** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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**(Mark one)**
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                    |
| **For the  quarterly period ended September 30, 2006** |
| ** **                                             | ** ** | ** **                                                                                    |
| **OR**                                                 |
| ** **                                             | ** ** | ** **                                                                                    |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission File No.333-125750**

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**PQ CORPORATION**

(Exactname of registrant as specified 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’stelephone number, including area code)

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.Yes     x      No     o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule12b-2 of the Exchange Act.

Large accelerated filer     o     Accelerated filer     o     Non-acceleratedfiler     x

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

As of November 14, 2006, the number of shares outstandingof the registrant’s common stock, par value $0.50 per share, was 1 share.

 

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**INDEX**
| PART I: FINANCIAL INFORMATION |                                                                                        |
|-------------------------------|---------------------------------------------------------------------------------------------|
|                          |                                                                                        |
| Item 1.                       | Financial  Statements (unaudited)                                                           |   |
|                          |                                                                                        |   |
|                          | CONDENSED CONSOLIDATED BALANCE SHEETS                                                       |   |
|                          |                                                                                        |   |
|                          | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                             |   |
|                          |                                                                                        |   |
|                          | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             |   |
|                          |                                                                                        |   |
|                          | NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                       |   |
|                          |                                                                                        |   |
| Item 2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                          |                                                                                        |   |
| Item 3.                       | Quantitative  and Qualitative Disclosures about Market Risk                                 |   |
|                          |                                                                                        |   |
| Item 4.                       | Controls and  Procedures                                                                    |   |
|                          |                                                                                        |   |
| PART II: OTHER  INFORMATION   |                                                                                        |
|                          |                                                                                        |
| Item 1.                       | Legal Proceedings                                                                           |   |
|                          |                                                                                        |   |
| Item 1A.                      | Risk  Factors                                                                               |   |
|                          |                                                                                        |   |
| Item 2.                       | Unregistered  Sale of Equity Securities and Use of Proceeds                                 |   |
|                          |                                                                                        |   |
| Item 3.                       | Defaults  upon Senior Securities                                                            |   |
|                          |                                                                                        |   |
| Item 4.                       | Submission  of Matters to a Vote of Security Holders                                        |   |
|                          |                                                                                        |   |
| Item 5.                       | Other Information                                                                           |   |
|                          |                                                                                        |   |
| Item 6.                       | Exhibits                                                                                    |   |
|                          |                                                                                        |   |
| Signatures                    |                                                                                        |

 

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** **

** **

**PART I.**

**FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

PQ CORPORATION ANDSUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

(in thousands)

(unaudited)
| ** **                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                                              |       |                   |       |                  |       |
| ASSETS                                                            |       |                   |       |                  |       |
| Cash and cash  equivalents                                        |       | $                      | 10,959     |                  | $          | 22,972 |   |
| Receivables, net                                                  |       | 116,717                |       | 90,714                |       |
| Inventories                                                       |       | 86,682                 |       | 84,239                |       |
| Prepaid and other  current assets                                 |       | 19,226                 |       | 38,333                |       |
|                                                              |       |                   |       |                  |       |
| Total current  assets                                             |       | 233,584                |       | 236,258               |       |
|                                                              |       |                   |       |                  |       |
| Investments in  affiliated companies                              |       | 71,570                 |       | 64,417                |       |
| Property, plant and  equipment, net                               |       | 315,071                |       | 318,337               |       |
| Goodwill                                                          |       | 231,936                |       | 234,483               |       |
| Tradenames                                                        |       | 53,000                 |       | 53,000                |       |
| Other intangible  assets, net                                     |       | 63,223                 |       | 77,650                |       |
| Other long-term assets                                            |       | 32,438                 |       | 45,728                |       |
|                                                              |       |                   |       |                  |       |
| Total assets                                                      |       | $                      | 1,000,822  |                  | $          | 1,029,873 |   |
|                                                              |       |                   |       |                  |       |
| LIABILITIES AND  STOCKHOLDER’S EQUITY                        |       |                   |       |                  |       |
| Revolver, notes payable  and current maturities of long-term debt |       | $                      | 21,688     |                  | $          | 26,689 |   |
| Cash overdraft                                                    |       | 4,737                  |       | 9,957                 |       |
| Accounts payable                                                  |       | 48,162                 |       | 51,302                |       |
| Accrued liabilities                                               |       | 50,923                 |       | 53,978                |       |
|                                                              |       |                   |       |                  |       |
| Total current  liabilities                                        |       | 125,510                |       | 141,926               |       |
|                                                              |       |                   |       |                  |       |
| Long-term debt                                                    |       | 631,022                |       | 633,821               |       |
| Deferred income taxes                                             |       | 112,802                |       | 127,806               |       |
| Other long-term  liabilities                                      |       | 82,485                 |       | 74,714                |       |
| Minority interest in  equity of subsidiaries                      |       | 4,836                  |       | 5,047                 |       |
| Commitments and  contingencies                                    |       |                   |       |                  |       |
| Stockholder’s equity                                         |       | 44,167                 |       | 46,559                |       |
|                                                              |       |                   |       |                  |       |
| Total liabilities and  stockholder’s equity                  |       | $                      | 1,000,822  |                  | $          | 1,029,873 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

1

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PQ CORPORATION AND SUBSIDIARIES

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)
| ** **                                       | ** ** | **Successor**                                            | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                       | ** ** | **Three months ended September 30,** | ** ** |
| ** **                                       | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
|                                             |       |                                                     |       |   |   |
| Sales                                            |       | $                                                        | 191,999    |   | $ | 170,974 |   |
| Cost of goods  sold                              |       | 147,223                                                  |       | 135,803 |   |
|                                             |       |                                                     |       |   |   |
| Gross profit                                     |       | 44,776                                                   |       | 35,171 |   |
|                                             |       |                                                     |       |   |   |
| Selling, general  and administrative expenses    |       | 21,837                                                   |       | 19,820 |   |
| Other operating  expense (income)                |       | 1,739                                                    |       | (2,075 | ) |
|                                             |       |                                                     |       |   |   |
| Operating income                                 |       | 21,200                                                   |       | 17,426 |   |
|                                             |       |                                                     |       |   |   |
| Equity in net  income of affiliated companies    |       | 6,210                                                    |       | 2,277 |   |
| Interest  expense, net                           |       | 13,140                                                   |       | 10,716 |   |
| Other expense                                    |       | 94                                                       |       | 255 |   |
|                                             |       |                                                     |       |   |   |
| Income before income taxes and minority interest |       | 14,176                                                   |       | 8,732 |   |
|                                             |       |                                                     |       |   |   |
| Provision for  income taxes                      |       | 6,501                                                    |       | 9,820 |   |
| Minority  interest                               |       | 194                                                      |       | 106 |   |
|                                             |       |                                                     |       |   |   |
| Net income  (loss)                               |       | $                                                        | 7,481      |   | $ | (1,194 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

2

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PQ CORPORATION ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(unaudited)
| ** **                                               | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                               | ** ** | **Nine months**   | ** ** | **Thirty-three**       | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **ended**              | ** ** | **weeks ended**   | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005** | ** ** |
|                                                     |       |                   |       |                   |       |   |   |
| Sales                                                    |       | $                      | 547,868    |                   | $          | 422,282 |   | $ | 64,195 |   |
| Cost of goods  sold                                      |       | 422,766                |       | 339,799                |       | 48,576 |   |
|                                                     |       |                   |       |                   |       |   |   |
| Gross profit                                             |       | 125,102                |       | 82,483                 |       | 15,619 |   |
|                                                     |       |                   |       |                   |       |   |   |
| Selling, general  and administrative expenses            |       | 61,260                 |       | 56,335                 |       | 11,221 |   |
| Other operating  expense                                 |       | 9,387                  |       | 17,031                 |       | 12,267 |   |
|                                                     |       |                   |       |                   |       |   |   |
| Operating income (loss)                                  |       | 54,455                 |       | 9,117                  |       | (7,869 | ) |
|                                                     |       |                   |       |                   |       |   |   |
| Equity in net  income (loss) of affiliated companies     |       | 11,907                 |       | 2,706                  |       | (265 | ) |
| Interest  expense, net                                   |       | 38,817                 |       | 26,370                 |       | 771 |   |
| Other expense                                            |       | 141                    |       | 7,528                  |       | 356 |   |
|                                                     |       |                   |       |                   |       |   |   |
| Income (loss) before income taxes and minority  interest |       | 27,404                 |       | (22,075                | )          | (9,261 | ) |
|                                                     |       |                   |       |                   |       |   |   |
| Provision  (benefit) for income taxes                    |       | 15,324                 |       | 4,606                  |       | (2,522 | ) |
| Minority  interest                                       |       | 504                    |       | 243                    |       | 59 |   |
|                                                     |       |                   |       |                   |       |   |   |
| Net income  (loss)                                       |       | $                      | 11,576     |                   | $          | (26,924 | ) | $ | (6,798 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

3

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PQ CORPORATION ANDSUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)
| ** **                                            | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **Nine months**   | ** ** | **Thirty-three**       | ** ** | **Six weeks** | ** ** |
| ** **                                            | ** ** | **ended**              | ** ** | **weeks ended**   | ** ** | **ended** | ** ** |
| ** **                                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 11,** | ** ** |
| ** **                                            | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2005** | ** ** |
|                                                  |       |                   |       |                   |       |   |   |
| Net cash  provided by (used for) operating activities |       | $                      | 23,639     |                   | $          | 6,244 |   | $ | (6,965 | ) |
|                                                  |       |                   |       |                   |       |   |   |
| Cash flows from  investing activities:                |       |                   |       |                   |       |   |   |
| Purchases of property, plant and equipment            |       | (19,765                | )          | (15,563                | )          | (2,358 | ) |
| Purchase of other intangible assets                   |       | (1,131                 | )          | —                 |       | — |   |
| Merger consideration                                  |       | —                 |       | (626,000               | )          | — |   |
| Merger costs, capitalized                             |       | —                 |       | (6,485                 | )          | — |   |
| Net cash used for investing activities                |       | (20,896                | )          | (648,048               | )          | (2,358 | ) |
|                                                  |       |                   |       |                   |       |   |   |
| Cash flows from  financing activities:                |       |                   |       |                   |       |   |   |
| Revolvers, notes payable and cash overdrafts, net     |       | (9,636                 | )          | 2,624                  |       | 44,857 |   |
| Issuance of long-term debt                            |       | —                 |       | 335,000                |       | — |   |
| Issuance of senior notes                              |       | —                 |       | 275,000                |       | — |   |
| Debt acquisition costs                                |       | —                 |       | (16,503                | )          | — |   |
| Repayments of long-term debt                          |       | (3,563                 | )          | (115,949               | )          | — |   |
| Proceeds from issuances of treasury stock             |       | —                 |       | —                 |       | 1,161 |   |
| Purchases of stock                                    |       | —                 |       | —                 |       | (47 | ) |
| Equity contribution                                   |       | —                 |       | 164,188                |       | — |   |
| Distributions to minority interests                   |       | (391                   | )          | (185                   | )          | — |   |
| Dividend distribution                                 |       | (1,613                 | )          | —                 |       | — |   |
| Net cash (used for) provided by financing activities  |       | (15,203                | )          | 644,175                |       | 45,971 |   |
|                                                  |       |                   |       |                   |       |   |   |
| Effect of  exchange rate changes on cash              |       | 447                    |       | (1,991                 | )          | (700 | ) |
|                                                  |       |                   |       |                   |       |   |   |
| Net change in  cash and cash equivalents              |       | (12,013                | )          | 380                    |       | 35,948 |   |
|                                                  |       |                   |       |                   |       |   |   |
| Cash and cash  equivalents at beginning of period     |       | 22,972                 |       | 48,757                 |       | 12,809 |   |
| Cash and cash  equivalents at end of period           |       | $                      | 10,959     |                   | $          | 49,137 |   | $ | 48,757 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

4

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PQ CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

(unaudited)

** **

**1.****                  Statementof Information Furnished:**

On December 15, 2004, PQCorporation (“Company”) and Niagara Acquisition, Inc. and its parent company,Niagara Holdings, Inc. (“Holdings”), entered into an Agreement and Plan ofMerger, pursuant to which Niagara Acquisition, Inc. merged with and into PQCorporation, with PQ Corporation continuing as the surviving entity and a wholly-ownedsubsidiary of Holdings (the “Merger”). Holdings is a Delaware corporation, a substantial majority of theoutstanding capital stock of which is owned by JPMorgan Partners LP and itsaffiliates and Peak Investments, LLC (“Sponsors”). The Merger was consummatedon February 11, 2005. The total merger consideration paid, excluding fees andexpenses, consisted of the stated purchase price of $626,000 and capitalizedacquisition costs of $6,485.

In connection with theMerger, substantially all existing debt of the Company, $120,849 as of February11, 2005, was repaid, including interest and make-whole payments of $5,185 forthe early retirement of debt. The Merger was financed through borrowings undera $335,000 term loan, the issuance of $275,000 of senior subordinatednotes, a $163,600 equity contribution from the Sponsors and existing cash onhand. 

The Company refers to theMerger and the related financings described above, collectively, as theTransactions.  For purposes ofidentification and description, the Company is referred to as the Predecessorfor the period prior to the Transactions on February 11, 2005, and theSuccessor for the periods subsequent to the Transactions.

The condensed consolidatedfinancial statements included herein are unaudited and have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial reporting and the United States Securities and ExchangeCommission (“SEC”) regulations.  Certaininformation and footnote disclosures normally included in annual financialstatements prepared in accordance with accounting principles generally acceptedin the United States have been condensed or omitted pursuant to such rules andregulations for interim reporting.  Inthe opinion of management, all adjustments of a normal and recurring naturenecessary to present fairly the financial position and results of operationshave been included. The results of operations are not necessarily indicative ofthe results to be expected for the full year. The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto for the yearended December 31, 2005, as included within amendment No. 3 to Form S-4 whichwas declared effective by the SEC on May 12, 2006. 

**2.****                  Recently Issued AccountingPronouncements**

In July 2006, the FASBissued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty inIncome Taxes-an interpretation of FASB Statement No. 109.” ThisInterpretation provides guidance for recognizing and measuring uncertain taxpositions, as defined in Statement of Financial Accounting Standards (“SFAS”)No. 109, “Accounting for Income Taxes.” FIN No. 48 prescribes athreshold condition that a tax position must meet for any of the benefit of theuncertain tax position to be recognized in the financial statements. Guidanceis also provided regarding derecognition, classification and disclosure ofthese uncertain tax positions. FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company is currently evaluating the impact of this Interpretation onits financial statements. 

In September 2006, StaffAccounting Bulletin (“SAB”) 108 was released. The bulletin establishes anapproach that requires quantification of financial statement errors based onthe effects of the error on each of the Company’s financial statements and therelated financial statement disclosures. SAB 108 is effective for the fiscal year ending  December 31, 2006. The Company does notexpect the adoption of this standard to have a significant impact on itsfinancial statements. 

In September 2006, the FASBissued SFAS No. 157, “Fair Value Measurement” which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurement. Companies are required to adopt the new standard forfiscal periods beginning after November 15, 2007. The Company is currentlyevaluating the impact of this standard on its financial statements. 

 

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”  SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements.  The 

5

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provisions of SFAS No. 158 are effective for the Company for the fiscal year ending December 31, 2007. The Company is currently evaluating the impact of the provisions of SFAS No. 158 on its financial statements.

In September 2006,the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities.”  The FSP prohibits companies from accruing thecost of planned major maintenance in advance of the activities actuallyoccurring.  This FSP is effective forfiscal years beginning after December 15, 2006. The adoption of FSP No. AUG AIR-1 is not expected to have a significantimpact on the Company’s financial statements.

**3.  BusinessCombination:**

SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets,” govern the accounting and reporting for business combinations.SFAS No. 141 requires all business combinations to be accounted forusing the purchase method of accounting. SFAS No. 142 provides that goodwill and other intangibleassets with indefinite lives will not be amortized, but will be tested forimpairment on at least an annual basis. The Successor has accounted for theTransactions in accordance with these standards. The Merger was treated as apurchase with Holdings as the accounting acquirer in accordance with SFAS No.141.

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 Consolidated Statement of Operations for the sixweeks ended February 11, 2005 for the unvested portion of the options andawards. 

The closing of theTransactions represented a change in control under certain executives’employment agreements. As a result, the Company recorded a charge in otheroperating expense of approximately $5,600 for severance provided to certainexecutives terminated before the closing of the Transactions in the Predecessor’sStatement of Operations. In addition, the Successor was required to pay $3,929pursuant to these agreements to executives who resigned subsequent to theTransactions and recorded a charge for such amount in the Successor’sConsolidated Statement of Operations for the thirty-three week period endedSeptember 30, 2005.   

The Company incurred othercosts relating to the Transactions, primarily for Sponsor fees, broker fees,legal and consulting of approximately $6,158 and $13,003 that were recorded inother operating expense for the six week period ended February 11, 2005 andthirty-three week ended period September 30, 2005, respectively.  The amount of Transaction expenses incurredduring the three months ended September 30, 2005 was $354.

The table below summarizesthe allocation of the total cost of the Merger to the assets acquired andliabilities assumed. The purchase price was allocated first to tangible andidentifiable intangible assets acquired and liabilities assumed based upontheir estimated fair values. The remaining excess of the purchase price overthe fair value of assets acquired and liabilities assumed was then recorded asgoodwill. 

6

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| 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                               |   | 336,344   |    |
| Investments in affiliated companies                         |   | 68,719    |    |
| Goodwill                                                    |   | 233,301   |    |
| Other intangible assets                                     |   | 157,595   |    |
| Other assets                                                |   | 30,805    |    |
| Fair value of assets acquired                               |   | 1,082,017 |    |
|                                                        |   |      |    |
| Current liabilities                                         |   | (176,954  | )       |
| Long-term debt                                              |   | (80,665   | )       |
| Deferred income taxes                                       |   | (101,403  | )       |
| Other liabilities                                           |   | (90,510   | )       |
| Purchase price                                              |   | $         | 632,485 |   |

The Company believes thatits leading market positions and diverse range of industrial, consumer andgovernmental applications in which its products are used were the primaryreasons that contributed to a total purchase price that resulted in therecognition of goodwill. The total other intangible assets amounted to$157,595, of which $53,000 was assigned to trade names that are not subject toamortization. In addition, total other intangible assets included $3,338 ofcapitalized in-process research and development that was immediately writtenoff to selling, general and administrative expenses in the Successor’sStatement of Operations. 

In accordance with therequirements of the purchase method of accounting for acquisitions, inventoriesas of February 11, 2005 were recorded at net realizable value (which is definedas estimated selling prices less the sum of (a) costs of disposal and(b) a reasonable profit allowance for the selling effort of the acquiringentity) which, in the case of finished products, was $24,555 higher than thePredecessor’s historical manufacturing cost. The Successor’s cost of productssold for the three month and thirty-three week periods ended September 30,2005, respectively, includes a pre-tax charge of $418 and $9,992 relating tothe step-up of finished product sold.

In addition, certain rawmaterial inventory purchased under favorable supply agreements was revalued tofair market value, which was $2,473 higher than historical cost. The Successor’scost of products sold includes a pre-tax charge of $0 and $942 relating to thestep-up of raw materials used in finished products sold for the three month andthirty-three week periods ended September 30, 2005.

The Company recorded aliability of $4,456 for building leases that were above fair market value atthe date of the Transactions. The liability was determined by comparing ourlease terms to those currently available for similar properties. The Successor’sStatement of Operations includes income from amortization of the unfavorablelease liability of $84 and $321 for the three and nine months ended September30, 2006, respectively, and $103 and $281 for the three months and thirty-threeweeks ended September 30, 2005, respectively. 

In May 2005, managementfinalized plans to terminate certain employees in the United States and atcertain foreign subsidiaries. Employees terminated under this plan are entitledto receive severance pay and benefits totaling approximately $5,200 which wasincluded in accrued liabilities in the opening balance sheet of the Successor.Cash expenditures toward this program of $731 and $1,450 were made during thethree and nine month periods ended September 30, 2006, respectively, andcharged against the reserve. Substantially all payments related to the remaining reserve of $514should be completed by December 31, 2006.

7

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During the third quarterended September 30, 2006, goodwill and the deferred income tax liability werereduced by $1,479 to reflect the correction of a 2005 error in the calculationof deferred taxes on undistributed earnings of non-U.S. subsidiaries that wasattributable to the opening balance sheet. This error correction is not material to the financial position of theCompany as of September 30, 2006 or December 31, 2005.  Accordingly, prior period financialstatements have not been restated.     

**4. Pro Forma Information:******

The following scheduleincludes statements of operations data for the prior year unaudited results asif the Transactions had occurred on January 1, 2005. The pro forma informationincludes the actual results with adjustments for the pro forma effect of thechange in interest expense related to the changes in capital structureresulting from the financings discussed in Note 9, purchase accountingadjustments resulting in changes to depreciation and amortization expenses, therevaluation of inventory to fair market value, amortization of the step up ofinvestment in affiliates and the reduction in pension and postretirementbenefit expense resulting from the elimination of the unamortized actuariallosses and prior service costs and the unamortized transition obligation. 

The unaudited pro formainformation is provided for illustrative purposes only. It does not purport torepresent what the results of operations would have been had the Transactionsoccurred on the date indicated above, nor does it purport to project theresults of operations for any future period. 
|                    | ** ** | **Pro forma nine  months ended  September 30,** | ** ** |
|--------------------|------------|---------------------------------------------------------------------|------------|
| ** **         | ** ** | **2005**                                                            | ** ** |
|               |       |                                                                |       |
| Net sales          |       | $                                                                   | 486,477    |   |
| Net income  (loss) |       | (6,851                                                              | )          |
|                    |            |                                                                     |            |  |

 

Included inthe net loss for the pro forma nine months ended September 30, 2005 wereafter-tax charges of $6,752 for the amortization of inventory revalued inpurchase accounting, $3,338 for the write-off of acquired in-process researchand development, $3,242 for the amortization of inventory of our equityaffiliates that was revalued in purchase accounting and $8,624 for amortizationof favorable raw materials supply contracts.

**5.  Comprehensive Income (Loss):**

The following table summarizes comprehensiveincome (loss), net of tax:
| ** **                                                         | ** ** | **Successor**                    | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                         | ** ** | ** **                       | ** ** | ** **             | ** ** | **Nine months**   | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                                                         | ** ** | **Three months ended** | ** ** | **ended**              | ** ** | **weeks ended**   | ** ** | **ended** | ** ** |
| ** **                                                         | ** ** | **September 30,**           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 11,** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                               |       |                             |       |                   |       |                   |       |   |   |   |   |
| Net income (loss)                                                  |       | $                                | 7,481      |                   | $          | (1,194                 | )          | $ | 11,576 |   | $ | (26,924 | ) | $ | (6,798 | ) |
|                                                               |       |                             |       |                   |       |                   |       |   |   |   |   |
| Gains (losses) in fair values of derivatives  qualifying as hedges |       | (3,737                           | )          | 15,101                 |       | (16,564                | )          | 20,373 |   | 785 |   |
| Foreign currency translation adjustments                           |       | 1,736                            |       | 492                    |       | 4,128                  |       | (11,014 | ) | (4,676 | ) |
|                                                               |       |                             |       |                   |       |                   |       |   |   |   |   |
| Comprehensive income  (loss)                                       |       | $                                | 5,480      |                   | $          | 14,399                 |       | $ | (860 | ) | $ | (17,565 | ) | $ | (10,689 | ) |

 

8

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**6. Inventories:**

Inventories were classified and valued asfollows:
|                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                                   |       |                   |       |                  |       |
| Finished  products and work in process |       | $                      | 65,036     |                  | $          | 64,436 |   |
| Raw materials                          |       | 21,646                 |       | 19,803                |       |
|                                   |       | $                      | 86,682     |                  | $          | 84,239 |   |
|                                   |       |                   |       |                  |       |
| Valued at lower  of cost or market:    |       |                   |       |                  |       |
| LIFO basis                             |       | 51,141                 |       | 50,864                |       |
| FIFO basis                             |       | 7,641                  |       | 5,997                 |       |
| Average cost basis                     |       | 27,900                 |       | 27,378                |       |
|                                   |       | $                      | 86,682     |                  | $          | 84,239 |   |

 

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

A summary of property, plant and equipment, at cost, andrelated accumulated depreciation and depreciation expense is as follows:
|                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**               | ** ** | **2005**              | ** ** |
|                            |       |                   |       |                  |       |
| Land                            |       | $                      | 57,210     |                  | $          | 57,148 |   |
| Buildings                       |       | 99,138                 |       | 97,785                |       |
| Machinery and  equipment        |       | 203,459                |       | 188,836               |       |
| Construction in  progress       |       | 20,243                 |       | 9,747                 |       |
|                            |       | 380,050                |       | 353,516               |       |
| Less:  accumulated depreciation |       | 64,979                 |       | 35,179                |       |
|                            |       | $                      | 315,071    |                  | $          | 318,337 |   |

 

Depreciation expense was $30,853 for the nine monthsended September 30, 2006, $23,626 for the thirty-three weeks ended September30, 2005 and $4,290 for the six weeks ended February 11, 2005.

**8.  Goodwill and Other Intangible Assets:**

During the third quarter, the Company completed its annual SFAS No. 142impairment review for 2006 and determined that goodwill and indefinite-livedintangible assets were not impaired as of the September 30th measurementdate.  For purposes of this review, weutilized discounted cash flow analyses for estimating the fair value of thereporting units.

9

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Gross carrying amounts andaccumulated amortization for intangible assets with estimable useful lives areas follows:
| ** **                           | ** ** | **September 30, 2006**                                          | ** ** | **December 31, 2005**                                                 | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Gross**                                                                 | ** ** | **Accumulated**                                                                 | ** ** | **Net** | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Net** | ** ** |
| ** **                           | ** ** | **Amounts**                                                               | ** ** | **Amortization**                                                                | ** ** | **Balance** | ** ** | **Amounts** | ** ** | **Amortization** | ** ** | **Balance** | ** ** |
| Formulations and  product technology |       | $           53,200 |       | $            (7,205 | )          | $           45,995 |   | $           53,200 |   | $            (3,920 | ) | $           49,280 |   |
| Non compete agreements               |       | 4,131                                                                     |       | (2,089                                                                          | )          | 2,042 |   | 3,900 |   | (1,140 | ) | 2,760 |   |
| Customer lists                       |       | 900                                                                       |       | (15                                                                             | )          | 885 |   | — |   | — |   | — |   |
| Raw material contracts               |       | 43,648                                                                    |       | (29,684                                                                         | )          | 13,964 |   | 43,648 |   | (18,453 | ) | 25,195 |   |
| Railcar leases                       |       | 509                                                                       |       | (172                                                                            | )          | 337 |   | 509 |   | (94 | ) | 415 |   |
| Total                                |       | $         102,388            |       | $          (39,165            | )          | $           63,223 |   | $         101,257 |   | $          (23,607 | ) | $           77,650 |   |

 

OnJune 20, 2006, the Company acquired certain intangible assets in the UnitedStates for a total purchase price of $1,131. The Company allocated $900 of the purchase price to customer listsacquired and approximately $231 to a non-compete agreement contained in theasset purchase agreement.

Totalamortization of intangibles was $15,614 for the nine months ended September 30,2006, $16,168 for the thirty-three weeks ended September 30, 2005 and $146 forthe six weeks ended February 11, 2005. Total amortization of intangibles included $11,231 and $12,258 relatedto raw material contracts that was recorded to cost of goods sold in theConsolidated Statements of Operations for the nine months ended September 30,2006 and thirty-three weeks ended September 30, 2005, respectively.

Theamortization periods for customer lists, formulations and product technologyand non-compete agreements and railcar leases are fifteen years, twelve years,and three to five years, respectively. The amortization period for raw material contracts is based on the termsof the contracts; the longest of which is three years in duration.

**9.**  **Long-termDebt:**

The summary oflong-term debt is as follows:
| ** **                                                                | ** ** | **September 30,**                                                     | ** ** | **December 31,**                                                      | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                                                   | ** ** | **2005**                                                                   | ** ** |
|                                                                      |       |                                                                       |       |                                                                       |       |
| Senior secured term  loans with interest at 7.4% as of September 30, 2006 |       | $           359,674 |       | $           362,412 |       |
| Senior subordinated  notes due 2013                                       |       | 275,000                                                                    |       | 275,000                                                                    |       |
| Revolving credit  agreements                                              |       | 17,817                                                                     |       | 22,120                                                                     |       |
| Other                                                                     |       | 219                                                                        |       | 978                                                                        |       |
|                                                                      |       | 652,710                                                                    |       | 660,510                                                                    |       |
|                                                                      |       |                                                                       |       |                                                                       |       |
| Less: current portion                                                     |       | 21,688                                                                     |       | 26,689                                                                     |       |
|                                                                      |       | $           631,022 |       | $           633,821 |       |

 

On February 11, 2005, the Company issued $275,000 of7.5% senior subordinated notes due 2013 and received cash proceeds of $267,781after deducting initial purchases discounts and expenses. The notes are seniorsubordinated obligations of the Company and rank junior to all other seniorindebtedness of the Company that does not contain similar subordinationprovisions. The indenture relating to the notes contains various limitations onthe Company’s ability to incur additional indebtedness, pay dividends, sellassets and create liens, among other things. Interest on the notes is payableon February 15 and August 15 of each year. No principal payments arerequired with respect to the notes prior to their final maturity.

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, and receivedcash proceeds of approximately $324,950 after deducting underwriting fees andexpenses. 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 $917 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

10

----

 

incurrence of certain indebtedness or proceedsreceived on the disposition of assets, adjusted for certain costs and expenses,and are payable promptly upon receipt subject, in the case of net proceeds fromasset dispositions, 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. The detailed calculations supporting those twoprepayments are defined in the credit agreement. The Company performed thecalculation for fiscal year 2005 and determined that no excess payment wasrequired.  The remaining principalbalance of the term loan is due upon maturity. At September 30, 2006, we were incompliance with our loan covenants.

The Senior CreditFacility also provides for up to $100,000 in revolving credit borrowings.Borrowings under the revolving facility bear interest at a rate equal to thebase or LIBOR rate elected by the Company at the time of borrowing plus amargin which can range from 0.75% to 2.25%, based on the rate elected and theconsolidated leverage ratio of the Company. In addition, there is an annualcommitment fee equal to 0.5% of the unused revolving credit borrowingsavailable under the Senior Credit Facility. Revolving credit borrowings arepayable at the option of the Company throughout the term of the Senior CreditFacility with the balance due February 11, 2011. There was $15,700 and $20,000in outstanding revolving credit borrowings under the Senior Credit Facility asof September 30, 2006 and December 31, 2005, respectively.

**In December 2005, the Companyamended its Senior Credit Facility to provide for an additional $30,000 of termloan borrowings and to permit the Company to dividend up to an additional$4,000 per year to Holdings, at the Company’s option, for the purpose ofservicing the interest expense on Holdings notes issued in the amount of$23,000.  These Holdings notes are notguaranteed by the Company.  In addition,the amendment provides for an increase to the effective interest rate on ourSenior Credit Facility by 25 basis points in the event our debt rating isdowngraded and stipulates a prepayment fee equal to 1.0% of certain voluntaryprepayments made within one year of the effective date of the amendment withthe proceeds of certain types of indebtedness and based on certain otherconditions.  The amendment does notchange any of the other existing covenants in the Senior Credit Facility.**

**10.  Financial Instruments:**

*The Company has 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 a hedge of the net investment inour European and Canadian operations, respectively.  The fairvalue of the net liability is recorded in other liabilities with a relatedoffset to foreign currency translation adjustments, net of taxes.  The contracts had a net liability balance*of $14,944, and$6,753 as of September 30, 2006 and December 31, 2005, respectively.  In the event the euro or Canadian dollarstrengthens against the U.S. dollar the fair value of the liability willincrease.

*The Company is exposed to risksin energy costs due to fluctuations in energy prices, particularly naturalgas.  There is a hedging program in the United States which allows us to mitigateexposure to natural gas volatility with futures contracts.  Thefutures contracts had a fair value of $4,125, and $30,950 at September 30, 2006and December 31, 2005, respectively. Fair value is determined based onestimated amounts that would be received or paid to terminate the contracts atthe reporting date based on quoted market prices of comparable contracts. Therespective current and non-current balances are recorded in prepaid and othercurrent assets and other long-term assets. The related gains or losses arerecorded in stockholder’s equity as a component of other comprehensive income(loss), net of tax. Realized gains and losses on natural gas hedges are includedin production costs and subsequently charged to cost of goods sold in theperiod in which inventory is sold.*

11

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* *

**11.  Pension and Post Retirement Benefits:**

Components of net periodic expenseare as follows:
| ** **                          | ** ** | **Successor**                                                                                               | ** ** | **Successor**                                                                                               | ** ** | **Predecessor**                                                                                             | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | ** **                                                                                                  | ** ** | ** **                                                                                                  | ** ** | **Nine months**                                                                                        | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                          | ** ** | **Three months ended**                                                                            | ** ** | **ended**                                                                                                   | ** ** | **weeks ended**                                                                                        | ** ** | **ended** | ** ** |
| ** **                          | ** ** | **September 30,**                                                                                      | ** ** | **September 30,**                                                                                      | ** ** | **September 30,**                                                                                      | ** ** | **February 11,** | ** ** |
| ** **                          | ** ** | **2006**                                                                                                    | ** ** | **2005**                                                                                                    | ** ** | **2006**                                                                                                    | ** ** | **2005** | ** ** | **2005** | ** ** |
| Pension Benefits  - U.S. and Canada |       |                                                                                                        |       |                                                                                                        |       |                                                                                                        |       |   |   |   |   |
| Service cost                        |       | $                 (636 | )          | $                 (862 | )          | $              (2,419                 | )          | $              (2,348 | ) | $                 (385 | ) |
| Interest cost                       |       | (1,976                                                                                                      | )          | (1,793                                                                                                      | )          | (5,520                                                                                                      | )          | (4,493 | ) | (830 | ) |
| Expected return  on assets          |       | 2,453                                                                                                       |       | 2,265                                                                                                       |       | 7,049                                                                                                       |       | 5,636 |   | 1,016 |   |
| Net amortization                    |       | —                                                                                                      |       | —                                                                                                      |       | —                                                                                                      |       | — |   | (288 | ) |
| Net periodic expense                |       | $                 (159 | )          | $                 (390 | )          | $                 (890 | )          | $              (1,205 | ) | $                 (487 | ) |

 
| ** **                      | ** ** | **Successor**                                                                                               | ** ** | **Successor**                                                                                               | ** ** | **Predecessor**                                                                             | ** ** |
|---------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| ** **                      | ** ** | ** **                                                                                                  | ** ** | ** **                                                                                                  | ** ** | **Nine months**                                                                        | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                      | ** ** | **Three months ended**                                                                            | ** ** | **ended**                                                                                                   | ** ** | **weeks ended**                                                                        | ** ** | **ended** | ** ** |
| ** **                      | ** ** | **September 30,**                                                                                      | ** ** | **September 30,**                                                                                      | ** ** | **September 30,**                                                                      | ** ** | **February 11,** | ** ** |
| ** **                      | ** ** | **2006**                                                                                                    | ** ** | **2005**                                                                                                    | ** ** | **2006**                                                                                    | ** ** | **2005** | ** ** | **2005** | ** ** |
| Pension Benefits  - Other Plans |       |                                                                                                        |       |                                                                                                        |       |                                                                                        |       |   |   |   |   |
| Service cost                    |       | $                 (669 | )          | $                 (871 | )          | $              (1,902 | )          | $              (1,907 | ) | $                 (377 | ) |
| Interest cost                   |       | (452                                                                                                        | )          | (305                                                                                                        | )          | (1,099                                                                                      | )          | (678 | ) | (167 | ) |
| Expected return  on assets      |       | 205                                                                                                         |       | 162                                                                                                         |       | 594                                                                                         |       | 303 |   | 79 |   |
| Net amortization                |       | 9                                                                                                           |       | —                                                                                                      |       | 27                                                                                          |       | — |   | (59 | ) |
| Net periodic expense            |       | $                 (907 | )          | $              (1,014                 | )          | $              (2,380 | )          | $              (2,282 | ) | $                 (524 | ) |

 
| ** **                | ** ** | **Successor**                                                                                                                   | ** ** | **Successor**                                                                                                          | ** ** | **Predecessor**                                                                                                                 | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | ** **                                                                                                                      | ** ** | ** **                                                                                                             | ** ** | **Nine months**                                                                                                            | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                | ** ** | **Three months ended**                                                                                                | ** ** | **ended**                                                                                                              | ** ** | **weeks ended**                                                                                                            | ** ** | **ended** | ** ** |
| ** **                | ** ** | **September 30,**                                                                                                          | ** ** | **September 30,**                                                                                                 | ** ** | **September 30,**                                                                                                          | ** ** | **February 11,** | ** ** |
| ** **                | ** ** | **2006**                                                                                                                        | ** ** | **2005**                                                                                                               | ** ** | **2006**                                                                                                                        | ** ** | **2005** | ** ** | **2005** | ** ** |
| Post Retirement  Benefits |       |                                                                                                                            |       |                                                                                                                   |       |                                                                                                                            |       |   |   |   |   |
| Service cost              |       | $                    — |       | $                   (55 | )          | $                    — |       | $                 (291 | ) | $                   (51 | ) |
| Interest cost             |       | (157                                                                                                                            | )          | (313                                                                                                                   | )          | (472                                                                                                                            | )          | (697 | ) | (127 | ) |
| Net amortization          |       | 112                                                                                                                             |       | —                                                                                                                 |       | 336                                                                                                                             |       | — |   | (28 | ) |
| Net periodic expense      |       | $                   (45          | )          | $                 (368            | )          | $                 (136                     | )          | $                 (988 | ) | $                 (206 | ) |

 

The Companyincurred net periodic expense related to the Company’s defined benefitsupplementary retirement plan of $569, $311 and $157 for the nine months endedSeptember 30, 2006, the thirty-three weeks ended September 30, 2005 and the sixweeks ended February 11, 2005, respectively.

The Company madecontributions of $397 and $3,980 to the U.S. and Canadian pension plans andother pension plans, respectively, for the nine months ended September 30,2006.  For the retiree health plans, theCompany made payments of $1,351 for the nine months ended September 30,2006.  In addition, the Company madecontributions of approximately $1,198 to defined contribution plans for thenine months ended September 30, 2006.

**12. Stock-based Compensation**

The Company hashistorically accounted for stock-based compensation as prescribed by SFAS No.123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accountingfor Stock-Based Compensation — Transition and Disclosures.”  EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123(R), “Share-BasedPayment”, which had no material effect on the financial statements.

12

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Subsequentto the Transactions, Holdings adopted a restricted stock plan for which 19,800shares of Holdings Class A common stock were awarded to certain executives ofthe Company in 2005.  There has been norestricted stock activity in the current year. The weighted average grant date fair value of the restricted stock is$21.37 per share.  The restricted stockvests as follows: 10% of each grant vests on February 11 in each year 2006 to2010, subject to the executive’s continued service with the Company on suchdate and subject to 100% vesting upon the earlier of an initial public offeringof stock by, or change of control of, Holdings, and subject to acceleratedvesting upon certain specified events of termination of service; and thevesting of 50% of each grant is based on performance measures at the time of aninitial public offering of stock by, or earlier change of control of, Holdings.  Compensation expense for the awards was $27and $81 for the three and nine months ended September 30, 2006,respectively.  As of September 30, 2006,there was $149 of unrecognized compensation cost related to nonvestedrestricted stock which is expected to be recognized over a weighted averageperiod of 1.37 years.

**13.  Income Taxes:**

The effective tax provision rate of 56% on theCompany’s consolidated pre-tax income for the nine months ended September 30,2006 differs from the U.S. statutory tax rate of 35.0% principally due to theU.S. tax effects on the earnings of non-U.S. subsidiaries.  The Company considers all earnings of foreignsubsidiaries to be available for repatriation to the U.S. and provides U.S. taxexpense in anticipation of the repatriation of these earnings.  The effective tax provision rate of 21% and27% on the Company’s consolidated pre-tax loss for the thirty-three weeks endedSeptember 30, 2005 and six weeks ended February 11, 2005, respectively, differfrom the U.S. statutory tax rate of 35% principally due to non-deductible andpartially deductible costs incurred related to the purchase Transactions.  The Successor period in 2005 was alsoaffected by the U.S. tax effects on the earnings of non-U.S. subsidiaries.

The Company has incurred a significant increasein interest expense from acquisition indebtedness in connection with theTransactions in 2005, substantially all of which is in the U.S.  The increase in interest expensesignificantly limits the Company’s ability to use foreign tax credits to offsetU.S. tax on dividends from foreign subsidiaries.  In addition, the Company’s carryforward ofits 2005 net operating loss to 2006 for U.S. federal income tax purposesfurther limits the use of foreign tax credits in 2006 and further increases theU.S. tax provision on 2006 earnings of foreign subsidiaries.

**14. Commitments and Contingencies:**

There is a risk of environmentalimpact in chemical manufacturing operations. The Company’s environmentalpolicies and practices are designed to ensure compliance with existing laws andregulations and to minimize the possibility of significant environmentalimpact. The Company is also subject to various other lawsuits and claims withrespect to matters such as governmental regulations, labor, and other 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 is the defendant in a personal injury casewhich occurred in 1996. The case is still being litigated; however, in thefourth quarter of 2005 the Company accrued its best estimate of a potentialsettlement in the amount of $2,300. The Company believes its exposure caused bythe claim is covered by insurance and as such, has recorded an offsettingreceivable for recovery of this claim from the insurance carrier in prepaid andother current assets.

The Company is subject to variouslaws and regulations regarding emissions from our plant locations. These lawsand regulations may limit the amount and types of emissions that can bereleased into the atmosphere. In 2003, following an incident at our KansasCity, Kansas plant in which an emission control device failed, we were issued adraft Consent Agreement from the Kansas Department of Health and Environment (“KDHE”)for operating the plant without such emission control device in place. InOctober 2006, the Company agreed to a Consent Order that requires payment of acivil penalty of $200 and supplemental environmental projects of approximately$100 which were fully reserved in accrued liabilities as of September 30, 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 inDecember 2004.  As required under ISRA, aGeneral Information Notice with respect to our two New Jersey locations wasfiled with the New Jersey Department of Environmental Protection (“NJDEP”) inDecember 2004.  Based on a preliminaryreview of the facilities by the NJDEP, the Company estimated that $500 would berequired for contamination assessment and removal work at these facilities, andrecorded a reserve for such amount as of December 31, 2005. During the quarterended June 30, 2006, it was**

13

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** **

**determined that additional removaland remediation work would be required and the reserve was increased by $500 to$1,000 to cover the estimated cost of such work. There may be additional costsrelated to the remediation of these two facilities, but until furtherinvestigation takes place, the Company cannot reasonably estimate the amount ofadditional liability that may exist. However, the total costs for remediation of these two facilities are notexpected to exceed $1,500.**

**15.  Related Party Transactions:**

**The Company, J.P. Morgan Partners(BHCA), L.P. and its affiliates and Peak Investments, LLC, and Holdings enteredinto management agreements relating to the provision of certain financial andstrategic advisory services and consulting services.  The Company paid a one-time fee in the amountof $10,000 on February 11, 2005 for structuring the Transactions.  Such payment was recorded in other operatingexpense for the thirty-three weeks ended September 30, 2005.  In addition, the Company agreed to pay to theSponsors a quarterly monitoring fee of $500 which commenced in 2006. The managementagreement also provides for the reimbursement of any fees payable by Holdingsfor the maintenance of its corporate existence, corporate overhead expenses andfor salaries and other compensation of certain employees who perform servicesfor both Holdings and the Company.**

**16.  Business Segments**:

TheCompany’s reportable segments are organized based on the operating divisionswithin the Company:  Chemicals andPotters. Chemicals develops, manufactures and sells silicate-based specialtychemicals to mainly large industrial and consumer products companies. Pottersmanufactures highly engineered solid and hollow glass spheres that are mainlysold to contractors, governmental agencies and manufacturing companies.

Thetable below presents information about the reported segments:
| ** **                | ** ** | **Successor**                                                                         | ** ** | **Successor**                                                                         | ** ** | **Predecessor**                                                                       | ** ** |
|---------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | ** **                                                                            | ** ** | ** **                                                                            | ** ** | **Nine months**                                                                  | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                | ** ** | **Three months ended**                                                      | ** ** | **ended**                                                                             | ** ** | **weeks ended**                                                                  | ** ** | **ended** | ** ** |
| ** **                | ** ** | **September 30,**                                                                | ** ** | **September 30,**                                                                | ** ** | **September 30,**                                                                | ** ** | **February 11,** | ** ** |
| ** **                | ** ** | **2006**                                                                              | ** ** | **2005**                                                                              | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** | **2005** | ** ** |
|                      |       |                                                                                  |       |                                                                                  |       |                                                                                  |       |   |   |   |   |
| Net Sales:                |       |                                                                                  |       |                                                                                  |       |                                                                                  |       |   |   |   |   |
| Chemicals                 |       | $           126,183            |       | $           105,329            |       | $           367,856            |       | $           266,150 |   | $             48,264 |   |
| Potters                   |       | 65,816                                                                                |       | 65,645                                                                                |       | 180,012                                                                               |       | 156,132 |   | 15,931 |   |
| Total                     |       | $           191,999            |       | $           170,974            |       | $           547,868            |       | $           422,282 |   | $             64,195 |   |
|                      |       |                                                                                  |       |                                                                                  |       |                                                                                  |       |   |   |   |   |
| Adjusted EBITDA  (1):     |       |                                                                                  |       |                                                                                  |       |                                                                                  |       |   |   |   |   |
| Chemicals                 |       | $             36,223 |       | $             24,811 |       | $             98,382 |       | $             64,500 |   | $             10,290 |   |
| Potters                   |       | 14,729                                                                                |       | 14,103                                                                                |       | 37,816                                                                                |       | 33,580 |   | 2,771 |   |
| Segments adjusted  EBITDA |       | $             50,952 |       | $             38,914 |       | $           136,198            |       | $             98,080 |   | $             13,061 |   |

 

----

(1)           Adjustedearnings before interest, income taxes, depreciation and amortization (“AdjustedEBITDA”) consists of EBITDA adjusted for items such as impairment charges,certain environmental and other expenses, purchase accounting impacts,severance and merger related costs. Management evaluates the performance of itssegments and allocates resources based on several factors, of which the primarymeasure is Adjusted EBITDA. Adjusted EBITDA does not represent cash flow forperiods presented and should not be considered as an alternative to net incomeas an indicator of the Company’s operating performance or as an alternative tocash flows as a source of liquidity. Adjusted EBITDA as defined by the Companymay not be comparable with EBITDA or Adjusted EBITDA as defined by othercompanies.

14

----

 

Areconciliation from Segments Adjusted EBITDA to pre-tax income follows:
| ** **                                               | ** ** | **Successor**                                                                         | ** ** | **Successor**                                                                                    | ** ** | **Predecessor**                                                                       | ** ** |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                               | ** ** | ** **                                                                            | ** ** | ** **                                                                                       | ** ** | **Nine months**                                                                  | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **Three months ended**                                                      | ** ** | **ended**                                                                                        | ** ** | **weeks ended**                                                                  | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **September 30,**                                                                | ** ** | **September 30,**                                                                           | ** ** | **September 30,**                                                                | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**                                                                              | ** ** | **2005**                                                                                         | ** ** | **2006**                                                                              | ** ** | **2005** | ** ** | **2005** | ** ** |
| Segments  adjusted EBITDA                                |       | $             50,952 |       | $             38,914            |       | $           136,198            |       | $             98,080 |   | $             13,061 |   |
| Less:                                                    |       |                                                                                  |       |                                                                                             |       |                                                                                  |       |   |   |   |   |
| Interest expense                                         |       | 13,140                                                                                |       | 10,716                                                                                           |       | 38,817                                                                                |       | 26,370 |   | 771 |   |
| Depreciation and  amortization                           |       | 11,544                                                                                |       | 10,685                                                                                           |       | 34,915                                                                                |       | 27,251 |   | 4,436 |   |
| Loss (gain) on  disposal of assets                       |       | 3                                                                                     |       | 177                                                                                              |       | 18                                                                                    |       | 11 |   | — |   |
| Corporate  expenses                                      |       | 8,391                                                                                 |       | 5,390                                                                                            |       | 18,747                                                                                |       | 13,348 |   | 2,857 |   |
| Environmental  and other                                 |       | 9                                                                                     |       | 1,483                                                                                            |       | (26                                                                                   | )          | 2,284 |   | — |   |
| Benefit plan  curtailments                               |       | —                                                                                |       | (5,979                                                                                           | )          | —                                                                                |       | (5,979 | ) | — |   |
| Write off of  in-process R&D                         |       | —                                                                                |       | —                                                                                           |       | —                                                                                |       | 3,338 |   | — |   |
| Raw material  contracts                                  |       | 2,960                                                                                 |       | 6,408                                                                                            |       | 11,231                                                                                |       | 12,258 |   | — |   |
| Investment in  affiliates step-up                        |       | 298                                                                                   |       | 255                                                                                              |       | 893                                                                                   |       | 5,889 |   | — |   |
| Inventory  step-up                                       |       | —                                                                                |       | 418                                                                                              |       | —                                                                                |       | 10,934 |   | — |   |
| Management  advisory fees                                |       | 500                                                                                   |       | —                                                                                           |       | 1,500                                                                                 |       | — |   | — |   |
| Operational  restructuring charges                       |       | 125                                                                                   |       | 333                                                                                              |       | 2,660                                                                                 |       | 4,262 |   | 5,604 |   |
| Merger related  costs                                    |       | —                                                                                |       | 402                                                                                              |       | 543                                                                                   |       | 20,432 |   | 8,713 |   |
| Minority  interest                                       |       | (194                                                                                  | )          | (106                                                                                             | )          | (504                                                                                  | )          | (243 | ) | (59 | ) |
| Income (loss) before  income taxes and minority interest |       | $             14,176 |       | $               8,732 |       | $             27,404 |       | $            (22,075 | ) | $              (9,261 | ) |

 

**17.  Investment in Affiliates**

Following is summarizedfinancial information of our Zeolyst International joint venture that qualifiesas a significant subsidiary:
| ** **       | ** ** | **Three months ended**      | ** ** | **Nine months ended**       | ** ** |
|------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **       | ** ** | **September 30,**                | ** ** | **September 30,**                | ** ** |
| ** **       | ** ** | **2006**                              | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|             |       |                                  |       |                                  |       |   |   |   |   |
| Net sales        |       | $     20,522 |       | $     20,636 |       | $     70,551 |   | $     78,630 |   |
| Gross profit     |       | 16,099                                |       | 9,119                                 |       | 38,783 |   | 30,800 |   |
| Operating income |       | 12,890                                |       | 5,024                                 |       | 25,297 |   | 16,720 |   |
| Net income       |       | 12,874                                |       | 4,962                                 |       | 25,114 |   | 16,025 |   |

 

Thisjoint venture, and our other investments in affiliated companies, is accountedfor under the equity method. The summarized financial information aboveexcludes expenses related to purchase accounting fair value adjustments of $298and $255 for the three months ended September 30, 2006 and 2005,respectively, and $893 and $5,889 for the nine months ended September 30,2006 and 2005, respectively. These purchase accounting adjustments wereestablished as a result of the Transactions and the related amortizationexpense is reflected as a reduction in the Company’s equity in net income ofaffiliated companies for the respective periods.

15

----

 

**18.  Guarantor and NonguarantorStatements:**

In connection with the Transactions described inNote 1 and as a part of the related financings, the Company issued$275,000 of 7.5% senior subordinated notes due 2013.  The notes are general unsecured obligationsof the Company, subordinated in right of payment to all existing and futuresenior indebtedness of the Company that does not contain similar subordinationprovisions, and guaranteed on a full, unconditional, joint and several basis bythe Company’s 100% owned domestic subsidiaries.

The following consolidating financial informationpresents:

·  Consolidating balance sheets as of September30, 2006 and December 31, 2005 for the Successor, statements of operations forthe three months and nine months ended September 30, 2006, and the three monthsand thirty-three weeks ended September 30, 2005 for the Successor and the sixweeks ended February 11, 2005 for the Predecessor. The related statements ofcash flows for the nine months ended September 30, 2006 and the thirty-threeweeks ended September 30, 2005 for the Successor and the six weeks ended February11, 2005 for the Predecessor.

·  Elimination entries necessary to consolidatethe Predecessor and Successor, with their respective guarantor subsidiaries andnonguarantor subsidiaries. The principal entries eliminate investments insubsidiaries and intercompany balances and transactions. Intercompany saleswere not reported as part of the consolidating statements and, therefore, donot require elimination.

16

----

 

PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEET - SUCCESSORSeptember 30, 2006(in thousands)(unaudited)
| ** **                                                         | ** ** | **Parent**                                                                                                                  | ** ** | **Guarantor**                                                                                                                   | ** ** | **Nonguarantor**                                                                                 | ** ** | ** **                                                                                                                      | ** ** | **Consolidated**                                                                      | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **company**                                                                                                                 | ** ** | **subsidiaries**                                                                                                                | ** ** | **subsidiaries**                                                                                 | ** ** | **Eliminations**                                                                                                                | ** ** | **total**                                                                             | ** ** |
| ASSETS                                                             |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| Cash and cash  equivalents                                         |       | $                    76 |       | $                  446                |       | $             10,437            |       | $                    — |       | $             10,959 |       |
| Receivables, net                                                   |       | 34,295                                                                                                                      |       | 22,280                                                                                                                          |       | 60,142                                                                                           |       | —                                                                                                                          |       | 116,717                                                                               |       |
| Intercompany  receivable                                           |       | —                                                                                                                      |       | 135,381                                                                                                                         |       | —                                                                                           |       | (135,381                                                                                                                        | )          | —                                                                                |       |
| Inventories                                                        |       | 26,631                                                                                                                      |       | 25,430                                                                                                                          |       | 34,621                                                                                           |       | —                                                                                                                          |       | 86,682                                                                                |       |
| Prepaid and  other current assets                                  |       | 13,582                                                                                                                      |       | 340                                                                                                                             |       | 5,304                                                                                            |       | —                                                                                                                          |       | 19,226                                                                                |       |
| Total current assets                                               |       | 74,584                                                                                                                      |       | 183,877                                                                                                                         |       | 110,504                                                                                          |       | (135,381                                                                                                                        | )          | 233,584                                                                               |       |
|                                                               |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| Investments in  subsidiaries                                       |       | 414,903                                                                                                                     |       | 125,155                                                                                                                         |       | —                                                                                           |       | (540,058                                                                                                                        | )          | —                                                                                |       |
| Investments in  affiliated companies                               |       | 64,976                                                                                                                      |       | 2,992                                                                                                                           |       | 3,602                                                                                            |       | —                                                                                                                          |       | 71,570                                                                                |       |
| Property, plant  and equipment, net                                |       | 111,320                                                                                                                     |       | 39,745                                                                                                                          |       | 164,006                                                                                          |       | —                                                                                                                          |       | 315,071                                                                               |       |
| Goodwill                                                           |       | 165,333                                                                                                                     |       | 66,603                                                                                                                          |       | —                                                                                           |       | —                                                                                                                          |       | 231,936                                                                               |       |
| Tradenames                                                         |       | 32,400                                                                                                                      |       | 20,600                                                                                                                          |       | —                                                                                           |       | —                                                                                                                          |       | 53,000                                                                                |       |
| Other intangible  assets, net                                      |       | 41,802                                                                                                                      |       | 20,888                                                                                                                          |       | 533                                                                                              |       | —                                                                                                                          |       | 63,223                                                                                |       |
| Other long-term  assets                                            |       | 28,379                                                                                                                      |       | 618                                                                                                                             |       | 3,441                                                                                            |       | —                                                                                                                          |       | 32,438                                                                                |       |
| Total assets                                                       |       | $           933,697                                                  |       | $           460,478                                                      |       | $           282,086                       |       | $          (675,439                                                           | )          | $        1,000,822                            |       |
|                                                               |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| LIABILITIES AND  STOCKHOLDER’S EQUITY                         |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| Revolvers, notes  payable and current maturities of long-term debt |       | $             19,352                                       |       | $                    — |       | $               2,336 |       | $                    — |       | $             21,688 |       |
| Cash overdraft                                                     |       | 2,675                                                                                                                       |       | 1,536                                                                                                                           |       | 526                                                                                              |       | —                                                                                                                          |       | 4,737                                                                                 |       |
| Accounts payable                                                   |       | 18,148                                                                                                                      |       | 7,839                                                                                                                           |       | 22,175                                                                                           |       | —                                                                                                                          |       | 48,162                                                                                |       |
| Intercompany  payable                                              |       | 63,134                                                                                                                      |       | —                                                                                                                          |       | 72,247                                                                                           |       | (135,381                                                                                                                        | )          | —                                                                                |       |
| Accrued  liabilities                                               |       | 18,259                                                                                                                      |       | 12,795                                                                                                                          |       | 19,869                                                                                           |       | —                                                                                                                          |       | 50,923                                                                                |       |
| Total current liabilities                                          |       | 121,568                                                                                                                     |       | 22,170                                                                                                                          |       | 117,153                                                                                          |       | (135,381                                                                                                                        | )          | 125,510                                                                               |       |
|                                                               |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| Long-term debt                                                     |       | 631,022                                                                                                                     |       | —                                                                                                                          |       | —                                                                                           |       | —                                                                                                                          |       | 631,022                                                                               |       |
| Deferred income  taxes                                             |       | 78,004                                                                                                                      |       | 23,405                                                                                                                          |       | 11,393                                                                                           |       | —                                                                                                                          |       | 112,802                                                                               |       |
| Other long-term  liabilities                                       |       | 58,936                                                                                                                      |       | —                                                                                                                          |       | 23,549                                                                                           |       | —                                                                                                                          |       | 82,485                                                                                |       |
| Minority  interest in equity of subsidiaries                       |       | —                                                                                                                      |       | —                                                                                                                          |       | 4,836                                                                                            |       | —                                                                                                                          |       | 4,836                                                                                 |       |
| Commitments and  contingencies                                     |       |                                                                                                                        |       |                                                                                                                            |       |                                                                                             |       |                                                                                                                            |       |                                                                                  |       |
| Stockholder’s  equity                                         |       | 44,167                                                                                                                      |       | 414,903                                                                                                                         |       | 125,155                                                                                          |       | (540,058                                                                                                                        | )          | 44,167                                                                                |       |
| Total  liabilities and stockholder’s equity                   |       | $           933,697                                                  |       | $           460,478                                                      |       | $           282,086                       |       | $          (675,439                                                           | )          | $        1,000,822                            |       |

 

17

----

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                                      |       | 52,957                                                                                           |       | 22,458                                                                                                                          |       | 2,235                                                                                            |       | —                                                                                                                          |       | 77,650                                                                                |       |
| Other long-term  assets                                            |       | 41,957                                                                                           |       | 378                                                                                                                             |       | 3,393                                                                                            |       | —                                                                                                                          |       | 45,728                                                                                |       |
| 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                            |       |

 

 

18

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PQCORPORATION AND SUBSIDIARIES

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSOR

For the threemonths ended September 30, 2006

(inthousands)

(unaudited)
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 65,436     |             | $          | 41,952           |       | $                | 84,611     |             | $          | — |   | $ | 191,999 |   |
| Cost of goods sold                                   |       | 50,823      |       | 30,713           |       | 65,687           |       | —           |       | 147,223          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 14,613      |       | 11,239           |       | 18,924           |       | —           |       | 44,776           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administrative expenses        |       | 11,787      |       | 2,679            |       | 7,371            |       | —           |       | 21,837           |       |
| Other operating expense                              |       | 976         |       | 720              |       | 43               |       | —           |       | 1,739            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating income                                     |       | 1,850       |       | 7,840            |       | 11,510           |       | —           |       | 21,200           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 18,575      |       | 5,423            |       | 97               |       | (17,885          | )          | 6,210            |       |
| Interest expense  (income), net                      |       | 14,385      |       | (2,966           | )          | 1,721            |       | —           |       | 13,140           |       |
| Other (income) expense                               |       | (491        | )          | (42              | )          | 627              |       | —           |       | 94               |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss)  before taxes and minority interest    |       | 6,531       |       | 16,271           |       | 9,259            |       | (17,885          | )          | 14,176           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision (benefit) for  income taxes                |       | (950        | )          | 3,834            |       | 3,617            |       | —           |       | 6,501            |       |
| Minority interest                                    |       | —      |       | —           |       | 194              |       | —           |       | 194              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net income (loss)                                    |       | $           | 7,481      |             | $          | 12,437           |       | $                | 5,448      |             | $          | (17,885 | ) | $ | 7,481 |   |

 

19

----

PQCORPORATION AND SUBSIDIARIES

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSOR

For the threemonths ended September 30, 2005

(inthousands)

(unaudited)
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 59,993     |             | $          | 38,898           |       | $                | 72,083     |             | $          | — |   | $ | 170,974 |   |
| Cost of goods  sold                                  |       | 49,401      |       | 30,014           |       | 56,388           |       | —           |       | 135,803          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 10,592      |       | 8,884            |       | 15,695           |       | —           |       | 35,171           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general  and administative expenses         |       | 8,555       |       | 3,764            |       | 7,501            |       | —           |       | 19,820           |       |
| Other operating  (income) expense                    |       | (2,772      | )          | 561              |       | 136              |       | —           |       | (2,075           | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating income                                     |       | 4,809       |       | 4,559            |       | 8,058            |       | —           |       | 17,426           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net  income (loss) of affiliated companies |       | 6,728       |       | (1,463           | )          | 22               |       | (3,010           | )          | 2,277            |       |
| Interest expense  (income), net                      |       | 11,006      |       | (2,038           | )          | 1,748            |       | —           |       | 10,716           |       |
| Other (income)  expense                              |       | (405        | )          | (4,933           | )          | 5,593            |       | —           |       | 255              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income before taxes and minority interest            |       | 936         |       | 10,067           |       | 739              |       | (3,010           | )          | 8,732            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision for  income taxes                          |       | 2,130       |       | 5,566            |       | 2,124            |       | —           |       | 9,820            |       |
| Minority  interest                                   |       | —      |       | —           |       | 106              |       | —           |       | 106              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net income  (loss)                                   |       | $           | (1,194     | )                | $          | 4,501            |       | $                | (1,491     | )                | $          | (3,010 | ) | $ | (1,194 | ) |

 

20

----

PQCORPORATION AND SUBSIDIARIES

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSOR

For the ninemonths ended September 30, 2006

(inthousands)

(unaudited)
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 198,612    |             | $          | 113,569          |       | $                | 235,687    |             | $          | — |   | $ | 547,868 |   |
| Cost of goods sold                                   |       | 155,914     |       | 83,286           |       | 183,566          |       | —           |       | 422,766          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 42,698      |       | 30,283           |       | 52,121           |       | —           |       | 125,102          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administrative expenses        |       | 30,286      |       | 8,358            |       | 22,616           |       | —           |       | 61,260           |       |
| Other operating expense                              |       | 7,334       |       | 2,021            |       | 32               |       | —           |       | 9,387            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating income                                     |       | 5,078       |       | 19,904           |       | 29,473           |       | —           |       | 54,455           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 44,108      |       | 9,987            |       | 331              |       | (42,519          | )          | 11,907           |       |
| Interest expense  (income), net                      |       | 42,033      |       | (8,448           | )          | 5,232            |       | —           |       | 38,817           |       |
| Other (income) expense                               |       | (935        | )          | (4,283           | )          | 5,359            |       | —           |       | 141              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss)  before taxes and minority interest    |       | 8,088       |       | 42,622           |       | 19,213           |       | (42,519          | )          | 27,404           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision (benefit) for  income taxes                |       | (3,488      | )          | 10,178           |       | 8,634            |       | —           |       | 15,324           |       |
| Minority interest                                    |       | —      |       | —           |       | 504              |       | —           |       | 504              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net income (loss)                                    |       | $           | 11,576     |             | $          | 32,444           |       | $                | 10,075     |             | $          | (42,519 | ) | $ | 11,576 |   |

 

21

----

PQCORPORATION AND SUBSIDIARIES

CONDENSEDCONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSOR

For thethirty-three weeks ended September 30, 2005

(inthousands)

(unaudited)
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 151,290    |             | $          | 84,064           |       | $                | 186,928    |             | $          | — |   | $ | 422,282 |   |
| Cost of goods sold                                   |       | 124,312     |       | 58,042           |       | 157,445          |       | —           |       | 339,799          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 26,978      |       | 26,022           |       | 29,483           |       | —           |       | 82,483           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administative expenses         |       | 26,609      |       | 9,432            |       | 20,294           |       | —           |       | 56,335           |       |
| Other operating expense                              |       | 15,613      |       | 1,288            |       | 130              |       | —           |       | 17,031           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating (loss)  income                             |       | (15,244     | )          | 15,302           |       | 9,059            |       | —           |       | 9,117            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 19,113      |       | (1,865           | )          | 218              |       | (14,760          | )          | 2,706            |       |
| Interest expense  (income), net                      |       | 27,149      |       | (4,970           | )          | 4,191            |       | —           |       | 26,370           |       |
| Other expense (income)                               |       | 7,051       |       | (5,832           | )          | 6,309            |       | —           |       | 7,528            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss)  before taxes and minority interest    |       | (30,331     | )          | 24,239           |       | (1,223           | )          | (14,760          | )          | (22,075          | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision (benefit) for  income taxes                |       | (3,407      | )          | 7,584            |       | 429              |       | —           |       | 4,606            |       |
| Minority interest                                    |       | —      |       | —           |       | 243              |       | —           |       | 243              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net (loss) income                                    |       | $           | (26,924    | )                | $          | 16,655           |       | $                | (1,895     | )                | $          | (14,760 | ) | $ | (26,924 | ) |

 

22

----

PQCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OFOPERATIONS - PREDECESSOR

For the sixweeks ended February 11, 2005

(inthousands)

(unaudited)
| ** **                                           | ** ** | **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 administrative 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 (loss) of affiliated companies |       | 2,127       |       | 3,980            |       | 75               |       | (6,447           | )          | (265             | )          |
| Interest expense  (income), 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 | ) |

 

23

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PQCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS - SUCCESSOR

For the ninemonths ended September 30, 2006

(inthousands)

(unaudited)
| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Net cash provided  by operating activities          |       | $           | 17,742     |             | $          | 3,902            |       | $                | 1,995      |             | $          | — |   | $ | 23,639 |   |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of property, plant and equipment          |       | (9,271      | )          | (4,846           | )          | (5,648           | )          | —           |       | (19,765          | )          |
| Purchase of other intangible assets                 |       | (1,131      | )          | —           |       | —           |       | —           |       | (1,131           | )          |
| Net cash used for investing activities              |       | (10,402     | )          | (4,846           | )          | (5,648           | )          | —           |       | (20,896          | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable and cash overdrafts, net              |       | (7,454      | )          | (106             | )          | (2,076           | )          | —           |       | (9,636           | )          |
| Repayments of long-term debt                        |       | (2,739      | )          | —           |       | (824             | )          | —           |       | (3,563           | )          |
| Distributions to minority interests                 |       | —      |       | —           |       | (391             | )          | —           |       | (391             | )          |
| Dividend distribution                               |       | (1,613      | )          | 1,228            |       | (1,228           | )          | —           |       | (1,613           | )          |
| Net cash (used in) provided by financing activities |       | (11,806     | )          | 1,122            |       | (4,519           | )          | —           |       | (15,203          | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Effect of  exchange rate changes on cash            |       | —      |       | —           |       | 447              |       | —           |       | 447              |       |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Net change in  cash and cash equivalents            |       | (4,466      | )          | 178              |       | (7,725           | )          | —           |       | (12,013          | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents at beginning of period   |       | 4,542       |       | 268              |       | 18,162           |       | —           |       | 22,972           |       |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents at end of period         |       | $           | 76         |             | $          | 446              |       | $                | 10,437     |             | $          | — |   | $ | 10,959 |   |

 

24

----

PQCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASHFLOWS - SUCCESSOR

For thethirty-three weeks ended September 30, 2005

(inthousands)

(unaudited)
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net cash (used)  provided by operating activities    |       | $           | (34,418    | )                | $          | 1,931            |       | $                | 38,731     |             | $          | — |   | $ | 6,244 |   |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:               |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of  property, plant and equipment          |       | (6,988      | )          | (1,670           | )          | (6,905           | )          | —           |       | (15,563          | )          |
| Merger  consideration                                |       | (626,000    | )          | —           |       | —           |       | —           |       | (626,000         | )          |
| Merger costs                                         |       | (6,485      | )          | —           |       | —           |       | —           |       | (6,485           | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net cash used  for investing activities              |       | (639,473    | )          | (1,670           | )          | (6,905           | )          | —           |       | (648,048         | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:               |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable  and cash overdrafts, net              |       | 3,034       |       | (408             | )          | (2               | )          | —           |       | 2,624            |       |
| Issuance of  long-term debt                          |       | 335,000     |       | —           |       | —           |       | —           |       | 335,000          |       |
| Issuance of  senior notes                            |       | 275,000     |       | —           |       | —           |       | —           |       | 275,000          |       |
| Debt acquisition  costs                              |       | (16,503     | )          | —           |       | —           |       | —           |       | (16,503          | )          |
| Repayments of  long-term debt                        |       | (115,142    | )          | —           |       | (807             | )          | —           |       | (115,949         | )          |
| Equity  Contribution                                 |       | 164,188     |       | —           |       | —           |       | —           |       | 164,188          |       |
| Distributions to  minority shareholders              |       | —      |       | —           |       | (185             | )          | —           |       | (185             | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net cash  provided by (used in) financing activities |       | 645,577     |       | (408             | )          | (994             | )          | —           |       | 644,175          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Effect of exchange rate  changes on cash             |       | —      |       | —           |       | (1,991           | )          | —           |       | (1,991           | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net change in cash and  cash equivalents             |       | (28,314     | )          | (147             | )          | 28,841           |       | —           |       | 380              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents at beginning of period    |       | 33,214      |       | 346              |       | 15,197           |       | —           |       | 48,757           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash equivalents at end of period           |       | $           | 4,900      |             | $          | 199              |       | $                | 44,038     |             | $          | — |   | $ | 49,137 |   |

 

25

----

PQCORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -PREDECESSOR

For the six weeks ended February 11, 2005

(inthousands)

(unaudited)
| ** **                                        | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                              |       |        |       |             |       |             |       |             |       |             |       |
| Net cash (used)  provided by operating activities |       | $           | (13,627    | )                | $          | 71               |       | $                | 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, notes payable and cash overdrafts, net  |       | 44,857      |       | —           |       | —           |       | —           |       | 44,857           |       |
| Proceeds from issuance of treasury stock          |       | 1,161       |       | —           |       | —           |       | —           |       | 1,161            |       |
| Purchase of stock                                 |       | (47         | )          | —           |       | —           |       | —           |       | (47              | )          |
|                                              |       |        |       |             |       |             |       |             |       |             |       |
| Net cash provided by financing activities         |       | 45,971      |       | —           |       | —           |       | —           |       | 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 |   |

 

26

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

*The following discussion and analysis of ourfinancial condition and results of operations covers periods both prior to andsubsequent to the Transactions. Accordingly, the discussion and analysis ofhistorical periods may not be comparable with the periods presented after theTransactions.  In addition, this QuarterlyReport may contain material which includes forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 thatreflect, when made, our current views with respect to current events andfinancial performance.  Theseforward-looking statements are subject to numerous risks and uncertainties,including, but not limited to, the risks and uncertainties described in “RiskFactors” and “Forward Looking Statements” as described in our registrationstatement on Form S-1**as filed with the Securities and ExchangeCommission ("SEC") on October 5, 2006**. Statements, other than those based on historical facts, which addressactivities, events or developments that we expect or anticipate may occur inthe future are forward-looking statements, which are based upon a number ofassumptions concerning future conditions that may ultimately prove to beinaccurate. Such statements may include words such as “anticipate,” “estimate,”“expect,” “project,” “intend,” “plan,” “believe,” and other words and terms ofsimilar meaning in connection with any discussion of future operating orfinancial performance.  Forward-lookingstatements are and will be, as the case may be, subject to many risks,uncertainties and factors relating to our operations and business environmentwhich may cause our actual results to be materially different from any futureresults, express or implied, by such forward-looking statements.  Except as required by law, we undertake noobligation to publicly update any forward-looking statements, whether as aresult of new information, future events or otherwise.*

**Overview**

Weare a global producer of inorganic specialty chemicals and engineered glassmaterials. We conduct our operations through two principal business divisions:our Chemicals division, which develops, manufactures and sells silicate-basedspecialty chemicals, and our Potters division, which manufactures and sellshighly engineered solid and hollow glass spheres. Our products are used in avariety of predominantly niche applications in a diverse range of industrial,consumer and municipal end-markets.  

OnFebruary 11, 2005, we were acquired by Niagara Holdings, Inc., or Holdings, anewly formed Delaware corporation affiliated with J.P. Morgan Partners (BHCA),L.P., or J.P. Morgan Partners, and certain affiliated funds and Peak Investments,LLC, which we refer to collectively as, the Sponsors. Pursuant to the terms ofthe Agreement and Plan of Merger, dated as of December 15, 2004, among PQCorporation, Holdings and Niagara Acquisition, Inc., a wholly owned subsidiaryof Holdings, (i) Niagara Acquisition, Inc. merged with and into PQ Corporation,with PQ Corporation continuing as the surviving entity and a wholly ownedsubsidiary of Holdings, (ii) PQ Corporation redeemed the outstanding shares ofits $16.44 Preferred Stock, Class A in accordance with its terms, and(iii) the common shareholders of PQ Corporation (both Series A andSeries B) and holders of options to purchase common stock of PQCorporation received cash in exchange for their shares or for the cancellationof their options. We refer to the actions set forth in clauses (i),(ii) and (iii) collectively as, the Merger.  

Inconnection with the Merger, affiliates of JPMorgan Partners and certain membersof our senior management contributed approximately $163.6 million in cashto Holdings, which in turn was contributed to the common equity of NiagaraAcquisition, Inc. The total Merger consideration paid, including capitalizedfees and expenses, was approximately $632.5 million.  In addition to cash on hand at February 11,2005, the Merger consideration was funded with the proceeds from: 

·                                          the investment by the Sponsors andcertain members of our senior management in Holdings and the  subsequent contribution of the cash proceedsfrom such investment to us as common equity; 

·                                          our issuance of $275.0 million of 7.5%senior subordinated notes due 2013; and 

·                                          term loan borrowings of $335.0 millionunder our senior secured credit facilities.

We refer to theMerger and the related financing described above, collectively as, the Transactions.

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**Results of Operations**

The following table setsforth our consolidated statements of operations data in dollar amounts for theperiods indicated.  The nine and threemonths ended September 30, 2006 and thirty-three week period from February 12,2005 to September 30, 2005 and three months ended September 30, 2005 arereferred to herein as “Successor” periods. The financial information for the six weeks ended February 11, 2005 isfor the period prior to the consummation of the Transactions and referred toherein as the “Predecessor” period.  As aresult of the Transactions and the resulting change in ownership, we arerequired to present separately our historical operating results for thePredecessor and Successor periods in the nine months ended September 30, 2005under U.S. GAAP.  The results ofoperations below include entries for the effects of purchase accountingadjustments for the Successor periods only and therefore are not comparable tothe Predecessor period.  Refer to thediscussions below for detail regarding the effects of purchase accountingadjustments in regard to comparability.
| ** **                                           | ** ** | **Successor**          | ** ** | **Successor**          | ** ** | **Predecessor**        | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **Three months**  | ** ** | **Three months**  | ** ** | **Nine months**   | ** ** | **Thirty-three** | ** ** | **Six weeks** | ** ** |
| ** **                                           | ** ** | **ended**              | ** ** | **ended**              | ** ** | **ended**              | ** ** | **weeks ended** | ** ** | **ended** | ** ** |
| ** **                                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **September 30,** | ** ** | **February 11,** | ** ** |
| ** **                                           | ** ** | **2006**               | ** ** | **2005**               | ** ** | **2006**               | ** ** | **2005** | ** ** | **2005** | ** ** |
| Sales                                                |       | $                      | 192.0      |                   | $          | 171.0                  |       | $ | 547.9 |   | $ | 422.3 |   | $ | 64.2 |   |
| Cost of goods                                        |       | 147.2                  |       | 135.8                  |       | 422.8                  |       | 339.8 |   | 48.6 |   |
| Gross profit                                         |       | 44.8                   |       | 35.2                   |       | 125.1                  |       | 82.5 |   | 15.6 |   |
| Selling, general and  administrative expenses        |       | 21.8                   |       | 19.8                   |       | 61.3                   |       | 56.4 |   | 11.2 |   |
| Other operating expense  (income)                    |       | 1.8                    |       | (2.1                   | )          | 9.4                    |       | 17.1 |   | 12.2 |   |
| Operating income  (loss)                             |       | 21.2                   |       | 17.5                   |       | 54.4                   |       | 9.0 |   | (7.8 | ) |
| Equity in net income  (loss) of affiliated companies |       | 6.2                    |       | 2.2                    |       | 11.9                   |       | 2.7 |   | (0.3 | ) |
| Interest expense, net                                |       | 13.1                   |       | 10.7                   |       | 38.8                   |       | 26.3 |   | 0.8 |   |
| Other non-operating  expense                         |       | 0.1                    |       | 0.3                    |       | 0.1                    |       | 7.5 |   | 0.4 |   |
| Income (loss)  before taxes and minority interest    |       | 14.2                   |       | 8.7                    |       | 27.4                   |       | (22.1 | ) | (9.3 | ) |
| Provision (benefit) for  income taxes                |       | 6.5                    |       | 9.8                    |       | 15.3                   |       | 4.5 |   | (2.5 | ) |
| Minority interest                                    |       | 0.2                    |       | 0.1                    |       | 0.5                    |       | 0.3 |   | — |   |
| Net income (loss)                                    |       | $                      | 7.5        |                   | $          | (1.2                   | )          | $ | 11.6 |   | $ | (26.9 | ) | $ | (6.8 | ) |

 

***Three Months Ended September 30, 2006 Compared to the ThreeMonths Ended September 30, 2005***

***Sales***

Sales for the three months ended September 30, 2006were $192.0 million compared with $171.0 million for the three monthsended September 30, 2005.  Overall, salesin the third quarter of 2006 increased by $21.0 million or 12% compared withsales for the same quarter in 2005. Increases in sales as compared to the prioryear period were primarily the result of average selling price increases andproduct mix of $17.7 million. Price increases were implemented to mitigate theimpact of increased energy, raw materials and transportation costs in both theChemicals and Potters divisions. In addition, the favorable effects of foreigncurrency exchange rates resulted in an increase of $3.5 million.

*Chemicals division.*  Sales of the Chemicals division for the threemonths ended September 30, 2006 were**$126.2million compared with $105.4 million for the three months ended September 30,2005.  Overall, sales in the thirdquarter of 2006 increased by $20.8 million compared with sales for the samequarter in 2005. This was a 20% increase in net sales which was primarily aresult of higher average selling prices and product mix of $14.9 million,increased sales volume of $3.2 million as well as the favorable impact offoreign currency exchange of $2.7 million. Average selling prices increasedprimarily as a result of favorable changes in product mix and price increasesintended to mitigate the impact of higher energy, raw materials andtransportation costs. The favorable currency exchange impact was largely due tothe strengthening of the Canadian dollar and the Euro in comparison to the U.S.dollar versus the quarter ended September 30, 2005.

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*Potters division.*  Sales of the Potters division for the threemonths ended September 30, 2006 were $65.8 million compared with $65.6 millionfor the three months ended September 30, 2005. Overall, sales in the third quarter of 2006 were in line with those ofthe comparable quarter of 2005.

***Gross profit***

Gross profit for the three months ended September 30,2006 was $44.8 million compared with $35.2 million for the three months endedSeptember 30, 2005.  Overall, grossprofit in the third quarter of 2006 increased by $9.6 million compared withgross profit for the same period in 2005. The favorable effects of higheraverage selling prices and product mix, net of increases in production andtransportation costs, contributed $6.6 million to gross profit and the effectsof foreign currency translation added another $0.4 million. Also affectinggross profit was an increase in depreciation expense of $1.2 million as aresult of additions to property, plant and equipment.  Approximately $3.9 million of the increase ingross profit was the result of a reduction in expense originating from purchaseaccounting, primarily from the expense for the post-acquisition sales ofinventories written up to fair value at the date of the Transactions and amortization of favorable raw material supplycontracts. The contribution from sales volumes was slightly down ascompared with that of the comparable quarter in 2005.

*Chemicals division.*  Gross profit for the three months endedSeptember 30, 2006 was $26.7 million compared with $17.2 million for the threemonths ended September 30, 2005. Overall, gross profit in the third quarter of2006 increased by $9.5 million, or 55%, compared with gross profit for the sameperiod in 2005. The favorable effects of higher average selling prices andproduct mix, net of increases in production and transportation costs,contributed $4.5 million and increased sales volume contributed $0.9 million.The impacts of foreign currency exchange added $0.7 million to the increase ingross profit. Approximately $3.4 million of the increase in gross profit wasthe result of a reduction in expense originating from purchase accounting,primarily from lower amortization of favorable revaluation of raw materialssupply contracts and the 2005 post-acquisition sales of inventories written upto fair value at the date of the Transactions.

*Potters division.*  Gross profit for the three months endedSeptember 30, 2006 was $18.1 million compared with $18.0 million for the threemonths ended September 30, 2005. Gross profit was favorably impacted byapproximately $0.5 million of reduced expense related to purchase accounting,primarily from the 2005 post-acquisition sales of inventories written up tofair value at the date of the Transactions. However, the majority of thisincrease in gross profit was offset by slightly lower volumes for the thirdquarter on a comparative basis.

***Selling, general and administrative expenses (SG&A)***

SG&A expenses for the three months ended September30, 2006 were $21.8 million compared with $19.8 million for the three monthsended September 30, 2005, an increase of $2.0 million or 10%. The increase inSG&A expenses was primarily due to increases in performance-based compensationaccruals in 2006 versus the amount recorded in the same period during 2005.

***Other operating (income) expense***

Other operating expense for the three months endedSeptember 30, 2006 was $1.8 million compared with other operating incomeof $2.1 million for the three months ended September 30, 2005.  The prior year quarter included a netcurtailment gain of $6.0 million relating to pension and post-retirement planamendments. The prior year quarter also included a total of $1.9 million inenvironmental, Transactions-related and acquisition due diligence costs. Otheroperating (income) expense in both periods includes the amortization ofintangibles of approximately $1.4 million and various miscellaneous operatingcosts.

***Equity in net income of affiliated companies***

Equity in net income of affiliated companies for thethree months ended September 30, 2006 was $6.2 million compared with $2.2million for the three months ended September 30, 2005, an increase of $4.0million. Both the current year and prior year period results were reduced by$0.3 million to reflect the amortization of intangible assets and increaseddepreciation of property, plant and equipment that resulted from fair marketvalue purchase accounting adjustments. The increase in the quarter endedSeptember 30, 2006 was due to a favorable mix of higher gross profit productsales as well as a reduction in marketing and technical support costs.

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***Interest expense, net***

Interest expense, net for the three months endedSeptember 30, 2006 was $13.1 million compared with $10.7 million for thethree months ended September 30, 2005, an increase of $2.4 million. Overall,interest expense, net was higher by $1.7 million due to increases in thevariable interest rate on our senior credit facility and $0.7 million due toadditional borrowings under our senior credit facility.

***Other non-operating (income) expense***

Other non-operating expense was$0.1 million for the three months ended September 30, 2006 comparedwith expense of $0.3 million for the three months ended September 30, 2005.  Othernon-operating expense for both the 2006 and 2005 periods consisted primarily offoreign currency gains and losses and miscellaneous financing income andexpense.

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

The provision for income taxes for the three monthsended September 30, 2006 was $6.5 million, or 46% of pre-tax income, comparedwith a provision of $9.8 million for the three months ended September 30, 2005.The effective tax rate for both the third quarter 2006 and 2005 was higher thanthe U.S. federal tax rate primarily due to the deferred U.S. tax effects on theearnings of non-U.S. subsidiaries which were not considered to be permanentlyreinvested.  In addition, the effectivetax rate for the third quarter of 2005 was higher as a result of an increase inthe forecasted full year effective tax rate caused by an increase in forecastedearnings of U.S. locations.

***Net income(loss)***

For the foregoing reasons andtaking into account the minority interest in earnings of subsidiaries for eachperiod presented, net income was $7.5 million for the three months endedSeptember 30, 2006 compared with net loss of $1.2 million for the threemonths ended September 30, 2005.

***Nine Months EndedSeptember 30, 2006 Compared to the Thirty-three weeks Ended September 30, 2005for the Successor and Six Weeks Ended February 11, 2005 for the Predecessor***

***Sales***

Sales for the nine months ended September 30, 2006were $547.9 million compared with $422.3 million for the thirty-threeweeks ended September 30, 2005 for the Successor and $64.2 million for the sixweeks ended February 11, 2005 for the Predecessor. Overall, Successor sales forthe nine months ended September 30, 2006 increased by $61.4 million comparedwith Successor and Predecessor sales for the 2005 periods. Increases in salesas compared to the prior year periods were primarily the result of higheraverage selling prices as well as increased sales volumes in both the Chemicalsand Potters divisions.

*Chemicals division.*  Sales of the Chemicals division for the ninemonths ended September 30, 2006 were**$367.9million compared with $266.1 million for the thirty-three weeks ended September30, 2005 for the Successor and $48.3 million for the six weeks ended February11, 2005 for the Predecessor. Overall, Successor sales in the first nine monthsof 2006 increased by $53.5 million compared with Successor and Predecessorsales for the 2005 periods. This was a 17% increase in net sales reflectingfavorable changes in product mix and selling price increases of $42.9 million,as well as increased sales volume of $7.3 million.  The impact of foreign currency exchange ratesresulted in a net increase in sales of $3.3 million, primarily as a result ofthe stronger Canadian dollar in comparison to the U.S. dollar. Selling priceswere increased in order to compensate for the impact of higher energy, rawmaterials and transportation costs. Sales volumes were favorable compared withthe prior year periods as a result of increased demand.

*Potters division.*  Sales of the Potters division for the ninemonths ended September 30, 2006 were $180.0 million compared with $156.2million for the thirty-three weeks ended September 30, 2005 for the Successorand $15.9 million for the six weeks ended February 11, 2005 for the Predecessor.  Overall, Successor sales in the nine monthsended September 30, 2006 increased by $7.9 million, or 5% compared withSuccessor and Predecessor sales for the

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nine months ended September 30, 2005. This increase innet sales was primarily a result of increased sales volumes of $2.3 million aswell as higher average selling prices of $5.4 million. Sales volume increasedas a result of strong demand in North America. Selling prices were increased inorder to compensate for the impact of higher energy, raw materials andtransportation costs. The impact of foreign currency exchange rates resulted inan increase to net sales of $0.2 million.

***Gross profit***

Gross profit for the nine months ended September 30,2006 was $125.1 million compared with $82.5 million for the thirty-threeweeks ended September 30, 2005 for the Successor and $15.6 million for the sixweeks ended February 11, 2005 for the Predecessor.  Overall, Successor gross profit for the ninemonths ended September 30, 2006 increased by $27.0 million compared withSuccessor and Predecessor gross profit for the nine months ended September 30,2005. The effects of higher selling prices and product mix, net of increases inproduction and transportation costs, contributed $11.7 million.  Also affecting gross profit was an increasein depreciation expense of $2.9 million as a result of additions to property,plant and equipment.  Increased salesvolume added $4.4 million, and the favorable impact of foreign currencyexchange rates, primarily as a result of the strengthening of the Canadiandollar in comparison to the U.S. dollar, increased gross profit by $1.4million. Approximately $12.4 million of this increase was the result of areduction in expense related to purchase accounting, primarily from the 2005Successor period expense for the post-acquisition sales of inventories writtenup to fair value at the date of the Transactions.

*Chemicals division.*  Gross profit for the nine months endedSeptember 30, 2006 was $76.0 million compared with $42.9 million for thethirty-three weeks ended September 30, 2005 for the Successor and $11.4 millionfor the six weeks ended February 11, 2005 for the Predecessor. Overall,Successor gross profit for the nine months ended September 30, 2006 increasedby $21.7 million compared with Successor and Predecessor gross profit for thenine months ended September 30, 2005. The favorable effects of higher sellingprices and product mix, net of increases in production and transportationcosts, contributed $11.0 million. Increased sales volume added $2.9 million andthe favorable impacts of foreign currency exchange contributed $1.3 million tothe increase. In addition, $6.5 million of the increase in gross profit was theresult of a reduction in expense related to purchase accounting, primarily fromthe 2005 post-acquisition sales of inventories written up to fair value at thedate of the Transactions and amortization of favorable revaluation of rawmaterials supply contracts.

*Potters division.*  Gross profit for the nine months endedSeptember 30, 2006 was $49.1 million compared with $39.6 million for thethirty-three weeks ended September 30, 2005 for the Successor and $4.2 millionfor the six weeks ended February 11, 2005 for the Predecessor. Overall, grossprofit for the nine months ended September 30, 2006 increased by $5.3 millioncompared with Successor and Predecessor gross profit for the nine months endedSeptember 30, 2005. This increase was primarily the result of a reduction inexpense related to purchase accounting, primarily from the 2005post-acquisition sales of inventories written up to fair value at the date ofthe Transactions.  The favorable impactsof volume, product mix and price increases were offset by higher energy, rawmaterials and transportation costs during the nine months ended September 30,2006 in comparison to the prior year.

***Selling, general and administrative expenses (S,G&A)***

SG&A expenses for the nine months ended September30, 2006 were $61.3 million compared with $56.4 million for the thirty-threeweeks ended September 30, 2005 for the Successor and $11.2 million for the sixweeks ended February 11, 2005 for the Predecessor.  Overall, SG&A for the nine months endedSeptember 30, 2006 decreased by $6.3 million compared with Successor andPredecessor SG&A for the nine months ended September 30, 2005.  The decrease in SG&A expense wasprimarily due to certain Transactions-related expenses incurred during theSuccessor thirty-three weeks ended September 30, 2005 and Predecessor six weeksended February 11, 2005. These expenses totaled $6.2 million, the majority ofwhich related to the write-off of acquired in-process research and developmentand the accelerated vesting of the Predecessor’s stock options and awards.SG&A has also benefited from the result of corporate cost reduction effortsthat were put in place subsequent to the date of the Transactions.  However, these benefits have been largelyoffset by increased performance-based bonus accruals in the current yearcompared to 2005.

***Other operating expense***

Other operating expense for the nine months endedSeptember 30, 2006 was $9.4 million compared with $17.1 million for thethirty-three weeks ended September 30, 2005 for the Successor and $12.2 millionfor the six weeks

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ended February 11, 2005 for the Predecessor.  Overall, Successor other operating expensefor the nine months ended September 30, 2006 decreased $19.9 million comparedwith Successor and Predecessor other operating expense for the nine months endedSeptember 30, 2005. Contributing to the decrease was $19.3 million in costsincurred in 2005 in connection with the acquisition of the Company. Inaddition, change-in-control severance benefits paid to former companyexecutives in 2005 related to the Transactions amounted to $9.5 million. Partiallyoffsetting these costs was a net curtailment gain of $6.0 million relating to2005 pension and post-retirement plan amendments. Both 2006 and 2005 includeamortization due to the recognition of intangible assets for purchaseaccounting of $4.3 million and $3.9 million, respectively. Included in theamount for the nine months ended September 30, 2006, was $2.3 million in costsincurred to improve the efficiency of plant operations for certain U.S. plants.

***Equity in net income of affiliated companies***

Equity in net income of affiliated companies for thenine months ended September 30, 2006 was $11.9 million compared with $2.7million for the thirty-three weeks ended September 30, 2005 for the Successorand a loss of $0.3 million for the six weeks ended February 11, 2005 for thePredecessor.  Overall, Successor equityin net income of affiliated companies for the nine months ended September 30,2006 increased by $9.5 million compared with Successor and Predecessor equityincome for the nine months ended September 30, 2005. Both the current year andprior year Successor period results were reduced to reflect the amortization ofintangible assets and increased depreciation of property, plant and equipmentthat resulted from fair market value purchase accounting adjustments of $0.9million and $0.7 million in 2006 and 2005, respectively. A majority of theincrease for the nine months ended September 30, 2006 compared to the ninemonths ended September 30, 2005 was due to purchase accounting expenses in thethirty-three weeks ended September 30, 2005 in the amount of $5.2 million forpost-acquisition sales of inventories written up to fair value at the date ofthe Transactions. The remaining difference was primarily due to the favorablemix of product sales and a reduction in marketing and technical support costs.

***Interest expense, net***

Interest expense, net for the nine months endedSeptember 30, 2006 was $38.8 million compared with $26.3 million for thethirty-three weeks ended September 30, 2005 for the Successor and $0.8 millionfor the six weeks ended February 11, 2005 for the Predecessor.  Overall, Successor interest expense, netincreased due to the higher levels of debt incurred as a result of theTransactions.  In addition, interestexpense increased in 2006 due to increases in the variable interest rate on oursenior credit facility and additional borrowings under the senior creditfacility. Effective January 10, 2006, the interest rate on our $275.0 millionsenior subordinated notes was increased 25 basis points to 7.75% as a result ofmissing the deadline for having the registration statement declared effectiveby the SEC. However, the interest rate on the notes reverted to 7.5% once theregistration statement was declared effective by the SEC on May 12, 2006.

***Other non-operating (income) expense***

Other non-operating expense was$0.1 million for the nine months ended September 30, 2006 comparedwith expense of $7.5 million for the thirty-three weeks ended September 30,2005 for the Successor and $0.4 million for the six weeks ended February 11,2005 for the Predecessor.  Other non-operating expense for thethirty-three weeks ended September 30, 2005 consisted of costs incurred as aresult of the Transactions including $5.2 million in “make-whole” paymentsfor the early payment of the Predecessor’s debt and $2.3 million infinancing fees for access to a bridge credit facility during theTransactions.  The remainder of othernon-operating expense for 2006 and 2005 consisted primarily of foreign currencygains and losses, and miscellaneous financial income and expense.

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

The provision for income taxes for the nine monthsended September 30, 2006 was $15.3 million, or 56% of pre-tax income,compared with a provision of $4.5 million for the thirty-three weeks endedSeptember 30, 2005 for the Successor and a benefit of $2.5 million for the sixweeks ended February 11, 2005 for the Predecessor. The effective tax rate forthe nine months ended September 30, 2006 was higher than the U.S. federal taxrate primarily due to the deferred U.S. tax effects on the earnings of non-U.S.subsidiaries which were not considered to be permanently reinvested.  In a like manner, the tax provision on pre-taxlosses during the thirty-three weeks ended September 30, 2005 for the Successorwas attributable to the impact of certain non-deductible and partiallydeductible costs of the Transactions as well as the deferred U.S. tax effectson the earnings of non-U.S. subsidiaries . The effective tax rate on the tax benefits of pre-tax losses  for the six weeks ended February 11, 2005 forthe Predecessor was significantly lower than the U.S.

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federaltax rate due also to the impact of certain non-deductible expenses incurred inconjunction with the acquisition of the Company.

***Net income (loss)***

Forthe foregoing reasons, and after accounting for minority interest in earningsof subsidiaries for each period presented, net income was $11.6 millionfor the nine months ended September 30, 2006 compared with a net loss of$26.9 million for the thirty-three weeks ended September 30, 2005 for theSuccessor and $6.8 million for the six weeks ended February 11, 2005 for thePredecessor.

**Liquidity and Capital Resources**

Cash and cash equivalents at September 30, 2006 were$11.0 million, which was a decrease of $12.0 million from December 31, 2005.

Net cash provided by operating activities was $23.6million for the nine months ended September 30, 2006 compared to $0.7 millioncash used during the same period in 2005. The primary contributors to the increase from the prior year period werethe elimination of $36.6 million of costs related to the Transactions andimproved operating results in 2006. Partially offsetting these improvements were increased investment inworking capital due to higher sales and raw material costs and higher interestpayments due to increased levels of debt as well as higher interest on ourvariable rate debt.

Net cash used in investing activities was $20.9million for the nine months ended September 30, 2006 compared to $650.4 millionduring the same period in 2005.  Thedecrease versus the prior year was due to $632.5 million in consideration paidto effect the Transactions in February 2005. The remaining difference was due to slightly higher capital spendingversus the prior year, mainly to expand capacity in certain manufacturingfacilities, as well as the acquisition of intangibles assets, consistingprimarily of customer lists, in June 2006.

Net cash used for financing activities was $15.2million for the nine months ended September 30, 2006 compared to net cashprovided of $690.1 million during the same period in 2005.  The current year spending primarily consistsof payments made to reduce amounts outstanding on the revolving credit facilityas well dividend distributions and quarterly debt payments.  The prior year included $164.2 million ofequity contributions and $610.0 million in proceeds from the issuance of newdebt that together were used to finance the Transactions.  Prior year outflows included $16.5 million ofcapitalized debt acquisition costs and payments of $115.9 million, including$114.5 million of principal due on the Predecessor’s existing debt.  Offsetting the $114.5 million was approximately$44.9 million that the Predecessor had drawn on the existing credit facilityprior to the Transactions.

In connection with the Transactions, we incurredsignificant indebtedness.  As ofSeptember 30, 2006 our total debt was $652.7 million. Borrowings under theterm loan are due and payable in quarterly installments of $0.9 million. Theremaining balance of the term loan is due and payable in full in 2012. Therevolving credit facility is available until 2011. In addition to payinginterest on outstanding principal amounts under our credit facilities, we arerequired to pay a commitment fee to the lenders for the unused portion of therevolving credit facility.

Our senior secured creditfacility contains various restrictive covenants. It restricts us from prepayingother indebtedness, including our senior subordinated notes, and requires us tomaintain a specified minimum interest coverage ratio of 2.0x, and a maximumtotal leverage ratio of 6.5x at September 30, 2006.  In addition, our senior secured creditfacility restricts our ability to incur indebtedness or liens, make investmentsor declare or pay dividends and limits our annual capital spending. Theindenture governing our senior subordinated notes among other things:(i) limits our ability and the ability of our 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 our subsidiaries to pay dividends ormake certain payments to us; and (iii) places restrictions on our abilityand the ability of our subsidiaries to merge or consolidate with any otherperson or sell, assign, transfer, convey or otherwise dispose of all orsubstantially all of our assets. At September 30, 2006, we were in compliancewith our loan covenants.

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**Recently Issued AccountingPronouncements**

**See footnote 2 to the condensed consolidated financialstatements for a discussion of recently issued accounting pronouncements.**

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

Ourmajor market risk exposure is potential losses arising from changing rates andprices regarding foreign currency exchange rate risk, interest rate risk,commodity price risk and credit risk. The audit committee of our Board ofDirectors regularly reviews foreign exchange, interest rate and commodityhedging activity and monitors compliance with our hedging policy. We do not usefinancial instruments for speculative purposes and we limit our hedgingactivity to the underlying economic exposure.

**Foreign Exchange Risk**

Ourfinancial results are subject to the impact of gains and losses on currencytranslations, which occur when the financial statements of foreign operationsare translated into U.S. dollars. We operate a geographically diverse businesswith approximately 44% of our sales during the twelve months endedDecember 31, 2005 coming from our international operations in currenciesother than the U.S. dollar. Because consolidated financial results are reportedin dollars, sales or earnings generated in currencies other than the U.S.dollar can result in a significant increase or decrease in the amount of thosesales and earnings when translated to U.S. dollars. The financial statements ofour operations outside the United States, where the local currency isconsidered to be the functional currency, are translated into U.S. dollarsusing the exchange rate in effect at each balance sheet date for assets andliabilities and the average exchange rate for each period for sales, expenses,gains, losses and cash flows. The exchange rates between these currencies andthe U.S. dollar in recent years have fluctuated significantly and may continueto do so in the future. The foreign currencies to which we have the mostsignificant exchange rate exposure include the Canadian dollar and the euro.The effect of translating foreign subsidiaries’ balance sheets into U.S.dollars is included in other comprehensive income. The impact of gains andlosses on transactions denominated in currencies other than the functionalcurrency of the relevant operations are included in other non-operating expenseand have historically not been material.

**Interest Rate Risk**

Weare exposed to fluctuations in interest rates on our long-term senior securedterm loan and revolving credit facility. Changes in interest rates will notaffect the market value of such debt but will affect the amount of our interestpayments over the term of the loans. Likewise, an increase in interest ratescould have a material impact on our cash flow. A 100 basis point increase ininterest rates on our variable term loan under our new senior secured creditfacility would have an estimated impact on pre-tax earnings of$3.6 million annually.

**Commodity Risk**

Wepurchase significant amounts of natural gas to supply the energy required inour production processes for our products in both the Chemicals and Pottersdivisions. Natural gas provides an energy source for us but is not a directfeedstock of our products. We have implemented a hedging program in the UnitedStates which allows us to mitigate exposure to natural gas volatility.  Forward purchases of natural gas are alsomade in regard to our production in Canada as a means of mitigating suchexposure.

Wehave entered into forward contracts with respect to the purchase of natural gasin our domestic operations. These contracts had a fair value of$4.1 million and $31.0 million at September 30, 2006 and December 31,2005, respectively.  The decrease in fairvalue was primarily due to a reduction in the forward natural gas price curvesince year-end 2005. The respective current and non-current balances arerecorded in prepaid and other current assets and other long-term assets. Therelated offset is recorded in other comprehensive income (loss), net of tax.Realized gains and losses on natural gas hedges are included in productioncosts and subsequently charged to cost of goods sold in the period in whichinventory is sold.

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**Credit Risk**

Weare exposed to credit risk on financial instruments to the extent ourcounterparty fails to perform certain duties as required under the provisionsof an agreement. We only transact with counterparties having an appropriatecredit rating for the risk involved. Credit exposure is managed through creditapproval and monitoring procedures.

Concentrationof credit risk can result primarily from trade receivables, for example, withcertain customers operating in the same industry or customer groups located inthe same geographic region. Credit risk related to these types of receivablesis managed through credit approval and monitoring procedures.

**ITEM4.   CONTROLS AND PROCEDURES**

**Evaluation of Controls and Procedures**

We maintain disclosure controlsand procedures (as defined 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 such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives.

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report. Asdescribed more fully below, based upon that evaluation and because the Companyhas not substantially completed its remediation of the material weaknessesidentified as of December 31, 2005, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective to accomplish their objectives as of September 30,2006.  However, management has takensteps including the hiring of internal and external resources as well as theimplementation of additional controls and procedures to remediate the materialweaknesses in the current year.  Inaddition, management will continue to assess the need for additional controls,procedures and resources to maintain an effective control environment on anongoing basis as circumstances change.

In connection with thepreparation 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.                  Insufficienttax expertise to properly prepare the accounting required under SFASNo. 109, “Accounting for Income Taxes”.

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

To address the materialweaknesses described above, the Company performed additional analyses and otherpost-closing procedures to ensure that the consolidated financial statementswere prepared in accordance with accounting principles generally accepted inthe United States of America (GAAP). Accordingly, management, including theChief Executive Officer and Chief Financial Officer, believe the consolidatedfinancial statements included in this report present fairly, in all materialrespects, the Company’s financial condition, results of operations and cashflows for the periods presented.

**Changes inInternal Control Over Financial Reporting**

Management as well as the AuditCommittee recognizes that the Company must take measures in order to remediatethe two material weaknesses described above. In that pursuit, the Company completed an independent assessment of itsexternal financial reporting and tax functions during the second quarter of2006 to help determine the appropriate level of staffing and identify areas ofimprovement and specific steps necessary to remediate these weaknesses.  This has resulted in the Company taking thefollowing additional actions during the quarter ended September 30, 2006:

·                  Theengagement  of outside tax experts toassist with the preparation of the tax provision in accordance with SFAS No.109 and to supplement our overall level of tax expertise.

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·                  Initiatedthe re-design and implementation of controls surrounding the preparation andreview of the tax provision and related disclosures.

·                  Initiatedsearches for internal resources with the goal of hiring additional accountingand financial reporting and internal audit personnel to augment our existingfinance staff.

In addition, we expect toimplement certain other processes and controls to address the materialweaknesses described above during the fourth quarter of 2006.

There have been no other changesin our internal control over financial reporting during the nine months endedSeptember 30, 2006, that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II.**

**OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

We are involved from time to timein administrative or legal proceeding relating to our operations andfacilities.

There is a risk of environmentalimpact in chemical manufacturing operations. Our environmental policies andpractices are designed to ensure compliance with existing laws and regulationsand to minimize the possibility of significant environmental impact.  We are also subject to various other lawsuitsand claims with respect to matters such as governmental regulations, labor, andother actions arising out of the normal course of business. No accrual forthese matters currently exists, with the exception of those listed below,because we believe that the liabilities resulting from such lawsuits and claimswill not materially affect our results of operations, financial position orcash flow.

We are subject to various lawsand regulations regarding emissions from our plant locations. These laws andregulations may limit the amount and types of emissions that can be releasedinto the atmosphere. In 2003, following an incident at our Kansas City, Kansasplant in which an emission control device failed, we were issued a draftConsent Agreement from the Kansas Department of Health and Environment (“KDHE”)for operating the plant without such emission control device in place.  In October 2006, we agreed to a Consent Orderthat requires payment of a civil penalty of $0.2 million and supplementalenvironmental projects of approximately $0.1 million which were fully reservedin accrued liabilities as of September 30, 2006.

As a result of an incident at ourBaltimore, Maryland facility on March 17, 1999 involving the unauthorizeddischarge of process water to a storm sewer, the United States Attorney for theDistrict of Maryland undertook an investigation into environmental complianceat our Baltimore plant. The investigation later expanded to include two of ourother plants in Chester, Pennsylvania and St. Louis, Missouri. OnMarch 10, 2004, we resolved the investigation by pleading guilty to threefelony violations of the Clean Water Act. In addition to paying$0.6 million in fines, restitution and the funding of a community serviceproject, we are on probation until June 2007. We also agreed to submitdocuments to the Department of Justice (“DOJ”) describing our EnvironmentalManagement System (“EMS”). Several additions to the EMS have been made basedupon discussions with the DOJ and we are in process of implementing the EMS.Successfully implementing the EMS is required by an action plan that has beenincorporated into the plea agreement.

We are the defendant in a personal injury case whichoccurred in 1996. The case is still being litigated; however, in the fourthquarter of 2005 we accrued our best estimate of a potential settlement in theamount of $2.3 million. The exposure caused by the claim is covered byinsurance and as such, we have also recorded a receivable for recovery of thisclaim from our insurance carrier.

In the past five years, we havebeen a party to civil litigation matters. These matters have included disputesregarding employment matters and product warranty and negligence claims. Allbut two matters have been covered by applicable insurance. The two matters thathave been denied coverage by our insurance carriers relate to the operations atour Augusta, Georgia facility. The suits, which are pending against numerousindustrial and utility defendants, allege that emissions of mercury from theutility and industrial defendants facilities resulted in harm to the twoplaintiffs. We do not believe we have any material exposure to litigation liability.

We triggered the requirement ofNew Jersey’s Industrial Site Recovery Act (“ISRA”) statute as part of the duediligence performed in connection with the Transactions in December 2004.  As required under ISRA, a General InformationNotice with respect to our two New Jersey locations was filed with the NewJersey Department of Environmental Protection (“NJDEP”) in December 2004.  Based on a preliminary review of thefacilities by the NJDEP, we estimated that $0.5 million would be required forcontamination assessment and removal work at these facilities, and recorded areserve for such amount as of December 31, 2005. During the quarter ended June30, 2006, it was determined that additional removal and remediation work wouldbe required and the reserve was increased by $0.5 million to $1.0 million tocover the estimated cost of such work. There may be additional costs related tothe remediation of these two facilities, but until further investigation takesplace, we cannot reasonably estimate the amount of additional liability thatmay exist.  However, the total costs forremediation of these two facilities are not expected to exceed $1.5 million.

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**ITEM 1A.****     RISK FACTORS**

There havebeen no material changes to the disclosure related risk factors made in ourregistration statement on Form S-1, as filed with the SEC on October 5, 2006.

**ITEM 2.****        UNREGISTERED SALE OF EQUITYSECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3.****        DEFAULTS UPON SENIORSECURITIES**

None.

**ITEM 4.****        SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

None.

**ITEM 5.****        OTHER INFORMATION**

Subsequentto the end of the reporting period for this quarterly report on Form 10-Q, onNovember 9, 2006, Mr. Michael Imbriani, currently Vice Chairman and President –Chemicals Division, announced that he will retire from PQ after thirty-threeyears of service effective December 31, 2006. His global role will not be filled; instead the management of the GlobalChemical business will be shared by existing leaders within PQ’s Chemicalsorganization.  Through December 31, 2006,Mr. Imbriani will actively work to assist in the transition of his activitiesto the respective senior leaders.  As anamed executive officer as of December 31, 2005, Mr. Imbriani’s retirement asan executive officer would have been reportable under Item 5.02(b) of Form 8-K.

**ITEM 6.****        EXHIBITS**
| 31.1   | Section 302 of the Sarbanes-Oxley Act of 2002  Certification of James P. Cox, Vice President, Treasurer and Chief Financial  Officer.                                                |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                 |
| 31.2   | Section 302 of the Sarbanes-Oxley Act of 2002  Certification of Michael R. Boyce, Chief Executive Officer.                                                                           |
|   |                                                                                                                                                                                 |
| 32.1   | Section 906 of the Sarbanes-Oxley Act of 2002  Certification of Michael R. Boyce, Chief Executive Officer, and James P. Cox,  Vice President, Treasurer and Chief Financial Officer. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, PQ Corporationhas caused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                     | PQ CORPORATION                                             |
|--------------------------|------------------------------------------------------------|
|                     |                                                       |
|                     |                                                       |
|                     | By:                                                        | /S/ JAMES P. COX |   |
| ** **               | ** **                                                 | James P. Cox |
|                     | Chief Financial Officer, Treasurer and Vice  President     |
|                     | (principal financial officer and duly authorized  officer) |
|                     |                                                       |
|                     |                                                       |
| Date: November  14, 2006 |                                                       |

 

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