**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 thequarterly period ended June 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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**PQCORPORATION**

(Exact name ofregistrant as specified in our charter)

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| **Pennsylvania**                          |   | **23-0972750**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
|                                      |   |                 |
| **1200  West Swedesford Road**            |   | **19312**            |
| **Berwyn,  Pennsylvania**                 |   | (Zip Code)           |
| (Address of  principal executive offices) |   |                 |

**(610)651-4200**

(Registrant’stelephone number, including area code)

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.   Yes   x   No   o

Indicate by check markwhether the registrant is a large accelerated filer, and accelerated filer, ora non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   o      Acceleratedfiler   o      Non-accelerated filer   x

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes   o   No   x

As of August 14, 2006, the number of shares outstanding of theregistrant’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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**PARTI.**

**FINANCIALINFORMATION**

**ITEM1.  FINANCIAL STATEMENTS**

**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)**
| ** **                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ASSETS                                                            |       |              |       |                  |       |
| Cash and cash  equivalents                                        |       | $                 | 9,823      |                  | $          | 22,972 |   |
| Receivables, net                                                  |       | 117,211           |       | 90,714                |       |
| Inventories                                                       |       | 94,558            |       | 84,239                |       |
| Prepaid and other  current assets                                 |       | 25,926            |       | 38,333                |       |
|                                                              |       |              |       |                  |       |
| Total current  assets                                             |       | 247,518           |       | 236,258               |       |
|                                                              |       |              |       |                  |       |
| Investments in  affiliated companies                              |       | 65,424            |       | 64,417                |       |
| Property, plant and  equipment, net                               |       | 320,351           |       | 318,337               |       |
| Goodwill                                                          |       | 233,316           |       | 234,483               |       |
| Tradenames                                                        |       | 53,000            |       | 53,000                |       |
| Other intangible  assets, net                                     |       | 67,658            |       | 77,650                |       |
| Other long-term assets                                            |       | 35,414            |       | 45,728                |       |
|                                                              |       |              |       |                  |       |
| Total assets                                                      |       | $                 | 1,022,681  |                  | $          | 1,029,873 |   |
|                                                              |       |              |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                        |       |              |       |                  |       |
| Revolver, notes payable  and current maturities of long-term debt |       | $                 | 34,061     |                  | $          | 26,689 |   |
| Cash overdraft                                                    |       | 5,484             |       | 9,957                 |       |
| Accounts payable                                                  |       | 53,381            |       | 51,302                |       |
| Accrued liabilities                                               |       | 50,677            |       | 53,978                |       |
|                                                              |       |              |       |                  |       |
| Total current  liabilities                                        |       | 143,603           |       | 141,926               |       |
|                                                              |       |              |       |                  |       |
| Long-term debt                                                    |       | 631,935           |       | 633,821               |       |
| Deferred income taxes                                             |       | 118,373           |       | 127,806               |       |
| Other long-term  liabilities                                      |       | 85,187            |       | 74,714                |       |
| Minority interest in  equity of subsidiaries                      |       | 4,922             |       | 5,047                 |       |
| Commitments and  contingencies                                    |       |              |       |                  |       |
| Stockholders’ equity                                         |       | 38,661            |       | 46,559                |       |
|                                                              |       |              |       |                  |       |
| Total liabilities and  stockholders’ equity                  |       | $                 | 1,022,681  |                  | $          | 1,029,873 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

1

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)(unaudited)**
| ** **                                           | ** ** | **Successor**                                       | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **Three months ended June 30,** | ** ** |
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                                 |       |                                                |       |   |   |
| Sales                                                |       | $                                                   | 189,127    |   | $ | 176,095 |   |
| Cost of goods sold                                   |       | 143,977                                             |       | 137,815 |   |
|                                                 |       |                                                |       |   |   |
| Gross profit                                         |       | 45,150                                              |       | 38,280 |   |
|                                                 |       |                                                |       |   |   |
| Selling, general and  administrative expenses        |       | 20,696                                              |       | 19,843 |   |
| Other operating expense                              |       | 3,013                                               |       | 2,476 |   |
|                                                 |       |                                                |       |   |   |
| Operating income                                     |       | 21,441                                              |       | 15,961 |   |
|                                                 |       |                                                |       |   |   |
| Equity in net income  (loss) of affiliated companies |       | 2,279                                               |       | (3,730 | ) |
| Interest expense, net                                |       | 13,037                                              |       | 10,303 |   |
| Other expense                                        |       | 254                                                 |       | 168 |   |
|                                                 |       |                                                |       |   |   |
| Income before  income taxes and minority interest    |       | 10,429                                              |       | 1,760 |   |
|                                                 |       |                                                |       |   |   |
| Provision (benefit) for  income taxes                |       | 6,844                                               |       | (732 | ) |
| Minority interest                                    |       | 192                                                 |       | 65 |   |
|                                                 |       |                                                |       |   |   |
| Net income                                           |       | $                                                   | 3,393      |   | $ | 2,427 |   |
|                                                 |       |                                                |       |   |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

2

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)(unaudited)**
| ** **                                               | ** ** | **Successor**       | ** ** | **Predecessor**       | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **ended**           | ** ** | **ended**             | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **June 30,**   | ** ** | **June 30,**     | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**            | ** ** | **2005**              | ** ** | **2005** | ** ** |
|                                                     |       |                |       |                  |       |   |   |
| Sales                                                    |       | $                   | 355,869    |                  | $          | 251,308 |   | $ | 64,195 |   |
| Cost of goods sold                                       |       | 275,543             |       | 203,996               |       | 48,576 |   |
|                                                     |       |                |       |                  |       |   |   |
| Gross profit                                             |       | 80,326              |       | 47,312                |       | 15,619 |   |
|                                                     |       |                |       |                  |       |   |   |
| Selling, general and  administrative expenses            |       | 39,423              |       | 36,515                |       | 11,221 |   |
| Other operating expense                                  |       | 7,648               |       | 19,106                |       | 12,267 |   |
|                                                     |       |                |       |                  |       |   |   |
| Operating income  (loss)                                 |       | 33,255              |       | (8,309                | )          | (7,869 | ) |
|                                                     |       |                |       |                  |       |   |   |
| Equity in net income  (loss) of affiliated companies     |       | 5,697               |       | 429                   |       | (265 | ) |
| Interest expense, net                                    |       | 25,677              |       | 15,654                |       | 771 |   |
| Other expense                                            |       | 47                  |       | 7,273                 |       | 356 |   |
|                                                     |       |                |       |                  |       |   |   |
| Income (loss)  before income taxes and minority interest |       | 13,228              |       | (30,807               | )          | (9,261 | ) |
|                                                     |       |                |       |                  |       |   |   |
| Provision (benefit) for  income taxes                    |       | 8,823               |       | (5,214                | )          | (2,522 | ) |
| Minority interest                                        |       | 310                 |       | 137                   |       | 59 |   |
|                                                     |       |                |       |                  |       |   |   |
| Net income  (loss)                                       |       | $                   | 4,095      |                  | $          | (25,730 | ) | $ | (6,798 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

3

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**
| ** **                                            | ** ** | **Successor**       | ** ** | **Predecessor**       | ** ** |
|-------------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                            | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                            | ** ** | **ended**           | ** ** | **ended**             | ** ** | **ended** | ** ** |
| ** **                                            | ** ** | **June 30,**   | ** ** | **June 30,**     | ** ** | **February 11,** | ** ** |
| ** **                                            | ** ** | **2006**            | ** ** | **2005**              | ** ** | **2005** | ** ** |
|                                                  |       |                |       |                  |       |   |   |
| Net cash provided by  (used for) operating activities |       | $                   | 3,013      |                  | $          | (21,099 | ) | $ | (6,965 | ) |
|                                                  |       |                |       |                  |       |   |   |
| Cash flows from  investing activities:                |       |                |       |                  |       |   |   |
| Purchases of  property, plant and equipment           |       | (14,376             | )          | (9,974                | )          | (2,358 | ) |
| Purchase of  other intangible assets                  |       | (1,122              | )          | —                |       | — |   |
| Merger  consideration                                 |       | —              |       | (626,000              | )          | — |   |
| Merger costs,  capitalized                            |       | —              |       | (6,485                | )          | — |   |
|                                                  |       |                |       |                  |       |   |   |
| Net cash used  for investing activities               |       | (15,498             | )          | (642,459              | )          | (2,358 | ) |
|                                                  |       |                |       |                  |       |   |   |
| Cash flows from  financing activities:                |       |                |       |                  |       |   |   |
| Revolvers, notes  payable and cash overdrafts, net    |       | 3,032               |       | 4,158                 |       | 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                         |       | (2,224              | )          | (115,112              | )          | — |   |
| Proceeds from  issuances of treasury stock            |       | —              |       | —                |       | 1,161 |   |
| Purchases of  stock                                   |       | —              |       | —                |       | (47 | ) |
| Equity  contribution                                  |       | —              |       | 163,600               |       | — |   |
| Distributions to  minority interests                  |       | (342                | )          | —                |       | — |   |
| Dividend  distribution                                |       | (1,613              | )          | —                |       | — |   |
|                                                  |       |                |       |                  |       |   |   |
| Net cash (used  for) provided by financing activities |       | (1,147              | )          | 646,143               |       | 45,971 |   |
|                                                  |       |                |       |                  |       |   |   |
| Effect of exchange rate  changes on cash              |       | 483                 |       | (294                  | )          | (700 | ) |
|                                                  |       |                |       |                  |       |   |   |
| Net change in cash and  cash equivalents              |       | (13,149             | )          | (17,709               | )          | 35,948 |   |
|                                                  |       |                |       |                  |       |   |   |
| Cash and cash  equivalents at beginning of period     |       | 22,972              |       | 48,757                |       | 12,809 |   |
|                                                  |       |                |       |                  |       |   |   |
| Cash and cash equivalents at end of period            |       | $                   | 9,823      |                  | $          | 31,048 |   | $ | 48,757 |   |

 

Seeaccompanying notes to condensed consolidated financial statements.

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**PQCORPORATION AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands)(unaudited)**

**1.   Statement of InformationFurnished:**

On December 15, 2004, PQ Corporation (“Company”) andNiagara Acquisition, Inc. and its parent company, Niagara Holdings, Inc. (“Holdings”),entered into an Agreement and Plan of Merger, pursuant to which NiagaraAcquisition, Inc. merged with and into PQ Corporation, with PQ Corporationcontinuing as the surviving entity and a wholly-owned subsidiary of Holdings(the “Merger”).  Holdings is a Delawarecorporation, a substantial majority of the outstanding capital stock of whichis owned by JPMorgan Partners LP and its affiliates and Peak Investments, LLC (“Sponsors”).The Merger was consummated on February 11, 2005. The total merger considerationpaid, excluding fees and expenses, consisted of the stated purchase price of$626,000 and capitalized acquisition costs of $6,485.

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

The Company refers to the Merger and the relatedfinancings described above, collectively, as the Transactions.  For purposes of identification anddescription, the Company is referred to as the Predecessor for the period priorto the Transactions on February 11, 2005, and the Successor for the periodssubsequent to the Transactions.

The condensed consolidated financial statementsincluded herein are unaudited and have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial reporting and the United States Securities and Exchange Commission (“SEC”)regulations.  Certain information andfootnote disclosures normally included in annual financial statements preparedin accordance with accounting principles generally accepted in the UnitedStates have been condensed or omitted pursuant to such rules and regulationsfor interim reporting.  In the opinion ofmanagement, all adjustments of a normal and recurring nature necessary topresent fairly the financial position and results of operations have beenincluded. The results of operations are not necessarily indicative of theresults to be expected for the full year. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto for the year endedDecember 31, 2005 as included within amendment No. 3 to Form S-4 which wasdeclared effective by the SEC on May 12, 2006.

**2.   Recently Issued AccountingPronouncements**

In July 2006, theFASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertaintyin Income 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 48 is effective for fiscal years beginning afterDecember 15, 2006.  The Company iscurrently evaluating the impact of this Interpretation on its financialstatements.

**3.   Business Combination:**

SFAS No. 141, “Business Combinations,” andSFAS No. 142, “Goodwill and Other Intangible Assets,” govern theaccounting and reporting for business combinations. SFAS No. 141requires all business combinations to be accounted for using the purchasemethod 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, whose sole asset is its investment in the common stockof the Company, as the accounting acquirer in accordance with SFAS No. 141.

Immediately prior to closing, pursuant to theiroriginal terms, all of the Predecessor’s outstanding stock options and awardsvested and the Predecessor exercised its option to purchase, at fair value, allof the shares of common stock to be acquired by exercise of options and awardsheld by employees pursuant to the Stock Option and Award Plan. As a result,immediately before the Transactions, compensation expense of approximately$2,400 was recorded in selling,

5

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general and administrative expenses in theConsolidated Statement of Operations for the six weeks ended February 11, 2005for the unvested portion of the options and awards.

The closing of the Transactions represented a changein control under certain executives’ employment agreements. As a result, theCompany recorded a charge in other operating expense of approximately $5,600for severance provided to certain executives terminated before the closing ofthe Transactions in the Predecessor’s Statement of Operations. In addition, theSuccessor was required to pay $3,929 pursuant to these agreements to executiveswho resigned subsequent to the Transactions and recorded a charge for suchamount in the Successor’s Consolidated Statement of Operations for the twentyweek period ended June 30, 2005.

The Company incurred other costs relating to theTransactions, primarily for Sponsor fees, broker fees, legal and consulting ofapproximately $6,158 and $12,649 that were recorded in other operating expensefor the six week period ended February 11, 2005 and twenty week period endedJune 30, 2005, respectively.

The table below summarizes the allocation of the totalcost of the Merger to the assets acquired and liabilities assumed. The purchaseprice was allocated first to tangible and identifiable intangible assetsacquired and liabilities assumed based upon their estimated fair values. Theremaining excess of the purchase price over the fair value of assets acquiredand liabilities assumed was then recorded as goodwill. 
| 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 that its leading market positionsand diverse range of industrial, consumer and governmental applications inwhich its products are used were the primary reasons that contributed to atotal purchase price that resulted in the recognition of goodwill. The totalother intangible assets amounted to $157,595, of which $53,000 was assigned totrade names that are not subject to amortization. In addition, total otherintangible assets included $3,338 of capitalized in-process research anddevelopment that was immediately written off to selling, general andadministrative expenses in the Successor’s Statement of Operations.

In accordance with the requirements of the purchasemethod of accounting for acquisitions, inventories as of February 11, 2005 wererecorded at net realizable value (which is defined as estimated selling pricesless the sum of (a) costs of disposal and (b) a reasonable profitallowance for the selling effort of the acquiring entity) which, in the case offinished products, was $24,555 higher than the Predecessor’s historicalmanufacturing cost. The Successor’s cost of products sold for the three monthand twenty week periods ended June 30, 2005, respectively, includes a pre-taxcharge of $2,763 and $9,577 relating to the step-up of finished product sold.

6

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In addition, certain raw material inventory purchasedunder favorable supply agreements was revalued to fair market value, which was$2,473 higher than historical cost. The Successor’s cost of products soldincludes a pre-tax charge of $56 and $942 relating to the step-up of rawmaterials used in finished products sold for the three month and twenty weekperiods ended June 30, 2005.

TheCompany recorded a liability of $4,456 for building leases that were above fairmarket value at the date of the Transactions. The liability was determined bycomparing our lease terms to those currently available for similar properties.The Successor’s Statement of Operations includes amortization of theunfavorable leases of $118 and $237 for the three and six months ended June 30,2006, respectively, and $178 for the twenty weeks ended June 30, 2005.

In May 2005, management finalized plans to terminatecertain employees in the United States and at certain foreign subsidiaries.Employees terminated under this plan are entitled to receive severance pay andbenefits totaling approximately $5,200 which was included in accruedliabilities in the opening balance sheet of the Successor. Cash expenditurestoward this program of $252 and $719 were made during the three and six monthperiods ended June 30, 2006, respectively, and charged against thereserve.  Substantially all paymentsrelated to the remaining reserve of $1,245 should be completed by December 31,2006.

**4.  Pro FormaInformation:**

The following schedule includes statements ofoperations data for the prior year unaudited results as if the Transactions hadoccurred on January 1, 2005. The pro forma information includes the actualresults with adjustments for the pro forma effect of the change in interestexpense related to the changes in capital structure resulting from thefinancings discussed in Note 8, purchase accounting adjustments resulting inchanges to depreciation and amortization expenses, the revaluation of inventoryto fair market value, amortization of the step up of investment in affiliatesand the reduction in pension and postretirement benefit expense resulting fromthe elimination of the unamortized actuarial losses and prior service costs andthe unamortized transition obligation.

The unaudited pro forma information is provided forillustrative purposes only. It does not purport to represent what the resultsof operations would have been had the Transactions occurred on the dateindicated above, nor does it purport to project the results of operations forany future period. 

|            | ** ** | **Pro forma six  months ended  June 30,** | ** ** |
|------------|------------|---------------------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                                      | ** ** |
|       |       |                                                          |       |
| Net sales  |       | $                                                             | 315,503    |   |
| Net loss   |       | (8,300                                                        | )          |
|            |            |                                                               |            |  |

 

Included in thenet loss for the pro forma six months ended June 30, 2005 were after-taxcharges of $6,659 for the amortization of inventory revalued in purchaseaccounting, $3,338 for the write-off of acquired in-process research anddevelopment, $3,242 for the amortization of inventory of our equity affiliatesthat was revalued in purchase accounting and $4,949 for amortization offavorable raw materials supply contracts.

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

The following tablesummarizes comprehensive (loss) income, net of tax:
| ** **                                                         | ** ** | **Successor**                    | ** ** | **Successor**       | ** ** | **Predecessor**       | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | ** **                       | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                                         | ** ** | **Three months ended** | ** ** | **ended**           | ** ** | **ended**             | ** ** | **ended** | ** ** |
| ** **                                                         | ** ** | **June 30,**                | ** ** | **June 30,**   | ** ** | **June 30,**     | ** ** | **February 11,** | ** ** |
| ** **                                                         | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                               |       |                             |       |                |       |                  |       |   |   |   |   |
| Net income  (loss)                                                 |       | $                                | 3,393      |                | $          | 2,427                 |       | $ | 4,095 |   | $ | (25,730 | ) | $ | (6,798 | ) |
|                                                               |       |                             |       |                |       |                  |       |   |   |   |   |
| Gains (losses) in fair values of derivatives  qualifying as hedges |       | (3,094                           | )          | (1,225              | )          | (12,827               | )          | 5,272 |   | 785 |   |
| Foreign currency  translation adjustments                          |       | 1,980                            |       | (9,543              | )          | 2,392                 |       | (11,506 | ) | (4,676 | ) |
|                                                               |       |                             |       |                |       |                  |       |   |   |   |   |
| Comprehensive income  (loss)                                       |       | $                                | 2,279      |                | $          | (8,341                | )          | $ | (6,340 | ) | $ | (31,964 | ) | $ | (10,689 | ) |

 

**6.  Inventories:**

Inventories were classified and valued asfollows:
| ** **                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                   |       |              |       |                  |       |
| Finished  products and work in process |       | $                 | 70,200     |                  | $          | 64,436 |   |
| Raw materials                          |       | 24,358            |       | 19,803                |       |
|                                   |       |              |       |                  |       |
|                                   |       | $                 | 94,558     |                  | $          | 84,239 |   |
|                                   |       |              |       |                  |       |
| Valued at lower  of cost or market:    |       |              |       |                  |       |
| LIFO basis                             |       | 56,922            |       | 50,864                |       |
| FIFO basis                             |       | 8,419             |       | 5,997                 |       |
| Average cost basis                     |       | 29,217            |       | 27,378                |       |
|                                   |       |              |       |                  |       |
|                                   |       | $                 | 94,558     |                  | $          | 84,239 |   |

 

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

A summary of property, plant and equipment, atcost, and related accumulated depreciation and depreciation expense is asfollows:
| ** **                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                            |       |              |       |                  |       |
| Land                            |       | $                 | 56,986     |                  | $          | 57,148 |   |
| Buildings                       |       | 99,043            |       | 97,785                |       |
| Machinery and  equipment        |       | 198,445           |       | 188,836               |       |
| Construction in  progress       |       | 20,516            |       | 9,747                 |       |
|                            |       |              |       |                  |       |
|                            |       | 374,990           |       | 353,516               |       |
| Less:  accumulated depreciation |       | (54,639           | )          | (35,179               | )          |
|                            |       |              |       |                  |       |
|                            |       | $                 | 320,351    |                  | $          | 318,337 |   |

 

Depreciation expense was $20,671 for the six monthsended June 30, 2006, $14,362 for the twenty weeks ended June 30, 2005 and$4,290 for the six weeks ended February 11, 2005.

8

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**8.  Other Intangible Assets:**

Grosscarrying amounts and accumulated amortization for intangible assets withestimable useful lives are as follows:
| ** **                           | ** ** | **Gross Amounts** | ** ** | **Accumulated Amortization** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **June 30,**      | ** ** | **December 31,**             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **                           | ** ** | **2006**               | ** ** | **2005**                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                 |       |                   |       |                              |       |   |   |   |   |
| Formulations and  product technology |       | $                      | 53,200     |                              | $          | 53,200 |   | $ | (6,096 | ) | $ | (3,920 | ) |
| Non-compete  agreements              |       | 4,122                  |       | 3,900                             |       | (1,754 | ) | (1,140 | ) |
| Customer lists                       |       | 900                    |       | —                            |       | — |   | — |   |
| Raw material  contracts              |       | 43,648                 |       | 43,648                            |       | (26,724 | ) | (18,453 | ) |
| Railcar leases                       |       | 509                    |       | 509                               |       | (147 | ) | (94 | ) |
|                                 |       |                   |       |                              |       |   |   |   |   |
| Total                                |       | $                      | 102,379    |                              | $          | 101,257 |   | $ | (34,721 | ) | $ | (23,607 | ) |

 

OnJune 20, 2006, the Company acquired certain intangible assets in the UnitedStates for a total purchase price of $1,122.  The Company allocated thepurchase price $900 to customer lists acquired and approximately $222 to anon-compete agreement contained in the asset purchase agreement.

Totalamortization of intangibles was $11,114 for the six months ended June 30, 2006,$8,164 for the twenty weeks ended June 30, 2005 and $146 for the six weeksended February 11, 2005.  Totalamortization of intangibles included $8,271 and $5,850 related to raw materialcontracts that was recorded to cost of goods sold in the ConsolidatedStatements of Operations for the six months ended June 30, 2006 and twentyweeks ended June 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 of long-term debt is as follows:
| ** **                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                           | ** ** | **2006**          | ** ** | **2005**              | ** ** |
|                                                                 |       |              |       |                  |       |
| Senior secured  term loans with interest at 7.0% as of June 30, 2006 |       | $                 | 360,587    |                  | $          | 362,412 |   |
| Senior  subordinated notes due 2013                                  |       | 275,000           |       | 275,000               |       |
| Revolving credit  agreements                                         |       | 29,885            |       | 22,120                |       |
| Other                                                                |       | 524               |       | 978                   |       |
|                                                                 |       |              |       |                  |       |
|                                                                 |       | 665,996           |       | 660,510               |       |
|                                                                 |       |              |       |                  |       |
| Less: current portion                                                |       | (34,061           | )          | (26,689               | )          |
|                                                                 |       |              |       |                  |       |
|                                                                 |       | $                 | 631,935    |                  | $          | 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 subordination provisions.The indenture relating to the notes contains various limitations on the Company’sability to incur additional indebtedness, pay dividends, sell assets and createliens, among other things. Interest on the notes is payable on February 15and August 15 of each year. No principal payments are required withrespect to the notes prior to their final maturity.

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

9

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equal to LIBOR plus a margin of 2.0%. The SeniorCredit Facility requires minimum quarterly principal payments of $917 on theterm loan, as well as prepayments from all “net proceeds” received and “excesscash flow,” if applicable. In accordance with the Senior Credit Facility, netproceeds generally relate to proceeds received from the issuance or incurrenceof certain indebtedness or proceeds received on the disposition of assets,adjusted for certain costs and expenses, and are payable promptly upon receiptsubject, in the case of net proceeds from asset dispositions, to meeting thethresholds described below. Net proceeds prepayments in respect of assetdispositions are not payable unless they are in excess of certain minimumamounts, both on an individual basis for any given disposition and in theaggregate for dispositions that, individually, would not meet the threshold.Excess cash flow is to be calculated annually and is defined as earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) adjusted for variousexpenditures and/or proceeds commencing with the 2005 fiscal year. Prepaymentswith respect to excess cash flow, if any, are to be made on an annual basis.The detailed calculations supporting those two prepayments are defined in thecredit agreement. The Company has performed the calculation for fiscal year2005 and determined that no excess payment is required.  The remaining principal balance of the termloan is due upon maturity.  At June 30, 2006, we were in compliance with ourloan 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 $27,700 and $20,000in outstanding revolving credit borrowings under the Senior Credit Facility asof June 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 our SeniorCredit Facility by 25 basis points in the event our debt rating is downgradedand stipulates a prepayment fee equal to 1.0% of certain voluntary prepaymentsmade within one year of the effective date of the amendment with the proceedsof certain types of indebtedness and based on certain other conditions.  The amendment does not change any of theother 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.  The fair value of the net liability is recorded inother liabilities with a related offset to foreign currency translationadjustments, net of taxes.  The contractshad a net liability balance*of $17,056, and $6,753 as of June 30, 2006and December 31, 2005, respectively.  Inthe event the euro or Canadian dollar strengthens against the U.S. dollar thefair value of the liability will increase.

*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 $10,177, and $30,950 at June 30, 2006 andDecember 31, 2005, respectively. Fair value is determined based on estimatedamounts that would be received or paid to terminate the contracts at thereporting 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 stockholders’ equity as a component of other comprehensive income(loss), net of tax. Realized gains and losses on natural gas hedges areincluded in production costs and subsequently charged to cost of goods sold inthe period in which inventory is sold.*

10

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

Components of net periodicexpense are as follows:
| ** **                                                      | ** ** | **Successor**                    | ** ** | **Successor**       | ** ** | **Predecessor**       | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                                      | ** ** | ** **                       | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                                      | ** ** | **Three months ended** | ** ** | **ended**           | ** ** | **ended**             | ** ** | **ended** | ** ** |
| ** **                                                      | ** ** | **June 30,**                | ** ** | **June 30,**   | ** ** | **June 30,**     | ** ** | **February 11,** | ** ** |
| **Pension Benefits - U.S. and Canada** | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                            |       |                             |       |                |       |                  |       |   |   |   |   |
| Service cost                                                    |       | $                                | (901       | )                   | $          | (992                  | )          | $ | (1,782 | ) | $ | (1,486 | ) | $ | (385 | ) |
| Interest cost                                                   |       | (1,767                           | )          | (1,666              | )          | (3,544                | )          | (2,700 | ) | (830 | ) |
| Expected return on  assets                                      |       | 2,300                            |       | 2,196               |       | 4,595                 |       | 3,371 |   | 1,016 |   |
| Net amortization                                                |       | —                           |       | —              |       | —                |       | — |   | (288 | ) |
| Net periodic expense                                            |       | $                                | (368       | )                   | $          | (462                  | )          | $ | (731 | ) | $ | (815 | ) | $ | (487 | ) |

 
| ** **                                             | ** ** | **Successor**                    | ** ** | **Successor**     | ** ** | **Predecessor**     | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                                             | ** ** | ** **                       | ** ** | ** **        | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                             | ** ** | **Three months ended** | ** ** | **ended**         | ** ** | **ended**           | ** ** | **ended** | ** ** |
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** | **June 30,**   | ** ** | **February 11,** | ** ** |
| **Pension Benefits - Other Plans** | ** ** | **2006**                         | ** ** | **2005**          | ** ** | **2006**            | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                   |       |                             |       |              |       |                |       |   |   |   |   |
| Service cost                                           |       | $                                | (433       | )                 | $          | (565                | )          | $ | (1,233 | ) | $ | (1,036 | ) | $ | (377 | ) |
| Interest cost                                          |       | (298                             | )          | (201              | )          | (648                | )          | (373 | ) | (167 | ) |
| Expected return on assets                              |       | 196                              |       | 69                |       | 388                 |       | 141 |   | 79 |   |
| Net amortization                                       |       | 22                               |       | —            |       | 18                  |       | — |   | (59 | ) |
| Net periodic expense                                   |       | $                                | (513       | )                 | $          | (697                | )          | $ | (1,475 | ) | $ | (1,268 | ) | $ | (524 | ) |

 
| ** **                             | ** ** | **Successor**                    | ** ** | **Successor**     | ** ** | **Predecessor**     | ** ** |
|----------------------------------------|------------|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                             | ** ** | ** **                       | ** ** | ** **        | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                             | ** ** | **Three months ended** | ** ** | **ended**         | ** ** | **ended**           | ** ** | **ended** | ** ** |
| ** **                             | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** | **June 30,**   | ** ** | **February 11,** | ** ** |
| **Post Retirement Benefits** | ** ** | **2006**                         | ** ** | **2005**          | ** ** | **2006**            | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                   |       |                             |       |              |       |                |       |   |   |   |   |
| Service cost                           |       | $                                | —     |              | $          | (143                | )          | $ | — |   | $ | (236 | ) | $ | (51 | ) |
| Interest cost                          |       | (157                             | )          | (241              | )          | (315                | )          | (384 | ) | (127 | ) |
| Net amortization                       |       | 157                              |       | —            |       | 224                 |       | — |   | (28 | ) |
| Net periodic expense                   |       | $                                | 0          |              | $          | (384                | )          | $ | (91 | ) | $ | (620 | ) | $ | (206 | ) |

 

The Company madecontributions of $220 and $2,761 to the U.S. and Canadian pension plans andother pension plans, respectively, for the six months ended June 30, 2006. Forthe retiree health plans, the Company made payments of $927 for the six monthsended June 30, 2006.  In addition, theCompany made contributions of approximately $750 to the 401(k) savings plan forthe six months ended June 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.

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 was norestricted stock activity in the current quarter.  The weighted average grant date fair value ofthe restricted stock is $21.37 per share. The restricted stock vests as follows: 10% of each grant vests onFebruary 11 in each year 2006 to 2010, subject to the

11

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executive’scontinued service with the Company on such date and subject to 100% vestingupon the earlier of an initial public offering of stock by, or change ofcontrol of, Holdings, and subject to accelerated vesting upon certain specifiedevents of termination of service; and the vesting of 50% of each grant is basedon performance measures at the time of an initial public offering of stock by,or earlier change of control of, Holdings. Compensation expense for the awards was $28 and $54 for the three andsix months ended June 30, 2006, respectively. As of June 30, 2006, there was$176 of unrecognized compensation cost related to nonvested restricted stockwhich is expected to be recognized over a weighted average period of 1.62years.

**13. Income Taxes:**

The effective tax provision rate of 66.7% on the Company’sconsolidated pre-tax income for the six months ended June 30, 2006 differs fromthe U.S. statutory tax rate of 35.0% principally due to the U.S. tax effects onthe earnings of non-U.S. subsidiaries. The Company considers all earnings of foreign subsidiaries to beavailable for repatriation to the U.S. and provides U.S. tax expense in anticipationof the repatriation of these earnings.

The Company has incurred a significant increase ininterest 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 increasesthe U.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 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. InFebruary 2006, the Company received a revised Consent Agreement and iscurrently negotiating with the KDHE regarding the settlement of this revisedConsent Agreement.  The Company has areserve of approximately $300 in accrued liabilities as of June 30, 2006 forestimated civil penalties and supplemental environmental projects.

**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 determined that additional removal and remediationwork would be required and the reserve was increased by $500 to $1,000 to coverthe estimated cost of such work. There may be additional costs related to theremediation of these two facilities, but until further investigation takesplace, the Company cannot reasonably estimate the amount of additionalliability that may exist.  However, thetotal costs for remediation of these two facilities are not expected to exceed$1,500.**

12

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** **

**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 twenty weeks ended June 30, 2005.  In addition, the Company agreed to pay to theSponsors a quarterly monitoring fee of $500 which commenced in 2006. Themanagement agreement also provides for the reimbursement of any fees payable byHoldings for the maintenance of its corporate existence, corporate overheadexpenses and for salaries and other compensation of certain employees whoperform services for both Holdings and the Company.**

**16.  Business Segments:**

The Company’s reportable segments areorganized based on the operating divisions within the Company:  Chemicals and Potters. Chemicals develops,manufactures and sells silicate-based specialty chemicals to mainly largeindustrial and consumer products companies. Potters manufactures highlyengineered solid and hollow glass spheres that are mainly sold to contractors,governmental agencies and manufacturing companies.

The table below presents informationabout the reported segments:

 
| ** **                | ** ** | **Successor**                    | ** ** | **Successor**     | ** ** | **Predecessor**     | ** ** |
|---------------------------|------------|----------------------------------|------------|-------------------|------------|---------------------|------------|
| ** **                | ** ** | ** **                       | ** ** | ** **        | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                | ** ** | **Three months ended** | ** ** | **ended**         | ** ** | **ended**           | ** ** | **ended** | ** ** |
| ** **                | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** | **June 30,**   | ** ** | **February 11,** | ** ** |
| ** **                | ** ** | **2006**                         | ** ** | **2005**          | ** ** | **2006**            | ** ** | **2005** | ** ** | **2005** | ** ** |
|                      |       |                             |       |              |       |                |       |   |   |   |   |
| Net Sales:                |       |                             |       |              |       |                |       |   |   |   |   |
| Chemicals                 |       | $                                | 118,723    |              | $          | 107,640             |       | $ | 241,673 |   | $ | 160,341 |   | $ | 48,264 |   |
| Potters                   |       | 70,404                           |       | 68,455            |       | 114,196             |       | 90,967 |   | 15,931 |   |
| Total                     |       | $                                | 189,127    |              | $          | 176,095             |       | $ | 355,869 |   | $ | 251,308 |   | $ | 64,195 |   |
|                      |       |                             |       |              |       |                |       |   |   |   |   |
| Adjusted EBITDA  (1):     |       |                             |       |              |       |                |       |   |   |   |   |
| Chemicals                 |       | $                                | 30,470     |              | $          | 25,197              |       | $ | 62,159 |   | $ | 39,689 |   | 10,290 |   |
| Potters                   |       | 15,323                           |       | 15,814            |       | 23,087              |       | 19,477 |   | 2,771 |   |
| Segments adjusted  EBITDA |       | $                                | 45,793     |              | $          | 41,011              |       | $ | 85,246 |   | $ | 59,166 |   | $ | 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.

13

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A reconciliation from Segments AdjustedEBITDA to pre-tax income follows:

 
| ** **                                               | ** ** | **Successor**                    | ** ** | **Successor**       | ** ** | **Predecessor**       | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **                                               | ** ** | ** **                       | ** ** | **Six months** | ** ** | **Twenty weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **Three months ended** | ** ** | **ended**           | ** ** | **ended**             | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **June 30,**                | ** ** | **June 30,**   | ** ** | **June 30,**     | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**                         | ** ** | **2005**            | ** ** | **2006**              | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                     |       |                             |       |                |       |                  |       |   |   |   |   |
| Segments  adjusted EBITDA                                |       | $                                | 45,793     |                | $          | 41,011                |       | $ | 85,246 |   | $ | 59,166 |   | $ | 13,061 |   |
| Less:                                                    |       |                             |       |                |       |                  |       |   |   |   |   |
| Interest expense                                         |       | 13,037                           |       | 10,303              |       | 25,677                |       | 15,654 |   | 771 |   |
| Depreciation and  amortization                           |       | 11,828                           |       | 8,511               |       | 23,371                |       | 16,566 |   | 4,436 |   |
| Loss (gain) on  disposal of assets                       |       | (8                               | )          | 10                  |       | 15                    |       | (166 | ) | — |   |
| Corporate  expenses                                      |       | 6,170                            |       | 4,913               |       | 10,356                |       | 7,958 |   | 2,857 |   |
| Environmental  and other                                 |       | 10                               |       | —              |       | (35                   | )          | 798 |   | — |   |
| Write off of  in-process R&D                         |       | —                           |       | —              |       | —                |       | 3,338 |   | — |   |
| Raw material  contracts                                  |       | 3,132                            |       | 5,850               |       | 8,271                 |       | 5,850 |   | — |   |
| Investment in  affiliates step-up                        |       | 297                              |       | 5,506               |       | 595                   |       | 5,634 |   | — |   |
| Inventory  step-up                                       |       | —                           |       | 2,819               |       | —                |       | 10,519 |   | — |   |
| Management  advisory fees                                |       | 500                              |       | —              |       | 1,000                 |       | — |   | — |   |
| Operational  restructuring charges                       |       | 125                              |       | 42                  |       | 2,535                 |       | 3,929 |   | 5,604 |   |
| Merger related  costs                                    |       | 465                              |       | 1,362               |       | 543                   |       | 20,030 |   | 8,713 |   |
| Minority  interest                                       |       | (192                             | )          | (65                 | )          | (310                  | )          | (137 | ) | (59 | ) |
|                                                     |       |                             |       |                |       |                  |       |   |   |   |   |
| Income (loss)  before income taxes and minority interest |       | $                                | 10,429     |                | $          | 1,760                 |       | $ | 13,228 |   | $ | (30,807 | ) | $ | (9,261 | ) |

 

**17.  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 followingconsolidating financial information presents:

·                     Consolidatingbalance sheets as of June 30, 2006 and December 31, 2005 for the Successor,statements of operations for the three months and six months ended June 30,2006, and the twenty weeks ended June 30, 2005 for the Successor and the sixweeks ended February 11, 2005 for the Predecessor. The related statements ofcash flows for the six months ended June 30, 2006 and the twenty weeks endedJune 30, 2005 for the Successor and the six weeks ended February 11, 2005 forthe Predecessor.

·                     Eliminationentries necessary to consolidate the Predecessor and Successor, with theirrespective guarantor subsidiaries and nonguarantor subsidiaries. The principalentries eliminate investments in subsidiaries and intercompany balances andtransactions. Intercompany sales were not reported as part of the consolidatingstatements and, therefore, do not require elimination.

14

----

 

**PQ CORPORATION AND SUBSIDIARIES**

**CONDENSED CONSOLIDATING BALANCESHEET—SUCCESSOR**

**June 30, 2006**

**(in thousands)**

**(unaudited)**

 
| ** **                                                         | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| ASSETS                                                             |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents                                         |       | $           | 76         |             | $          | 299              |       | $                | 9,448      |             | $          | — |   | $ | 9,823 |   |
| Receivables, net                                                   |       | 31,149      |       | 26,652           |       | 59,410           |       | —           |       | 117,211          |       |
| Intercompany receivable                                            |       | —      |       | 115,880          |       | —           |       | (115,880         | )          | —           |       |
| Inventories                                                        |       | 27,140      |       | 29,879           |       | 37,539           |       | —           |       | 94,558           |       |
| Prepaid and other  current assets                                  |       | 19,875      |       | —           |       | 6,051            |       | —           |       | 25,926           |       |
|                                                               |       |        |       |             |       |             |       |             |       |             |       |
| Total current  assets                                              |       | 78,240      |       | 172,710          |       | 112,448          |       | (115,880         | )          | 247,518          |       |
|                                                               |       |        |       |             |       |             |       |             |       |             |       |
| Investments in  subsidiaries                                       |       | 402,471     |       | 120,292          |       | —           |       | (522,763         | )          | —           |       |
| Investments in  affiliated companies                               |       | 58,837      |       | 3,024            |       | 3,563            |       | —           |       | 65,424           |       |
| Property, plant and  equipment, net                                |       | 112,315     |       | 39,927           |       | 168,109          |       | —           |       | 320,351          |       |
| Goodwill                                                           |       | 166,713     |       | 66,603           |       | —           |       | —           |       | 233,316          |       |
| Tradenames                                                         |       | 32,400      |       | 20,600           |       | —           |       | —           |       | 53,000           |       |
| Other intangible  assets, net                                      |       | 45,607      |       | 21,411           |       | 640              |       | —           |       | 67,658           |       |
| Other long-term assets                                             |       | 31,245      |       | 510              |       | 3,659            |       | —           |       | 35,414           |       |
|  Total assets                                                 |       | $           | 927,828    |             | $          | 445,077          |       | $                | 288,419    |             | $          | (638,643 | ) | $ | 1,022,681 |   |
|                                                               |       |        |       |             |       |             |       |             |       |             |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                         |       |        |       |             |       |             |       |             |       |             |       |
| Revolvers, notes  payable and current maturities of long-term debt |       | $           | 31,352     |             | $          | —           |       | $                | 2,709      |             | $          | — |   | $ | 34,061 |   |
| Cash overdraft                                                     |       | 3,650       |       | 1,460            |       | 374              |       | —           |       | 5,484            |       |
| Accounts payable                                                   |       | 18,124      |       | 8,557            |       | 26,700           |       | —           |       | 53,381           |       |
| Intercompany payable                                               |       | 35,210      |       | —           |       | 80,670           |       | (115,880         | )          | —           |       |
| Accrued liabilities                                                |       | 33,758      |       | 9,184            |       | 7,735            |       | —           |       | 50,677           |       |
|                                                               |       |        |       |             |       |             |       |             |       |             |       |
| Total current  liabilities                                         |       | 122,094     |       | 19,201           |       | 118,188          |       | (115,880         | )          | 143,603          |       |
|                                                               |       |        |       |             |       |             |       |             |       |             |       |
| Long-term debt                                                     |       | 631,935     |       | —           |       | —           |       | —           |       | 631,935          |       |
| Deferred income taxes                                              |       | 74,142      |       | 23,405           |       | 20,826           |       | —           |       | 118,373          |       |
| Other long-term  liabilities                                       |       | 60,996      |       | —           |       | 24,191           |       | —           |       | 85,187           |       |
| Minority interest in  equity of subsidiaries                       |       | —      |       | —           |       | 4,922            |       | —           |       | 4,922            |       |
| Commitments and  contingencies                                     |       |        |       |             |       |             |       |             |       |             |       |
| Stockholders’ equity                                          |       | 38,661      |       | 402,471          |       | 120,292          |       | (522,763         | )          | 38,661           |       |
| Total liabilities and  stockholders’ equity                   |       | $           | 927,828    |             | $          | 445,077          |       | $                | 288,419    |             | $          | (638,643 | ) | $ | 1,022,681 |   |

 

15

----

**PQCORPORATION AND SUBSIDIARIESCONDENSED 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  STOCKHOLDERS’ 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                                     |       |        |       |             |       |             |       |             |       |             |       |
| Stockholders’ equity                                          |       | 46,559      |       | 369,053          |       | 109,719          |       | (478,772         | )          | 46,559           |       |
| Total liabilities and  stockholders’ equity                   |       | $           | 937,359    |             | $          | 403,512          |       | $                | 277,648    |             | $          | (588,646 | ) | $ | 1,029,873 |   |

 

16

----

**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the three months ended June 30, 2006(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Sales                                                |       | $           | 63,734     |             | $          | 45,417           |       | $                | 79,976     |             | $          | — |   | $ | 189,127 |   |
| Cost of goods sold                                   |       | 48,867      |       | 33,604           |       | 61,506           |       | —           |       | 143,977          |       |
| Gross profit                                         |       | 14,867      |       | 11,813           |       | 18,470           |       | —           |       | 45,150           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administrative expenses        |       | 9,823       |       | 2,960            |       | 7,913            |       | —           |       | 20,696           |       |
| Other operating expense                              |       | 2,163       |       | 848              |       | 2                |       | —           |       | 3,013            |       |
| Operating (loss)  income                             |       | 2,881       |       | 8,005            |       | 10,555           |       | —           |       | 21,441           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 14,630      |       | 843              |       | 115              |       | (13,309          | )          | 2,279            |       |
| Interest expense  (income), net                      |       | 14,089      |       | (2,828           | )          | 1,776            |       | —           |       | 13,037           |       |
| Other expense (income)                               |       | 87          |       | (4,624           | )          | 4,791            |       | —           |       | 254              |       |
| Income (loss)  before taxes and minority interest    |       | 3,335       |       | 16,300           |       | 4,103            |       | (13,309          | )          | 10,429           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision for income  taxes                          |       | (58         | )          | 3,865            |       | 3,037            |       | —           |       | 6,844            |       |
| Minority interest                                    |       | —      |       | —           |       | 192              |       | —           |       | 192              |       |
| Net income (loss)                                    |       | $           | 3,393      |             | $          | 12,435           |       | $                | 874        |             | $          | (13,309 | ) | $ | 3,393 |   |

 

17

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**PQCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the three months ended June 30, 2005(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 61,585     |             | $          | 36,481           |       | $                | 78,029     |             | $          | — |   | $ | 176,095 |   |
| Cost of goods sold                                   |       | 52,003      |       | 21,479           |       | 64,333           |       | —           |       | 137,815          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 9,582       |       | 15,002           |       | 13,696           |       | —           |       | 38,280           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administative expenses         |       | 7,935       |       | 3,685            |       | 8,223            |       | —           |       | 19,843           |       |
| Other operating expense  (income)                    |       | 2,276       |       | 377              |       | (177             | )          | —           |       | 2,476            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating (loss)  income                             |       | (629        | )          | 10,940           |       | 5,650            |       | —           |       | 15,961           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 6,017       |       | 4,264            |       | 109              |       | (14,120          | )          | (3,730           | )          |
| Interest expense  (income), net                      |       | 11,568      |       | (2,932           | )          | 1,667            |       | —           |       | 10,303           |       |
| Other (income) expense                               |       | (5,974      | )          | 6,905            |       | (763             | )          | —           |       | 168              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss)  before taxes and minority interest    |       | (206        | )          | 11,231           |       | 4,855            |       | (14,120          | )          | 1,760            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision (benefit) for  income taxes                |       | (2,633      | )          | 1,367            |       | 534              |       | —           |       | (732             | )          |
| Minority interest                                    |       | —      |       | —           |       | 65               |       | —           |       | 65               |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net income (loss)                                    |       | $           | 2,427      |             | $          | 9,864            |       | $                | 4,256      |             | $          | (14,120 | ) | $ | 2,427 |   |

 

18

----

**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the six months ended June 30, 2006(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 133,176    |             | $          | 71,617           |       | $                | 151,076    |             | $          | — |   | $ | 355,869 |   |
| Cost of goods  sold                                  |       | 105,091     |       | 52,573           |       | 117,879          |       | —           |       | 275,543          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 28,085      |       | 19,044           |       | 33,197           |       | —           |       | 80,326           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general  and administrative expenses        |       | 18,499      |       | 5,679            |       | 15,245           |       | —           |       | 39,423           |       |
| Other operating  expense (income)                    |       | 6,358       |       | 1,301            |       | (11              | )          | —           |       | 7,648            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating income                                     |       | 3,228       |       | 12,064           |       | 17,963           |       | —           |       | 33,255           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net  income (loss) of affiliated companies |       | 25,533      |       | 4,564            |       | 234              |       | (24,634          | )          | 5,697            |       |
| Interest expense  (income), net                      |       | 27,648      |       | (5,482           | )          | 3,511            |       | —           |       | 25,677           |       |
| Other (income)  expense                              |       | (444        | )          | (4,241           | )          | 4,732            |       | —           |       | 47               |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss) before taxes and minority interest     |       | 1,557       |       | 26,351           |       | 9,954            |       | (24,634          | )          | 13,228           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision  (benefit) for income taxes                |       | (2,538      | )          | 6,344            |       | 5,017            |       | —           |       | 8,823            |       |
| Minority  interest                                   |       | —      |       | —           |       | 310              |       | —           |       | 310              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net income  (loss)                                   |       | $           | 4,095      |             | $          | 20,007           |       | $                | 4,627      |             | $          | (24,634 | ) | $ | 4,095 |   |

 

19

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**PQCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—SUCCESSORFor the twenty weeks ended June 30, 2005(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Sales                                                |       | $           | 91,297     |             | $          | 45,166           |       | $                | 114,845    |             | $          | — |   | $ | 251,308 |   |
| Cost of goods sold                                   |       | 74,911      |       | 28,028           |       | 101,057          |       | —           |       | 203,996          |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Gross profit                                         |       | 16,386      |       | 17,138           |       | 13,788           |       | —           |       | 47,312           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general and  administative expenses         |       | 18,054      |       | 5,668            |       | 12,793           |       | —           |       | 36,515           |       |
| Other operating expense  (income)                    |       | 18,385      |       | 727              |       | (6               | )          | —           |       | 19,106           |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Operating (loss)  income                             |       | (20,053     | )          | 10,743           |       | 1,001            |       | —           |       | (8,309           | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net income  (loss) of affiliated companies |       | 12,385      |       | (403             | )          | 196              |       | (11,749          | )          | 429              |       |
| Interest expense  (income), net                      |       | 16,143      |       | (2,932           | )          | 2,443            |       | —           |       | 15,654           |       |
| Other expense (income)                               |       | 7,456       |       | (899             | )          | 716              |       | —           |       | 7,273            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Income (loss)  before taxes and minority interest    |       | (31,267     | )          | 14,171           |       | (1,962           | )          | (11,749          | )          | (30,807          | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision (benefit) for  income taxes                |       | (5,537      | )          | 2,018            |       | (1,695           | )          | —           |       | (5,214           | )          |
| Minority interest                                    |       | —      |       | —           |       | 137              |       | —           |       | 137              |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Net (loss) income                                    |       | $           | (25,730    | )                | $          | 12,153           |       | $                | (404       | )                | $          | (11,749 | ) | $ | (25,730 | ) |

 

20

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS—PREDECESSOR****Forthe six weeks ended February 11, 2005(in thousands)(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 | ) |

 

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—SUCCESSORFor the six months ended June 30, 2006(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash provided  (used) by operating activities    |       | $           | 954        |             | $          | 4,365            |       | $                | (2,306     | )                | $          | — |   | $ | 3,013 |   |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:               |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of  property, plant and equipment          |       | (6,380      | )          | (4,152           | )          | (3,844           | )          | —           |       | (14,376          | )          |
| Purchase of  other intangible assets                 |       | (1,122      | )          | —           |       | —           |       | —           |       | (1,122           | )          |
| Net cash used  for investing activities              |       | (7,502      | )          | (4,152           | )          | (3,844           | )          | —           |       | (15,498          | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:               |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable  and cash overdrafts, net              |       | 5,521       |       | (182             | )          | (2,307           | )          | —           |       | 3,032            |       |
| Repayments of  long-term debt                        |       | (1,826      | )          | —           |       | (398             | )          | —           |       | (2,224           | )          |
| Distributions to  minority shareholders              |       |        |       |             |       | (342             | )          | —           |       | (342             | )          |
| Dividend  distribution                               |       | (1,613      | )          | —           |       | —           |       | —           |       | (1,613           | )          |
| Net cash  provided by (used in) financing activities |       | 2,082       |       | (182             | )          | (3,047           | )          | —           |       | (1,147           | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Effect of exchange rate  changes on cash             |       | —      |       | —           |       | 483              |       | —           |       | 483              |       |
| Net change in cash and  cash equivalents             |       | (4,466      | )          | 31               |       | (8,714           | )          | —           |       | (13,149          | )          |
| Cash and cash  equivalents at beginning of period    |       | 4,542       |       | 268              |       | 18,162           |       | —           |       | 22,972           |       |
| Cash and cash equivalents at end of period           |       | $           | 76         |             | $          | 299              |       | $                | 9,448      |             | $          | — |   | $ | 9,823 |   |

 

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**PQ CORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—SUCCESSOR****Forthe twenty weeks ended June 30, 2005(in thousands)(unaudited)**
| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash (used)  provided by operating activities   |       | $           | (46,239    | )                | $          | (2,828           | )          | $                | 27,968     |             | $          | — |   | $ | (21,099 | ) |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of property, plant and equipment          |       | (4,122      | )          | (1,097           | )          | (4,755           | )          | —           |       | (9,974           | )          |
| Merger consideration                                |       | (626,000    | )          | —           |       | —           |       | —           |       | (626,000         | )          |
| Merger costs                                        |       | (6,485      | )          | —           |       | —           |       | —           |       | (6,485           | )          |
| Net cash used for investing activities              |       | (636,607    | )          | (1,097           | )          | (4,755           | )          | —           |       | (642,459         | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable and cash overdrafts, net              |       | 2,108       |       | (217             | )          | 2,267            |       | —           |       | 4,158            |       |
| 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                        |       | (109,450    | )          | —           |       | (5,662           | )          | —           |       | (115,112         | )          |
| Equity Contribution                                 |       | 163,600     |       | —           |       | —           |       | —           |       | 163,600          |       |
| Dividend distribution                               |       | —      |       | 4,313            |       | (4,313           | )          | —           |       | —           |       |
| Net cash provided by (used in) financing activities |       | 649,755     |       | 4,096            |       | (7,708           | )          | —           |       | 646,143          |       |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Effect of  exchange rate changes on cash            |       | —      |       | —           |       | (294             | )          | —           |       | (294             | )          |
| Net change in  cash and cash equivalents            |       | (33,091     | )          | 171              |       | 15,211           |       | —           |       | (17,709          | )          |
| Cash and cash  equivalents at beginning of period   |       | 33,214      |       | 346              |       | 15,197           |       | —           |       | 48,757           |       |
| Cash and cash  equivalents at end of period         |       | $           | 123        |             | $          | 517              |       | $                | 30,408     |             | $          | — |   | $ | 31,048 |   |

 

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**PQCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS—PREDECESSORFor the six weeks ended February 11, 2005(in thousands)(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 |   |

** **

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** **

**ITEM 2.****                                                         MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS**

*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, thisQuarterly Report may contain material which includes forward-looking statementswithin the 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 Statement” as described in amendment No. 4 to ourregistration statement on Form S-4 as filed with the Securities and ExchangeCommission (“SEC”) on May 11, 2006. Statements, other than those based onhistorical facts, which address activities, events or developments that weexpect or anticipate may occur in the future are forward-looking statements,which are based upon a number of assumptions concerning future conditions thatmay ultimately prove to be inaccurate. Such statements may include words suchas “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,”and other words and terms of similar meaning in connection with any discussionof future operating or financial performance. Forward-looking statements are and will be, as the case may be, subjectto many risks, uncertainties and factors relating to our operations and businessenvironment which may cause our actual results to be materially different fromany future results, express or implied, by such forward-lookingstatements.  Except as required by law,we undertake no obligation to publicly update any forward-looking statements,whether as a result 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, consumerand 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 PeakInvestments, LLC, which we refer to collectively as, the Sponsors. Pursuant tothe terms of the Agreement and Plan of Merger, dated as of December 15, 2004,among PQ Corporation, Holdings and Niagara Acquisition, Inc., a wholly ownedsubsidiary of Holdings, (i) Niagara Acquisition, Inc. merged with and into PQCorporation, with PQ Corporation continuing as the surviving entity and awholly owned subsidiary of Holdings, (ii) PQ Corporation redeemed theoutstanding shares of its $16.44 Preferred Stock, Class A in accordance withits terms, and (iii) the common shareholders of PQ Corporation (bothSeries A and Series B) and holders of options to purchase commonstock of PQ Corporation received cash in exchange for their shares or for thecancellation of 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, includingcapitalized fees 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 the Mergerand the related financing described above, collectively as, the Transactions.

25

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**Results of Operations**

The following table sets forth our consolidatedstatements of operations data in dollar amounts for the periods indicated.  The six and three months ended June 30, 2006and twenty week period from February 12, 2005 to June 30, 2005 and three monthsended June 30, 2005 are referred to herein as “Successor” periods.  The financial information for the six weeksended February 11, 2005 is for the period prior to the consummation of theTransactions and referred to herein as the “Predecessor” period.  As a result of the Transactions and theresulting change in ownership, we are required to present separately ourhistorical operating results for the Predecessor and Successor periods in thesix months ended June 30, 2005 under U.S. GAAP. The results of operations below include entries for the effects ofpurchase accounting adjustments for the Successor periods only and thereforeare not comparable to the Predecessor period. Refer to the discussions below for detail regarding the effects ofpurchase accounting adjustments in regard to comparability.
| ** **                                           | ** ** | **Successor**                               | ** ** | **Successor**                               | ** ** | **Predecessor**                           | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Three months  ended  June 30,** | ** ** | **Three months  ended  June 30,** | ** ** | **Six months  ended  June 30,** | ** ** | **Twenty weeks  ended  June 30,** | ** ** | **Six weeks  ended  February 11,** | ** ** |
| ** **                                           | ** ** | **2006**                                    | ** ** | **2005**                                    | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Sales                                                |       | $                                           | 189.1      |                                        | $          | 176.1                                     |       | $ | 355.8 |   | $ | 251.3 |   | $ | 64.2 |   |
| Cost of goods                                        |       | 144.0                                       |       | 137.8                                       |       | 275.5                                     |       | 204.0 |   | 48.6 |   |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Gross profit                                         |       | 45.1                                        |       | 38.3                                        |       | 80.3                                      |       | 47.3 |   | 15.6 |   |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Selling, general  and administrative expenses        |       | 20.7                                        |       | 19.8                                        |       | 39.4                                      |       | 36.5 |   | 11.2 |   |
| Other operating  expense                             |       | 3.0                                         |       | 2.5                                         |       | 7.6                                       |       | 19.1 |   | 12.2 |   |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Operating income (loss)                              |       | 21.4                                        |       | 16.0                                        |       | 33.3                                      |       | (8.3 | ) | (7.8 | ) |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Equity in net  income (loss) of affiliated companies |       | 2.3                                         |       | (3.7                                        | )          | 5.7                                       |       | 0.4 |   | (0.3 | ) |
| Interest  expense, net                               |       | 13.0                                        |       | 10.3                                        |       | 25.7                                      |       | 15.6 |   | 0.8 |   |
| Other  non-operating expense (income)                |       | 0.3                                         |       | 0.2                                         |       | 0.1                                       |       | 7.3 |   | 0.4 |   |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Income (loss) before taxes and minority interest     |       | 10.4                                        |       | 1.8                                         |       | 13.2                                      |       | (30.8 | ) | (9.3 | ) |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Provision (benefit)  for income taxes                |       | 6.8                                         |       | (0.7                                        | )          | 8.8                                       |       | (5.2 | ) | (2.5 | ) |
| Minority  interest                                   |       | 0.2                                         |       | 0.1                                         |       | 0.3                                       |       | 0.1 |   | — |   |
|                                                 |       |                                        |       |                                        |       |                                      |       |   |   |   |   |
| Net income  (loss)                                   |       | $                                           | 3.4        |                                        | $          | 2.4                                       |       | $ | 4.1 |   | $ | (25.7 | ) | $ | (6.8 | ) |

 

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

***Sales***

Salesfor the three months ended June 30, 2006 were $189.1 million compared with$176.1 million for the three months ended June 30, 2005.  Overall, sales in the second quarter of 2006increased by $13.0 million or 7% compared with sales for the same quarter in2005. Increases in sales as compared to the prior year period were primarilythe result of average selling price increases and product mix.  Price increases were implemented to mitigatethe impact of increased energy, raw materials and transportation costs in boththe Chemicals and Potters divisions.

*Chemicals division.*  Sales of the Chemicals division for the threemonths ended June 30, 2006 were**$118.7 millioncompared with $107.6 million for the three months ended June 30, 2005.  Overall, sales in the second quarter of 2006increased by $11.1 million compared with sales for the same quarter in 2005.This was a 10% increase in net sales which was primarily a result of higheraverage selling prices of $12.8 million as well as the favorable impact offoreign currency exchange of $1.6 million. The impact of lower volumes for the quarter resulted in a reduction insales of $3.3 million, primarily as a result of the timing of customer ordersand resulting large volume of shipments in the first quarter of 2006.  Average selling prices increased primarily asa result of changes in product mix and price increases intended to mitigate theimpact of higher energy, raw materials and transportation costs.  The favorable currency exchange impact waslargely due to the strengthening of the Canadian dollar in comparison to theU.S. dollar during the quarter ended June 30, 2006.

***Pottersdivision.***  Sales of the Potters division for the threemonths ended June 30, 2006 were $70.4 million compared with $68.5 million forthe three months ended June 30, 2005. Overall, sales in the second quarter of 2006 increased

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*** ***

***by $1.9 million compared with sales for the same quarter in2005. This was a 3% increase in net sales which was a result of changes inproduct mix and selling price increases which were intended to mitigate theimpact of higher energy, raw materials and transportation costs compared withthe prior year quarter.***

***Gross profit***

Grossprofit for the three months ended June 30, 2006 was $45.1 million comparedwith $38.3 million for the three months ended June 30, 2005.  Overall, gross profit in the second quarterof 2006 increased by $6.8 million compared with gross profit for the sameperiod in 2005. The favorable effects of higher average selling prices and productmix contributed $14.9 million and the effects of foreign currency translationadded another $0.9 million.  Increases inproduction and transportation costs partially offset the selling priceincreases by $10.6 million and lower sales volumes reduced gross profit by $2.2million. Approximately $3.8 million of this increase was the result of areduction in expense related to purchase accounting, primarily from the expensefor the post-acquisition sales of inventories written up to fair value at thedate of the Transactions and amortization offavorable raw material supply contracts.

*Chemicals division.*  Gross profit for the three months ended June30, 2006 was $25.6 million compared with $20.8 million for the three monthsended June 30, 2005. Overall, gross profit in the second quarter of 2006increased by $4.8 million compared with gross profit for the same period in2005. The favorable effects of higher average selling prices and product mixcontributed $13.0 million and the impacts of foreign currency exchange addedanother $0.2 million. Increases in production and transportation costs reducedgross profit by $7.9 million and lower volume contributed $2.0 million to thereduction in gross profit.  The majorityof the production cost increases was due to higher energy and raw materialscosts compared with the prior year period. Approximately $1.5 million of theincrease in gross profit was the result of a reduction in expense related topurchase accounting, primarily from lower amortization of favorable revaluationof raw materials supply contracts and the 2005 post-acquisition sales ofinventories written up to fair value at the date of the Transactions.

*Potters division.*  Gross profit for the three months ended June30, 2006 was $19.5 million compared with $17.5 million for the three monthsended June 30, 2005. Overall, gross profit in the second quarter of 2006increased by $2.0 million compared with gross profit for the same period in2005. Approximately $2.3 million of this increase was the result in a reductionin expense related to purchase accounting, primarily from the 2005post-acquisition sales of inventories written up to fair value at the date ofthe Transactions. Volume was slightly lower than the prior year period by $0.2million. The favorable impacts of selling price increases, product mix andforeign currency exchange rates were offset by higher energy, raw materials andtransportation costs.

***Selling, generaland administrative expenses (SG&A)***

SG&A expenses for thethree months ended June 30, 2006 were $20.7 million compared with $19.8 millionfor the three months ended June 30, 2005, an increase of $0.9 million or5%.  The increase in SG&A expenseswas primarily due to various professional fees including tax and accountingservices incurred during the current year quarter.

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

Other operating expensefor the three months ended June 30, 2006 was $3.0 million compared with$2.5 million for the three months ended June 30, 2005, an increase of $0.5million.  Contributing to the increasewas the $0.5 million fee paid to the Sponsors during the quarter ended June 30,2006 for monitoring services as part of the management agreement.

***Equity in netincome of affiliated companies***

Equity in net income ofaffiliated companies for the three months ended June 30, 2006 was$2.3 million compared with a loss of $3.7 million for the three monthsended June 30, 2005, an increase of $6.0 million. Both the current year andprior year period results were reduced by $0.3 million to reflect theamortization of intangible assets and increased depreciation of property, plantand equipment that resulted from fair market value purchase accountingadjustments.  The significant increase inthe quarter ended June 30, 2006 was primarily due to higher expense frompurchase accounting adjustments in the quarter ended June 30, 2005 in theamount of $5.2 million for post-acquisition sales of inventories written up tofair value at the date of the Transactions. In addition, the remaining increase of $0.8 million was due primarily toa favorable mix of product sales.

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***Interest expense,net***

Interest expense, net forthe three months ended June 30, 2006 was $13.0 million compared with $10.3million for the three months ended June 30, 2005, an increase of $2.7 million.Overall, interest expense, net was higher by $2.1 million due to increases inthe variable interest rate on our senior credit facility and $0.6 million dueto additional borrowings under our senior credit facility. Effective January10, 2006, the interest rate on our $275.0 million senior subordinated notes wasincreased 25 basis points to 7.75% as a result of missing the deadline forhaving a registration statement declared effective by the SEC.  The interest rate on the notes reverted to7.5% once the registration statement on Form S-4 was declared effective by theSEC on May 12, 2006.

***Othernon-operating (income) expense***

Other non-operatingexpense was $0.3 million for the three months ended June 30, 2006 comparedwith expense of $0.2 million for the three months ended June 30, 2005.  Other non-operating expense for both the 2006and 2005 periods consisted primarily of foreign currency gains and losses, andmiscellaneous financial income and expense.

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

The provision for incometaxes for the three months ended June 30, 2006 was $6.8 million, or 65% ofpre-tax income, compared with a benefit of $0.7 million for the three monthsended June 30, 2005. The effective tax rate for the second quarter 2006 washigher than the U.S. federal tax rate primarily due to the deferred U.S. taxeffects on the earnings of non-U.S. subsidiaries which were not considered tobe permanently reinvested. In a like manner, the effective tax rate on the tax benefit of pre-taxincome during the three months ended June 30, 2005 was lower than the U.S.federal rate due to the deferred U.S. tax effects on the earnings of non-U.S.subsidiaries.

***Net income***

For the foregoing reasonsand taking into account the deductions for minority interest in each periodpresented, net income was $3.4 million for the three months ended June 30,2006 compared with net income of $2.4 million for the three months ended June30, 2005.

***Six Months Ended June 30, 2006 Compared to the TwentyWeeks Ended June 30, 2005 for the Successor and Six Weeks Ended February 11,2005 for the Predecessor***

***Sales***

Sales for the six monthsended June 30, 2006 were $355.8 million compared with $251.3 million forthe twenty weeks ended June 30, 2005 for the Successor and $64.2 million for thesix weeks ended February 11, 2005 for the Predecessor.  Overall, Successor sales in the first half of2006 increased by $40.3 million or 13% compared with Successor and Predecessorsales for the 2005 periods. Increases in sales as compared to the prior yearperiods were primarily the result of higher average selling prices as well asincreased sales volumes in both the Chemicals and Potters divisions.

*Chemicalsdivision.*  Sales of theChemicals division for the six months ended June 30, 2006 were**$241.6 million compared with $160.3 million for the twentyweeks ended June 30, 2005 for the Successor and $48.3 million for the six weeksended February 11, 2005 for the Predecessor. Overall, Successor sales in the first half of 2006 increased by $33.0million compared with Successor and Predecessor sales for the 2005 periods.This was a 16% increase in net sales which was primarily a result of favorablechanges in product mix and selling price increases of $28.0 million, as well asthe impact of increased volume of $4.5 million. The impact of foreign currency exchange rates resulted in a net increasein sales of $0.5 million, primarily as a result of the stronger Canadian dollarin comparison to the U.S. dollar. Selling prices were increased in order tomitigate the impact of the higher energy, raw materials and transportationcosts. Sales volumes were favorable compared with the prior year periods, withincreases in sales into several end-markets including oil drilling additivesand zeolite-based laundry detergents.

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Potters division.  Sales of the Potters division for the sixmonths ended June 30, 2006 were $114.2 million compared with $91.0 million forthe twenty weeks ended June 30, 2005 for the Successor and $15.9 million forthe six weeks ended February 11, 2005 for the Predecessor.  Overall, Successor sales in the first half of2006 increased by $7.3 million, or 7% compared with Successor and Predecessorsales for the first half of 2005. This increase in net sales was primarily aresult of increased sales volumes of $5.3 million as well as higher averageselling prices of $2.6 million. Sales volume increased as a result of strongdemand in North America. Higher average selling prices were the result offavorable product mix and price increases designed to compensate for higherenergy, raw materials and transportation costs. The unfavorable impact of foreign currency exchange rates, primarily asa result of the weakening of certain Asia-Pacific currencies in comparison tothe U.S. dollar, reduced sales by $0.6 million.

***Gross profit***

Gross profit for the sixmonths ended June 30, 2006 was $80.3 million compared with $47.3 millionfor the twenty weeks ended June 30, 2005 for the Successor and $15.6 millionfor the six weeks ended February 11, 2005 for the Predecessor.  Overall, Successor gross profit in the firsthalf of 2006 increased by $17.4 million compared with Successor and Predecessorgross profit for the first half of 2005. Approximately $8.4 million of thisincrease was the result of a reduction in expense related to purchaseaccounting, primarily from the 2005 Successor period expense for thepost-acquisition sales of inventories written up to fair value at the date ofthe Transactions.  The effects of higherselling prices and product mix contributed $29.9 million, while increases inproduction and transportation costs reduced gross profit by $26.5 million.Increased sales volume added $4.7 million, and the favorable impact of foreigncurrency exchange rates, primarily as a result of the strengthening of theCanadian dollar in comparison to the U.S. dollar, increased gross profit by$0.9 million.

*Chemicalsdivision.*  Gross profitfor the six months ended June 30, 2006 was $49.3 million compared with $25.9million for the twenty weeks ended June 30, 2005 for the Successor and $11.4million for the six weeks ended February 11, 2005 for the Predecessor. Overall,Successor gross profit in the first half of 2006 increased by $12.0 millioncompared with Successor and Predecessor gross profit for the first half of2005. The favorable effects of higher selling prices and product mixcontributed $27.8 million, while increases in production and transportationcosts reduced gross profit by $21.0 million. Increased sales volume added $1.9million and the favorable impacts of foreign currency exchange contributed $0.4million to the increase. In addition, $2.9 million of the increase in grossprofit was the result of a reduction in expense related to purchase accounting,primarily from the 2005 post-acquisition sales of inventories written up tofair value at the date of the Transactions, partially offset by higheramortization of favorable revaluation of raw materials supply contracts in2006.

*Pottersdivision.*  Gross profitfor the six months ended June 30, 2006 was $31.0 million compared with $21.4million for the twenty weeks ended June 30, 2005 for the Successor and $4.2million for the six weeks ended February 11, 2005 for the Predecessor. Overall,gross profit in the first half of 2006 increased by $5.4 million compared withSuccessor and Predecessor gross profit for the first half of 2005. Thisincrease was the result of a reduction in expense related to purchaseaccounting, primarily from the 2005 post-acquisition sales of inventorieswritten up to fair value at the date of the Transactions.  The favorable impacts of volume, product mixand price increases were substantially offset by higher energy, raw materialsand transportation costs during the six months ended June 30, 2006 incomparison to the prior year.

***Selling, generaland administrative expenses***

SG&A expenses for thesix months ended June 30, 2006 were $39.4 million compared with $36.5 millionfor the twenty weeks ended June 30, 2005 for the Successor and $11.2 millionfor the six weeks ended February 11, 2005 for the Predecessor.  Overall, SG&A in the first half of 2006decreased by $8.3 million compared with Successor and Predecessor SG&A forthe first half of 2005.  The decrease inSG&A expenses was primarily due to certain Transactions-related expenses incurredduring the Successor twenty weeks ended June 30, 2005 and Predecessor six weeksended February 11, 2005. These expenses totaled $6.5 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. Thebalance of the decrease in SG&A expense of $1.8 million was primarily theresult of the current year benefit of corporate cost reduction efforts thatwere put in place subsequent to the date of the Transactions.

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***Other operatingexpense***

Other operating expensefor the six months ended June 30, 2006 was $7.6 million compared with$19.1 million for the twenty weeks ended June 30, 2005 for the Successor and$12.2 million for the six weeks ended February 11, 2005 for thePredecessor.  Overall, Successor otheroperating expense in the first half of 2006 decreased $23.7 million comparedwith Successor and Predecessor other operating expense for the first half of2005. Contributing to the decrease was the change-in-control severance benefitspaid to former company executives in 2005 related to the Transactions in theamount of $9.5 million.  In addition,costs incurred in 2005 in connection with the acquisition of the Companyamounted to $19.1 million. Both 2006 and 2005 include amortization due to therecognition of intangible assets for purchase accounting of $2.8 million and$2.4 million, respectively.  Included inthe amount for the six months ended June 30, 2006, was $2.4 million in costsincurred to improve the efficiency of certain plant operations and the $1.0million fee paid to the Sponsors during the six months ended June 30, 2006 formonitoring services as stipulated in the management agreement.

***Equity in netincome of affiliated companies***

Equity in net income ofaffiliated companies for the six months ended June 30, 2006 was$5.7 million compared with $0.4 million for the twenty weeks ended June30, 2005 for the Successor and a loss of $0.3 million for the six weeks endedFebruary 11, 2005 for the Predecessor. Overall, Successor equity in net income of affiliated companies in thefirst half of 2006 increased by $5.6 million compared with Successor andPredecessor equity income for the first half of 2005.  Both the current year and prior yearSuccessor period results were reduced to reflect the amortization of intangibleassets and increased depreciation of property, plant and equipment thatresulted from fair market value purchase accounting adjustments of $0.6 millionand $0.4 million in 2006 and 2005, respectively. The significant increase inthe six months ended June 30, 2006 compared to the first half of 2005 wasprimarily due to purchase accounting expenses in the twenty weeks ended June30, 2005 in the amount of $5.2 million for post-acquisition sales ofinventories written up to fair value at the date of the Transactions. Theremaining difference was primarily due to the favorable mix of product sales.

***Interest expense,net***

Interest expense, net forthe six months ended June 30, 2006 was $25.7 million compared with $15.6million for the twenty weeks ended June 30, 2005 for the Successor and $0.8million for 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.

***Othernon-operating (income) expense***

Othernon-operating expense was $0.1 million for the six months ended June 30,2006 compared with expense of $7.3 million for the twenty weeks endedJune 30, 2005 for the Successor and $0.4 million for the six weeks endedFebruary 11, 2005 for the Predecessor.  Other non-operating expense for the twentyweeks ended June 30, 2005 consisted of costs incurred as a result of theTransactions including $5.2 million in “make-whole” payments for the earlypayment of the Predecessor’s debt and $2.3 million in financing fees foraccess to a bridge credit facility during the Transactions.  The remainder of other non-operating expensefor 2006 and 2005 consisted primarily of foreign currency gains and losses, andmiscellaneous financial income and expense.

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

The provision for incometaxes for the six months ended June 30, 2006 was $8.8 million, or 67% ofpre-tax income, compared with benefits of $5.2 million for the twenty weeksended June 30, 2005 for the Successor and $2.5 million for the six weeks endedFebruary 11, 2005 for the Predecessor. The effective tax rate for the firsthalf of 2006 was higher than the U.S. federal tax rate primarily due to thedeferred U.S. tax effects on the earnings of non-U.S. subsidiaries which werenot considered to be permanently reinvested.  In a like manner,the effective tax rate on the tax benefit of pre-tax losses during theSuccessor twenty weeks ended June 30, 2005 was lower than the U.S. federal ratedue to the deferred U.S. tax effects on the earnings of non-U.S. subsidiaries.The effective tax rate on the tax benefits of pre-tax 

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lossesin both the Successor and Predecessor periods in 2005 were significantly lowerthan the U.S. federal tax rate due to the impact of certain non-deductibleexpenses incurred in conjunction with the acquisition of the Company.

***Net income (loss)***

For the foregoingreasons, and the deductions for minority interest in each period presented, netincome was $4.1 million for the six months ended June 30, 2006 comparedwith net loss of $25.7 million for the twenty weeks ended June 30, 2005 for theSuccessor and $6.8 million for the six weeks ended February 11, 2005 for thePredecessor.

**Liquidity andCapital Resources**

Cash and cash equivalentsat June 30, 2006 were $9.8 million, which was a decrease of $13.1 million fromDecember 31, 2005.

Net cash provided byoperating activities was $3.0 million for the six months ended June 30, 2006compared to $28.1 million cash used during the same period in 2005.  The main contributor to the improvement fromthe prior year period was the elimination of $35.2 million of costs related tothe Transactions.  Increased cash fromoperations, due to increased sales and operating income versus the prior yearperiod, were offset by increased interest payments of $15.9 million.

Net cash used ininvesting activities was $15.5 million for the six months ended June 30, 2006compared to $644.8 million during the same period in 2005.  The decrease versus the prior year was due to$632.5 million in consideration paid to effect the Transactions in February2005.  The remaining difference was dueto slightly higher capital spending versus the prior year as well as theacquisition of intangibles assets, consisting primarily of customer lists, inJune 2006.

Net cash used forfinancing activities was $1.1 million for the six months ended June 30, 2006compared to net cash provided of $692.1 million during the same period in2005.  The current year primarilyconsists of drawings on the revolving credit facility offset by dividendsdistributions and quarterly debt payments. The prior year included $163.6 million in equity contributions and$610.0 million in proceeds from the issuance of new debt that together wereused to finance the Transactions.  Prioryear outflows included $16.5 million of capitalized debt acquisition costs andpayments of $115.1 million for principal due on the Predecessor’s existingdebt.  Offsetting the $115.1 million wasapproximately $44.9 million that the Predecessor had drawn on the existingcredit facility prior to the Transactions.

In connection with theTransactions, we incurred significant indebtedness.  As of June 30, 2006 our total debt was$666.0 million. Borrowings under the term loan are due and payable inquarterly installments of $0.9 million. The remaining balance of the term loanis due and payable in full in 2012. The revolving credit facility is availableuntil 2011. In addition to paying interest on outstanding principal amountsunder our credit facilities, we are required to pay a commitment fee to thelenders for the unused portion of the revolving 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 2.0, and a maximumtotal leverage ratio of 6.5 at June 30, 2006. In addition, our senior secured credit facility restricts our ability toincur indebtedness or liens, make investments or declare or pay dividends andlimits our annual capital spending. The indenture governing our seniorsubordinated notes among other things: (i) limits our ability and theability of our subsidiaries to incur additional indebtedness, incur liens, paydividends or make certain other restricted payments and enter into certaintransactions with affiliates; (ii) places restrictions on the ability ofcertain of our subsidiaries to pay dividends or make certain payments to us;and (iii) places restrictions on our ability and the ability of oursubsidiaries to merge or consolidate with any other person or sell, assign,transfer, convey or otherwise dispose of all or substantially all of ourassets. At June 30, 2006, we were in compliance with our loan covenants.

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Our major market risk exposure ispotential losses arising from changing rates and prices regarding foreigncurrency exchange rate risk, interest rate risk, commodity price risk and creditrisk. The audit committee of our Board of Directors regularly reviews foreignexchange, interest rate and commodity hedging activity and monitors compliancewith our hedging policy. We do not use financial instruments for speculativepurposes and we limit our hedging activity to the underlying economic exposure.

**Foreign ExchangeRisk**

Our financial results are subjectto the impact of gains and losses on currency translations, which occur whenthe financial statements of foreign operations are translated into U.S.dollars. We operate a geographically diverse business with approximately 44% ofour sales during the twelve months ended December 31, 2005 coming from ourinternational operations in currencies other than the U.S. dollar. Becauseconsolidated financial results are reported in dollars, sales or earningsgenerated in currencies other than the U.S. dollar can result in a significantincrease or decrease in the amount of those sales and earnings when translatedto U.S. dollars. The financial statements of our operations outside the UnitedStates, where the local currency is considered to be the functional currency,are translated into U.S. dollars using the exchange rate in effect at eachbalance sheet date for assets and liabilities and the average exchange rate foreach period for sales, expenses, gains, losses and cash flows. The exchangerates between these currencies and the U.S. dollar in recent years havefluctuated significantly and may continue to do so in the future. The foreigncurrencies to which we have the most significant exchange rate exposure includethe Canadian dollar and the euro. The effect of translating foreignsubsidiaries’ balance sheets into U.S. dollars is included in othercomprehensive income. The impact of gains and losses on transactionsdenominated in currencies other than the functional currency of the relevantoperations are included in other non-operating expense and have historicallynot been material.

**Interest RateRisk**

We are exposed to fluctuations ininterest rates on our long-term senior secured term loan and revolving creditfacility. Changes in interest rates will not affect the market value of suchdebt but will affect the amount of our interest payments over the term of theloans. Likewise, an increase in interest rates could have a material impact onour cash flow. A 100 basis point increase in interest rates on our variableterm loan under our new senior secured credit facility would have an estimatedimpact on pre-tax earnings of $3.7 million annually.

**Commodity Risk**

We purchase significant amountsof natural gas to supply the energy required in our production processes forour products in both the Chemicals and Potters divisions. Natural gas providesan energy source for us but is not a direct feedstock of our products. We haveimplemented a hedging program in the United States which allows us to mitigateexposure to natural gas volatility. Forward purchases of natural gas are also made in regard to ourproduction in Canada as a means of mitigating such exposure.

We have entered into forwardcontracts with respect to the purchase of natural gas in our domesticoperations. These contracts had a fair value of $10.2 million and$30.9 million at June 30, 2006 and December 31, 2005, respectively. Therespective current and non-current balances are recorded in prepaid and othercurrent assets and other long-term assets. The related offset is recorded inother comprehensive income (loss), net of tax. Realized gains and losses onnatural gas hedges are included in production costs and subsequently charged tocost of goods sold in the period in which inventory is sold.

**Credit Risk**

We are exposed to credit risk onfinancial instruments to the extent our counterparty fails to perform certainduties as required under the provisions of an agreement. We only transact withcounterparties having an appropriate credit rating for the risk involved.Credit exposure is managed through credit approval and monitoring procedures.

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

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**ITEM 4.   CONTROLS ANDPROCEDURES**

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 June 30, 2006.

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, in all material respects,the Company’s financial condition, results of operations and cash flows for thequarter ended June 30, 2006.

There have been no changes in ourinternal control over financial reporting during our fiscal quarter ended June30, 2006, that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. However, management aswell as the Audit Committee recognizes that the Company will have to takemeasures in order to remediate the two material weaknesses described above.  The Company has completed an independentassessment of its external financial reporting function in order to helpdetermine the appropriate level of staffing, skill sets and processes necessaryto implement an effective control environment. Management expects to implement certain recommendations resulting fromthe assessment in the third and fourth quarters of 2006.

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**PART II.**

**OTHER INFORMATION**

**ITEM1.   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 laws andregulations 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 February 2006, we received a revisedConsent Agreement and are currently negotiating with the KDHE regarding thesettlement of this revised Consent Agreement. We have a reserve of $0.3 million as of June 30, 2006 for estimatedcivil penalties and supplemental environmental projects.

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 litigationliability.

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 estimate that $0.5 million will 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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**ITEM1A.  RISK FACTORS**

There have been no materialchanges to the disclosure related risk factors made in our Registration Statement on Form S-4, as filed with the SEC on May 11, 2006.

**ITEM2.     UNREGISTERED SALE OF EQUITYSECURITIES AND USE OF PROCEEDS**

None.

**ITEM3.     DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4.     SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

None.

**ITEM5.     OTHER INFORMATION**

None.

**ITEM6.     EXHIBITS**
| 31.1   |   | Section 302 of the Sarbanes-Oxley Act of 2002  Certification of James P. Cox, Vice President 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 and Chief Financial Officer. |   |

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**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, as amended, PQ Corporation has caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|            | PQ CORPORATION |
|------------|----------------|
|       |           |
|       |           |
|       | By:            | /S/ JAMES P. COX |
| ** ** |           | James P. Cox |
|       |           | Chief Financial Officer and Vice President |
|       |           | (principal financial officer and duly authorized  officer) |

 

Date: August 14, 2006

 

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