base contribution to 4% ofeligible earnings, and also provide additional transition contributions for employees who met certain age, service andpoint requirements as of December 31 2006  In 2006, personal retirement account contributions under the Company’s401(k) plan cliff vest after five years or upon a change in control.Similar defined contribution based programs have been established in the UnitedKingdom in 2006 and in Canada in 2007.

***Other Elements of Compensation and Perquisites***

In line with our overallcompensation philosophy, the executive benefits offered are identical to thoseoffered to all other employees.

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**Report of the Compensation Committee of the Board ofDirectors**

The following report hasbeen submitted by the Compensation Committee of the Board of Directors:

The Compensation Committeeof the Board of Directors has reviewed and discussed the Company’s CompensationDiscussion and Analysis with management. Based on this review and discussion,the Compensation Committee recommended to the Board of Directors that theCompensation Discussion and Analysis be included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2006, as filedwith the Securities and Exchange Commission.

Theforegoing report was submitted by the Compensation Committee of the Board andshall not be deemed to be “soliciting material” or to be “filed” with theCommission or subject to Regulation 14A promulgated by the Commission orSection 18 of the Securities Act of 1934.

|   | Respectfully submitted,     |
|--------|-----------------------------|
|   | Timothy  J. Walsh, Chairman |
|   | Michael  R. Boyce           |

 

**Summary Compensation Table**

Thefollowing table sets forth information regarding compensation earned during2006 by our Chief Executive Officer, our Chief Financial Officer, and our fourother most highly compensated executive officers, who we refer to collectivelyas our Named Executive Officers.

| Name and  Principal Position                                                    | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary  ($)** | ** ** | **Bonus  ($)** | ** ** | **Stock Awards(4)  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation(1)  ($)** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation(2)  ($)** | ** ** | **Total($)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|--------------|------------|
| Michael R. BoyceChairman, Chief Executive Officer, and  President                         |       |       | 2006       |     |       | $               | 522,917    |           |       | $                             | —     |                    |       |                                                      | $          | 32,740                                                                                           |       |                                     |       | $            | —     |   |   |   | $ | 800,722 |   |   |   | $ | — |   |   |   | $ | 13,200 |   |   | $ | 1,369,579 |   |
| James P. Cox  Chief Financial Officer, Treasurer, and Vice President                      |       |       | 2006       |     |       | 217,271         |       |           | —     |                          |       |                    | 5,457      |                                                      |       |                                                                                             | —     |                                     |       |         | 222,784    |   |   |   | 129,075 |   |   |   | 6,518 |   |   | 581,105 |   |
| Michael R.  ImbrianiVice Chairman and President—Chemicals  Division(3)               |       |       | 2006       |     |       | 352,479         |       |           | —     |                          |       |                    | —     |                                                      |       |                                                                                             | —     |                                     |       |         | 315,142    |   |   |   | 227,243 |   |   |   | 1,954,226 |   |   | 2,849,090 |   |
| Erwin J. Goede  President—PQ Chemicals Europe, Asia and Australia                    |       |       | 2006       |     |       | 318,205         |       |           | —     |                          |       |                    | 4,365      |                                                      |       |                                                                                             | —     |                                     |       |         | 208,604    |   |   |   | 36,484 |   |   |   | 32,039 |   |   | 599,697 |   |
| Scott RandolphVice President of PQ and  President—Potters Division                   |       |       | 2006       |     |       | 249,174         |       |           | —     |                          |       |                    | 10,913     |                                                      |       |                                                                                             | —     |                                     |       |         | 263,489    |   |   |   | — |   |   |   | 13,200 |   |   | 536,776 |   |
| William J.  Sichko, Jr.  Chief Administrative Officer, Secretary, and Vice President |       |       | 2006       |     |       | 249,174         |       |           | —     |                          |       |                    | 10,913     |                                                      |       |                                                                                             | —     |                                     |       |         | 263,489    |   |   |   | — |   |   |   | 13,200 |   |   | 536,776 |   |
|                                                                                           |            |            |            |          |            |                 |            |                |            |                               |            |                         |            |                                                           |            |                                                                                                  |            |                                          |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                Compensation from the annual bonus plan islisted for the year in which the performance is measured. Payments under theannual bonus plan are generally made in the first quarter of the following yearand the employee generally must be employed on the payment date to receive anybonus. The plan generally requires the attainment of a stated minimum operatingresult for payments to be earned.

(2)                All other compensation in fiscal year 2006represents the following: a)  Company matching contributions under the PQ401(k) Plan for Mr. Boyce of $6,600; for Mr. Cox of $6,518; forMr. Randolph of $6,600; for Mr. Sichko of $6,600; and forMr. Imbriani of $6,600, b) Company contributions to the individual’spersonal retirement account under the Company’s 401(k) Plan forMessrs. Boyce, Randolph and Sichko of $6,600, $6,600 and $6,600,respectively, c) 2006 portion of the retention bonus for Mr. Imbrianiof $479,000 as part of his Transition agreement, d) separation payment for Mr. Imbrianiof $654,603 as part of his Transition agreement, e) estimated 2007 and 2008bonus of $585,614 for Mr. Imbriani as part of his Transition agreement,and f) annual auto lease fee of €21,625 (approximately $28,500) for acompany car for Mr. Goede.

(3)                Mr. Imbriani, our former ViceChairman and President—Chemicals Division, retired effective December 31,2006.

(4)                See Note 19 in “Item 8. FinancialStatements and Supplementary Data” for details on stock-based compensation andthe assumptions used in determining the fair value of the stock awards.

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**Grants of Plan-Based Awards Table**

Thetable below shows amounts payable under the Company's annual cash incentiveplan for 2006.

| ** **             | ** ** | ** **     | ** ** | **Estimated Future Payouts Under Non-Equity  Incentive Plan Awards** | ** ** |
|------------------------|------------|----------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | ** **     | ** ** | **Grant Date**                                                                                | ** ** | **Threshold ($)** | ** ** | **Target ($)** | ** ** | **Maximum ($)** | ** ** |
| Michael R. Boyce       |       | Not applicable |       | Not applicable                                                                                     |       | $ | 522,917 |   |   | $ | 800,722 |   |   |
| James P. Cox           |       | Not applicable |       | Not applicable                                                                                     |       | 97,772 |   |   | 222,784 |   |   |
| Michael R. Imbriani    |       | Not applicable |       | Not applicable                                                                                     |       | 176,240 |   |   | 315,142 |   |   |
| Erwin J. Goede         |       | Not applicable |       | Not applicable                                                                                     |       | 111,372 |   |   | 208,604 |   |   |
| Scott Randolph         |       | Not applicable |       | Not applicable                                                                                     |       | 124,587 |   |   | 263,489 |   |   |
| William J. Sichko, Jr. |       | Not applicable |       | Not applicable                                                                                     |       | 124,587 |   |   | 263,489 |   |   |
|                        |            |                |            |                                                                                                    |            |  |  |  |  |  |  |  |  |  |  |

 

**No payment is made for performancebelow the Adjusted EBITDA target amount. The Target amount reported abovereflects the amount payable if the Adjusted EBITDA target is met, and thetarget for each executive is a percentage of 2006 earned salary.  There is no maximum specified under the plan.If performance exceeds the Adjusted EBITDA target, a pool is created consistingof 0.25 dollars for each dollar above target and that pool is allocated amongparticipants (which includes key employees other than the Named ExecutiveOfficers) proportionately (based on the ratio of the participant's target bonuspercentage to the sum of all eligible participants' target bonus percentages).The Maximum amount reported above reflects the actual amount payable to theexecutive for 2006 performance.**

**Outstanding EquityAwards at Fiscal Year-end Table**

Thefollowing table sets forth information regarding the outstanding equity awardsthat have been granted but remain unvested for our Named Executive Officers asof December 31, 2006:

| ** **                   | ** ** | ** ** | ** ** | **Stock Awards**                                                                                          | ** ** |
|------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| **Name**                     | ** ** | ** ** | ** ** | **Number of  Shares or  Units of Stock  That Have Not  Vested(1) (#)** | ** ** | **Market Value  of Shares or  Units of Stock  That Have Not  Vested(3) ($)** | ** ** | **Equity Incentive  Plan Awards:  Number of  Unearned Shares,  Units or Other  Rights That Have  Not Vested(2) (#)** | ** ** | **Equity Incentive Plan  Awards: Market or  Payout Value of  Unearned Shares,  Units or Other Rights  That Have Not  Vested(3) ($)** | ** ** |
| Michael R. Boyce             |       |       | 2,400      |                                                                                                      |       |   | $ | 2,908,800 |   |   |   | 3,000 |   |   |   | $ | 3,636,000 |   |   |
| James P. Cox                 |       |       | 400        |                                                                                                      |       |   | 484,800 |   |   |   | 500 |   |   |   | 606,000 |   |   |
| Michael R.  Imbriani         |       |       | —     |                                                                                                      |       |   | — |   |   |   | — |   |   |   | — |   |   |
| Erwin J. Goede               |       |       | 320        |                                                                                                      |       |   | 387,840 |   |   |   | 400 |   |   |   | 484,800 |   |   |
| Scott Randolph               |       |       | 800        |                                                                                                      |       |   | 969,600 |   |   |   | 1,000 |   |   |   | 1,212,000 |   |   |
| William J.  Sichko, Jr. |       |       | 800        |                                                                                                      |       |   | 969,600 |   |   |   | 1,000 |   |   |   | 1,212,000 |   |   |

 

Holdings granted restricted shares during 2005 of itsClass A Common Stock to certain of our Named Executive Officers asfollows: Mr. Boyce—6,000 shares; Mr. Cox—1,000; Mr. Goede—800shares Mr. Randolph—2,000 shares; and Mr. Sichko—2,000 shares. Theamount paid by each of these individuals for such restricted stock was not lessthan the fair market value (as determined by the board of directors ofHoldings) on the date of purchase. Dividends, if any, declared on therestricted stock will be payable to the executive whether or not the stock isthen vested.

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(1)          This portion of thegrants vest as follows: 10% of each grant vests on February 11 in eachyear 2006-2010, subject to the executive’s continued service withHoldings and its subsidiaries on such date and subject to 100% vesting upon theearlier of an initial public offering of stock by, or change in control of,Holdings, and subject to accelerated vesting upon certain specified events oftermination of service.

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(2)          The vesting of thisportion of the grants (the Equity Incentive Plan Awards) is based onperformance measures at the time of an initial public offering of stock by, orearlier change in control of, Holdings.

(3)          There is no publicmarket for the common stock of Holdings. The market value reported reflects theboard of directors’ good faith determination of fair market value for itsClass A common stock as of December 31, 2006 of $1,212 per share.

**Option Exercisesand Stock Vested Table**

Thefollowing table sets forth the number of shares of stock that vested for ourNamed Executive Officers during 2006 and the aggregate dollar amount by ourNamed Executive Officers upon the vesting of the stock:
|                              | ** ** | **Stock Awards** | ** ** |
|------------------------------|------------|-----------------------|------------|
| **Name**                     | ** ** | ** **            | ** ** | **Number of Shares  Acquired on  Vesting (#)** | ** ** | **Value on  Vesting(1) ($)** | ** ** |
| Michael R. Boyce             |       |                  | 600        |   |   |   | $ | 342,000 |   |   |
| James P. Cox                 |       |                  | 100        |   |   |   | 57,000 |   |   |
| Michael R.  Imbriani         |       |                  | —     |   |   |   | — |   |   |
| Erwin J. Goede               |       |                  | 80         |   |   |   | 45,600 |   |   |
| Scott Randolph               |       |                  | 200        |   |   |   | 114,000 |   |   |
| William J.  Sichko, Jr. |       |                  | 200        |   |   |   | 114,000 |   |   |
|                              |            |                       |            |  |  |  |  |  |  |  |  |  |

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(1)          Thereis no public market for the common stock of Holdings. The market value reportedreflects the board of directors’ good faith determination of fair market valuefor its Class A common stock as of February 11, 2006 of $570 pershare.

**Pension BenefitsTable**

Thefollowing table sets forth information regarding the pension benefits of ourNamed Executive Officers during 2006:
| Name                                  | ** ** | ** **                                           | ** ** | **Plan Name** | ** ** | **Number of  Years  Credited  Service (#)** | ** ** | **Present  Value of  Accumulated  Benefit ($)** | ** ** | **Payments  During  Last Fiscal  Year ($)** |
|---------------------------------------|------------|------------------------------------------------------|------------|--------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------|
| Michael R. Boyce            |       |                                                 |       | —             |       | $                                                     | —     |                                                      | $          | —                                                |
| James P. Cox                |       | PQ Corporation Retirement  Plan (Qualified Plan)     |       | 32                 |       | 551,831                                               |       | —                                                    |
|                                  |       | PQ Corporation  Retirement Benefits Restoration Plan |       | 32                 |       | 128,561                                               |       | —                                                    |
| Michael R. Imbriani         |       | PQ Corporation  Retirement Plan (Qualified Plan)     |       | 34                 |       | 1,005,032                                             |       | —                                                    |
|                                  |       | PQ Corporation  Retirement Benefits Restoration Plan |       | 34                 |       | 1,551,749                                             |       | —                                                    |
| Erwin J. Goede              |       | Pension Plan of PQ  Netherlands B.V.                 |       | 5                  |       | 267,528                                               |       | —                                                    |
| Scott Randolph                   |       |                                                 |       | —             |       | —                                                |       | —                                                    |
| William J. Sichko, Jr. |       |                                                 |       | —             |       | —                                                |       | —                                                    |
|                                       |            |                                                      |            |                    |            |                                                       |            |                                                           |            |                                                       |  |  |

 

The present value of the accumulated benefit has beendetermined assuming benefits commence as of each executive’s earliestretirement age at which they are entitled to unreduced benefits in total fromboth plans (later of age 62 or current age) and the same actuarial assumptionsused for financial disclosure requirements for the pension plans. Specifically,the mortality assumption is based on the RP2000 

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Mortality Table projectedto 2005 for healthy males and females, and a discount rate of 5.90% has beenused in the calculation of the present value at December 31, 2006.However, no decrements have been applied prior to the earliest unreducedretirement date. For the calculation of the present value at December 31,2005 the mortality was based on the RP2000 Mortality Table with no projectionfor healthy males and females, and a discount rate of 5.60% was used.

As an employee of PQNederland B.V., a subsidiary of ours, Mr. Goede participates in a separatedefined benefit pension program in the Netherlands. The retirement age underthis program is 65 and the pension benefit is calculated using a career averagepay formula. For the year ended December 31, 2006, the discount rate usedwas 4.50%. For the pensionable salary in excess of 178,000 euros, a definedcontribution system is in place. The projected value at retirement age issubject to the collective benefit calculation stipulated by the plan.

**NonqualifiedDeferred Compensation**

Thefollowing table sets forth information regarding non-qualified deferredcompensation for our Named Executive Officers during 2006:
| Name                         | ** ** | ** ** | ** ** | **Executive  Contributions  in Last FY  ($)** | ** ** | **Registrant  Contributions  in Last FY  ($)** | ** ** | **Aggregate  Withdrawals/  Distributions  ($)** | ** ** | **Aggregate  Earnings in  Last FY  ($)** | ** ** | **Aggregate  Balance at  Last FYE  ($)** | ** ** |
|------------------------------|------------|------------|------------|---------------------------------------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| Michael R. Boyce             |       |       | $          | —                                                  |       |                                                     |       | $                                               | 26,619     |                                               |       |                                               | $          | — |   |   |   | $ | — |   |   |   | $ | 34,069 |   |   |
| James P. Cox                 |       |       | —     |                                                    |       |                                                     | —     |                                            |       |                                               | —     |                                               |       |   | — |   |   |   | — |   |   |
| Michael R.  Imbriani         |       |       | —     |                                                    |       |                                                     | —     |                                            |       |                                               | —     |                                               |       |   | — |   |   |   | — |   |   |
| Erwin J. Goede               |       |       | —     |                                                    |       |                                                     | —     |                                            |       |                                               | —     |                                               |       |   | — |   |   |   | — |   |   |
| Scott Randolph               |       |       | —     |                                                    |       |                                                     | 4,768      |                                            |       |                                               | —     |                                               |       |   | — |   |   |   | 5,068 |   |   |
| William J.  Sichko, Jr. |       |       | —     |                                                    |       |                                                     | 4,768      |                                            |       |                                               | —     |                                               |       |   | — |   |   |   | 5,068 |   |   |

 

The Company has establisheda personal retirement account “excess plan.” The personal retirement accountexcess plan is a non-qualified, unfunded plan under which eligible participantsare credited with the amount of personal retirement account contributions basedon compensation in excess of the maximum level of compensation taken in accountunder the 401(k) plan. In 2006, personal retirement account contributionsunder the Company’s 401(k) excess plan cliff vest after five years or upona change in control. Company contributions for the personal retirement accountunder the Company’s 401(k) excess plan are recorded in selling, general,and administrative expense in the period incurred.

**DirectorCompensation Table**

Thefollowing table sets forth a summary of the compensation we paid to ournon-employee directors in 2006:
| Name                         | ** ** | ** ** | ** ** | **Fees  Earned or  Paid in  Cash(1) ($)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension Value  and  Nonqualified  Deferred  Compensation  Earnings ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total ($)** | ** ** |
|------------------------------|------------|------------|------------|----------------------------------------------------------|------------|------------------------|------------|-------------------------|------------|--------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| Barry Goldstein         |       |       | $          | 50,000                                                   |       |                   |       | $                       | —     |                                                   |       |                                                                                                 | $          | —                                |       |               |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 50,000 |   |
| Arnold L. Chavkin  |       |       | —     |                                                     |       |                   | —     |                    |       |                                                   | —     |                                                                                                 |       |                                  | —     |               |       |   | — |   |   |   | — |   |   | — |   |
| Stephen V. McKenna |       |       | —     |                                                     |       |                   | —     |                    |       |                                                   | —     |                                                                                                 |       |                                  | —     |               |       |   | — |   |   |   | — |   |   | — |   |
| Timothy J. Walsh   |       |       | —     |                                                     |       |                   | —     |                    |       |                                                   | —     |                                                                                                 |       |                                  | —     |               |       |   | — |   |   |   | — |   |   | — |   |
| Peter Savage            |       |       | 50,000     |                                                     |       |                   | —     |                    |       |                                                   | —     |                                                                                                 |       |                                  | —     |               |       |   | — |   |   |   | — |   |   | 50,000 |   |
|                              |            |            |            |                                                          |            |                        |            |                         |            |                                                        |            |                                                                                                      |            |                                       |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Wepay each non-employee director that is not an affiliate of JPMorgan Partners anannual retainer of $40,000 paid in advance in quarterly installments for theirservices on our Board of Directors. In addition, we pay the chairman of theAudit Committee and Health, Safety and Environment Committee an additional$10,000 per year for their services on their respective committees.

**Employment,Severance Change in Control Agreements**

*EmploymentAgreement with Michael R. Boyce.**  *Effective February 11, 2005,we entered into an employment agreement with Michael R. Boyce wherebyMr. Boyce will serve as our Chief Executive Officer, for an initial termof five years from such date. Thereafter, the employment term may be extendedfor one or more additional one-year period(s) by mutual agreement ofus and Mr. Boyce not later than 90 days prior to the expiration of theinitial term or any extension term. Pursuant to the agreement Mr. Boycewill receive annual base salary in the amount of $500,000, or such higher rateas our Board or Compensation Committee may designate from time to time andMr. Boyce will also be eligible to receive an annual bonus according to aformula based on performance goals established each year with a target equal to100% of Mr. Boyce’s annual base salary. The agreement further providesthat in the event that Mr. Boyce’s employment is terminated by us without“cause” or by Mr. Boyce with “good reason,” and subject to his executionof a release, Mr. Boyce will be entitled to severance compensation  of (i) eighteen months continued basesalary, (ii) a pro rata share of the bonus that would have been payable inrespect of the calendar year in which his employment terminates; (iii) theamount of any unpaid bonus in respect of years ending prior to the year oftermination and (iv) 150% of the bonus paid to Mr. Boyce in the mostrecently completed fiscal year prior to the year of termination. “Good Reason”means any of the following events without the prior consent of the executive:  (i) a material reduction in hisauthority, duties and responsibilities, excluding isolated or immaterialactions or (ii) a reduction in the base salary or target bonus percentageor any failure by us to provide any material payment or benefit under thisEmployment Agreement; provided, however, that the executive must provide uswith at least 30 days’ prior written notice not later than the 30th dayfollowing the occurrence of the event constituting Good Reason and we have theopportunity to remedy the alleged violation during such 30 day notice period.In addition, Mr. Boyce may resign his employment with good reason (asdefined in his employment agreement) upon 30 days’ prior written notice notlater than 90 days following the occurrence of a Change in Control. “Cause” isdefined as the executive’s (i) failure to observe any material Companypolicies and material policies of subsidiaries generally applicable toexecutives of the Company and/or its subsidiaries of which the executive hasnotice; (ii) gross negligence or willful misconduct in the performance ofhis duties or willful disregard of his duties; (iii) commission of any actwhich results in his conviction, or plea of guilty or no contest to, a felony,or commission of any act involving moral turpitude, fraud or theft;(iv) material breach of the employment agreement, or any subscription,restricted stock or stockholders agreement relating to our stock or the stockof Holdings or (v) any acts of dishonesty intended to result in substantialenrichment, at our expense, of the Executive or any other person.

In the event that his employment is terminated byreason of his death or disability, Mr. Boyce (or his estate orbeneficiaries) will be entitled to a pro rata portion of the bonus that would havebeen payable for the calendar year in which the termination occurs.

The employment agreement also subjects Mr. Boyceto certain non-competition and non-solicitation covenants duringthe employment term and until eighteen months following his employmenttermination date. In addition, Mr. Boyce is subject to certainconfidentiality covenants.

*Employment Agreement witheach of William J. Sichko, Jr. and Scott Randolph.**  *Effective February 11, 2005,we entered into employment agreements with William J. Sichko, Jr. andScott Randolph, each for an initial term of five years from such date.Thereafter, the terms of each employment may be extended for one or moreadditional one-year period(s) by mutual agreement of us andMr. Sichko or Mr. Randolph, as 

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the case may be,not later than 90 days prior to the expiration of the initial term or anyextension term. Pursuant to the agreements Mr. Sichko andMr. Randolph will each receive an annual base salary in the amount of$240,000, or such higher rate as our Board or Compensation Committee maydesignate from time to time and an annual bonus according to a formula based onperformance goals established each year with a target, in each case, equal to40% of the applicable annual base salary. The agreements further provide thatin the event that Mr. Sichko’s or Mr. Randolph’s employment isterminated by us without cause or by employee with good reason, and subject tothe employee’s entering into a release, such employee will be entitled toseverance compensation equal to (i) eighteen months continued base salary,(ii) a pro rata share of the bonus that would have been payable in respectof the calendar year in which his employment terminates; (iii) any unpaidbonus in respect of years ended prior to the year of termination and(iv) 150% of the bonus paid to the applicable employee in the mostrecently completed fiscal year prior to his termination. “Cause” for each ofMessrs. Sichko and Randolph has the same definition as in Mr. Boyce’semployment agreement with the addition of the executive’s failure to performsuch duties as are reasonably requested by the Board which failure is not curedwithin thirty (30) days of receipt of written notice; “good reason” has thesame definition as in Mr. Boyce’s employment agreement.

In the event employment isterminated by reason of death or disability, Mr. Sichko orMr. Randolph (or their respective estates or beneficiaries), as the casemay be, will be entitled to a pro rata portion of the bonus that would havebeen payable for the calendar year in which the termination occurs.

The employment agreementsalso subject Mr. Sichko and Mr. Randolph  to certain non-competition and non-solicitationcovenants during their respective employment terms and until eighteen monthsfollowing their respective employment termination dates. In addition,Messrs. Sichko and Randolph are each subject to certain confidentialitycovenants.

*Employment Agreement withPaul Ferrall.**  *EffectiveOctober 1, 2005, we entered into an employment agreement with Paul Ferrallfor an initial term of five years from such date. Thereafter, the terms ofemployment may be extended for one or more additional one-yearperiod(s) by mutual agreement of us and Mr. Ferrall, not later than90 days prior to the expiration of the initial term or any extension term.Pursuant to the agreement, Mr. Ferrall will receive an annual base salaryin the amount of $200,000, or such higher rate as our Board or CompensationCommittee may designate from time to time and an annual bonus according to aformula based on performance goals established each year with a target, in eachcase, equal to 40% of his annual base salary. The agreement further providesthat in the event that Mr. Ferrall’s employment is terminated by uswithout cause or by employee with good reason, and subject to the employee’sentering into a release, such employee will be entitled to severancecompensation equal to (i) eighteen months continued base salary,(ii) a pro rata share of the bonus that would have been payable in respectof the calendar year in which his employment terminates; (iii) any unpaidbonus in respect of years ended prior to the year of termination and(iv) 150% of the bonus paid to the applicable employee in the mostrecently completed fiscal year prior to his termination. “Cause” forMr. Ferrall has the same definition as in Mr. Boyce’s employmentagreement with the addition of the executive’s failure to perform such dutiesas are reasonably requested by the Board which failure is not cured withinthirty (30) days of receipt of written notice; “good reason” has the samedefinition as in Mr. Boyce’s employment agreement.

In the event that hisemployment is terminated by reason of his death or disability, Mr. Ferrall(or his estate or beneficiaries) will be entitled to a pro rata portion of thebonus that would have been payable for the calendar year in which thetermination occurs.

The employment agreement also subjectsMr. Ferrall to certain non-competition and non-solicitationcovenants during the employment term and until eighteen months following hisemployment termination date. In addition, Mr. Ferrall is subject tocertain confidentiality covenants.

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*Transition Agreement withMichael Imbriani.*   In November 2006 weentered into a transition agreement with Mr. Imbriani, pursuant to whichthe Company agreed to provide Mr. Imbriani certain benefits in connectionwith his retirement effective on December 31, 2006. Such benefits consistof the payment, in lump sums, of: (a) a separation payment of $654,603,equal to 22 months of base salary; (b) his 2006 earned bonus, at the levelcalculated in accordance with the plan applicable to all participants;(c) his estimated 2007 and 2008 bonus at a base salary assumed to be$357,056 for 2007 and $297,547 for 2008, subject to adjustment in accordancewith the plan; (d) a retention bonus of $958,333, equal to 23/24ths of the$1,000,000 retention bonus to which he would have been entitled on the secondanniversary of his February 2005 employment agreement; (e) the cashout value of his term life policy in the amount of $27,037; (g) thepresent value of his company matching contributions in the 401(k) SavingsPlan in the amount of $11,974; (h) the amount of $21,432, representing theequivalent value of remaining lease payments on his company vehicle;(i) reimbursement for club dues in the amount of $10,000;(j) reimbursement for financial planning assistance in the amount of$8,000; (k) vacation pay for all accrued and unused vacation for 2006; and(l) reimbursement of legal fees to a maximum of $3,000 in connection withthe preparation of the transition agreement. In addition, Mr. Imbrianiwill continue to participate in the Company’s group health plans, or willreceive a lump sum payment equal to the present value of such benefits, for the22 months until his 65th birthday. The Company also agreed to make atax gross-up payment in the event that excise tax is assessed on any of theamounts paid pursuant to the termination agreement. Finally, the Company paidMr. Imbriani the sum of $70,000 in consideration for a one-year consultingagreement.

*Other Arrangements.**  *Erwin J. Goede is party to anemployment letter with us. Under the terms of the letter, Mr. Goede willbe entitled to his base salary for a period of two years in the event hisemployment is terminated by us for any reason other than cause (as defined inthe letter).

**Potential Payments on Termination or Change in Control**

The table below reflectsthe amount of compensation to each of our named executive officers in the eventof termination of such executive’s employment. The amount of compensation(exclusive of accrued pension benefits, which are payable pursuant to the termsof the frozen pension plans following any termination of employment) payable toeach named executive officer upon involuntary termination without cause orresignation for good reason, and termination as a result of death or disabilityis shown below. The employment contracts of Messrs. Boyce, Randolph andSichko provide that a change in control constitutes good reason for theexecutive to terminate his employment (provided he so elects within 90 days ofsuch event) , and thus would entitle him to certain severance benefits.

The amounts shown below assume that such terminationor change of control occurred on December 31, 2006. Different payments maybe applicable upon a later termination of employment. The actual amounts to bepaid out can only be determined at the time of such executive’s separation fromthe Company.

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| ** **                                                  | ** ** | ** ** | ** ** | ** **                            | ** ** | ** **                 | ** ** | ** **                                             | ** ** | ** **   | ** ** | ** **   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|---------------------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|--------------|------------|--------------|------------|
| Name                                                        | ** ** | ** ** | ** ** | **Cash  Severance  Payment ($)** | ** ** | **Stock  Awards ($)** | ** ** | **Nonqualified  Deferred  Compensation  (4) ($)** | ** ** | **Other($)** | ** ** | **Total($)** | ** ** |
| Michael R. Boyce (1)                         |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Termination without Cause                                   |       | $          | 2,789,305  |                                  | $          | 6,544,800                  | (2)        |                                                   | $          | —       |       |         | $          | — |   | $ | 9,334,105 |   |
| Termination For Good Reason (other than Change in  Control) |       | 2,789,305  |       | —                                |       |                       | —     |                                                   |       | —       |       | 2,789,305    |       |
| Change in Control                                           |       | 2,789,305  |       | 6,544,800                             | (3)        |                       | 34,069     |                                                   |       | —       |       | 9,368,174    |       |
| Death or Disability                                         |       | 800,722    |       | —                                |       |                       | —     |                                                   |       | —       |       | 800,722      |       |
| James P. Cox (5)                             |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Termination without Cause                                   |       | 220,004    |       | —                                |       |                       | —     |                                                   |       | —       |       | 220,004      |       |
| Termination For Good Reason (other than Change in  Control) |       | 220,004    |       | —                                |       |                       | —     |                                                   |       | —       |       | 220,004      |       |
| Change in Control                                           |       | 220,004    |       | 1,090,800                             | (3)        |                       | —     |                                                   |       | —       |       | 1,310,804    |       |
| Death or Disability                                         |       | —     |       | —                                |       |                       | —     |                                                   |       | —       |       | —       |       |
| Michael R.  Imbriani                                        |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Resignation on December 31, 2006                       |       | 2,513,692  | (6)        | —                                |       |                       | —     |                                                   |       | 99,173       | (7)        | 2,612,865    |       |
| Erwin J. Goede (8)                           |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Termination without Cause                                   |       | 680,451    |       | —                                |       |                       | —     |                                                   |       | —       |       | 680,451      |       |
| Termination For Good Reason (other than Change in  Control) |       | 680,451    |       | —                                |       |                       | —     |                                                   |       | —       |       | 680,451      |       |
| Change in Control                                           |       | 680,451    |       | 872,640                               | (3)        |                       | —     |                                                   |       | —       |       | 1,553,091    |       |
| Death or Disability                                         |       | —     |       | —                                |       |                       | —     |                                                   |       | —       |       | —       |       |
| Scott Randolph (1)                                |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Termination without Cause                                   |       | 1,033,735  |       | 2,181,600                             | (9)        |                       | —     |                                                   |       | —       |       | 3,215,335    |       |
| Termination For Good Reason (other than Change in  Control) |       | 1,033,735  |       | —                                |       |                       | —     |                                                   |       | —       |       | 1,033,735    |       |
| Change in Control                                           |       | 1,033,735  |       | 2,181,600                             | (3)        |                       | 5,086      |                                                   |       | —       |       | 3,220,421    |       |
| Death or Disability                                         |       | 263,489    |       | —                                |       |                       | —     |                                                   |       | —       |       | 263,489      |       |
| William J. Sichko, Jr. (1)              |       |       |       |                                  |       |                       |       |                                                   |       |         |       |         |       |
| Termination without Cause                                   |       | 1,033,735  |       | 2,181,600                             | (9)        |                       | —     |                                                   |       | —       |       | 3,215,335    |       |
| Termination For Good Reason (other than Change in  Control) |       | 1,033,735  |       | —                                |       |                       | —     |                                                   |       | —       |       | 1,033,735    |       |
| Change in Control                                           |       | 1,033,735  |       | 2,181,600                             | (3)        |                       | 5,086      |                                                   |       | —       |       | 3,220,421    |       |
| Death or  Disability                                        |       | 263,489    |       | —                                |       |                       | —     |                                                   |       | —       |       | 263,489      |       |
|                                                             |            |            |            |                                       |            |                            |            |                                                        |            |              |            |              |            |  |  |  |  |  |  |  |

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(1)          The cash severancepayment, payable to the executive under his employment agreement, whichincludes 18 months of base salary, the annual bonus for 2006, and 150% of the2006 annual bonus, is payable in equal installments over 18 months.

(2)          Depending on the date oftermination, the restricted stock vests in full upon termination without causeonly if the implied rate of return on Class B common stock is at leastequal to 1.75 or 2.25 times the JPMP initial investment. The market value reported reflects the board ofdirectors’ good faith determination of fair market value for its Class Acommon stock as of December 31, 2006 of $1,212 per share.

(3)          The time vestingrestricted stock vests in full upon a change in control. If the event occursprior to February 11, 2008, the performance vesting restricted stock vestsin full only if the implied rate of 

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return on Class Bcommon stock is at least 2.00 times the JPMP investment; for a later occurringchange in control, the percentage of the restricted stock that vests range from25% to 100% for return rates ranging from 2.00 to 3.00 times the JPMP initialinvestment. The market value reportedreflects the board of directors’ good faith determination of fair market valuefor its Class A common stock as of December 31, 2006 of $1,212 pershare.

(4)          This amount includesamounts that were otherwise vested as of December 31, 2006. Payments underthis plan are payable in a lump sum or installments as elected by theexecutive.

(5)          The cash severanceamount payable to Mr. Cox represents 52 weeks of base salary.

(6)          The cash payment to Mr. Imbriani, in a lump sum, consistsof: (a) a separation payment of $654,603, equal to 22 months of basesalary; (b) his 2006 earned bonus, at the level calculated in accordancewith the plan applicable to all participants; (c) estimated 2007 and 2008bonus of $585,614; and (d) a retention bonus of $958,333, equal to23/24ths of the $1,000,000 retention bonus to which he would otherwise havebeen entitled on the second anniversary of his February 2005 employmentagreement.

(7)          Such benefits consistof: (a) the cash out value of his term life policy in the amount of$27,037; (b) the present value of his company matching contributions inthe 401(k) Savings Plan in the amount of $11,974; (c) the amount of $21,432,representing the equivalent value of remaining lease payments on his companyvehicle; (d) reimbursement for club dues in the amount of $10,000; (e) reimbursementfor financial planning assistance in the amount of $8,000; (f) vacationpay for all accrued and unused vacation for 2006; (g) reimbursement oflegal fees to a maximum of $3,000 in connection with the preparation of thetransition agreement; and (h) estimated employer premium payments formedical and dental insurance coverage of $17,730 representing 22 months ofcoverage.

(8)          The cash severanceamount payable to Mr. Goede represents 2 years of base salary.

(9)          Inthe event Mr. Boyce is no longer employed as of the respective date of Mr. Randolph’sor Mr. Sichko’s termination of employment, the restricted stock vests infull if the implied rate of Class B return equals at least 1.75 times theJPMP initial investment (or 2.25 times the JPMP initial investment fortermination on or after February 11, 2008).

**ITEM12.**         SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

All ofour Common Stock is held by Holdings, and its address is 1200 West SwedesfordRoad, Berwyn, Pennsylvania, 19312. The Common Stock of Holdings is comprised ofClass A Common Stock and Class B Common Stock. The Class ACommon Stock and Class B Common Stock have the same rights and privileges,rank equally and share ratably and are otherwise identical except the Class BCommon Stock is the sole voting stock of Holdings. In the event that Holdingsmakes a distribution, the holders of Class B Common Stock are entitled toreceive such distribution prior in right to the holders of Class A CommonStock up to an amount equal to each Class B Common Stock holder’s “Paid-InCapital” (the amount originally paid by each for the Class B CommonStock). Once the holders of Class B Common Stock have receiveddistributions equal to the aggregate Paid-In Capital, then holders of Class ACommon Stock and the Class B Common Stock are equally entitled to receivedistributions. The following table sets forth information with respect to thebeneficial ownership of the Common Stock of Holdings as of April 2, 2007:

·       eachperson that is a beneficial owner of more than 5% of the Common Stock;

·       eachof our directors and Named Executive Officers; and

·       allof our directors and executive officers as a group.

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Exceptas otherwise indicated in these footnotes, each of the beneficial owners listedhas, or to our knowledge, sole voting and investment power with respect to theindicated shares of Common Stock.
| Name of Beneficial Owner                                                                    | ** ** | ** **                                          | ** ** | **Number of Shares of  Class A and Class B Common  Stock beneficially owned** | ** ** | **% of Common  Stock**(1) | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                 | ** ** | **# of Shares**                           | ** ** | **% of Class**                                                                                                        | ** ** |
| ** **                                                                                                 | ** ** | **Beneficial Ownership of Holdings** | ** ** |
| Funds affiliated  with JPMP(2), c/o JPMP Capital Corp., 270 Park Avenue, New York, NY 10017                |       |                                                | 168,155    |                                                                                                                            |       |                                | 83.7       |   |   |
| Stephen V.  McKenna(3)                                                                                     |       |                                                | —     |                                                                                                                            |       |                                | —     |   |   |
| Arnold L. Chavkin(3)                                                                                       |       |                                                | —     |                                                                                                                            |       |                                | —     |   |   |
| Timothy J. Walsh(3)                                                                                        |       |                                                | —     |                                                                                                                            |       |                                | —     |   |   |
| Peter Savage(4)                                                                                            |       |                                                | 272        |                                                                                                                            |       |                                | *          |   |   |
| Barry Goldstein(4)                                                                                         |       |                                                | 272        |                                                                                                                            |       |                                | *          |   |   |
| Michael R. Boyce(5)                                                                                        |       |                                                | 13,943     |                                                                                                                            |       |                                | 6.9        |   |   |
| Scott Randolph(6)                                                                                          |       |                                                | 2,000      |                                                                                                                            |       |                                | 1.0        |   |   |
| William J.  Sichko, Jr.(7)(8)                                                                         |       |                                                | 2,536      |                                                                                                                            |       |                                | 1.3        |   |   |
| Michael R.  Imbriani                                                                                       |       |                                                | —     |                                                                                                                            |       |                                | —     |   |   |
| James P. Cox(9)                                                                                            |       |                                                | 1,218      |                                                                                                                            |       |                                | *          |   |   |
| Erwin J. Goede(10)                                                                                         |       |                                                | 909        |                                                                                                                            |       |                                | *          |   |   |
| All executive officers  and directors as a group (12 persons)(11)       |       |                                                | 23,150     |                                                                                                                            |       |                                | 11.5       |   |   |

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  *                  Less than 1%.

(1)              Represents theaggregate ownership of the Class A and Class B Common Stock ofHoldings.

(2)              The funds affiliatedwith JPMP are J.P. Morgan Partners (BHCA), L.P. (“BHCA”), J.P. MorganPartners Global Investors, L.P., J.P. Morgan Partners GlobalInvestors A, L.P., J.P. Morgan Partners Global Investors (Cayman),L.P., J.P. Morgan Partners Global Investors (Cayman) II, L.P.,J.P. Morgan Partners Global Investors (Selldown), L.P. andJ.P. Morgan Partners Global Investors (Selldown) II, L.P.(collectively, the “Global Fund Entities”), each of which hold94,884 shares, 22,694 shares, 3,487 shares, 11,393 shares,1,274 shares, 7,684 shares and 26,738 shares of Class B CommonStock, respectively. The general partner of BHCA is JPMP Master Fund Manager,L.P., and the general partner of each of the Global Fund Entities is JPMPGlobal Investors, L.P. JPMP Capital Corp., a wholly owned subsidiary ofJPMorgan Chase & Co., is the General Partner of each of JPMP MasterFund Manager, L.P. and JPMP Global Investors, L.P. Voting and dispositiondecisions at JPMP Capital Corp. are made by three or more of its officers, andtherefore no individual officer of JPMP Capital Corp. is the beneficial ownerof the securities. The address for each of these entities is 270 Park Avenue,New York, New York 10017, except that the address of each Cayman Global FundEntity is c/o Walkers SPV Limited, PO Box 908 GT, Walker House, George Town,Grand Cayman, Cayman Islands.

(3)              Mr. Chavkin isa Senior Advisor and Mr. McKenna and Mr. Walsh are Managing Directorsof CCMP Capital Advisors, LLC (“CCMP Capital”), a private equity firm comprisedof the former buyout/growth equity professionals of J.P. Morgan Partners, LLC (“JPMP”)who separated from JPMorgan Chase & Co. to form an independent privateequity platform. CCMP Capital provides investment advisory services to JPMP asto the investment by BHCA and the Global Fund Entities in Holdings. Each of Messrs. McKenna,Chavkin and Walsh disclaims any beneficial ownership of any shares beneficiallyowned by JPMP Capital Corp. or its affiliates, except to the extent of theirrespective pecuniary interest therein, if any.

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(4)              All shares areClass B Common Stock.

(5)              Includes6,000 shares of Class A Common Stock held by The Michael R. BoyceFamily Trust-1997 over which the trustees have dispositive control and7,943 shares of Class B Common Stock held by PQP LLC, whichMr. Boyce may be deemed to beneficially own by virtue of his status asmanager of PQP LLC.

(6)              All shares areClass A Common Stock.

(7)              Includes 2,000shares of Class A Common Stock held by The William J. Sichko FamilyTrust-2005 over which the trustee has dispositive control and536 shares of Class B Common Stock held by PQ EquityInvestors LLC, which Mr. Sichko may be deemed to beneficially own byvirtue of his status as manager of PQ Equity Investors LLC.

(8)              Does not include6,000 shares of Class A Common Stock held by The Michael R. Boyce FamilyTrust-1997 over which Mr. Sichko, as co-trustee, sharesdispositive control and may be deemed to beneficially own. Mr. Sichkodisclaims such beneficial ownership and the foregoing is not an admission thatMr. Sichko is the beneficial owner of such shares.

(9)              Includes 1,000shares of Class A Common Stock and 218 shares of Class B CommonStock.

(10)       Includes 800 shares ofClass A Common Stock and 109 shares of Class B Common Stock.

(11)       Includes 13,800 sharesof Class A Common Stock and 9,350 shares of Class B CommonStock.

**ITEM 13.**         CERTAINRELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

We maintain certain policies and procedures for thereview, approval, and ratification of related party transactions to ensure thatall transactions with selected parties are fair, reasonable and in our bestinterest. All significant relationships and transactions are separatelyidentified by management if they meet the definition of a related party or arelated party transaction. Related party transactions include transactions thatoccurred during the year, or are currently proposed, in which we were or willbe a participant and which any related person had or will have a direct orindirect material interest. All related party transactions are reviewed,approved and documented by the appropriate level of our management inaccordance with these policies and procedures.

Each of the Sponsors, Holdings and us entered intomanagement agreements relating to the provision of certain financial andstrategic advisory services and consulting services to us by the sponsors. Wepaid the Sponsors a one-time fee in the amount of $10.0 million on February 11,2005 for structuring the Transactions. In addition, we agreed to pay to theSponsors an annual monitoring fee of $2.0 million commencing in 2006. Themanagement agreements provide for reimbursement of fees payable by Holdings forthe maintenance of its corporate existence, corporate overhead expenses and forsalaries and other compensation of certain employees who perform services forboth Holdings and us. We agreed to indemnify the Sponsors and their directors,officers and representatives for losses relating to the services contemplatedby the management agreements and the engagement of affiliates of the Sponsorspursuant to, and the performance by them of the services contemplated by, themanagement agreement.

Mr. Boyce, our Chairman, Chief Executive Officer,President and a member of our Compensation Committee, is also Chairman, ChiefExecutive Officer and 99% stockholder of Peak Investments, LLC, one of ourSponsors.

In December 2005, wepaid a dividend to Holdings of $85.3 million, and in turn, Holdings paid adividend to its stockholders in an aggregate amount of $110.0 million and paidcertain expenses. Holdings issued $23.0 million of 12.75% Senior Notes due March 15,2013 in order to fund the difference between amounts received from PQ and thedividend distribution to stockholders. These notes require quarterly 

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interestpayments with payment in kind provisions, allowing Holdings to defer the entirepayment, or a portion thereof, at Holdings’ option. The amount of any deferredinterest payment shall become additional principal. Our senior secured creditfacility allows for dividends of up to $4.0 million per year to Holdings forthe purpose of servicing the interest expense on the Holdings notes. TheHoldings notes are not guaranteed by us. During the year ended December 31,2006, we returned $2.3 million in capital contributions to Holdings asdividends.

**HoldingsStockholders Agreement**

In connection withthe Transactions, Holdings, JPMorgan Partners and certain members of managementwho invest in Holdings have entered into a stockholders’ agreement. Among otherthings, the stockholders’ agreement provides that the parties to thestockholders’ agreement agree to the following:

·       tovote all of their shares of Class B Common Stock held of record orbeneficially owned to cause Holdings’ board of directors to have between fourand ten directors, but JPMorgan Partners and its affiliates may increase ordecrease the number of directors;

·       tovote all of their shares of Class B Common Stock held of record orbeneficially owned to elect a Chief Executive Officer of Holdings and thatnumber of directors designated by JPMorgan Partners;

·       priorto the date on which Holdings commences an initial public offering of Holdings,to vote all of their shares of Class B Common Stock only as directed byJPMorgan Partners, provided that none of the parties will be required to votein favor of, or provide its consent to, any action that woulddisproportionately affect that party relative to other parties in any materialand adverse manner;

·       togrant an irrevocable proxy for the term of the agreement to a representative ofJPMorgan Partners;

·       tocause our board and the board of directors of each of our significantsubsidiaries to be composed of the same proportion of designees of JPMorganPartners and its affiliates as in Holdings, unless otherwise determined byholders of a majority of outstanding shares of Class B Common Stock;

·       JPMorganPartners and its affiliates (before an initial public offering) and parties tothe stockholders’ agreement holding at least 50% of the then outstanding sharesof Holdings (after an initial public offering) have drag along rights; and

·       if JPMorgan Partners or itsaffiliates propose to transfer 5% or more of the shares of Holdings to anindependent third party, then investors in Holdings (other than JPMorganPartners and its affiliates) have tag along rights.

**Holdings RestrictedStock Program**

In connection with theTransactions, certain of our senior management and other key employees wereoffered the opportunity to acquire Class A Common Stock and/or Class BCommon Stock of Holdings under individual restricted stock agreements betweenHoldings and each employee-purchaser. Shares of Holdings’ common stockpurchased by the employees are subject to the stockholders agreement describedabove. The shares of Class B Common Stock are fully vested whereas theshares of Class A Common Stock are initially unvested and subject torepurchase by Holdings. The generally applicable terms of the restricted stockprogram are described in this paragraph. See also “Item 11. ExecutiveCompensation—Outstanding Equity Awards at Fiscal Year-end Table” for additionalinformation concerning our Named Executive Officers. Ten percent of an employee’sshares of Class A Common Stock will vest on each of the first fiveanniversaries of the date of the Merger, subject to the employee’s continuedemployment with us (the “time-vesting shares”), and will vest in full upon thefirst “change in control” or “IPO” (each, as 

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definedin the agreement). The remaining 50% of the employee’s Class A CommonStock will be eligible to vest upon the first to occur of a change in controlor IPO, provided certain return on investment criteria are satisfied withrespect to the shares of Class B Common Stock in connection with suchevent (the “performance vesting shares”). Upon the employee’s termination ofemployment prior to the fifth anniversary of the Transactions, Holdings willhave the right to repurchase all then unvested shares Class A Common Stockheld by such employee at the original purchase price; provided, however, thatif such termination of employment is for any reason other than “cause” (asdefined in the agreement) and prior to the first to occur of a change incontrol or IPO, Holdings shall only be permitted to repurchase that portion ofthe performance vesting shares equal to the unvested portion of thetime-vesting shares (and the remaining unvested performance vesting shares willremain eligible to vest upon a change in control or IPO). Furthermore, in theevent of his or her termination for cause or upon a breach of the subscriptionagreement, Holdings will have the right to repurchase all of the employee’sshares of Class A Common Stock, vested and unvested, at the originalpurchase price. In addition, upon the employee’s termination of employment forany reason other than cause or, in the event he or she effects an impermissibletransfer of shares, Holdings will have the right to repurchase the shares of Class BCommon Stock held by such employee at the then fair market value of such sharesof Class B Common Stock. In the event of the employee’s termination forcause or specified breaches of the restrictive covenants, Holdings will havethe right to repurchase the shares of Class B Common Stock held by theemployee at the lesser of the then fair market value and the original purchaseprice. In the event of the employee’s death, his or her estate or heirs shallhave the right, for six months following such death, to require Holdings torepurchase the shares of Class B Common Stock held by such deceasedemployee at the fair market value thereof.

**Tax Consolidation**

We file U.S. federalincome tax returns with Holdings on a consolidated basis. We entered into a taxallocation agreement with Holdings which provides that we make distributions toHoldings such that we and our subsidiaries will incur expense for taxesgenerated by our business with respect to income taxes on the same basis as ifwe and our subsidiaries paid such taxes on a stand-alone basis.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The Audit Committeeappointed PricewaterhouseCoopers LLP as independent auditors to audit andreport on our financial statements for fiscal years 2006 and 2005. The following are the fees that we were billed foraudit and other services provided by PricewaterhouseCoopers LLP for fiscalyears 2006 and 2005.

**Audit Fees**

Audit Fees, includingout-of-pocket expenses, totaled $1,971,000 and $1,458,000 for 2006 and 2005,respectively. These fees represent professional services rendered for theaudits of our consolidated financial statements, including U.S. and foreignsubsidiary audits, statutory audits, and reviews of the financial statementsincluded in our quarterly reports.

**Audit-Related Fees**

This category consists ofassurance and related services that are reasonably related to the performanceof the audit or review of our financial statements and are not reported under “AuditFees.”  The services for the feesdisclosed under this category include issuance of comfort letters, review ofregistration statements filed with the SEC, and other accounting and consultingservices.  Audit related fees totaled$327,000 and $350,000 for 2006 and 2005, respectively.

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**Tax Fees**

Tax fees billed to us for tax services rendered,primarily related to tax compliance, tax advice and tax planning totaled$630,000 and $733,000 for 2006 and 2005, respectively.

The Audit Committee hasadopted policies and procedures for the pre-approval of audit services andpermitted non-audit services to be performed by its independent accounting firmin order to assure that the provision of such services does not impair theindependent accounting firm’s independence and is permitted by applicable law. Thepolicies provide general pre-approval for certain types of services, as well asapproved costs for those services.

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

Documents filed aspart of this Annual Report:

1.                 Thefollowing financial statements of the Company and its subsidiaries are includedin Item 8

|                                                                                                                                                                                                                                            | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| Reports of Independent Registered Public Accounting  Firm                                                                                                                                                                                  |       |     | 47 |   |
| Consolidated  Balance Sheets as of December 31, 2006 and 2005                                                                                                                                                                         |       |     | 49 |   |
| Consolidated Statements of Operations for the year  ended December 31, 2006, the forty-six weeks ended  December 31, 2005, the six weeks ended February 11, 2005, and the  year ended December 31, 2004                |       |     | 50 |   |
| Consolidated Statements of Stockholders’ Equity for  the year ended December 31, 2006, the forty-six weeks ended  December 31, 2005, the six weeks ended February 11, 2005, and the  year ended December 31, 2004 |       |     | 51 |   |
| Consolidated Statements of Cash Flows for the year  ended December 31, 2006, the forty-six weeks ended  December 31, 2005, the six weeks ended February 11, 2005, and the  year ended December 31, 2004                |       |     | 52 |   |
| Notes to Consolidated Financial Statements                                                                                                                                                                                                 |       |     | 53 |   |

 

2.                 FinancialStatement Schedules:  None

3.                 The exhibitsrequired to be provided as part of this report are listed in the Exhibit Indexthat is attached hereto, and incorporated by reference herein.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|        |   | PQ CORPORATION |
|--------|--------|----------------|
|   |   | By:            |   | /s/ MICHAEL R. BOYCE  |
|   |   |           |   | Michael R. Boyce |
|   |   |           |   | Chief Executive Officer |
|   |   | Date:          |   | April 2, 2007 |

 

Pursuantto the requirements of the Security Exchange Act of 1934, this report has beensigned below by the following persons on behalf of PQ Corporation and in thecapacities indicated.
|                         | **Signature** | ** **                                      | ** ** | ** **          | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|---------------|-------------------------------------------------|------------|---------------------|-----------|------------|------------|------------|----------|------------|
| /s/ MICHAEL R.  BOYCE   |          | Chief Executive  Officer, Chairman of the Board |       | April 2,  2007 |
| Michael  R. Boyce       |          | and Director (principal  executive officer)     |       |                |
| /s/ JAMES P.  COX       |          | Chief Financial  Officer                        |       | April 2,  2007 |
| James  P. Cox           |          | (principal financial and  accounting officer)   |       |                |
| /s/ ARNOLD L.  CHAVKIN  |          | Director                                        |       | April 2,  2007 |
| Arnold  L. Chavkin      |          |                                            |       |                |
| /s/ STEPHEN V.  MCKENNA |          | Director                                        |       | April 2,  2007 |
| Stephen  V. McKenna     |          |                                            |       |                |
| /s/ TIMOTHY J.  WALSH   |          | Director                                        |       | April 2,  2007 |
| Timothy J. Walsh        |          |                                            |       |                |

 

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**INDEX TO EXHIBITS**

| Number | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | **Description** | ** ** |
|--------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|
|   | 2.1        |       |       | Agreement of and Plan of Merger among PQ  Corporation, Niagara Acquisition, Inc. and Niagara Holdings, Inc.,  dated December 15, 2004 (incorporated by reference from Exhibit 2.1  to the Company’s Form S-4 (File No. 333-125750) filed  June 13, 2005).                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.1        |       |       | Amended and Restated Articles of Incorporation of PQ  Corporation (incorporated by reference from Exhibit 3.1 to the Company’s  Form S-4/A (File No. 333-125750) filed  November 25, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3.2        |       |       | Certificate of Merger of PQ Corporation and Niagara  Acquisition, Inc., filed February 11, 2005 (incorporated by  reference from Exhibit 3.2 to the Company’s Form S-4 (File  No. 333-125750) filed June 13, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 3.3        |       |       | Articles of Merger of PQ Corporation and Niagara  Acquisition, Inc., filed February 11, 2005 (incorporated by  reference from Exhibit 3.3 to the Company’s Form S-4 (File  No. 333-125750) filed June 13, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   | 3.4        |       |       | Amended and Restated By-laws of PQ Corporation  (incorporated by reference from Exhibit 3.4 to the Company’s Form S-4/A  (File No. 333-125750) filed November 25, 2005).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.1        |       |       | Indenture with respect to the 71⁄2% Senior  Subordinated Notes due 2013, among Niagara Acquisition, Inc. and Wells  Fargo Bank, National Association, as trustee, and countersigned by PQ  Corporation and the guarantors named therein, dated February 11, 2005  (incorporated by reference from Exhibit 4.1 to the Company’s Form S-4  (File No. 333-125750) filed June 13, 2005).                                                                                                                                                                                                                                                                     |
|   | 4.2        |       |       | Form of 71⁄2% Senior Subordinated Notes due 2013  (included in exhibit 4.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 4.3        |       |       | Registration Rights Agreement among Niagara  Acquisition, Inc. and Credit Suisse First Boston LLC, J.P. Morgan  Securities Inc. and UBS Securities LLC, and countersigned by PQ Corporation  and the guarantors named therein, dated February 11, 2005 (incorporated  by reference from Exhibit 4.3 to the Company’s Form S-4 (File  No. 333-125750) filed June 13, 2005).                                                                                                                                                                                                                                                                                  |
|   | 10.1       |       |       | Credit Agreement, dated as of February 11,  2005, among Niagara Holdings, Inc., Niagara Acquisition, Inc., the  lenders party thereto, UBS AG, Stamford Branch, as administrative agent,  JPMorgan Chase Bank, N.A. as syndication agent, J.P. Morgan Securities Inc.  and UBS Securities LLC, joint lead arrangers and as joint bookrunners, and  Credit Suisse First Boston, acting through its Cayman Islands Branch and  General Electric Capital Corporation, as co-documentation agents (the “Credit  Agreement”) (incorporated by reference from Exhibit 10.1 to the  Company’s Form S-4 (File No. 333-125750) filed  June 13, 2005). |
|   | 10.1       | (a)        |       | First amendment to the Credit Agreement, dated  October 28, 2005 (incorporated by reference from  Exhibit 10.1(a) to the Company’s Form S-4/A (File  No. 333-125750) filed April 13, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10.1       | (b)        |       | Second amendment to the Credit Agreement, dated  November 17, 2005 (incorporated by reference from  Exhibit 10.1(b) to the Company’s Form S-4/A (File  No. 333-125750) filed April 13, 2006).                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|        |            |            |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                 |            |  |  |

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|        | 10.2  |   |   | Guarantee and Collateral Agreement, dated and  effective as of February 11, 2005, by and between Niagara Holdings Inc.,  Niagara Acquisition Inc., each Subsidiary of Holdings identified therein and  UBS AG, Stamford Branch, as administrative agent (incorporated by reference  from Exhibit 10.2 to the Company’s Form S-4 (File  No. 333-125750) filed June 13, 2005). |
|--------|-------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10.3  |   |   | Stockholders Agreement, dated as of  February 11, 2005, by and between Niagara Holdings, Inc. and the  investors defined therein (incorporated by reference from Exhibit 10.3  to the Company’s Form S-4 (File No. 333-125750) filed  June 13, 2005).                                                                                                                   |
|   | 10.4  |   |   | Employment Agreement, dated as of November 18,  2004, by and between PQ Corporation and Erwin Goede (incorporated by  reference from Exhibit 10.6 to the Company’s Form S-4 (File  No. 333-125750) filed June 13, 2005).                                                                                                                                                     |
|   | 10.5  |   |   | Tax Sharing Agreement, dated as of February 11,  2005. by and between Niagara Holdings, Inc. and PQ Corporation  (incorporated by reference from Exhibit 10.7 to the Company’s  Form S-4 (File No. 333-125750) filed June 13,  2005).                                                                                                                                   |
|   | 10.6  |   |   | Employment Agreement, dated as of February 11,  2005, by and between PQ Corporation and Michael R. Imbriani (incorporated by  reference from Exhibit 10.8 to the Company’s Form S-4/A (File  No. 333-125750) filed April 13, 2006).                                                                                                                                          |
|   | 10.7  |   |   | Letter Agreement amending the Employment Agreement  by and between PQ Corporation and Michael R. Imbriani (incorporated by  reference from Exhibit 10.9 to the Company’s Form S-4/A (File  No. 333-125750) filed April 13, 2006).                                                                                                                                                 |
|   | 10.8  |   |   | Employment Agreement, dated as of February 11,  2005, by and between PQ Corporation and Michael R. Boyce (incorporated by  reference from Exhibit 10.10 to the Company’s Form S-4/A  (File No. 333-125750) filed November 25, 2005).                                                                                                                                         |
|   | 10.9  |   |   | Employment Agreement, dated as of February 11,  2005, by and between PQ Corporation and William J. Sichko, Jr (incorporated  by reference from Exhibit 10.11 to the Company’s Form S-4/A  (File No. 333-125750) filed November 25, 2005).                                                                                                                                    |
|   | 10.10 |   |   | Employment Agreement, dated as of February 11,  2005, by and between PQ Corporation and Scott H. Randolph (incorporated by  reference from Exhibit 10.12 to the Company’s Form S-4/A  (File No. 333-125750) filed November 25, 2005).                                                                                                                                        |
|   | 10.11 |   |   | Form of Restricted Stock Agreement  (incorporated by reference from Exhibit 10.13 to the Company’s  Form S-4/A (File No. 333-125750) filed  November 25, 2005).                                                                                                                                                                                                              |
|   | 10.12 |   |   | Management Agreement, dated as of February 11,  2005, by and between Niagara Holdings, Inc., Niagara  Acquisition, Inc. and Peak Investments LLC (incorporated by reference  from Exhibit 10.14 to the Company’s Form S-4/A (File  No. 333-125750) filed April 13, 2006).                                                                                          |
|   | 10.13 |   |   | Management Agreement, dated as of February 11,  2005, by and between Niagara Holdings, Inc., Niagara  Acquisition, Inc. and J.P. Morgan Partners (BHCA), L.P (incorporated by  reference from Exhibit 10.15 to the Company’s Form S-4/A  (File No. 333-125750) filed April 13, 2006).                                                                              |
|   | 10.14 | *      |   | Transition Agreement, dated as of November 8,  2006, by and between Michael R. Imbriani and PQ Corporation.                                                                                                                                                                                                                                                                                           |

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|        | 10.15 | * |   | Employment Agreement, effective as of  October 1, 2005, by and between PQ Corporation and Paul Ferrall.                                                              |
|--------|-------|---|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 12.1  | * |   | Statement Regarding Computation of Ratio of Earnings  to Fixed Charges.                                                                                                   |
|   | 14.1  | * |   | Code of Conduct.                                                                                                                                                          |
|   | 21.1  | * |   | List of Subsidiaries.                                                                                                                                                     |
|   | 31.1  | * |   | Certification of Michael R. Boyce pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                        |
|   | 31.2  | * |   | Certification of James P. Cox pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                            |
|   | 32.1  | * |   | Certifications of Michael R. Boyce, Chief Executive  Officer, and James P. Cox, Chief Financial Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|   | 99.1  | * |   | Unaudited Pro forma Condensed Consolidated Financial  Information                                                                                                         |
|   | 99.2  | * |   | Zeolyst International Financial Statements as of  December 31, 2006 and 2005 and for the years ended December 31,  2006, 2005, and 2004                         |

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*                    Filedherewith.

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