**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 March 31, 2006**

**OR**
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

**Commission File No. 333-**

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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   o   No   x

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 June 23, 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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**PART I.FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**PQCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)(unaudited)**
| ** **                                                        | ** ** | **Successor**      | ** ** |
|-------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                        | ** ** | **2006**           | ** ** | **2005** | ** ** |
|                                                              |       |               |       |   |   |
| ASSETS                                                            |       |               |       |   |   |
| Cash and cash  equivalents                                        |       | $                  | 11,469     |   | $ | 22,972 |   |
| Receivables, net                                                  |       | 102,819            |       | 90,714 |   |
| Inventories                                                       |       | 96,317             |       | 84,239 |   |
| Prepaid and  other current assets                                 |       | 30,030             |       | 38,333 |   |
|                                                              |       |               |       |   |   |
| Total current assets                                              |       | 240,635            |       | 236,258 |   |
|                                                              |       |               |       |   |   |
| Investments in  affiliated companies                              |       | 65,455             |       | 64,417 |   |
| Property, plant  and equipment, net                               |       | 317,171            |       | 318,337 |   |
| Goodwill                                                          |       | 233,301            |       | 234,483 |   |
| Tradenames                                                        |       | 53,000             |       | 53,000 |   |
| Other intangible  assets, net                                     |       | 71,145             |       | 77,650 |   |
| Other long-term  assets                                           |       | 38,335             |       | 45,728 |   |
|                                                              |       |               |       |   |   |
| Total assets                                                      |       | $                  | 1,019,042  |   | $ | 1,029,873 |   |
|                                                              |       |               |       |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                        |       |               |       |   |   |
| Revolver, notes  payable and current maturities of long-term debt |       | $                  | 43,468     |   | $ | 26,689 |   |
| Cash overdraft                                                    |       | 7,621              |       | 9,957 |   |
| Accounts payable                                                  |       | 52,320             |       | 51,302 |   |
| Accrued  liabilities                                              |       | 43,860             |       | 53,978 |   |
|                                                              |       |               |       |   |   |
| Total current liabilities                                         |       | 147,269            |       | 141,926 |   |
|                                                              |       |               |       |   |   |
| Long-term debt                                                    |       | 632,848            |       | 633,821 |   |
| Deferred income  taxes                                            |       | 119,989            |       | 127,806 |   |
| Other long-term  liabilities                                      |       | 76,775             |       | 74,714 |   |
| Minority  interest in equity of subsidiaries                      |       | 5,073              |       | 5,047 |   |
| Commitments and  contingencies                                    |       |               |       |   |   |
| Stockholders’  equity                                        |       | 37,088             |       | 46,559 |   |
|                                                              |       |               |       |   |   |
| Total  liabilities and stockholders’ equity                  |       | $                  | 1,019,042  |   | $ | 1,029,873 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

1

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**PQ CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands)(unaudited)**

** **
| ** **                                               | ** ** | **Successor**         | ** ** | ** **           | ** ** | **Predecessor** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                               | ** ** | **Three months** | ** ** | **Seven weeks** | ** ** | ** **      | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **ended**             | ** ** | **ended**            | ** ** | ** **      | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **March 31,**    | ** ** | **March 31,**   | ** ** | ** **      | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**              | ** ** | **2005**             | ** ** | ** **      | ** ** | **2005** | ** ** |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Sales                                                    |       | $                     | 166,742    |                 | $          | 75,213          |       |   |   | $ | 64,195 |   |
| Cost of goods  sold                                      |       | 131,566               |       | 66,181               |       |            |       | 48,576 |   |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Gross profit                                             |       | 35,176                |       | 9,032                |       |            |       | 15,619 |   |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Selling, general  and administrative expenses            |       | 18,727                |       | 16,672               |       |            |       | 11,221 |   |
| Other operating  expense                                 |       | 4,635                 |       | 16,630               |       |            |       | 12,267 |   |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Operating income  (loss)                                 |       | 11,814                |       | (24,270              | )          |            |       | (7,869 | ) |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Equity in net  income (loss) of affiliated companies     |       | 3,418                 |       | 4,159                |       |            |       | (265 | ) |
| Interest  expense, net                                   |       | 12,640                |       | 5,351                |       |            |       | 771 |   |
| Other (income)  expense                                  |       | (207                  | )          | 7,105                |       |            |       | 356 |   |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Income (loss)  before income taxes and minority interest |       | 2,799                 |       | (32,567              | )          |            |       | (9,261 | ) |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Provision  (benefit) for income taxes                    |       | 1,979                 |       | (4,482               | )          |            |       | (2,522 | ) |
| Minority  interest                                       |       | 118                   |       | 72                   |       |            |       | 59 |   |
|                                                     |       |                  |       |                 |       |            |       |   |   |
| Net income (loss)                                        |       | $                     | 702        |                 | $          | (28,157         | )          |   |   | $ | (6,798 | ) |

 

See accompanying notes to condensed consolidatedfinancial statements.

2

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**PQ CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)**

 
| ** **                                        | ** ** | **Successor**         | ** ** | ** **           | ** ** | **Predecessor** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|----------------------|------------|-----------------|------------|
| ** **                                        | ** ** | **Three months** | ** ** | **Seven weeks** | ** ** | ** **      | ** ** | **Six weeks** | ** ** |
| ** **                                        | ** ** | **ended**             | ** ** | **ended**            | ** ** | ** **      | ** ** | **ended** | ** ** |
| ** **                                        | ** ** | **March 31,**    | ** ** | **March 31,**   | ** ** | ** **      | ** ** | **February 11,** | ** ** |
| ** **                                        | ** ** | **2006**              | ** ** | **2005**             | ** ** | ** **      | ** ** | **2005** | ** ** |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Net cash used  for operating activities           |       | $                     | (20,842    | )                    | $          | (33,010         | )          |   |   | $ | (6,965 | ) |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Cash flows from  investing activities:            |       |                  |       |                 |       |            |       |   |   |
| Purchases of property, plant and equipment        |       | (5,870                | )          | (3,089               | )          |            |       | (2,358 | ) |
| Merger consideration                              |       | —                |       | (626,000             | )          |            |       | — |   |
| Merger costs, capitalized                         |       | —                |       | (6,485               | )          |            |       | — |   |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Net cash used for investing activities            |       | (5,870                | )          | (635,574             | )          |            |       | (2,358 | ) |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Cash flows from  financing activities:            |       |                  |       |                 |       |            |       |   |   |
| Revolvers, notes payable and cash overdrafts, net |       | 17,240                |       | (1,890               | )          |            |       | 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                      |       | (1,300                | )          | (114,524             | )          |            |       | — |   |
| Proceeds from issuances of treasury stock         |       | —                |       | —               |       |            |       | 1,161 |   |
| Purchases of stock                                |       | —                |       | —               |       |            |       | (47 | ) |
| Equity contribution                               |       | —                |       | 163,600              |       |            |       | — |   |
| Dividend distribution                             |       | (880                  | )          | —               |       |            |       | — |   |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Net cash provided by financing activities         |       | 15,060                |       | 640,683              |       |            |       | 45,971 |   |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Effect of  exchange rate changes on cash          |       | 149                   |       | 456                  |       |            |       | (700 | ) |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Net change in  cash and cash equivalents          |       | (11,503               | )          | (27,445              | )          |            |       | 35,948 |   |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Cash and cash  equivalents at beginning of period |       | 22,972                |       | 48,757               |       |            |       | 12,809 |   |
|                                              |       |                  |       |                 |       |            |       |   |   |
| Cash and cash  equivalents at end of period       |       | $                     | 11,469     |                 | $          | 21,312          |       |   |   | $ | 48,757 |   |

 

See accompanying notes tocondensed consolidated financial statements.

 

3

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**PQ CORPORATION ANDSUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands)(unaudited)**

 

**1. Background andBasis of Presentation:**

On December 15, 2004, PQ Corporation (“Company”)and Niagara Acquisition, Inc. and its parent company, Niagara Holdings, Inc.(“Holdings”), entered into an Agreement and Plan of Merger, pursuant to whichNiagara Acquisition, Inc. merged with and into PQ Corporation, with PQCorporation continuing as the surviving entity and a wholly-owned subsidiary ofHoldings (the “Merger”). Holdings is a Delaware corporation, a substantialmajority of the outstanding capital stock of which is owned by JPMorganPartners LP and its affiliates and Peak Investments, LLC (“Sponsors”). TheMerger was consummated on February 11, 2005. The total mergerconsideration paid, excluding fees and expenses, consisted of the statedpurchase price of $626,000 and capitalized acquisition costs of $6,485.

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

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

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information. The year-end condensed consolidated balance sheet wasderived from the audited financial statements but does not include alldisclosures required by accounting principles generally accepted in the UnitedStates of America. In the opinion of management, all adjustments of a normaland recurring nature necessary to present fairly the financial position andresults of operations have been included. The results of operations are notnecessarily indicative of the results to be expected for the full year. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes thereto for the year ended December 31, 2005.

**2. BusinessCombination:**

Statement of Financial Accounting Standards (“SFAS”) No. 141,“Business Combinations,” and SFAS No. 142, “Goodwill and OtherIntangible Assets,” govern the accounting and reporting for businesscombinations. SFAS No. 141 requires all business combinations to beaccounted for using the purchase method of accounting. SFAS No. 142provides that goodwill and other intangible assets with indefinite lives willnot be amortized, but will be tested for impairment on at least an annualbasis. The Successor has accounted for the Transactions in accordance withthese standards. The Merger was treated as a purchase with Holdings, whose soleasset is its investment in the common stock of the Company, as the accountingacquirer 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 $2,400was recorded in selling, general and administrative expenses in theConsolidated Statement of Operations for the six weeks ended February 11,2005 for 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 sevenweek period ended March 31, 2005.

4

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The Company incurredother costs relating to the Transactions, primarily for Sponsor fees, brokerfees, legal and consulting of approximately $6,158 and $11,213 that wererecorded in other operating expense for the six week period ended February 11,2005 and seven week period ended March 31, 2005, respectively.

The table belowsummarizes the allocation of the total cost of the Merger to the assetsacquired and liabilities assumed. The purchase price was allocated first totangible and identifiable intangible assets acquired and liabilities assumedbased upon their estimated fair values. The remaining excess of the purchaseprice over the fair value of assets acquired and liabilities assumed was thenrecorded as goodwill.
| Net cash paid to  acquire stock               |   | $         | 626,000 |   |
|-----------------------------------------------|--------|-----------|---------|--------|
| Transaction  costs, capitalized               |   | 6,485     |    |
| Total purchase price                          |   | $         | 632,485 |   |
|                                          |   |      |    |
| The purchase price was  allocated as follows: |   |      |    |
| Cash                                          |   | $         | 48,757  |   |
| Receivables                                   |   | 91,813    |    |
| Inventories                                   |   | 98,298    |    |
| Prepaid and other current assets              |   | 16,385    |    |
| Property, plant and equipment                 |   | 336,344   |    |
| Investments in affiliated companies           |   | 68,719    |    |
| Goodwill                                      |   | 233,301   |    |
| Other intangible assets                       |   | 157,595   |    |
| Other assets                                  |   | 30,805    |    |
| Fair value of assets acquired                 |   | 1,082,017 |    |
| Current  liabilities                          |   | (176,954  | )       |
| Long-term debt                                |   | (80,665   | )       |
| Deferred income  taxes                        |   | (101,403  | )       |
| Other  liabilities                            |   | (90,510   | )       |
| Purchase price                                |   | $         | 632,485 |   |

 

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

In accordance with therequirements of the purchase method of accounting for acquisitions, inventoriesas of February 11, 2005 were recorded at net realizable value (which isdefined as estimated selling prices less the sum of (a) costs of disposaland (b) a reasonable profit allowance for the selling effort of theacquiring entity) which, in the case of finished products, was $24,555 higherthan the Predecessor’s historical manufacturing cost. The Successor’s cost ofproducts sold for the seven weeks ended March 31, 2005 includes a pre-taxcharge of $6,812 relating to the step-up of finished product sold during theperiod.

In addition, certain rawmaterial inventory purchased under favorable supply agreements was revalued tofair market value, which was $2,473 higher than historical cost. The Successor’scost of products sold for the seven weeks ended March 31, 2005includes a pre-tax charge of $888 relating to the step-up of raw materials usedin finished products sold during the period.

In May 2005,management finalized plans to terminate certain employees in the United Statesand at certain foreign subsidiaries. Employees terminated under this plan areentitled to receive severance pay and benefits totaling approximately $5,200which was included in accrued liabilities in the opening balance sheet of theSuccessor. Cash expenditures toward this program of $467 were made during thethree months ended March 31, 2006 and charged 

5

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against the reserve. Substantiallyall payments related to the remaining reserve of $1,623 should be completed by December 31,2006.

**3. Pro FormaInformation:**

The following scheduleincludes statements of operations data for the prior year unaudited results asif the Transactions had occurred on January 1, 2005. The pro formainformation includes the actual results with adjustments for the pro formaeffect of the change in interest expense related to the changes in capitalstructure resulting from the financings discussed in Note 8, purchaseaccounting adjustments resulting in changes to depreciation and amortizationexpenses, the revaluation of inventory to fair market value, amortization ofthe step up of investment in affiliates and the reduction in pension andpostretirement benefit expense resulting from the elimination of theunamortized actuarial losses and prior service costs and the unamortizedtransition obligation.

The unaudited pro formainformation is provided for illustrative purposes only. It does not purport torepresent what the results of operations would have been had the Transactionsoccurred on the date indicated above, nor does it purport to project theresults of operations for any future period. 

|           | ** ** | **Pro forma three  months ended   March 31,  2005** | ** ** |
|-----------|------------|------------------------------------------------------------------------------|------------|
| Net sales |       | $                                                                            | 139,408    |   |
| Net loss  |       | (13,562                                                                      | )          |
|           |            |                                                                              |            |  |

 

Included in the net lossfor the pro forma three months ended March 31, 2005 were pre-tax chargesof $9,786 for the amortization of inventory revalued in purchase accounting,$3,338 for the write-off of acquired in-process research and development, and$2,097 for amortization of favorable raw materials supply contracts.

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

The following table summarizes comprehensive (loss)income, net of tax:

 
| ** **                                                         | ** ** | **Successor**                                      | ** ** | **Predecessor**                                         | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Seven weeks   ended  March 31,  2005** | ** ** | **Six weeks   ended  February 11,  2005** | ** ** |
| Net income  (loss)                                                 |       | $                                                  | 702        |                                                    | $          | (28,157 | ) | $ | (6,798 | ) |
|                                                               |       |                                               |       |                                                    |       |   |   |
| Gains (losses) in fair values of derivatives  qualifying as hedges |       | (9,733                                             | )          | 6,497                                                   |       | 785 |   |
| Foreign currency translation adjustments                           |       | 412                                                |       | (1,963                                                  | )          | (4,676 | ) |
| Comprehensive (loss)  income                                       |       | $                                                  | (8,619     | )                                                       | $          | (23,623 | ) | $ | (10,689 | ) |

 

6

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**5. Inventories:**

Inventories were classified and valued as follows:

 
| ** **                             | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished products  and work in process |       | $                        | 72,759     |                        | $          | 64,436 |   |
| Raw materials                          |       | 23,558                   |       | 19,803                      |       |
|                                   |       | $                        | 96,317     |                        | $          | 84,239 |   |
|                                   |       |                     |       |                        |       |
| Valued at lower  of cost or market:    |       |                     |       |                        |       |
| LIFO basis                             |       | 59,127                   |       | 50,864                      |       |
| FIFO basis                             |       | 8,102                    |       | 5,997                       |       |
| Average cost basis                     |       | 29,088                   |       | 27,378                      |       |
|                                   |       | $                        | 96,317     |                        | $          | 84,239 |   |

 

**6. Property, Plantand Equipment:**

A summary of property, plant and equipment, at cost,and related accumulated depreciation and depreciation expense is as follows:

 
| ** **                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                            |       | $                        | 56,688     |                        | $          | 57,148 |   |
| Buildings                       |       | 97,247                   |       | 97,785                      |       |
| Machinery and  equipment        |       | 190,816                  |       | 188,836                     |       |
| Construction in  progress       |       | 16,193                   |       | 9,747                       |       |
|                            |       | 360,944                  |       | 353,516                     |       |
| Less:  accumulated depreciation |       | 43,773                   |       | 35,179                      |       |
|                            |       | $                        | 317,171    |                        | $          | 318,337 |   |

 

Depreciation expense was$10,227 for the three months ended March 31, 2006, $6,984 for the sevenweeks ended March 31, 2005 and $4,290 for the six weeks ended February 11,2005.

**7. OtherIntangible Assets:**

Gross carrying amounts and accumulated amortizationfor intangible assets with estimable useful lives are as follows:

 
| ** **                           | ** ** | **Gross Amounts**   | ** ** | **Accumulated Amortization** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **March 31,  2006** | ** ** | **December 31,  2005**       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| Formulations and  product technology |       | $                        | 53,200     |                              | $          | 53,200 |   | $ | (4,987 | ) | $ | (3,920 | ) |
| Non compete  agreements              |       | 3,900                    |       | 3,900                             |       | (1,438 | ) | (1,140 | ) |
| Raw material  contracts              |       | 43,648                   |       | 43,648                            |       | (23,566 | ) | (18,453 | ) |
| Railcar leases                       |       | 509                      |       | 509                               |       | (121 | ) | (94 | ) |
| Total                                |       | $                        | 101,257    |                              | $          | 101,257 |   | $ | (30,112 | ) | $ | (23,607 | ) |

 

7

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The amortization periodsfor formulations and product technology, non-compete agreements and railcarleases are twelve years, three years and five years, respectively. Theamortization period for raw material contracts is based on the terms of thecontracts; the longest of which is three years in duration.

**8. Long-term Debt:**

The summary of long-termdebt is as follows:
| ** **                                                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Senior secured  term loans with interest at 6.56% as of March 31, 2006 |       | $                        | 361,499    |                        | $          | 362,412 |   |
| Senior  subordinated notes due 2013                                         |       | 275,000                  |       | 275,000                     |       |
| Revolving credit  agreements                                                |       | 39,325                   |       | 22,120                      |       |
| Other                                                                       |       | 492                      |       | 978                         |       |
|                                                                        |       | 676,316                  |       | 660,510                     |       |
| Less: current portion                                                       |       | (43,468                  | )          | (26,689                     | )          |
|                                                                        |       | $                        | 632,848    |                        | $          | 633,821 |   |

 

On February 11,2005, the Company issued $275,000 of 7.5% senior subordinated notes due 2013 intransactions exempt from or not subject to registration under the SecuritiesAct pursuant to Rule 144A under the Securities Act and received cashproceeds of $267,781 after deducting initial purchases discounts and expenses.The notes are senior subordinated obligations of the Company and rank junior toall other senior indebtedness of the Company that does not contain similarsubordination provisions. The indenture relating to the notes contains variouslimitations on the Company’s ability to incur additional indebtedness, paydividends, sell assets and create liens, among other things. Interest on thenotes is payable on February 15 and August 15 of each year. Noprincipal payments are required with respect to the notes prior to their finalmaturity. Effective January 10, 2006, the interest rate was increased 25basis points to 7.75% as a result of missing the deadline for having aregistration statement declared effective by the SEC. The interest rate on thenotes reverted to 7.5% once the registration statement was declared effectiveby the SEC on May 12, 2006.

On February 11,2005, the Company entered into a senior secured credit facility (“Senior CreditFacility”) having a term loan in the amount of $335,000 with a maturity date ofFebruary 11, 2012, and received cash proceeds of approximately $324,950after deducting underwriting fees and expenses. As discussed below, the SeniorCredit Facility was subsequently amended to provide for an additional $30,000of term loan borrowings. Interest on the term loan is variable and is equal toLIBOR plus a margin of 2.0%. The Senior Credit Facility requires minimumquarterly principal payments of $917 on the term loan, as well as prepaymentsfrom all “net proceeds” received and “excess cash flow,” if applicable. Inaccordance with the Senior Credit Facility, net proceeds generally relate toproceeds received from the issuance or incurrence of certain indebtedness orproceeds received on the disposition of assets, adjusted for certain costs andexpenses, and are payable promptly upon receipt subject, in the case of netproceeds from asset dispositions, to meeting the thresholds described below.Net proceeds prepayments in respect of asset dispositions are not payableunless they are in excess of certain minimum amounts, both on an individualbasis for any given disposition and in the aggregate for dispositions that,individually, would not meet the threshold. Excess cash flow is to becalculated annually and is defined as earnings before interest, taxes,depreciation and amortization (“EBITDA”) adjusted for various expendituresand/or proceeds commencing with the 2005 fiscal year. Prepayments with respectto excess cash flow, if any, are to be made on an annual basis, with the firstpayment due March 31, 2006. The detailed calculations supporting those twoprepayments are defined in the credit agreement. The Company has performed thecalculation for fiscal year 2005 and determined that no excess payment isrequired. The remaining principal balance of the term loan is due uponmaturity.

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 

8

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the Company throughoutthe term of the Senior Credit Facility with the balance due February 11,2011. There was $37,200 and $20,000 in outstanding revolving credit borrowingsunder the Senior Credit Facility as of March 31, 2006 and December 31,2005, respectively.

In December 2005,the Company amended its Senior Credit Facility, the primary purpose of whichwas to permit the payment of a dividend to Holdings of $85,000. The amendmentexpands the Senior Credit facility to provide for an additional $30,000 of termloan borrowings and also permits 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 the Holdings notes issued in the amount of$23,000. These Holdings notes are not guaranteed by the Company. In addition,the amendment provides for an increase to the effective interest rate on ourSenior Credit Facility by 25 basis points in the event our debt rating isdowngraded and stipulates a prepayment fee equal to 1.0% of certain voluntaryprepayments made within one year of the effective date of the amendment withthe proceeds of certain types of indebtedness and based on certain otherconditions. The amendment does not change any of the other existing covenantsin the Senior Credit Facility. Upon receipt of the dividend from the Companyand the funding of the Holdings debt instrument, Holdings paid a dividend toits stockholders in an aggregate amount of $110,000.

**9. FinancialInstruments:**

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 ahedge of the net investment in our European and Canadian operations. The fairvalue of the net liability is recorded in other liabilities with a relatedoffset to foreign currency translation adjustments, net of taxes. The contractshad a net liability balance of $9,004 and $6,753 as of March 31, 2006 and December 31,2005, respectively. In the event the euro or Canadian dollar strengthensagainst the U.S. dollar the fair value of the liability will increase.

The Company is exposed torisks in energy costs due to fluctuations in energy prices, particularlynatural gas. There is a hedging program in the United States which allows us tomitigate exposure to natural gas volatility with futures contracts. The futurescontracts had a fair value of $15,188 and $30,950 at March 31, 2006 and December 31,2005, respectively. Fair value is determined based on estimated amounts thatwould be received or paid to terminate the contracts at the reporting datebased on quoted market prices of comparable contracts. The respective currentand non-current balances are recorded in prepaid and other current assets andother long-term assets. The related gains or losses are recorded instockholders’ equity as a component of other comprehensive income (loss), netof tax. Realized gains and losses on natural gas hedges are included inproduction costs and subsequently charged to cost of goods sold in theconsolidated statements of income in the period in which inventory is sold.

**10. Pension andPost Retirement Benefits:**

Net periodic pensionexpense is as follows:

 
| ** **                 | ** ** | **U.S. and Canada** | ** ** | **Other**                | ** ** |
|----------------------------|------------|-------------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **Successor**                 | ** ** | **Predecessor**          | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                 | ** ** | **Three months**         | ** ** | **Seven weeks**     | ** ** | **Six weeks** | ** ** | **Three months** | ** ** | **Seven weeks** | ** ** | **Six weeks** | ** ** |
| ** **                 | ** ** | **ended**                     | ** ** | **ended**                | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** | **ended** | ** ** |
| ** **                 | ** ** | **March 31,  2006**      | ** ** | **March 31,  2005** | ** ** | **February 11,  2005** | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **February 11,  2005** | ** ** |
| Service cost               |       | $                             | (881       | )                        | $          | (494 | ) | $ | (385 | ) | $ | (800 | ) | $ | (471 | ) | $ | (377 | ) |
| Interest cost              |       | (1,778                        | )          | (1,034                   | )          | (830 | ) | (350 | ) | (172 | ) | (167 | ) |
| Expected return  on assets |       | 2,295                         |       | 1,174                    |       | 1,016 |   | 193 |   | 72 |   | 79 |   |
| Net amortization           |       | —                        |       | —                   |       | (288 | ) | (4 | ) | — |   | (59 | ) |
| Net periodic expense       |       | $                             | (364       | )                        | $          | (354 | ) | $ | (487 | ) | $ | (961 | ) | $ | (571 | ) | $ | (524 | ) |

 

9

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Net periodic retiree health cost is as follows:

 
| ** **           | ** ** | **Successor**         | ** ** | **Predecessor**      | ** ** |
|----------------------|------------|-----------------------|------------|----------------------|------------|
| ** **           | ** ** | **Three months** | ** ** | **Seven weeks** | ** ** | **Six weeks** | ** ** |
| ** **           | ** ** | **ended**             | ** ** | **ended**            | ** ** | **ended** | ** ** |
| ** **           | ** ** | **March 31,**    | ** ** | **March 31,**   | ** ** | **February 11,** | ** ** |
| ** **           | ** ** | **2006**              | ** ** | **2005**             | ** ** | **2005** | ** ** |
| Service cost         |       | $                     | —     |                 | $          | (93 | ) | $ | (51 | ) |
| Interest cost        |       | (157                  | )          | (144                 | )          | (127 | ) |
| Net amortization     |       | (33                   | )          | —               |       | (28 | ) |
| Net periodic expense |       | $                     | (190       | )                    | $          | (237 | ) | $ | (206 | ) |

 

The Company madecontributions of $87 and $1,945 to the U.S. and Canadian pension plans andother pension plans, respectively, for the three months ended March 31,2006. For the retiree health plans, the Company made payments of $414 for thethree months ended March 31, 2006. In addition, the Company madecontributions of approximately $439 to the 401(k) savings plan for thethree months ended March 31, 2006.

**11. Stock-basedCompensation**

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.”  Effective January 1, 2006, the Companyadopted SFAS No. 123(R), “Share-Based Payment”, which had no materialeffect on the financial statements.

Subsequent to theTransactions, Holdings adopted a restricted stock plan for which 19,800 sharesof Holding’s Class A common stock were awarded to certain executives ofthe Company in 2005. There was no restricted stock activity in the currentquarter. The weighted average grant date fair value of the restricted stock is$21.37 per share. The restricted stock vests as follows: 10% of each grantvests on February 11 in each year 2006 to 2010, subject to the executive’scontinued service with the Company on such date and subject to 100% vesting uponthe earlier of an initial public offering of stock by, or change of control of,Holdings, and subject to accelerated vesting upon certain specified events oftermination of service; and the vesting of 50% of each grant is based onperformance measures at the time of an initial public offering of stock by, orearlier change of control of, Holdings. Compensation expense for the awards was$26 for the three months ended March 31, 2006 and $14 for the seven weeksended March 31, 2005. As of March 31, 2006, there was $203 ofunrecognized compensation cost related to nonvested restricted stock which isexpected to be recognized over a weighted average period of 1.88 years.

**12. Income Taxes:**

The effective taxprovision rate of 70.7% on the Company’s consolidated pre-tax income for thethree months ended March 31, 2006 differs from the U.S. statutory tax rateof 35.0% principally due to the U.S. tax effects on the 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 inanticipation of the repatriation of these earnings.

The Company has incurreda significant increase in interest expense from acquisition indebtedness inconnection with the Transactions in 2005, substantially all of which is in theU.S. The increase in interest expense significantly limits the Company’sability to use foreign tax credits to offset U.S. tax on dividends from foreignsubsidiaries. In addition, the Company’s carryforward of its 2005 net operatingloss to 2006 for U.S. federal income tax purposes further limits the use offoreign tax credits in 2006, and further increases the U.S. tax provision on2006 earnings of foreign subsidiaries.

**13. Commitmentsand Contingencies:**

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

10

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matters such asgovernmental regulations, labor, and other actions arising out of the normalcourse of business. No accrual for these matters currently exists, with theexception of those listed below, because management believes that theliabilities resulting from such lawsuits and claims will not materially affectthe results of operations, financial position or cash flow of the Company.

The Company is thedefendant in a personal injury case which occurred in 1996. The case is stillbeing litigated; however, in the fourth quarter of 2005 the Company accrued itsbest estimate of a potential settlement in the amount of $2,300. The Companybelieves its exposure caused by the claim is covered by insurance and as such,has recorded an offsetting receivable for recovery of this claim from theinsurance carrier in prepaid and other current assets.

The Company is subject tovarious laws and regulations regarding emissions from its plant locations.These laws and regulations may limit the amount and types of emissions that canbe released into the atmosphere. In 2003, following an incident at the KansasCity, Kansas plant in which an emission control device failed, we were issued adraft Consent Agreement from the Kansas Department of Health and Environment (“KDHE”)for operating the plant without such emission control device in place. In February 2006,the Company received a revised Consent Agreement and is currently negotiating withthe KDHE regarding the settlement of this revised Consent Agreement. TheCompany has a reserve of $500 in accrued liabilities as of March 31, 2006for estimated civil penalties.

The Company triggered therequirement of New Jersey’s Industrial Site Recovery Act (“ISRA”) statute aspart of the due diligence performed in connection with the Transactions in December 2004.As required under ISRA, a General Information Notice with respect to our twoNew Jersey locations was filed with the New Jersey Department of EnvironmentalProtection (“NJDEP”) in December 2004. Based on a preliminary review ofthe facilities by the NJDEP, the Company estimates that $500 will be requiredfor additional contamination assessment and removal work at these facilities,and recorded a reserve for such amount as of December 31, 2005. There maybe additional costs related to the remediation of these two facilities, butuntil further investigation takes place, the Company cannot reasonably estimatethe amount of additional liability that may exist. However, the total costs forremediation of these two facilities are not expected to exceed $1,000.

**14. Related PartyTransactions:**

The Company, J.P. MorganPartners (BHCA), L.P. and its affiliates and Peak Investments, LLC, andHoldings entered into management agreements relating to the provision ofcertain financial and strategic advisory services and consulting services. TheCompany paid a one-time fee in the amount of $10,000 on February 11, 2005for structuring the Transactions. Such payment was recorded in other operatingexpense for the seven week period ended March 31, 2005. In addition, theCompany agreed to pay to the Sponsors a quarterly monitoring fee of $500 whichcommenced in 2006. The management agreement also provides for the reimbursementof any fees payable by Holdings for the maintenance of its corporate existence,corporate overhead expenses and for salaries and other compensation of certainemployees who perform services for both Holdings and the Company.

**15. Business Segments:**

The Company’s reportablesegments are organized based on the operating divisions within theCompany:  Chemicals and Potters.Chemicals develops, manufactures and sells silicate-based specialty chemicalsto mainly large industrial and consumer products companies. Pottersmanufactures highly engineered solid and hollow glass spheres that are mainlysold to contractors, governmental agencies and manufacturing companies.

11

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The table below presentsinformation about the reported segments:
| ** **                | ** ** | **Successor**                                      | ** ** | **Predecessor**                                   | ** ** |
|---------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Seven weeks  ended  March 31,  2005** | ** ** | **Six weeks  ended  February 11,  2005** | ** ** |
| Net Sales:                |       |                                               |       |                                              |       |   |   |
| Chemicals                 |       | $                                                  | 122,950    |                                              | $          | 52,701 |   | $ | 48,264 |   |
| Potters                   |       | 43,792                                             |       | 22,512                                            |       | 15,931 |   |
| Total                     |       | $                                                  | 166,742    |                                              | $          | 75,213 |   | $ | 64,195 |   |
|                      |       |                                               |       |                                              |       |   |   |
| Adjusted EBITDA (1):      |       |                                               |       |                                              |       |   |   |
| Chemicals                 |       | $                                                  | 31,689     |                                              | $          | 14,492 |   | 10,290 |   |
| Potters                   |       | 7,764                                              |       | 3,663                                             |       | 2,771 |   |
| Segments  adjusted EBITDA |       | $                                                  | 39,453     |                                              | $          | 18,155 |   | $ | 13,061 |   |

----

(1)             Adjustedearnings before interest, income taxes, depreciation and amortization (“AdjustedEBITDA”) consists of EBITDA adjusted for items such as impairment charges,environmental and other expenses, purchase accounting impacts, severance andmerger related costs. Management evaluates the performance of its segments andallocates resources based on several factors, of which the primary measure isAdjusted EBITDA. Adjusted EBITDA does not represent cash flow for periodspresented and should not be considered as an alternative to net income as anindicator of the Company’s operating performance or as an alternative to cashflows as a source of liquidity. Adjusted EBITDA as defined by the Company maynot be comparable with EBITDA or Adjusted EBITDA as defined by other companies.

Areconciliation from Segments Adjusted EBITDA to pre-tax income follows:
| ** **                                    | ** ** | **Successor**                                      | ** ** | **Predecessor**                                   | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | **Three months  ended  March 31,  2006** | ** ** | **Seven weeks  ended  March 31,  2005** | ** ** | **Six weeks  ended  February 11,  2005** | ** ** |
|                                          |       |                                               |       |                                              |       |   |   |
| Segments  adjusted EBITDA                     |       | $                                                  | 39,453     |                                              | $          | 18,155 |   | $ | 13,061 |   |
| Less:                                         |       |                                               |       |                                              |       |   |   |
| Interest  expense, net                        |       | 12,640                                             |       | 5,351                                             |       | 771 |   |
| Depreciation and  amortization                |       | 11,543                                             |       | 8,055                                             |       | 4,436 |   |
| Loss (gain) on  disposal of long-lived assets |       | 23                                                 |       | (176                                              | )          | — |   |
| Corporate  expenses                           |       | 4,186                                              |       | 3,114                                             |       | 2,857 |   |
| Environmental  and other                      |       | (45                                                | )          | 798                                               |       | — |   |
| Write-off of  in-process R&D              |       | —                                             |       | 3,338                                             |       | — |   |
| Amortization of  raw materials contracts      |       | 5,139                                              |       | —                                            |       | — |   |
| Equity in  earnings of affiliates step-up     |       | 298                                                |       | 128                                               |       | — |   |
| Inventory  step-up                            |       | —                                             |       | 7,700                                             |       | — |   |
| Management  advisory fees                     |       | 500                                                |       | —                                            |       | — |   |
| Operational  restructuring charges            |       | 2,410                                              |       | 3,887                                             |       | 5,604 |   |
| Merger related  costs                         |       | 78                                                 |       | 18,599                                            |       | 8,713 |   |
| Minority  interest                            |       | (118                                               | )          | (72                                               | )          | (59 | ) |
| Income before  taxes and minority interest    |       | $                                                  | 2,799      |                                              | $          | (32,567 | ) | $ | (9,261 | ) |

 

 

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**16.    Guarantorand Nonguarantor Statements:**

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 in transactions exemptfrom or not subject to the Securities Act pursuant to Rule 144A andRegulation S under the Securities Act. The notes are general unsecuredobligations of the Company, subordinated in right of payment to all existingand future senior indebtedness of the Company that does not contain similarsubordination provisions, and guaranteed on a full, unconditional, joint andseveral basis by the Company’s 100% owned domestic subsidiaries.

The following consolidating financial informationpresents:

·                  Consolidatingbalance sheets as of March 31, 2006 and December 31, 2005and the related statements of operations and cash flows for the threemonths ended March 31, 2006 and the seven weeks ended March 31, 2005for the Successor and statements of operations and cash flows for the six weeksended February 11, 2005 for the Predecessor.

·                  Elimination entries necessary toconsolidate the Predecessor and Successor, with their respective guarantorsubsidiaries and nonguarantor subsidiaries. The principal entries eliminateinvestments in subsidiaries and intercompany balances and transactions.Intercompany sales were not reported as part of the consolidating statementsand, therefore, do not require elimination.

 

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**PQCORPORATION AND SUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEET - SUCCESSOR**March 31, 2006(in thousands)(unaudited)
| ** **                                                         | ** ** | **Parent  company** | ** ** | **Guarantor  subsidiaries** | ** ** | **Nonguarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  total** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------------|------------|------------------|------------|-------------------------|------------|
| ASSETS                                                             |       |                |       |                        |       |                                 |       |             |       |                    |       |
| Cash and cash  equivalents                                         |       | $                   | 76         |                        | $          | 267                                  |       | $                | 11,126     |                    | $          | — |   | $ | 11,469 |   |
| Receivables, net                                                   |       | 34,074              |       | 14,675                      |       | 54,070                               |       | —           |       | 102,819                 |       |
| Intercompany  receivable                                           |       | —              |       | 102,495                     |       | 73,012                               |       | (175,507         | )          | —                  |       |
| Inventories                                                        |       | 24,760              |       | 34,643                      |       | 36,914                               |       | —           |       | 96,317                  |       |
| Prepaid and  other current assets                                  |       | 24,307              |       | —                      |       | 5,723                                |       | —           |       | 30,030                  |       |
| Total current assets                                               |       | 83,217              |       | 152,080                     |       | 180,845                              |       | (175,507         | )          | 240,635                 |       |
|                                                               |       |                |       |                        |       |                                 |       |             |       |                    |       |
| Investments in  subsidiaries                                       |       | 379,271             |       | 113,240                     |       | —                               |       | (492,511         | )          | —                  |       |
| Investments in  affiliated companies                               |       | 62,498              |       | 2,957                       |       | —                               |       | —           |       | 65,455                  |       |
| Property, plant  and equipment, net                                |       | 111,752             |       | 38,922                      |       | 166,497                              |       | —           |       | 317,171                 |       |
| Goodwill                                                           |       | 166,698             |       | 66,603                      |       | —                               |       | —           |       | 233,301                 |       |
| Tradenames                                                         |       | 32,400              |       | 20,600                      |       | —                               |       | —           |       | 53,000                  |       |
| Other intangible  assets, net                                      |       | 48,542              |       | 21,959                      |       | 644                                  |       | —           |       | 71,145                  |       |
| Other long-term  assets                                            |       | 36,543              |       | 535                         |       | 1,257                                |       | —           |       | 38,335                  |       |
| Total assets                                                       |       | $                   | 920,921    |                        | $          | 416,896                              |       | $                | 349,243    |                    | (668,018   | ) | $ | 1,019,042 |   |
|                                                               |       |                |       |                        |       |                                 |       |             |       |                    |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                         |       |                |       |                        |       |                                 |       |             |       |                    |       |
| Revolvers, notes  payable and current maturities of long-term debt |       | $                   | 40,852     |                        | $          | —                               |       | $                | 2,616      |                    | $          | — |   | $ | 43,468 |   |
| Cash overdraft                                                     |       | 5,198               |       | 2,111                       |       | 312                                  |       | —           |       | 7,621                   |       |
| Accounts payable                                                   |       | 13,519              |       | 5,928                       |       | 32,873                               |       | —           |       | 52,320                  |       |
| Intercompany  payable                                              |       | 23,614              |       | —                      |       | 151,893                              |       | (175,507         | )          | —                  |       |
| Accrued  liabilities                                               |       | 26,893              |       | 6,181                       |       | 10,786                               |       | —           |       | 43,860                  |       |
| Total current liabilities                                          |       | 110,076             |       | 14,220                      |       | 198,480                              |       | (175,507         | )          | 147,269                 |       |
|                                                               |       |                |       |                        |       |                                 |       |             |       |                    |       |
| Long-term debt                                                     |       | 632,848             |       | —                      |       | —                               |       | —           |       | 632,848                 |       |
| Deferred income  taxes                                             |       | 87,704              |       | 23,405                      |       | 8,880                                |       | —           |       | 119,989                 |       |
| Other long-term  liabilities                                       |       | 53,205              |       | —                      |       | 23,570                               |       | —           |       | 76,775                  |       |
| Minority  interest in equity of subsidiaries                       |       | —              |       | —                      |       | 5,073                                |       | —           |       | 5,073                   |       |
| Commitments and  contingencies                                     |       |                |       |                        |       |                                 |       |             |       |                    |       |
| Stockholders’  equity                                         |       | 37,088              |       | 379,271                     |       | 113,240                              |       | (492,511         | )          | 37,088                  |       |
| Total liabilities and stockholders’ equity                    |       | $                   | 920,921    |                        | $          | 416,896                              |       | $                | 349,243    |                    | (668,018   | ) | $ | 1,019,042 |   |
|                                                               |       |                |       |                        |       |                                 |       |             |       |                    |       |

 

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING BALANCE SHEET - SUCCESSORDecember 31, 2005(in thousands)(unaudited)**
| ** **                                                         | ** ** | **Parent  company** | ** ** | **Guarantor  subsidiaries** | ** ** | **Nonguarantor   subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  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 |   |

 

 

15

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSORFor the three months ended March 31, 2006(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent  company** | ** ** | **Guarantor  subsidiaries** | ** ** | **Nonguarantor  subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated  total** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------|------------|-------------------------|------------|
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Sales                                                |       | $                   | 69,442     |                        | $          | 26,200                         |       | $                | 71,100     |                    | $          | — |   | $ | 166,742 |   |
| Cost of goods  sold                                  |       | 56,224              |       | 18,969                      |       | 56,373                         |       | —           |       | 131,566                 |       |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Gross profit                                         |       | 13,218              |       | 7,231                       |       | 14,727                         |       | —           |       | 35,176                  |       |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Selling, general  and administrative expenses        |       | 8,676               |       | 2,719                       |       | 7,332                          |       | —           |       | 18,727                  |       |
| Other operating  expense (income)                    |       | 4,195               |       | 453                         |       | (13                            | )          | —           |       | 4,635                   |       |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Operating (loss) income                              |       | 347                 |       | 4,059                       |       | 7,408                          |       | —           |       | 11,814                  |       |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Equity in net  income (loss) of affiliated companies |       | 10,903              |       | 3,721                       |       | 119                            |       | (11,325          | )          | 3,418                   |       |
| Interest expense  (income), net                      |       | 13,559              |       | (2,654                      | )          | 1,735                          |       | —           |       | 12,640                  |       |
| Other (income)  expense                              |       | (531                | )          | 383                         |       | (59                            | )          | —           |       | (207                    | )          |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Income (loss) before taxes and minority interest     |       | (1,778              | )          | 10,051                      |       | 5,851                          |       | (11,325          | )          | 2,799                   |       |
|                                                 |       |                |       |                        |       |                           |       |             |       |                    |       |
| Provision  (benefit) for income taxes                |       | (2,480              | )          | 2,479                       |       | 1,980                          |       | —           |       | 1,979                   |       |
| Minority  interest                                   |       | —              |       | —                      |       | 118                            |       | —           |       | 118                     |       |
| Net income (loss)                                    |       | $                   | 702        |                        | $          | 7,572                          |       | $                | 3,753      |                    | $          | (11,325 | ) | $ | 702 |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - SUCCESSORFor the seven weeks ended March 31, 2005(in thousands)(unaudited)**
| ** **                                           | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Sales                                                |       | $           | 29,712     |             | $          | 8,685            |       | $                | 36,816     |             | $          | — |   | $ | 75,213 |   |
| Cost of goods  sold                                  |       | 22,908      |       | 6,549            |       | 36,724           |       | —           |       | 66,181           |       |
| Gross profit                                         |       | 6,804       |       | 2,136            |       | 92               |       | —           |       | 9,032            |       |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Selling, general  and administrative expenses        |       | 10,119      |       | 1,983            |       | 4,570            |       | —           |       | 16,672           |       |
| Other operating  expense                             |       | 16,148      |       | 350              |       | 132              |       | —           |       | 16,630           |       |
| Operating loss                                       |       | (19,463     | )          | (197             | )          | (4,610           | )          | —           |       | (24,270          | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Equity in net  income (loss) of affiliated companies |       | 3,105       |       | (3,289           | )          | 87               |       | 4,256            |       | 4,159            |       |
| Interest  expense, net                               |       | 5,169       |       | —           |       | 182              |       | —           |       | 5,351            |       |
| Other expense  (income)                              |       | 8,948       |       | (2,576           | )          | 733              |       | —           |       | 7,105            |       |
| Income (loss) before taxes and minority interest     |       | (30,475     | )          | (910             | )          | (5,438           | )          | 4,256            |       | (32,567          | )          |
|                                                 |       |        |       |             |       |             |       |             |       |             |       |
| Provision  (benefit) for income taxes                |       | (2,318      | )          | 64               |       | (2,228           | )          | —           |       | (4,482           | )          |
| Minority  interest                                   |       | —      |       | —           |       | 72               |       | —           |       | 72               |       |
| Net (loss)  income                                   |       | $           | (28,157    | )                | $          | (974             | )          | $                | (3,282     | )                | $          | 4,256 |   | $ | (28,157 | ) |

 

17

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - PREDECESSORFor the 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 ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - SUCCESSORFor the three months ended March 31, 2006(in thousands)unaudited)**
| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash (used)  provided by operating activities   |       | $           | (17,643    | )                | $          | 1,226            |       | $                | (4,425     | )                | $          | — |   | $ | (20,842 | ) |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of property, plant and equipment     |       | (1,599      | )          | (2,126           | )          | (2,145           | )          | —           |       | (5,870           | )          |
| Net cash used for investing activities              |       | (1,599      | )          | (2,126           | )          | (2,145           | )          | —           |       | (5,870           | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable and cash overdrafts, net              |       | 16,569      |       | 899              |       | (228             | )          | —           |       | 17,240           |       |
| Repayments of long-term debt                        |       | (913        | )          | —           |       | (387             | )          | —           |       | (1,300           | )          |
| Dividend distribution                               |       | (880        | )          | —           |       | —           |       | —           |       | (880             | )          |
| Net cash provided by (used in) financing activities |       | 14,776      |       | 899              |       | (615             | )          | —           |       | 15,060           |       |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Effect of  exchange rate changes on cash            |       | —      |       | —           |       | 149              |       | —           |       | 149              |       |
| Net change in  cash and cash equivalents            |       | (4,466      | )          | (1               | )          | (7,036           | )          | —           |       | (11,503          | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents at beginning of period   |       | 4,542       |       | 268              |       | 18,162           |       | —           |       | 22,972           |       |
| Cash and cash  equivalents at end of period         |       | $           | 76         |             | $          | 267              |       | $                | 11,126     |             | $          | — |   | $ | 11,469 |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - SUCCESSORFor the seven weeks ended March 31, 2005**(in thousands)(unaudited)
| ** **                                          | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Nonguarantor** | ** ** | ** **       | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **company** | ** ** | **subsidiaries** | ** ** | **subsidiaries** | ** ** | **Eliminations** | ** ** | **total**        | ** ** |
| Net cash (used)  provided by operating activities   |       | $           | (37,761    | )                | $          | 1,099            |       | $                | 3,652      |             | $          | — |   | $ | (33,010 | ) |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  investing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Purchases of property, plant and equipment     |       | (1,359      | )          | (423             | )          | (1,307           | )          | —           |       | (3,089           | )          |
| Merger consideration                                |       | (626,000    | )          | —           |       | —           |       | —           |       | (626,000         | )          |
| Merger costs                                        |       | (6,485      | )          | —           |       | —           |       | —           |       | (6,485           | )          |
| Net cash used for investing activities              |       | (633,844    | )          | (423             | )          | (1,307           | )          | —           |       | (635,574         | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash flows from  financing activities:              |       |        |       |             |       |             |       |             |       |             |       |
| Notes payable and cash overdrafts, net              |       | 4,960       |       | (503             | )          | (6,347           | )          | —           |       | (1,890           | )          |
| 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                        |       | (114,524    | )          | —           |       | —           |       | —           |       | (114,524         | )          |
| Equity contribution                                 |       | 163,600     |       | —           |       | —           |       | —           |       | 163,600          |       |
| Net cash provided by (used in) financing activities |       | 647,533     |       | (503             | )          | (6,347           | )          | —           |       | 640,683          |       |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Effect of  exchange rate changes on cash            |       | —      |       | —           |       | 456              |       | —           |       | 456              |       |
| Net change in  cash and cash equivalents            |       | (24,072     | )          | 173              |       | (3,546           | )          | —           |       | (27,445          | )          |
|                                                |       |        |       |             |       |             |       |             |       |             |       |
| Cash and cash  equivalents at beginning of period   |       | 33,214      |       | 346              |       | 15,197           |       | —           |       | 48,757           |       |
| Cash and cash  equivalents at end of period         |       | $           | 9,142      |             | $          | 519              |       | $                | 11,651     |             | $          | — |   | $ | 21,312 |   |

 

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**PQ CORPORATION ANDSUBSIDIARIESCONDENSED 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 AND RESULTS OF OPERATIONS**

*The following discussion and analysis of ourfinancial condition and results of operations covers periods both prior to andsubsequent to the Transactions. Accordingly, historical periods may not becomparable with the periods presented after the Transactions. 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. These forward-looking statements are subject to numerousrisks and uncertainties, including, but not limited to, the risks anduncertainties described in “Risk Factors” and “Forward Looking Statement” asdescribed in our 2005 Annual Report within amendment No. 3 toForm S-4. Statements, other than those based on historical facts, whichaddress activities, events or developments that we expect or anticipate mayoccur in the future are forward-looking statements, which are based upon anumber of assumptions concerning future conditions that may ultimately prove tobe inaccurate. Such forward-looking statements are and will be, as the case maybe, subject to many risks, uncertainties and factors relating to our operationsand business environment which may cause our actual results to be materiallydifferent from any future results, express or implied, by such forward-lookingstatements.*

**Overview**

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

OnFebruary 11, 2005, we were acquired by Niagara Holdings, Inc., orHoldings, a newly formed Delaware corporation affiliated with J.P. MorganPartners (BHCA), L.P. and certain affiliated funds and Peak Investments, LLC,which we refer to collectively as the Sponsors. Pursuant to the terms of theAgreement and Plan of Merger, dated as of December 15, 2004, among PQCorporation, Holdings and Niagara Acquisition, Inc., a wholly ownedsubsidiary of Holdings, (i) Niagara Acquisition, Inc. merged with andinto PQ Corporation, with PQ Corporation continuing as the surviving entity anda wholly owned subsidiary of Holdings, (ii) PQ Corporation redeemed theoutstanding shares of its $16.44 Preferred Stock, Class A in accordancewith its terms, and (iii) the common shareholders of PQ Corporation (both Series Aand Series B) and holders of options to purchase common stock of PQCorporation received cash in exchange for their shares or for the cancellationof their options. We refer to the actions set forth in clauses (i), (ii) and(iii) 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. Inaddition to cash on hand at February 11, 2005, the Merger considerationwas 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.

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**Resultsof Operations**

Thefollowing table sets forth our consolidated statements of operations data indollar amounts for the periods indicated. The three months ended March 31,2006 and seven week period from February 12, 2005 to March 31, 2005are referred to herein as “Successor” periods. The financial information forthe six weeks ended February 11, 2005 is for the period prior to theconsummation of the Transactions and referred to herein as the “Predecessor”period. As a result of the Transactions and the resulting change in ownership,we are required to present separately our historical operating results for thePredecessor and Successor periods in the three months ended March 31, 2005under U.S. GAAP. The results of operations below include entries for theeffects of purchase accounting adjustments for the Successor periods only andtherefore are not comparable to the Predecessor period. Refer to thediscussions below for detail regarding the effects of purchase accountingadjustments in regard to comparability.
| ** **                                               | ** ** | **Successor**         | ** ** | **Predecessor**      | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Three months** | ** ** | **Seven weeks** | ** ** | **Six weeks** | ** ** |
| ** **                                               | ** ** | **ended**             | ** ** | **ended**            | ** ** | **ended** | ** ** |
| ** **                                               | ** ** | **March 31,**    | ** ** | **March 31,**   | ** ** | **February 11,** | ** ** |
| ** **                                               | ** ** | **2006**              | ** ** | **2005**             | ** ** | **2005** | ** ** |
| Sales                                                    |       | $                     | 166.7      |                 | $          | 75.2 |   | $ | 64.2 |   |
| Cost of goods  sold                                      |       | 131.6                 |       | 66.2                 |       | 48.6 |   |
|                                                     |       |                  |       |                 |       |   |   |
| Gross profit                                             |       | 35.1                  |       | 9.0                  |       | 15.6 |   |
|                                                     |       |                  |       |                 |       |   |   |
| Selling, general  and administrative expenses            |       | 18.7                  |       | 16.7                 |       | 11.2 |   |
| Other operating  expense                                 |       | 4.6                   |       | 16.6                 |       | 12.2 |   |
|                                                     |       |                  |       |                 |       |   |   |
| Operating income  (loss)                                 |       | 11.8                  |       | (24.3                | )          | (7.8 | ) |
|                                                     |       |                  |       |                 |       |   |   |
| Equity in net  income (loss) of affiliated companies     |       | 3.4                   |       | 4.2                  |       | (0.3 | ) |
| Interest  expense, net                                   |       | 12.6                  |       | 5.3                  |       | 0.8 |   |
| Other (income)  expense                                  |       | (0.2                  | )          | 7.1                  |       | 0.4 |   |
|                                                     |       |                  |       |                 |       |   |   |
| Income (loss)  before income taxes and minority interest |       | 2.8                   |       | (32.5                | )          | (9.3 | ) |
|                                                     |       |                  |       |                 |       |   |   |
| Provision  (benefit) for income taxes                    |       | 2.0                   |       | (4.5                 | )          | (2.5 | ) |
| Minority  interest                                       |       | 0.1                   |       | 0.1                  |       | — |   |
|                                                     |       |                  |       |                 |       |   |   |
| Net income (loss)                                        |       | $                     | 0.7        |                 | $          | (28.1 | ) | $ | (6.8 | ) |

***Three Months EndedMarch 31, 2006 Compared to the Seven Weeks Ended March 31, 2005 forthe Successor and Six Weeks Ended February 11, 2005 for the Predecessor***

***Sales***

Salesfor the three months ended March 31, 2006 were $166.7 millioncompared with $75.2 million for the seven weeks ended March 31, 2005 and$64.2 million for the Predecessor six weeks ended February 11, 2005. Overall,Successor sales in the first quarter of 2006 increased by $27.3 million or 20%compared with Successor and Predecessor sales for the 2005 periods. Increasesin sales as compared to the prior year periods were primarily the result ofhigher average selling prices due to increased energy, raw materials andtransportation costs as well as increased sales volumes in both the Chemicalsand Potters divisions.

*Chemicals division.*Sales of theChemicals division for the three months ended March 31, 2006 were**$122.9 million compared with $52.7 million for the sevenweeks ended March 31, 2005 and $48.3 million for the Predecessor six weeksended February 11, 2005. Overall, Successor sales in the first quarter of2006 increased by $21.9 million compared with Successor and Predecessor salesfor the 2005 periods. This was a 22% increase in net sales which was primarilya result of higher average selling prices and product mix of $15.2 million, aswell as the impact of increased volume of $7.7 million. The impact of foreigncurrency exchange rates resulted in a net reduction in sales of $1.0 million,primarily as a result of the weaker euro in comparison to the U.S. dollar.Selling prices were increased in order to mitigate the impact of the higherenergy, raw materials and transportation costs. Sales volumes were favorablecompared with the prior year periods, with increases across most products andgeographic regions.

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*Potters division*. Sales ofthe Potters division for the three months ended March 31, 2006 were $43.8million compared with $22.5 million for the seven weeks ended March 31,2005 and $15.9 million for the Predecessor six weeks ended February 11,2005. Overall, Successor sales in the first quarter of 2006 increased by $5.4million compared with Successor and Predecessor sales for the 2005 periods.This was a 14% increase in net sales which was primarily a result of increasedsales volume. Higher average selling prices resulted in an increase to sales of$0.7 million, however this increase was offset by the unfavorable impact offoreign currency exchange rates, primarily as a result of the weakening ofcertain Asian-Pacific currencies in comparison to the U.S. dollar.

***Gross profit***

Grossprofit for the three months ended March 31, 2006 was $35.1 millioncompared with $9.0 million for the seven weeks ended March 31, 2005 and$15.6 million for the Predecessor six weeks ended February 11, 2005. Overall,Successor gross profit in the first quarter of 2006 increased by $10.5 millioncompared with Successor and Predecessor gross profit for the 2005 periods.Approximately $4.4 million of this increase was the result of a reduction inexpense related to purchase accounting, primarily from the 2005 Successorperiod expense for the post-acquisition sales of inventories written up to fairvalue at the date of the Transactions. The favorable effects of higher sellingprices and product mix contributed $15.1 million and increased sales volumeadded another $6.8 million. Increases in production and transportation costsreduced gross profit by $15.8 million.

*Chemicals division.*Gross profitfor the three months ended March 31, 2006 was $23.7 million compared with$5.1 million for the seven weeks ended March 31, 2005 and $11.4 millionfor the Predecessor six weeks ended February 11, 2005. Overall, Successorgross profit in the first quarter of 2006 increased by $7.2 million comparedwith Successor and Predecessor gross profit for the 2005 periods. The favorableeffects of higher selling prices and product mix contributed $14.9 million andincreased sales volume added another $3.9 million. The majority of the priceincreases were implemented in response to higher energy, raw materials andtransportation costs. Sales volume increases were driven by increased demand ina majority of Chemicals’ products. Increases in production and transportationcosts reduced gross profit by $13.1 million. Approximately $1.4 million of theincrease in gross profit was the result of a reduction in expense related topurchase accounting, primarily from the 2005 post-acquisition sales ofinventories written up to fair value at the date of the Transactions, partiallyoffset by amortization of favorable revaluation of raw materials supplycontracts in 2006.

*Potters division.*Gross profitfor the three months ended March 31, 2006 was $11.4 million compared with$3.9 million for the seven weeks ended March 31, 2005 and $4.2 million forthe Predecessor six weeks ended February 11, 2005. Overall, Successorgross profit in the first quarter of 2006 increased by $3.3 million comparedwith Successor and Predecessor gross profit for the 2005 period. Approximately$3.0 million of this increase is the result in a reduction in expense relatedto purchase accounting, primarily from the 2005 post-acquisition sales ofinventories written up to fair value at the date of the Transactions. Thefavorable impacts of volume and price increases were substantially offset byhigher energy, raw materials and transportation costs.

***Selling, general and administrative expenses***

SG&Aexpenses for the three months ended March 31, 2006 were $18.7 millioncompared with $16.7 million for the seven weeks ended March 31, 2005 and$11.2 million for the Predecessor six weeks ended February 11, 2005. Overall,Successor SG&A in the first quarter of 2006 decreased by $9.2 millioncompared with Successor and Predecessor SG&A for the 2005 periods. Thedecrease in SG&A expenses was primarily due to certain Transactions-relatedexpenses incurred during the Successor seven weeks ended March 31, 2005and Predecessor six weeks ended February 11, 2005. These expenses totaled$6.5 million, the majority of which related to the write-off of acquiredin-process research and development and the accelerated vesting of thePredecessor’s stock options and awards. The balance of the decrease in SG&Aexpense of $2.7 million was primarily the result of the current year benefit ofcorporate cost reduction efforts that were put in place subsequent to the dateof the Transactions.

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

Otheroperating expense for the three months ended March 31, 2006 was$4.6 million compared with $16.6 million for the seven weeks ended March 31,2005 and $12.2 million for the Predecessor six weeks ended February 11,2005. Overall, Successor other operating expense in the first quarter of 2006decreased $24.2 million compared with Successor and Predecessor other operatingexpense for the 2005 periods. Contributing to the decrease was thechange-in-control severance benefits paid to former company executives in 2005related to the Transactions in the 

 

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amountof $9.5 million. In addition, costs incurred in 2005 in connection with theacquisition of the Company in 2005 amounted to $17.4 million. Both 2006 and2005 include amortization due to the recognition of intangible assets forpurchase accounting of $1.4 million and $1.3 million, respectively. Included inthe amount for the three months ended March 31, 2006, were $2.4 million incosts incurred to improve the efficiency of certain plant operations.

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

Equityin net income of affiliated companies for the three months ended March 31,2006 was $3.4 million compared with $4.2 million for the seven weeks endedMarch 31, 2005 and a loss of $0.3 million for the Predecessor six weeksended February 11, 2005. Overall, Successor equity in net income ofaffiliated companies in the first quarter of 2006 decreased by $0.5 millioncompared with Successor and Predecessor equity income for the 2005 periods. Boththe current year and prior year Successor period results are reduced to reflectthe amortization of intangible assets and increased depreciation of property,plant and equipment that resulted from fair market value purchase accountingadjustments. The overall decrease was primarily due to the timing of customersales.

***Interest expense, net***

Interest expense, netfor the three months ended March 31, 2006 was $12.6 million comparedwith $5.3 million for the seven weeks ended March 31, 2005 and $0.8million for the Predecessor six weeks ended February 11, 2005. Overall,Successor interest expense, net increased due to the higher levels of debtincurred as a result of the Transactions. In addition, Successor interestexpense increased in the first quarter of 2006 due to increases in the variableinterest rate on our senior credit facility and additional borrowings under thesenior credit facility in connection with a fourth quarter 2005 dividenddistribution to Holdings. Effective January 10, 2006, the interest rate onour $275.0 million senior subordinated notes was increased 25 basis points to7.75% as a result of missing the deadline for having the registration statementdeclared effective by the SEC. The interest rate on the notes will revert to7.5% once the registration statement is declared effective by the SEC.

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

Othernon-operating income was $0.2 million for the three months ended March 31,2006 compared with expense of $7.1 million for the seven weeks ended March 31,2005 and $0.4 million for the Predecessor six weeks ended February 11,2005. Other non-operating expense for theseven weeks ended March 31, 2005 includes costs incurred as a result ofthe Transactions including $5.2 million in “make-whole” payments for theearly payment of the Predecessor’s debt and $2.3 million in financing feesfor access to a bridge credit facility during the Transactions. The remainderof other non-operating (income) expense for 2006 and 2005 consisted primarilyof foreign currency gains and losses, and miscellaneous financial income andexpense.

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

The provision forincome taxes for the three months ended March 31, 2006 was$2.0 million, or 71% of pre-tax income, compared with a benefit of $4.5million for the seven weeks ended March 31, 2005 and $2.5 million for thePredecessor six weeks ended February 11, 2005. The effective tax rate forthe first quarter 2006 was higher than the U.S. federal tax rate primarily dueto the deferred U.S. tax effects on the earnings of non-U.S. subsidiaries whichwere not considered to be permanently reinvested. In a like manner, the effective tax rate on thetax benefit of pre-tax losses during the Successor seven weeks ended March 31,2005 was lower than the U.S. federal rate due to the deferred U.S. tax effectson the earnings of non-U.S. subsidiaries. The effective tax rate on the taxbenefits of pre-tax losses in both the Successor and Predecessor periods in2005 were significantly lower than the U.S. federal tax rate due to the impactof certain non-deductible expenses incurred in conjunction with the acquisitionof the Company.

***Net***income (loss)

Forthe foregoing reasons, and the deductions for minority interest in each periodpresented, net income was $0.7 million for the three months ended March 31, 2006 compared with net loss of$28.1 million for the seven weeks ended March 31, 2005 and $6.8 millionfor the Predecessor six weeks ended February 11, 2005.

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**Liquidity andCapital Resources**

Cashand cash equivalents at March 31, 2006 were $11.5 million, which was adecrease of $11.5 million from December 31,2005.

Netcash used in operating activities was $20.8 million for the three months ended March 31,2006 compared to $40.0 million during the same period in 2005. Themain contributor to the improvement from the prior year period was theelimination of $34.4 million of costs related to the Transactions. Offsettingthe decrease in Transactions costs was a $14.8 million increase in interestpayments versus the prior year quarter. Overall, net cash used in operatingactivities in the first quarter 2006 was due to increases in working capital asa result of strong first quarter sales and the typical build in first quarterinventory in anticipation of the Potters highway striping season.

Netcash used in investing activities was $5.9 million for the three months ended March 31,2006 compared to $637.9 million during the same period in 2005. Thedecrease versus prior year was due to $632.5 million in consideration paid toeffect theTransactions in February 2005. The remaining difference was due toslightly higher capital spending versus the prior year quarter.

Netcash provided by financing activities was $15.1 million for the three monthsended March 31, 2006 compared to net cash provided of $686.7 million during the sameperiod in 2005. The current year primarily consists of drawings on therevolving credit facility to finance working capital. The prior year included$163.6 million in equity contributions and $610.0 million in proceeds from theissuance of new debt that together were used to finance the Transactions. Prioryear outflows included $16.5 million of capitalized debt acquisition costs andpayments of $114.5 million for principal due on the Predecessor’s existing debt.Offsetting the $114.5 million was approximately $44.9 million that thePredecessor had drawn on the existing credit facility prior to theTransactions.

In connection with theTransactions, we incurred significant indebtedness. As of March 31, 2006our total debt was $676.3 million. Borrowings under the term loan are dueand payable in quarterly installments of $0.9 million. The remaining balance ofthe term loan is due and payable in full in 2012. The revolving credit facilityis available until 2011. In addition to paying interest on outstandingprincipal amounts under our new credit facilities, we are required to pay acommitment fee to the lenders for the unused portion of our new revolvingcredit facility.

Thesenior secured credit facility contains various restrictive covenants. Itrestricts us from prepaying other indebtedness, including the notes, andrequires us to maintain a specified minimum interest coverage ratio of 2.0, anda maximum total leverage ratio of 6.5 at March 31, 2006. In addition, ournew senior secured credit facility restricts our ability to incur indebtedness orliens, make investments or declare orpay dividends and limits our annual capital spending. The indenture governingthe subordinated 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 March 31, 2006, we were in compliance with all of our loancovenants.

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**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Ourmajor market risk exposure is potential losses arising from changing rates andprices regarding foreign currency exchange rate risk, interest rate risk, commodity price risk and credit risk.The audit committee of our Board 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**

Ourfinancial results are subject to the impact of gains and losses on currencytranslations, which occur when the financial statements of foreign operationsare translated into U.S. dollars. We operate a geographically diverse businesswith approximately 44% of our sales during the twelve months ended December 31,2005 coming from our international operations in currencies other than the U.S. dollar. Because consolidatedfinancial results are reported in dollars, sales or earnings generated incurrencies other than the U.S. dollar can result in a significant increase ordecrease in the amount of those sales and earnings when translated to U.S.dollars. The financial statements of our operations outside the United States,where the local currency is considered to be the functional currency, aretranslated into U.S. dollars using the exchange rate in effect at each balancesheet date for assets and liabilities and the average exchange rate for eachperiod for sales, expenses, gains, losses and cash flows. The exchange ratesbetween these currencies and the U.S. dollar in recent years have fluctuatedsignificantly and may continue to do so in the future. The foreign currenciesto which we have the most significant exchange rate exposure include theCanadian dollar and the euro. The effect of translating foreign subsidiaries’balance sheets into U.S. dollars is included in other comprehensive income. Theimpact of gains and losses on transactions denominated in currencies other thanthe functional currency of the relevant operations are included in othernon-operating expense and have historically not been material.

**Interest RateRisk**

Weare exposed to fluctuations in interest rates on our long-term senior securedterm loan and revolving credit facility. Changes in interest rates will not affect the market value of such debt but will affect theamount of our interest payments over the term of the loans. Likewise, anincrease in interest rates could have a material impact on our cash flow. A 100basis point increase in interest rates on our variable term loan under our newsenior secured credit facility would have an estimated impact on pre-taxearnings of $3.7 million annually. Effective January 10, 2006,the interest rate on our $275 million senior subordinated notes was increased25 basis points from 7.50% to 7.75% as a result of missing the deadline forhaving the registration statement declared effective by the SEC. The interestrate on the notes reverted to 7.5% once the registration statement was declaredeffective by the SEC on May 12, 2006.

**Commodity Risk**

Wepurchase significant amounts of natural gas to supply the energy required inour production processes for our products in both the Chemicals and Potters divisions. Natural gas provides an energy sourcefor us but is not a direct feedstock of our products. We have implemented ahedging program in the United States which allows us to mitigate exposure tonatural gas volatility. Forward purchases of natural gas are also made inregard to our production in Canada as a means of mitigating such exposure.

Wehave entered into forward contracts with respect to the purchase of natural gasin our domestic operations. These contracts had a fair value of$15.2 million and $30.9 million at March 31, 2006 and December 31,2005, respectively. The respective current and non-current balances are recorded in prepaid and other current assetsand other long-term assets. The related offset is recorded in othercomprehensive income (loss), net of tax. Realized gains and losses on naturalgas hedges are included in production costs and subsequently charged to cost ofgoods sold in the period in which inventory is sold.

**Credit Risk**

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

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Concentrationof credit risk can result primarilyfrom trade receivables, for example, with certain customers operating in thesame industry or customer groups located in the same geographic region.Credit risk related to these types of receivables is managed through creditapproval and monitoring procedures.

**ITEM 4.   CONTROLSAND PROCEDURES**

We maintain disclosure controls and procedures (asdefined in Rules 13a-15(a) and 15d-15(e) promulgated under the Securitiesand Exchange Act of 1934, or the “Exchange Act”) that are designed to ensurethat information required to be disclosed in Exchange Act reports is recorded,processed, summarized, and reported within the time periods specified in therules and forms of the SEC and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. Any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives.

Our management, with the participation of our ChiefExecutive Officer and Chief Financial Officer, has evaluated the effectivenessof the design and operation of our disclosure controls and procedures as of theend of the period covered by this report. As described more fully below, basedupon that evaluation and because the Company has not substantially completedits remediation of the material weaknesses identified as of December 31,2005, our Chief Executive Officer and Chief Financial Officer have concludedthat our disclosure controls and procedures were not effective to accomplishtheir objectives as of March 31, 2006.

In connection with the preparation of the Company’sannual financial statements for the year ended December 31, 2005,management identified and reported to the Audit Committee of the Board ofDirectors two control deficiencies that constituted material weaknesses ininternal control over financial reporting. A material weakness is a deficiency,or combination of deficiencies, that results in more than a remote likelihoodthat a material misstatement of the annual or interim financial statements willnot be prevented or detected. Had we performed an evaluation of our internalcontrol over financial reporting in accordance with the provisions of theSarbanes-Oxley Act, additional control deficiencies may have been identified andthose control deficiencies could have also represented one or more materialweaknesses. We communicated to our Audit Committee of the Board of Directorsthe 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 material weaknesses described above, theCompany performed additional analyses and other post-closing procedures toensure that the consolidated financial statements were prepared in accordancewith accounting principles generally accepted in the United States of America(GAAP). Accordingly, management, including the Chief Executive Officer andChief Financial Officer, believe the consolidated financial statements includedin this report present, in all material respects, the Company’s financialcondition, results of operations and cash flows for the quarter endedMarch 31, 2006.

There have been no changes in our internal control overfinancial reporting during our fiscal quarter ended March 31, 2006, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting. However, management as well as theAudit Committee recognizes that the Company will have to take measures in orderto remediate the two material weaknesses described above. The Company isundertaking an independent assessment of its external financial reportingfunction in order to help determine the appropriate level of staffing, skillsets and processes necessary to implement an effective control environment.Management expects to complete this study by June 30, 2006, at which time wewill begin to implement recommendations that result from such assessment.

 

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**PART II.**

**OTHERINFORMATION**

**ITEM 1   LEGAL PROCEEDINGS**

Weare involved from time to time in administrative or legal proceeding relating to our operations and facilities.

Thereis a risk of environmental impact in chemical manufacturing operations. Ourenvironmental policies and practices are designed to ensure compliance withexisting laws and regulations and to minimize the possibility of significantenvironmental impact. We are also subject to various other lawsuits and claims with respect to matters such asgovernmental regulations, labor, and other actions arising out of the normalcourse of business. No accrual for these matters currently exists, with theexception of those listed below, because we believe that the liabilitiesresulting from such lawsuits and claims will not materially affect our resultsof operations, financial position or cash flow.

Weare subject to various laws and regulations regarding emissions from its plantlocations. These laws and regulations may limit the amount and types ofemissions that can be released into the atmosphere. In 2003, following anincident at the Kansas City, Kansas plant in which an emission control devicefailed, we were issued a draft Consent Agreement from the Kansas Department ofHealth and Environment (“KDHE”) for operating the plant without such emissioncontrol device in place. In February 2006, we received a revised ConsentAgreement and are currently negotiating with the KDHE regarding the settlementof this revised Consent Agreement. We have a reserve of $0.5 million as of March 31,2006 for estimated civil penalties.

Asa result of an incident at our Baltimore, Maryland facility on March 17,1999 involving the unauthorized discharge of process water to a storm sewer,the United States Attorney for the District of Maryland undertook an investigationinto environmental compliance at our Baltimore plant. The investigation laterexpanded to include two of our other plants in Chester, Pennsylvania and St.Louis, Missouri. On March 10, 2004, we resolved the investigation bypleading guilty to three felony violations of the Clean Water Act. In additionto paying $0.6 million in fines, restitution and the funding of acommunity service project, we are on probation until June 2007. We alsoagreed to submit documents to the Department of Justice (“DOJ”) describing ourEnvironmental Management System (“EMS”). Several additions to the EMS have beenmade based upon discussions with the DOJ and we are in process of implementingthe EMS. Successfully implementing the EMS is required by an action plan thathas been incorporated into the plea agreement.

Inthe past five years, we have been a party to civil litigation matters. Thesematters have included disputes regarding employment matters and productwarranty and negligence claims. All but two matters have been covered byapplicable insurance. The two matters that have been denied coverage by ourinsurance carriers relate to the operations at our Augusta, Georgia facility.The suits, which are pending against numerous industrial and utilitydefendants, allege that emissions of mercury from the utility and industrialdefendants facilities resulted in harm to the two plaintiffs. We do not believewe have any material exposure to litigation liability.

We are the defendantin 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.

Wetriggered the requirement of New Jersey’s Industrial Site Recovery Act (“ISRA”)statute as part of the due diligence performed in connection with theTransactions in December 2004. As required under ISRA, a GeneralInformation Notice with respect to our two New Jersey locations was filed withthe New Jersey Department of Environmental Protection (“NJDEP”) in December 2004.Based on a preliminary review of the facilities by the NJDEP, we estimate that$0.5 million will be required for additional contamination assessment andremoval work at these facilities, and recorded a reserve for such amount as of December 31,2005. There may be additional costs related to the remediation of these twofacilities, but until further investigation takes place, we cannot reasonablyestimate the amount of additional liability that may exist. However, the totalcosts for remediation of these two facilities are not expected to exceed $1.0million.

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**ITEM 1A.   RISK FACTORS**

Therehave been no material changes to the disclosure related risk factors made inour Registration Statement on Form S-4, as filed on May 11, 2006.

**ITEM 2.   UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3.**   DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

**ITEM 5.**   OTHER INFORMATION

The restated quarterly unauditedfinancial statements and footnotes for the periods ended March 31, 2005and September 30, 2005 attached to this report as exhibits 99.1 and 99.2,respectively, are being included for the purpose of amending quarterly financialinformation included on Form S-4 filed with the SEC for therespective periods. See footnote 1 of the quarterly unaudited financial statementsand footnotes for explanation of the restatements.

 

The information containedin Exhibits 99.1 and 99.2 to this report is incorporated herein.

**ITEM 6.**   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. |
|   |                                                                                                                                                                      |
| 99.1   | Restated quarterly report for the period ended  March 31, 2005.                                                                                                      |
|   |                                                                                                                                                                      |
| 99.2   | Restated quarterly report for the period ended  September 30, 2005.                                                                                                  |

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, PQCorporation has caused this report to be signed on its behalf by theundersigned, 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: June 23,  2006 |           |   |

 

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