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United States Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 001-08137
 AMERICAN PACIFIC CORPORATION
  
 Delaware
    
    59-6490478(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 3770 Howard Hughes Parkway, Suite 300
Las Vegas, Nevada 89169
 702) 735-2200
 þ o
  o o þ
 o þ




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AMERICAN PACIFIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
  
 PART I. FINANCIAL INFORMATIONITEM 1.
    
    Condensed Consolidated Statements of Operations (unaudited)
    
    
    2Condensed Consolidated Balance Sheets (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    31ITEM 4.
    
    Controls and Procedures
    
    
    31PART II. OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    32ITEM 1A.
    
    Risk Factors
    
    
    32ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    43ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    43ITEM 5.
    
    Other Information
    
    
    43ITEM 6.
    

Exhibits
    
    
    43EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL STATEMENTS
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Statements of Operations
 (Unaudited, Dollars in Thousands, Except per Share Amounts)
 Three Months EndedDecember 31,2006
    
    2005Revenues
    
    $
    34,888
    
    
    $
    16,485Cost of Revenues
    
    
    21,980
    
    
    
    12,139Gross Profit
    
    
    12,908
    
    
    
    4,346Operating Expenses
    
    
    8,513
    
    
    
    5,465Operating Income (Loss)
    
    
    4,395
    
    
    
    (1,119
    )Interest and Other Income
    
    
    94
    
    
    
    875Interest Expense
    
    
    3,303
    
    
    
    1,069Income (Loss) from Continuing Operations
before Incomes Tax
    
    
    1,186
    
    
    
    (1,313
    )Income Tax Benefit
    
    
    547
    
    
    
    (523
    )Income (Loss) from Continuing Operations
    
    
    639
    
    
    
    (790
    )Loss from Discontinued Operations, Net of Tax
    
    
    
    
    
    
    (515
    )Net Income (Loss)
    
    $
    639
    
    
    $
    (1,305
    )Basic Earnings (Loss) Per Share:Income (Loss) from Continuing Operations
    
    $
    0.09
    
    
    $
    (0.11
    )Loss from Discontinued Operations, Net of Tax
    
    
    
    
    
    
    (0.07
    )Net Income (Loss)
    
    $
    0.09
    
    
    $
    (0.18
    )Diluted Earnings (Loss) Per Share:Income (Loss) from Continuing Operations
    
    $
    0.09
    
    
    $
    (0.11
    )Loss from Discontinued Operations, Net of Tax
    
    
    
    
    
    
    (0.07
    )Net Income (Loss)
    
    $
    0.09
    
    
    $
    (0.18
    )Weighted Average Shares Outstanding:Basic
    
    
    7,324,000
    
    
    
    7,297,000Diluted
    
    
    7,367,000
    
    
    
    7,297,000
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Balance Sheets
 (Unaudited, Dollars in Thousands)
 December 31,
    
    September 30,2006
    
    2006ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    1,684
    
    
    $
    6,872Accounts Receivable
    
    
    17,538
    
    
    
    19,474Notes Receivable
    
    
    
    
    
    
    7,510Inventories
    
    
    53,674
    
    
    
    39,755Prepaid Expenses and Other Assets
    
    
    2,421
    
    
    
    1,845Deferred Income Taxes
    
    
    1,887
    
    
    
    1,887Total Current Assets
    
    
    77,204
    
    
    
    77,343Property, Plant and Equipment, Net
    
    
    120,027
    
    
    
    119,746Intangible Assets, Net
    
    
    9,966
    
    
    
    14,237Deferred Income Taxes
    
    
    21,701
    
    
    
    21,701Other Assets
    
    
    6,237
    
    
    
    6,428TOTAL ASSETS
    
    $
    235,135
    
    
    $
    239,455LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    16,520
    
    
    $
    11,158Accrued Liabilities
    
    
    11,875
    
    
    
    11,257Employee Related Liabilities
    
    
    2,842
    
    
    
    4,600Environmental Remediation Reserves
    
    
    740
    
    
    
    1,631Deferred Revenues
    
    
    3,433
    
    
    
    5,683Current Portion of Debt
    
    
    3,902
    
    
    
    9,593Total Current Liabilities
    
    
    39,312
    
    
    
    43,922Long-Term Debt
    
    
    97,497
    
    
    
    97,771Environmental Remediation Reserves
    
    
    15,758
    
    
    
    15,880Pension Obligations and Other Long-Term Liabilities
    
    
    9,974
    
    
    
    9,998Total Liabilities
    
    
    162,541
    
    
    
    167,571Commitments and ContingenciesStockholders EquityPreferred Stock  No par value; 3,000,000 authorized; none outstanding
    
    
    
    
    
    
    Common Stock  $.10 par value; 20,000,000 shares authorized,
9,359,041 issued
    
    
    933
    
    
    
    933Capital in Excess of Par Value
    
    
    86,773
    
    
    
    86,724Retained Earnings
    
    
    2,951
    
    
    
    2,312Treasury Stock - 2,034,870 shares
    
    
    (16,982
    )
    
    
    (16,982
    )Accumulated Other Comprehensive Loss
    
    
    (1,081
    )
    
    
    (1,103
    )Total Shareholders Equity
    
    
    72,594
    
    
    
    71,884TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    235,135
    
    
    $
    239,455
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Statements of Cash Flow
 (Unaudited, Dollars in Thousands)
 Three Months EndedDecember 31,2006
    
    2005Cash Flows from Operating Activities:Net Income (Loss)
    
    $
    639
    
    
    $
    (1,305
    )Adjustments to Reconcile Net Income (Loss)
to Net Cash Used by Operating Activities:Depreciation and amortization
    
    
    5,144
    
    
    
    2,740Non-cash interest expense
    
    
    1,075
    
    
    
    374Share-based compensation
    
    
    49
    
    
    
    135Gain on sale of assets
    
    
    
    
    
    
    (630
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,956
    
    
    
    (371
    )Inventories
    
    
    (13,919
    )
    
    
    (6,695
    )Prepaid expenses
    
    
    (576
    )
    
    
    (2,161
    )Accounts payable and accrued liabilities
    
    
    4,821
    
    
    
    3,461Deferred revenues
    
    
    (2,250
    )
    
    
    (256
    )Environmental remediation reserves
    
    
    (1,013
    )
    
    
    (2,747
    )Pension obligations, net
    
    
    257
    
    
    
    23Discontinued operations, net
    
    
    
    
    
    
    805Other
    
    
    (164
    )
    
    
    893Net Cash Used by Operating Activities
    
    
    (3,981
    )
    
    
    (5,734
    )Cash Flows from Investing Activities:Acquisition of businesses
    
    
    
    
    
    
    (111,471
    )Capital expenditures
    
    
    (1,430
    )
    
    
    (2,443
    )Proceeds from sale of assets
    
    
    
    
    
    
    2,395Discontinued operations, net
    
    
    7,510
    
    
    
    (200
    )Net Cash Provided (Used) by Investing Activities
    
    
    6,080
    
    
    
    (111,719
    )Cash Flows from Financing Activities:Proceeds from the issuance of long-term debt
    
    
    
    
    
    
    85,000Payments of long-term debt
    
    
    (7,287
    )
    
    
    (162
    )Debt issuance costs
    
    
    
    
    
    
    (1,677
    )Discontinued operations, net
    
    
    
    
    
    
    (10
    )Net Cash Provided (Used) by Financing Activities
    
    
    (7,287
    )
    
    
    83,151Net Change in Cash and cash Equivalents
    
    
    (5,188
    )
    
    
    (34,302
    )Cash and Cash Equivalents, Beginning of Period
    
    
    6,872
    
    
    
    37,213Cash and Cash Equivalents, End of Period
    
    $
    1,684
    
    
    $
    2,911Cash Paid For:Interest
    
    $
    2,206
    
    
    $
    39Income taxes
    
    
    68
    
    
    
    428Non-Cash Transactions:Capital leases originated
    
    $
    321
    
    
    $
    
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AMERICAN PACIFIC CORPORATION
 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited, Dollars in Thousands, Except per Share Amounts)
 1.
    
    INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIESInterim Basis of Presentation:The accompanying condensed consolidated financial statements of
American Pacific Corporation and its subsidiaries (the Company, we, us, or our) are
unaudited, but in our opinion, include all adjustments, which are of a normal recurring nature,
necessary for the fair presentation of financial results for interim periods. These statements
should be read in conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended September 30, 2006. The operating
results and cash flows for the three-month period ended December 31, 2006 are not necessarily
indicative of the results that will be achieved for the full fiscal year or for future periods.Accounting Policies:A description of our significant accounting policies is included in Note 1
to our consolidated financial statements included in our Annual Report on Form 10-K for the year
ended September 30, 2006.Principles of Consolidation:Our consolidated financial statements include the accounts of
American Pacific Corporation and our wholly owned subsidiaries. In connection with our
acquisition of the fine chemicals business (the AFC Business) of GenCorp, Inc. (GenCorp),
through the purchase of substantially all of the assets of Aerojet Fine Chemicals LLC and the
assumption of certain of its liabilities, we began consolidating our newly formed, wholly-owned
subsidiary, Ampac Fine Chemicals (AFC) on November 30, 2005 (See Note 2). All significant
intercompany accounts have been eliminated.Discontinued Operations:In June 2006, our board of directors approved and we committed to a
plan to sell our 50% interest in the Energetic Systems (ESI) joint venture based on our
determination that ESIs product lines were no longer a strategic fit with our business
strategies. We consolidated ESI in accordance with Financial Accounting Standards Board
(FASB) Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities,
which requires companies to consolidate variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its activities without
additional subordinated financial support, or (2) hold a significant variable interest in, or
have significant involvement with, an existing variable interest entity. Revenues, expenses and
cash flows associated with ESIs operations are presented as discontinued operations for all
periods presented. Effective September 30, 2006, we completed the sale of our interest in ESI.
ESI was formerly reported within our Specialty Chemicals operating segment. See Note 12.Recently Issued or Adopted Accounting Standards:In July 2006, the FASB issued Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes, which clarifies the accounting
for uncertainty in income taxes recognized in the financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial
statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the impact of this standard on
our consolidated financial statements.In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 108 (SAB 108), which documents the SEC staffs views regarding the process of
quantifying financial statement misstatements. Under SAB 108, we must evaluate the materiality
of an identified unadjusted error by considering the impact of both the current year error and
the
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cumulative error, if applicable. This also means that both the impact on the current period
income statement and the period-end balance sheet must be considered. SAB 108 is effective for
fiscal years ending after November 15, 2006. Any past adjustments required to be recorded as a
result of adopting SAB 108 will be recorded as a cumulative effect adjustment to the opening
balance of retained earnings. We do not believe the adoption of SAB 108 will have a material
impact on our consolidated financial statements.In September 2006, FASB issued Statement No. 158 (SFAS 158) Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106,
and 132(R), which requires companies to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income. This statement becomes effective for us on September 30, 2007. We are
currently evaluating the impact the adoption of SFAS 158 will have on our consolidated financial
statements.2.
    
    ACQUISITIONSAFC Business Acquisition:In July 2005, we entered into an agreement to acquire, and on November
30, 2005, we completed the acquisition of the AFC Business of GenCorp through the purchase of
substantially all of the assets of Aerojet Fine Chemicals, LLC and the assumption of certain of
its liabilities. The assets were acquired and liabilities assumed by our newly formed,
wholly-owned subsidiary, Ampac Fine Chemicals or AFC. AFC is a manufacturer of active
pharmaceutical ingredients and registered intermediates under the U.S. Food and Drug
Administrations (FDA) current good manufacturing practices (cGMP) guidelines for customers
in the pharmaceutical industry. Its facilities in California offer specialized engineering
capabilities including high containment for high potency compounds, energetic and nucleoside
chemistries, and chiral separation using the first commercial-scale simulated moving bed in the
United States.The total consideration for the AFC Business acquisition is comprised of the following:
 Cash
    
    $
    88,500Fair value of Seller Subordinated Note (Face value $25,500)
    
    
    19,400Capital expenditures adjustment
    
    
    17,431Working capital adjustment
    
    
    (1,268
    )Earnout adjustment
    
    
    5,000Other direct acquisition costs
    
    
    4,348Total purchase price
    
    $
    133,411
 Subordinated Seller Note The fair value of the Seller Subordinated Note was
determined by discounting the required principal and interest payments at a rate of 15%,
which the Company believes is appropriate for instruments with comparable terms.Capital Expenditures Adjustment The capital expenditures adjustment represents net
reimbursements to GenCorp for their cash capital investments, as defined in the acquisition
agreements, during the period July 2005 through the closing date on November 30, 2005.Working Capital Adjustment The working capital adjustment represents a net adjustment to
the purchase price based on actual working capital as of the closing date compared to a
target working capital amount specified in the acquisition agreements.Earnout and EBITDAP Adjustments The acquisition agreements included a reduction of the
purchase price if AFC did not achieve a specified level of earnings before interest, taxes,
depreciation, amortization, and pension expense (EBITDAP) for the three months ended
December 31, 2005, equal to four times the difference between the targeted EBITDAP and the
actual EBITDAP achieved, not to exceed $1,000. This target was not met, and accordingly, we
received $1,000 from GenCorp. In addition to the amounts paid at closing, the purchase
price
was subject to an additional contingent cash payment of up to $5,000 based on targeted
financial
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performance of AFC during the year ending September 30, 2006. If the full Earnout
Adjustment became payable to GenCorp, the EBITDAP Adjustment also became refundable to
GenCorp. During the year ended September 30, 2006, the AFC financial performance target was
exceeded. Accordingly, we recorded a $6,000 payable to GenCorp as of September 30, 2006 and
December 31, 2006 (classified as accrued liabilities) comprised of the $5,000 Earnout
Payment and the $1,000 refund of the EBITDAP Adjustment. We paid GenCorp $6,000 in February
2007.Direct Acquisition Costs Total direct acquisition costs, consisting primarily of legal and
due diligence fees, were $4,348.
 In connection with the AFC Business acquisition, we entered into Credit Facilities and a Seller
Subordinated Note, each discussed in Note 7. The total purchase price was funded with net
proceeds from the Credit Facilities of $81,881, the Seller Subordinated Note of $25,500 and
existing cash.This acquisition was accounted for using the purchase method of accounting, under which the
total purchase price was allocated to the fair values of the assets acquired and liabilities
assumed. We engaged outside consultants to assist in the valuation of property, plant and
equipment and intangible assets. As of September 30, 2006, the allocation of the purchase price
and the related determination of the useful lives of property, plant and equipment were
preliminary and subject to change based on the then pending final valuation report. As a result
of the final valuation report, during the first quarter of fiscal 2007, we recorded a
reclassification of assigned purchase price from intangible assets to property, plant and
equipment, and finalized our estimates of the related remaining useful lives. The final
allocation of the purchase price is comprised of the following:
 Historical book value of Aerojet Fine Chemicals as of November 30, 2005
    
    $
    93,181Less liabilities not acquiredPayable to GenCorp
    
    
    24,916Cash overdraft
    
    
    3,761Adjusted historical book value of Aerojet Fine Chemicals as of November 30, 2005
    
    
    121,858Estimated fair value adjustments relating to:Inventories
    
    
    (84
    )Prepaid expenses
    
    
    (29
    )Property, plant and equipment
    
    
    2,633Customer relationships, average life of 5.5 years
    
    
    7,957Backlog, average life of 1.5 years
    
    
    2,287Accrued liabilities
    
    
    651Pension assets / liabilities
    
    
    (1,823
    )Other
    
    
    (39
    )$
    133,411
 Intangible assets, consisting of customer relationships and existing customer backlog, have
definite lives and will be amortized over their estimated useful lives using the straight-line
method.3.
    
    SHARE-BASED COMPENSATIONOn October 1, 2005, we adopted SFAS No. 123R (SFAS No. 123R), Share-Based Payment, which
requires us to measure the cost of employee services received in exchange for an award of equity
instruments based on the grant date fair value of the award. We have elected to use the Modified
Prospective Transition method such that SFAS No. 123R applies to the unvested portion of
previously issued awards, new awards and to awards modified, repurchased or canceled after the
effective date. Accordingly, commencing October 1, 2005, we recognize share-based compensation
for all current award grants and for the unvested portion of previous award grants based on
grant date fair values. Prior to fiscal 2006, we accounted for share-based awards under the
Accounting Principles Board Opinion No. 25 intrinsic value method, under which no compensation
expense was recognized because all historical options granted were at an exercise price equal to
the market value
of our stock on the grant date. Prior period financial statements have not been adjusted to
reflect fair value share-based compensation expense under SFAS No. 123R.
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Our share-based payment arrangements are designed to attract and retain employees and directors.
The amount, frequency, and terms of share-based awards may vary based on competitive practices,
our operating results, and government regulations. New shares are issued upon option exercise or
restricted share grants. We do not settle equity instruments in cash. We maintain two share
based plans, each as discussed below.The American Pacific Corporation 2001 Stock Option Plan, as amended (the 2001 Plan), permits
the granting of incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code and nonqualified options that do not meet the requirements of Section 422 to
employees, officers, directors and consultants. Options granted under the 2001 Plan generally
vest 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire in
ten years. As of December 31, 2006, there were 20,000 shares available for grant under the 2001
Plan. This plan was approved by our shareholders.The American Pacific Corporation 2002 Directors Stock Option Plan (the 2002 Directors Plan)
compensates outside Directors with annual grants of stock options or upon other discretionary
events. Options are granted to each eligible director at a price equal to the fair market value
of our common stock on the date of the grant. Options granted under the 2002 Directors Plan
generally vest 50% at the grant date and 50% on the one-year anniversary of the grant date, and
expire in ten years. As of December 30, 2006, there were 25,000 shares available for grant under
the 2002 Directors Plan. This plan was approved by our shareholders.A summary of our outstanding and vested stock option activity for the three months ended
December 31, 2006 is as follows:
 Total Outstanding
    
    Non VestedWeighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    FairPrice
    
    
    
    
    
    ValueShares
    
    Per Share
    
    Shares
    
    Per ShareBalance, September 30, 2006
    
    
    515,500
    
    
    $
    6.95
    
    
    
    18,750
    
    
    $
    1.95Granted
    
    
    19,000
    
    
    
    7.64
    
    
    
    19,000
    
    
    
    3.63Vested
    
    
    
    
    
    
    
    
    
    
    (28,250
    )
    
    
    2.51Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired / Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2006
    
    
    534,500
    
    
    
    6.97
    
    
    
    9,500
    
    
    
    3.63
 A summary of our exercisable stock options as of December 31, 2006 is as follows:
 Number of vested stock options
    
    
    525,000Weighted-average exercise price per share
    
    $
    6.96Aggregate intrinsic value
    
    $
    651Weighted-average remaining contractual term in years
    
    
    7.4
 We determine the fair value of share-based awards at their grant date, using a
Black-Scholes option-pricing model applying the assumptions in the following table. Actual
compensation, if any, ultimately realized by optionees may differ significantly from the amount
estimated using an option valuation model.
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Three Months EndedDecember 31,2006
    
    2005Weighted-average grant date fair value per share of options granted
    
    $
    3.68
    
    
    $
    2.00Significant fair value assuptions:Expected term in years
    
    
    5.25
    
    
    
    4.75Expected volatility
    
    
    47.0
    %
    
    
    50.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rates
    
    
    4.7
    %
    
    
    4.4
    %Total intrinsic value of options exercised
    
    $
    
    
    
    $
    Aggregate cash received for option exercises
    
    $
    
    
    
    $
    Total compensation cost (included in operating expenses)
    
    $
    49
    
    
    $
    134Tax benefit recognized
    
    
    18
    
    
    
    53Net compensation cost
    
    $
    31
    
    
    $
    81As of period end date:Total compensation cost for non-vested awards
not yet recognized
    
    $
    28
    
    
    $
    290Weighted-average years to be recognized
    
    
    0.8
    
    
    
    0.7
 4.
    
    SELECTED BALANCE SHEET DATAInventories:Inventories consist of the following:
 December 31,
    
    September 30,2006
    
    2006Finished goods
    
    $
    5,440
    
    
    $
    7,170Work-in-process
    
    
    32,005
    
    
    
    20,196Raw materials and supplies
    
    
    16,509
    
    
    
    12,664Allowance for obsolete inventory
    
    
    (280
    )
    
    
    (275
    )Total
    
    $
    53,674
    
    
    $
    39,755
 Intangible Assets:We account for our intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Intangible assets consist of the following:
 December 31,
    
    September 30,2006
    
    2006Perchlorate customer list
    
    $
    38,697
    
    
    $
    38,697Less accumulated amortization
    
    
    (34,255
    )
    
    
    (33,280
    )4,442
    
    
    
    5,417Customer relationships and backlog
    
    
    10,244
    
    
    
    13,230Less accumulated amortization
    
    
    (5,066
    )
    
    
    (4,756
    )5,178
    
    
    
    8,474Pension-related intangible
    
    
    346
    
    
    
    346Total
    
    $
    9,966
    
    
    $
    14,237
 The perchlorate customer list is an asset of our Specialty Chemicals segment and is subject
to amortization. Amortization expense was $975 for both the three months ended December 31, 2006
and 2005.The pension-related intangible is an actuarially calculated amount related to unrecognized prior
service cost for our defined benefit pension plan and supplemental executive retirement plan.In connection with our acquisition of the AFC Business, we acquired intangible assets with fair
values of $7,957 for customer relationships and $2,287 for existing customer backlog. These
assets have definite lives and are assigned to our Fine Chemicals segment. Amortization expense
for the three months ended December 31, 2006 and 2005 was $310 and $476, respectively.
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5.
    
    COMPREHENSIVE INCOME (LOSS)Comprehensive income (loss) consists of the following:
 Three Months EndedDecember 31,2006
    
    2005Net Income (Loss)
    
    $
    639
    
    
    $
    (1,305
    )Other Comprehensive Income (Loss) -
Foreign currency translation adjustment
    
    
    22
    
    
    
    (46
    )Comprehensive Income (Loss)
    
    $
    661
    
    
    $
    (1,351
    )
 6.
    
    EARNINGS (LOSS) PER SHAREShares used to compute earnings (loss) per share from continuing operations are as follows:
 Three Months EndedDecember 31,2006
    
    2005Income (Loss) from Continuing Operations
    
    $
    639
    
    
    $
    (790
    )Basic:Weighted average shares
    
    
    7,324,000
    
    
    
    7,297,000Diluted:Weighted average shares, basic
    
    
    7,324,000
    
    
    
    7,297,000Dilutive effect of stock options
    
    
    43,000
    
    
    
    Weighted average shares, diluted
    
    
    7,367,000
    
    
    
    7,297,000Basic loss per share from continuing operations
    
    $
    0.09
    
    
    $
    (0.11
    )Diluted loss per share from continuing operations
    
    $
    0.09
    
    
    $
    (0.11
    )
 As of December 31, 2006 and 2005, we had 226,000 and 561,000 antidilutive options
outstanding. The stock options are antidilutive because we are reporting a loss from continuing
operations or the exercise price of certain options exceeds the average fair market value of our
stock for the period. These options could be dilutive in future periods if our operations are
profitable or our stock price increases.7.
    
    DEBTOur outstanding debt balances consist of the following:
 December 31,
    
    September 30,2006
    
    2006Credit Facilities:First Lien Term Loan, 9.4%, due through 2010
    
    $
    57,120
    
    
    $
    64,350First Lien Revolving Credit
    
    
    
    
    
    
    Second Lien Term Loan plus accrued PIK Interest of $221 and $170, 14.4%, due 2011
    
    
    20,221
    
    
    
    20,170Subordinated Seller Note plus accrued PIK Interest of $2,965 and $2,226, 10.4%,
Net of Discount of $5,211 and $5,424, due 2012
    
    
    23,254
    
    
    
    22,304Capital Leases
    
    
    804
    
    
    
    540Total Debt
    
    
    101,399
    
    
    
    107,364Less Current Portion
    
    
    (3,902
    )
    
    
    (9,593
    )Total Long-term Debt
    
    $
    97,497
    
    
    $
    97,771
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Credit Facilities:In connection with our acquisition of the AFC Business, discussed in
Note 2, on November 30, 2005, we entered into a $75,000 first lien credit agreement (the First
Lien Credit Facility) with Wachovia Bank, National Association and other lenders. We also
entered into a $20,000 second lien credit agreement (the Second Lien Credit Facility, and
together with the First Lien Credit Facility, the Credit
Facilities) with Wachovia Bank, National Association, and certain other lenders. The Credit Facilities are collateralized by
substantially all of our assets and the assets of our domestic subsidiaries. Concurrent with
the issuance of our senior notes in February 2007, we amended our First Lien Credit Facility and
repaid and terminated our Second Lien Credit Facility.Seller Subordinated Note:In connection with our acquisition of the AFC Business, discussed in
Note 2, we issued an unsecured subordinated seller note in the principal amount of $25,500 to
Aerojet-General Corporation, a subsidiary of GenCorp. The note accrued payment-in-kind interest
(PIK Interest) at a rate equal to the threemonth U.S. dollar LIBOR as from time to time in
effect plus a margin equal to the weighted average of the interest rate margin for the loans
outstanding under the Credit Facilities, including certain changes in interest rates due to
subsequent amendments or refinancing of the Credit Facilities. The note was subordinated to the
senior debt under or related to the Credit Facilities and certain other indebtedness, subject to
certain terms and conditions.In connection with our February 2007 refinancing activities, we negotiated an early retirement
of the Seller Subordinated Note at a discount of approximately $5,000 from the face amount of
the note. On February 6, 2007, we paid GenCorp $23,735 representing full settlement of the
Seller Subordinated Note and accrued interest.Senior Notes:On February 6, 2007, we issued and sold $110,000 aggregate principal amount of
9.0% Senior Notes due February 1, 2015 (the Senior Notes). The Senior Notes accrue interest
at a rate per annum equal to 9.0%, to be payable semi-annually in arrears on each February 1 and
August 1, beginning on August 1, 2007. The Senior Notes are guaranteed on a senior unsecured
basis by all of our existing and future material U.S. subsidiaries. The Senior Notes are:
 
    
    ranked equally in right of payment with all of our existing and future senior
indebtedness;
    
    ranked senior in right of payment to all of our existing and future senior subordinated
and subordinated indebtedness;
    
    effectively junior to our existing and future secured debt to the extent of the value of
the assets securing such debt; and
    
    structurally subordinated to all of the existing and future liabilities (including trade
payables) of each of our subsidiaries that do not guarantee the Senior Notes.
 The Senior Notes may be redeemed, in whole or in part, under the following circumstances:
 
    
    at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of
the Senior Notes plus a make-whole premium as defined in the related indenture;
    
    at any time on or after February 1, 2011 at redemption prices beginning at 104.5% and
reducing to 100% by February 1, 2013; and
    
    until February 1, 2010, up to 35% of the principal amount of the Senior Notes with the
proceeds of certain sales of its equity securities.
   
    
    incur additional debt;
    
    pay dividends or make other restricted payments;
    
    create liens on assets to secure debt;
    
    incur dividend or other payment restrictions with regard to restricted subsidiaries;
    
    transfer or sell assets;
    
    enter into transactions with affiliates;
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
    
    enter into sale and lease back transactions;
    
    create an unrestricted subsidiary;
    
    enter into certain business activities; or
    
    effect a consolidation, merger or sale of all or substantially all of our assets.
 The Indenture also contains certain customary events of default.In connection with the closing of the sale of the Senior Notes, we entered into a registration
rights agreement and agreed to use our reasonable best efforts to:
 
    
    file a registration statement with respect to an offer to exchange the Senior Notes for
notes that have substantially identical terms as the Senior Notes and are registered under
the Securities Act of 1933, as amended (the Securities Act);
    
    cause the registration statement to become effective within 210 days after the closing; and
    
    consummate the exchange offer within 240 days after the closing.
 If we cannot effect an exchange offer within the time periods listed above, we have agreed to
file a shelf registration statement for the resale of the Senior Notes. If we do not comply
with certain of our obligations under the registration rights agreement (a Registration
Default), the annual interest rate on the Senior Notes will increase by 0.25%. The annual
interest rate on the Senior Notes will increase by an additional 0.25% for any subsequent 90 day
period during which the Registration Default continues, up to a maximum additional interest rate
of 1.00% per year. If we correct the Registration Default, the interest rate on the Senior
Notes will revert immediately to the original rate.Revolving Credit Facility: On February 6, 2007, we entered into an Amended and Restated Credit
Agreement which provides a secured revolving credit facility in an aggregate principal amount of
up to $20.0 million (the Revolving Credit Facility) with an initial maturity in 5 years. We
may prepay and terminate the Revolving Credit Facility at any time. The annual interest rates
applicable to loans under the Revolving Credit Facility will be at our option, the Alternate
Base Rate or LIBOR Rate (each as defined in the Revolving Credit Facility) plus, in each case,
an applicable margin. The applicable margin will be tied to our total leverage ratio (as
defined in the Revolving Credit Facility). In addition, we will pay commitment fees, other fees
related to the issuance and maintenance of the letters of credit, and certain agency fees.The Revolving Credit Facility is guaranteed by and secured by substantially all of the assets of
our current and future domestic subsidiaries, subject to certain exceptions as set forth in the
Revolving Credit Facility. The Revolving Credit Facility contains certain negative covenants
restricting and limiting our ability to, among other things:
 
    
    incur debt, incur contingent obligations and issue certain types of preferred stock;
    
    create liens;
    
    pay dividends, distributions or make other specified restricted payments;
    
    make certain investments and acquisitions;
    
    enter into certain transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    merge or consolidate with any other entity or sell, assign, transfer, lease, convey or
otherwise dispose of assets.
 Financial covenants under the Revolving Credit Facility include quarterly requirements for total
leverage ratio of less than or equal to 5.25 to 1.00, and interest coverage ratio of at least
2.50 to 1.00. The Revolving Credit Facility also contains usual and customary events of default
(subject to certain threshold amounts and grace periods). If an event of default occurs and is
continuing, we may be required to repay the obligations under the Revolving Credit Facility
prior to its stated maturity and the
related commitments may be terminated. We were in compliance with the financial covenants of
our Revolving Credit Facility as of the inception date, February 6, 2007.
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Letters of Credit:As of December 31, 2006, we had $2,332 in outstanding standby letters of
credit which mature through May 2012. These letters of credit principally secure performance of
certain environmental protection equipment sold by us and payment of fees associated with the
delivery of natural gas and power.Interest Rate Swap Agreements: In May 2006, we entered into two interest rate swap agreements,
expiring on June 30, 2008, for the purpose of hedging a portion of our exposure to changes in
variable rate interest on our Credit Facilities. Under the terms of the swap agreements, which
have an aggregate notional amount of $41,769 at December 31, 2006, we pay fixed rate interest
and receive variable rate interest based on a specific spread over three-month LIBOR. The
differential to be paid or received is recorded as an adjustment to interest expense. The swap
agreements do not qualify for hedge accounting treatment. We record an asset or liability for
the fair value of the swap agreements, with the effect of marking these contracts to fair value
being recorded as an adjustment to interest expense. The aggregate fair values of the swap
agreements at December 31, 2006 and September 30, 2006, which are recorded as other long-term
liabilities, were $215 and $314, respectively.8.
    
    COMMITMENTS AND CONTINGENCIESEnvironmental Matters:Review of Perchlorate Toxicity by the EPA Perchlorate (the anion) is not currently included in the list of hazardous substances compiled
by the U.S. Environmental Protection Agency (EPA), but it is on the EPAs Contaminant
Candidate List. The EPA has conducted a risk assessment relating to perchlorate, two drafts of
which were subject to formal peer reviews held in 1999 and 2002. Following the 2002 peer
review, the EPA perchlorate risk assessment together with other perchlorate related science was
reviewed by the National Academy of Sciences (NAS). This NAS report was released on January
11, 2005. The recommendations contained in this NAS report indicate that human health is
protected in drinking water at a level of 24.5 parts per billion (ppb). Certain states have
also conducted risk assessments and have set preliminary levels from 1  14 ppb. The EPA has
established a reference dose for perchlorate of .0007 mg/kg/day which is equal to a Drinking
Water Equivalent Level (DWEL) of 24.5 ppb. A decision as to whether or not to establish a
Maximum Contaminate Level (MCL) is pending. The outcome of these federal EPA actions, as well
as any similar state regulatory action, will influence the number, if any, of potential sites
that may be subject to remediation action.Perchlorate Remediation Project in Henderson, Nevada We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (the
Ampac Henderson Site) from 1958 until the facility was destroyed in May 1988, after which we
relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corp
(KMCC) also operated a perchlorate production facility in Henderson, Nevada from 1967 to 1998.
Between 1956 to 1967, American Potash operated a perchlorate production facility at the same
site. For many years prior to 1956, other entities also manufactured perchlorate chemicals at
that site. In 1998, Kerr-McGee Chemical LLC became the operating entity and it ceased the
production of perchlorate at the Kerr McGee Henderson Site. Thereafter, it continued to produce
other chemicals at this site until it was recently sold. As a result of a longer production
history at Henderson, KMCC and its predecessor operations have manufactured significantly
greater amounts of perchlorate over time than we did at the Ampac Henderson Site.In 1997, the Southern Nevada Water Authority (SNWA) detected trace amounts of the perchlorate
anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern
Nevada and areas of Southern California. The Las Vegas Wash flows into Lake Mead from the Las
Vegas valley.
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In response to this discovery by SNWA, and at the request of the Nevada Division of
Environmental Protection (NDEP), we engaged in an investigation of groundwater near the Ampac
Henderson site and down gradient toward the Las Vegas Wash. That investigation and related
characterization which lasted more than six years employed experts in the field of hydrogeology.
This investigation concluded that, although there is perchlorate in the groundwater in the
vicinity of the Ampac Henderson Site up to 700 ppm, perchlorate from this Site does not
materially impact, if at all, water flowing in the Las Vegas Wash toward Lake Mead. It has
been well established, however, by data generated by SNWA and NDEP, that perchlorate from the
Kerr McGee Henderson Site did materially impact the Las Vegas Wash and Lake Mead. Kerr McGees
successor, Tronox LLC, operates an ex situ perchlorate groundwater remediation facility at their
Henderson site and this facility has had a significant effect on the load of perchlorate
entering Lake Mead over the last 5 years. Recent measurements of perchlorate in Lake Mead made
by SNWA have been less than 10 ppb.Notwithstanding these facts, and at the direction of NDEP and the EPA, we conducted an
investigation of remediation technologies for perchlorate in groundwater with the intention of
remediating groundwater near the Ampac Henderson Site. The technology that was chosen as most
efficient and appropriate is in situ bioremediation (ISB). The technology reduces perchlorate
in the groundwater by precise addition of an appropriate carbon source to the groundwater itself
while it is still in the ground (as opposed to an above ground, more conventional, ex situ
process). This induces naturally occurring organisms in the groundwater to reduce the
perchlorate among other oxygen containing compounds.In 2002, we conducted a pilot test in the field of the ISB technology and it was successful. On
the basis of the successful test and other evaluations, in fiscal 2005 we submitted a work plan
to NDEP for the construction of a remediation facility near the Ampac Henderson Site. The
conditional approval of the work plan by NDEP in our third quarter of fiscal 2005 allowed us to
generate estimated costs for the installation and operation of the
remediation facility that
will address perchlorate from the Ampac Henderson Site. We commenced construction July 2005.
In December 2006, we began operations, reducing perchlorate concentrations in system extracted
groundwater in Henderson.Henderson Site Environmental Remediation Reserve During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate
of the probable costs of our remediation efforts at the Henderson Site, including the costs for
equipment, operating and maintenance costs, and consultants. Key factors in determining the
total estimated cost include an estimate of the speed of groundwater entering the treatment
area, which was then used to estimate a project life of 45 years, as well as estimates for
capital expenditures and annual operating and maintenance costs. The project consists of two
primary phases; the initial construction of the remediation equipment and the operating and
maintenance phase. During our fiscal 2006, we increased our total cost estimate for the
construction phase by $3,600 due primarily to changes in the engineering designs, delays in
receiving permits and the resulting extension of construction time. We commenced the
construction phase in late fiscal 2005, completed an interim system in June 2006, and completed
the permanent facility in December 2006. These estimates are based on information currently
available to us and may be subject to material adjustment upward or downward in future periods
as new facts or circumstances may indicate.A summary of our environmental reserve activity for the three months ended December 31,
2006 is shown below:
 Balance, September 30, 2006
    
    $
    17,511Additions or adjustments
    
    
    Expenditures
    
    
    (1,013
    )Balance, December 31, 2006
    
    $
    16,498
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AFC Environmental Matters AFCs facility is located on land leased from Aerojet. The leased land is part of a tract of
land owned by Aerojet designated as a Superfund Site under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA). The tract of land had been used by Aerojet
and affiliated companies to manufacture and test rockets and related equipment since the 1950s.
Although the chemicals identified as contaminants on the leased land were not used by Aerojet
Fine Chemicals as part of its operations, CERCLA, among other things, provides for joint and
severable liability for environmental liabilities including, for example, the environmental
remediation expenses.As part of the agreement to sell the AFC Business, an Environmental Indemnity Agreement was
entered into whereby GenCorp agreed to indemnify us against any and all environmental costs and
liabilities arising out of or resulting from any violation of environmental law prior to the
effective date of the sale, or any release of hazardous substances by the AFC Business, Aerojet
or GenCorp on the AFC premises or Aerojets Sacramento site prior to the effective date of the
sale.On November 29, 2005, EPA Region IX provided us with a letter indicating that the EPA does not
intend to pursue any clean up or enforcement actions under CERCLA against future lessees of the
Aerojet Fine Chemicals property for existing contamination, provided that the lessees do not
contribute to or do not exacerbate existing contamination on or under the Aerojet Superfund
site.Employment Matters: Effective March 25, 2006, the employment of Dr. Seth Van Voorhees, as our
Chief Financial Officer, Vice President and Treasurer, terminated. Dr. Van Voorhees was
employed by us pursuant to an employment agreement dated December 1, 2005. On December 6, 2006,
we reached a settlement with Dr. Van Voorhees under which we paid Dr. Van Voorhees $600 and both
parties entered into a standard mutual release.Other Matters:We are from time to time involved in other claims or lawsuits. We believe that
current claims or lawsuits against us, individually and in the aggregate, will not have a
material adverse effect on our financial condition, cash flows or results of operations.9.
    
    SEGMENT INFORMATIONWe report our business in four operating segments: Specialty Chemicals, Fine Chemicals,
Aerospace Equipment and Other Businesses. These segments are based upon business units that
offer distinct products and services, are operationally managed separately and produce products
using different production methods. Segment operating profit includes all sales and expenses
directly associated with each segment. Environmental remediation charges, corporate general and
administrative costs, which consist primarily of executive, investor relations, accounting,
human resources and information technology expenses, and interest are not allocated to segment
operating results.Specialty Chemicals:Our Specialty Chemicals segment manufactures and sells: (i) perchlorate
chemicals, used principally in solid rocket propellants for the space shuttle and defense
programs, (ii) sodium azide, a chemical used in pharmaceutical manufacturing and historically
used principally in the inflation of certain automotive airbag systems, and (iii)
Halotronâ, clean gas fire extinguishing agents designed to replace halons.One perchlorates customer accounted for 16% of our consolidated revenues for the three months
ended December 31, 2006. No single perchlorate customer exceeded 10% of our consolidated
revenues for the three months ended December 31, 2005.Fine Chemicals:On November 30, 2005, we created a new operating segment, Fine Chemicals, to
report the financial performance of AFC (See Note 2). AFC is a manufacturer of active
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pharmaceutical ingredients and registered intermediates under cGMP guidelines for commercial
customers in the pharmaceutical industry, involving high potency compounds, energetic and
nucleoside chemistries, and chiral separation.For the three months ended December 31, 2006, three Fine Chemicals customers accounted for 20%,
14%, and 10% of our consolidated revenues. For the three months ended December 31, 2005, one
Fine Chemicals customer accounted for 20% of our consolidated revenues.Aerospace Equipment:The Aerospace Equipment, or ISP business, manufactures and sells in-space
propulsion systems, thrusters (monopropellant or bipropellant) and propellant tanks.Other Businesses:Our Other Businesses segment contains our water treatment equipment and real
estate activities. Our water treatment equipment business designs, manufactures and markets
systems for the control of noxious odors, the disinfection of water streams and the treatment of
seawater.The following provides financial information about our segment operations:
 Three Months EndedDecember 31,2006
    
    2005Revenues:Specialty Chemicals
    
    $
    11,790
    
    
    $
    4,705Fine Chemicals
    
    
    17,591
    
    
    
    5,172Aerospace Equipment
    
    
    3,976
    
    
    
    4,645Other Businesses
    
    
    1,531
    
    
    
    1,963Total Revenues
    
    $
    34,888
    
    
    $
    16,485Segment Operating Income (Loss):Specialty Chemicals
    
    $
    3,493
    
    
    $
    420Fine Chemicals
    
    
    2,919
    
    
    
    951Aerospace Equipment
    
    
    186
    
    
    
    261Other Businesses
    
    
    593
    
    
    
    517Total Segment Operating Income
    
    
    7,191
    
    
    
    2,149Corporate Expenses
    
    
    (2,796
    )
    
    
    (3,268
    )Interest and Other Income (Expense), Net
    
    
    (3,209
    )
    
    
    (194
    )Loss from Continuing Operations before Tax
    
    $
    1,186
    
    
    $
    (1,313
    )Depreciation and Amortization:Specialty Chemicals
    
    $
    1,282
    
    
    $
    1,279Fine Chemicals
    
    
    3,697
    
    
    
    1,300Aerospace Equipment
    
    
    32
    
    
    
    17Other Businesses
    
    
    3
    
    
    
    3Corporate
    
    
    130
    
    
    
    141Total Depreciation and Amortization
    
    $
    5,144
    
    
    $
    2,740
 10.
    
    INTEREST AND OTHER INCOMEInterest and other income consist of the following:
 Three Months EndedDecember 31,2006
    
    2005Interest income
    
    $
    94
    
    
    $
    246Gain on sale of Hughes Parkway
    
    
    
    
    
    
    580Other
    
    
    
    
    
    
    49$
    94
    
    
    $
    875
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We owned a 70% interest as general and limited partner in Gibson Business Park Associates
1986-1 (the Partnership), a real estate development limited partnership. The remaining 30%
limited partners included certain current and former members of our board of directors. The
Partnership, in turn, owned a 33% limited partnership interest in 3770 Hughes Parkway Associates
Limited Partnership, a Nevada limited partnership (Hughes Parkway). Hughes Parkway owns the
building in which we lease office space in Las Vegas, Nevada.In October 2005, the Partnership sold its interest in Hughes Parkway, which resulted in a net
gain and cash distribution to us of $2,395. Concurrent with, and as a condition of, the sale of
the Partnerships interest in Hughes Parkway, we renewed our office space lease through February
2009. We accounted for the transaction as a sale leaseback. Accordingly, we deferred gain
totaling $1,815 representing the present value of future lease payments. We amortize the
deferred gain (as a reduction of rental expense), using the straight-line method over the term
of the lease. We recognized the remaining gain of $580, which is reported as interest and other
income.11.
    
    DEFINED BENEFIT PLANSWe maintain three defined benefit pension plans which cover substantially all of our U.S.
employees, excluding employees of our Aerospace Equipment Segment: the American Pacific
Corporation Defined Benefit Pension Plan (Ampac Plan), the Ampac Fine Chemical LLC Pension
Plan for Salaried Employees (AFC Salaried Plan), and the Ampac Fine Chemical LLC Pension Plan
for Bargaining Unit Employees (AFC Bargaining Plan). Collectively, these three plans are
referred to as the Pension Plans. The AFC Salaried Plan and the AFC Bargaining Plan were
established in connection with our acquisition of the AFC business and include the assumed
liabilities for pension benefits to existing employees at the acquisition date. In addition, we
have a supplemental executive retirement plan (SERP) that includes our former and current
Chief Executive Officer.Net periodic pension cost related to the Pension Plans consists of the following:
 Three Months EndedDecember 31,2006
    
    2005Pension Plans:Service Cost
    
    $
    391
    
    
    $
    227Interest Cost
    
    
    425
    
    
    
    349Expected Return on Plan Assets
    
    
    (376
    )
    
    
    (288
    )Recognized Actuarial Losses
    
    
    123
    
    
    
    12Amortization of Prior Service Costs
    
    
    12
    
    
    
    98Net Periodic Pension Cost
    
    $
    575
    
    
    $
    398SERP:Service Cost
    
    $
    
    
    
    $
    Interest Cost
    
    
    35
    
    
    
    37Expected Return on Plan Assets
    
    
    
    
    
    
    Recognized Actuarial Losses
    
    
    6
    
    
    
    11Amortization of Prior Service Costs
    
    
    11
    
    
    
    7Net Periodic Pension Cost
    
    $
    52
    
    
    $
    55
 For the three months ended December 31, 2006, we contributed $479 to the Pension Plan to
fund benefit payments and anticipate making approximately $2,226 in additional contributions
through September 30, 2007. For the three months ended December 31, 2006, we contributed $32 to
the SERP to fund benefit payments and anticipate making approximately $95 in additional
contributions through September 30, 2007.
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12.
    
    DISCONTINUED OPERATIONSIn June 2006, our board of directors approved and we committed to a plan to sell our interest in
ESI, based on our determination that ESIs product lines were no longer a strategic fit with our
business strategies. Revenues and expenses associated with ESIs operations are presented as
discontinued operations for all periods presented. ESI was formerly reported within our
Specialty Chemicals segment.Effective September 30, 2006, we completed the sale of our interest in ESI for $7,510, which,
after deducting direct expenses, resulted in a gain on the sale before income taxes of $258.
The ESI sale proceeds are reflected as a note receivable as of September 30, 2006 and we
collected the amount in full in October 2006.Summarized financial information for ESI is as follows for the three months ended December 31,
2005:
 Revenues
    
    $
    2,632Discontinued Operations:Operating loss before tax
    
    
    (844
    )Benefit for income tax
    
    
    (329
    )Net loss from discontinued operations
    
    $
    (515
    )
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
   OUR COMPANY
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OUR BUSINESS SEGMENTS
  Three Months EndedDecember 31,2006
    
    2005Specialty Chemicals:Perchlorates
    
    
    29
    %
    
    
    21
    %Sodium Azide
    
    
    3
    %
    
    
    3
    %Halotron
    
    
    2
    %
    
    
    5
    %Total Specialty Chemicals
    
    
    34
    %
    
    
    29
    %Fine Chemicals
    
    
    51
    %
    
    
    31
    %Aerospace Equipment
    
    
    11
    %
    
    
    28
    %Other Businesses:Real Estate
    
    
    1
    %
    
    
    3
    %Water Treatment Equipment
    
    
    3
    %
    
    
    9
    %Total Other Businesses
    
    
    4
    %
    
    
    12
    %Total Revenues
    
    
    100
    %
    
    
    100
    %
 Specialty Chemicals:
    Fine Chemicals .
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Aerospace Equipment:
 Other Businesses :
 Discontinued Operations
 RESULTS OF OPERATIONS
 Revenues
 December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Specialty Chemicals
    
    $
    11,790
    
    
    $
    4,705
    
    
    $
    7,085
    
    
    
    151
    %Fine Chemicals
    
    
    17,591
    
    
    
    5,172
    
    
    
    12,419
    
    
    
    240
    %Aerospace Equipment
    
    
    3,976
    
    
    
    4,645
    
    
    
    (669
    )
    
    
    (14
    %)Other Businesses
    
    
    1,531
    
    
    
    1,963
    
    
    
    (432
    )
    
    
    (22
    %)Total Revenues
    
    $
    34,888
    
    
    $
    16,485
    
    
    $
    18,403
    
    
    
    112
    %
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##### Table of Contents



Cost of Revenues and Gross Margin
 December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Revenues
    
    $
    34,888
    
    
    $
    16,485
    
    
    $
    18,403
    
    
    
    112
    %Cost of Revenues
    
    
    21,980
    
    
    
    12,139
    
    
    
    9,841
    
    
    
    81
    %Gross Margin
    
    
    12,908
    
    
    
    4,346
    
    
    
    8,562
    
    
    
    197
    %Gross Margin Percentage
    
    
    37
    %
    
    
    26
    %
  
    
    Specialty Chemicals gross margin dollars and as a percentage of revenues improved primarily as a result of the higher
Grade I AP volume and the related effect on perchlorate gross margin percentage that results from better absorption of
relatively fixed depreciation and amortization that is included in cost of sales.
 
    
    Fine Chemicals segment gross margins improved due primarily to better production efficiency.
 
    
    Aerospace Equipment segment gross margin improved in dollars and as a percentage of revenues, despite a decline in
revenue. The improvement is primarily attributed to changes in product mix. The prior year quarter included work
performed under certain development contracts at lower gross margin rates.
 
    
    Gross margin dollars from our Other Businesses segment is consistent with the prior year quarter.
 Operating Expenses
 December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Operating Expenses
    
    $
    8,513
    
    
    $
    5,465
    
    
    $
    3,048
    
    
    
    56
    %Percentage of Revenues
    
    
    24
    %
    
    
    33
    %
 The increases in operating expenses are substantially due to AFC and reflect:
 
    
    An increase in AFC operating expenses due to the inclusion of
three months in the fiscal 2007 first quarter compared to one
month in the prior year quarter. AFC operating expenses for the
first quarter of fiscal 2007 include $310 of amortization expense
related to intangible assets.
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
    
    A reduction in corporate expenses from $3,268 to $2,796 million.
 Segment Operating Profit (Loss)
 December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Specialty Chemicals
    
    $
    3,493
    
    
    $
    420
    
    
    $
    3,073
    
    
    
    732
    %Fine Chemicals
    
    
    2,919
    
    
    
    951
    
    
    
    1,968
    
    
    
    207
    %Aerospace Equipment
    
    
    186
    
    
    
    261
    
    
    
    (75
    )
    
    
    (29
    %)Other Businesses
    
    
    593
    
    
    
    517
    
    
    
    76
    
    
    
    15
    %Segment Operating Profit
    
    
    7,191
    
    
    
    2,149
    
    
    
    5,042
    
    
    
    235
    %Corporate Expenses
    
    
    (2,796
    )
    
    
    (3,268
    )
    
    
    472
    
    
    
    (14
    %)Operating Income (Loss)
    
    $
    4,395
    
    
    $
    (1,119
    )
    
    $
    5,514
    
    
    
    (493
    %)
    Interest and Other Income/Interest Expense
 December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Interest and Other Income
    
    $
    94
    
    
    $
    875
    
    
    $
    (781
    )
    
    
    (89
    %)Interest Expense
    
    $
    3,303
    
    
    $
    1,069
    
    
    $
    2,234
    
    
    
    209
    %
   LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows
 Three Months Ended December 31,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeCash Provided (used) by:Operating activities
    
    $
    (3,981
    )
    
    $
    (5,734
    )
    
    $
    1,753
    
    
    
    (31
    %)Financing Activities
    
    
    6,080
    
    
    
    (111,719
    )
    
    
    117,799
    
    
    
    (105
    %)Investing Activities
    
    
    (7,287
    )
    
    
    83,151
    
    
    
    (90,438
    )
    
    
    (109
    %)Net change in cash for the period
    
    $
    (5,188
    )
    
    $
    (34,302
    )
    
    $
    29,114
    
    
    
    (85
    %)
 Operating Activities:
 
    
    An increase in cash due to improved profitability of $7,051.
 
    
    An increase in cash used to fund working capital increases of $3,946.
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
    
    An increase in cash used for interest payments of $2,167.
 
    
    A reduction in cash used for environmental remediation of $1,734.
 
    
    Other increases in cash used for operating activities of $919.
  Investing Activities:
  
    
    Cash received from the sale of ESI of $7,510.
 
    
    Cash used for capital expenditures of $1,430.
  
    
    Cash used for our acquisition of AFC of $111,471.
 
    
    Cash used for capital expenditures of $2,443.
 
    
    Cash provided by proceeds from the sale of our interest in a real estate partnership of $2,395.
 Financing Activities:
 Liquidity and Capital Resources
    Long Term Debt and Revolving Credit Facilities
 Credit Facilities:
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Seller Subordinated Note:
  Senior Notes
 
    
    ranked equally in right of payment with all of our existing and future senior indebtedness;
 
    
    ranked senior in right of payment to all of our existing and future senior subordinated
and subordinated indebtedness;
 
    
    effectively junior to our existing and future secured debt to the extent of the value of
the assets securing such debt; and
 
    
    structurally subordinated to all of the existing and future liabilities (including trade
payables) of each of our subsidiaries that do not guarantee the Senior Notes.
  
    
    at any time prior to February 1, 2011 at a price equal to 100% of the purchase amount of
the Senior Notes plus a make-whole premium as defined in the related indenture;
 
    
    at any time on or after February 1, 2011 at redemption prices beginning at 104.5% and
reducing to 100% by February 1, 2013; and
 
    
    until February 1, 2010, up to 35% of the principal amount of the Senior Notes with the
proceeds of certain sales of its equity securities.
   
    
    incur additional debt;
 
    
    pay dividends or make other restricted payments;
 
    
    create liens on assets to secure debt;
 
    
    incur dividend or other payment restrictions with regard to restricted subsidiaries;
 
    
    transfer or sell assets;
 
    
    enter into transactions with affiliates;
 
    
    enter into sale and lease back transactions;
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
    
    create an unrestricted subsidiary;
 
    
    enter into certain business activities; or
 
    
    effect a consolidation, merger or sale of all or substantially all of our assets.
   
    
    file a registration statement with respect to an offer to exchange the Senior Notes for notes that have substantially
identical terms as the Senior Notes and are registered under the Securities Act of 1933, as amended (the Securities
Act);
 
    
    cause the registration statement to become effective within 210 days after the closing; and
 
    
    consummate the exchange offer within 240 days after the closing.
  Revolving Credit Facility
  
    
    incur debt, incur contingent obligations and issue certain types of preferred stock;
 
    
    create liens;
 
    
    pay dividends, distributions or make other specified restricted payments;
 
    
    make certain investments and acquisitions;
 
    
    enter into certain transactions with affiliates;
 
    
    enter into sale and leaseback transactions; and
 
    
    merge or consolidate with any other entity or sell, assign, transfer, lease, convey or otherwise dispose of assets.
  - 26 -




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Interest Rate Swap Agreements
  Environmental Remediation  Henderson Site
  Contractual Obligations and Off-Balance Sheet Arrangements
  Payments Due by Year Ending September 30,2007
    
    2008-09
    
    2010-11
    
    Thereafter
    
    TotalSenior Notes, due 2015
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    110,000
    
    
    $
    110,000Interest on Senior Notes (a)
    
    
    6,401
    
    
    
    19,800
    
    
    
    19,800
    
    
    
    33,199
    
    
    
    79,200Capital Leases
    
    
    171
    
    
    
    369
    
    
    
    
    
    
    
    
    
    
    
    540Interest on Capital Leases
    
    
    36
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    51Operating Leases
    
    
    1,013
    
    
    
    1,430
    
    
    
    76
    
    
    
    4
    
    
    
    2,523Total
    
    $
    7,621
    
    
    $
    21,614
    
    
    $
    19,876
    
    
    $
    143,203
    
    
    $
    192,314
 
 (a)
    
    2007 amount represents interest obligation from the issuance date on February 6, 2007 through
September 30, 2007.  CRITICAL ACCOUNTING POLICIES
  - 27 -




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Sales and Revenue Recognition
   Depreciable or Amortizable Lives of Long-Lived Assets
   Impairment of Long-Lived Assets
  - 28 -




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Environmental Costs
   Income Taxes
   Pension Benefits
  - 29 -




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Recently Issued or Adopted Accounting Standards
    - 30 -




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in Thousands)
    
 ITEM 4. CONTROLS AND PROCEDURES
 (a) Evaluation of disclosure controls and procedures
  (b) Changes in internal controls
  - 31 -




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PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
  We can be adversely impacted by reductions or changes in NASA or U.S. government military spending.
      - 32 -




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We depend on a limited number of customers for most of our sales in our Specialty Chemicals,
Aerospace Equipment and Fine Chemicals segments and the loss of one or more of these customers
could have a material adverse affect on our revenues.
   Our existing U.S. government contracts and contracts based on U.S. government contracts are subject
to continued appropriations by congress and may be terminated if future funding is not made
available.
  -33-




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The inherent limitations of our cost-plus or fixed-price government contracts may impact our
profitability.
   Our U.S. government contracts and our customers U.S. government contracts are subject to
termination.
  
    
    the contractor is paid an amount agreed upon for completed and
partially completed products and services accepted by the U.S.
government;
    
    the U.S. government is not liable for the contractors costs for
unaccepted items, and is entitled to repayment of any advance
payments and progress payments related to the terminated portions
of the contract; and
    
    the contractor may be liable for excess costs incurred by the U.S.
government in procuring undelivered items from another source.
  -34-




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We are subject to procurement and other related laws and regulations, non-compliance with which may
expose us to adverse consequences.
   Our operations and properties are currently the subject of numerous environmental and other
government regulations, which may become more stringent in the future and may reduce our
profitability and liquidity.
  Review of Perchlorate Toxicity by EPA
 Perchlorate Remediation Project in Henderson, Nevada
 -35-




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Henderson Site Environmental Remediation Reserve
 Other AFC Environmental Matters
 The production of most of our Specialty Chemicals products is conducted in a single facility and
our operations will be materially affected if production at that facility is disrupted.
  Disruptions in the supply of key raw materials and difficulties in the supplier qualification
process, as well as increases in prices of raw materials, could adversely impact our operations.
   -36-




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Our Fine Chemicals segment may be unable to comply with customer specifications and manufacturing
instructions, experience schedule delays or other problems with existing or new products and
systems, which could result in increased costs and loss of sales.
  Failure to meet strict timing or delivery requirements could cause AFC to be in breach of material
customer contracts.
  Successful commercialization of pharmaceutical products and product line extensions is very
difficult and subject to many uncertainties. If a customer is not able to successfully
commercialize its products for which AFC produces compounds, then the operating results of AFC may
be negatively impacted.
  -37-




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AFC or its customers may be unable to obtain government approval for its products or comply with
government regulations relating to its business.
      Recall or withdrawal of a customers product from the market or the failure of the customer to
obtain regulatory approval of its products will impact forecasted revenues.
  -38-




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A strike or other work stoppage, or the inability to renew collective bargaining agreements on
favorable terms, could have a material adverse effect on the cost structure and operational
capabilities of AFC.
  The pharmaceutical fine chemicals industry is a capital-intensive industry and if AFC does not have
enough capital to finance the necessary capital expenditures, its business and results of
operations may be harmed.
  Although we have established reserves for our environmental liabilities, given the many
uncertainties involved in assessing liability for environmental claims, our reserves may not be
sufficient.
  The release or explosion of dangerous materials used in our business could disrupt our operations
and cause us to incur additional costs and liability.
  -39-




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Our inability to adapt to rapid technological changes could impair our ability to remain
competitive.
  
    
    adversely impact our competitive position if we are unable to react to these developments in a timely or efficient
manner;
    
    require us to write-down obsolete facilities, equipment and technology;
    
    require us to discontinue production of obsolete products before we can recover any or all of our related research,
development and commercialization expenses; or
    
    require significant capital expenditures for research, development and launch of new products or processes.
 Our proprietary rights may be violated or compromised, which could damage our operations.
  We are subject to intense competition in certain of the industries where we compete and therefore
may not be able to compete successfully.
  -40-




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Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating
results to fluctuate.
  The cyclicality and volatility of the chemical industry affects our capacity utilization and causes
fluctuations in our results of operations.
  A loss of key personnel or highly skilled employees could disrupt our operations.
  We may continue to expand our operations through acquisitions, which could divert managements
attention and expose us to unanticipated liabilities and costs. We may experience difficulties
integrating the acquired operations, and we may incur costs relating to acquisitions that are never
consummated.
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We have a substantial amount of debt, and the cost of servicing that debt could adversely affect
our ability to take actions or our liquidity or financial condition.
   
    
    make it more difficult for us to satisfy our outstanding debt obligations;
    
    require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, reducing the
amount of our cash flow available for working capital, capital expenditures, acquisitions, developing our real estate
assets and other general corporate purposes;
    
    limit our flexibility in planning for, or reacting to, changes in the industries in which we compete;
    
    place us at a competitive disadvantage compared to our competitors, some of which have lower debt service obligations
and greater financial resources than we do;
    
    limit our ability to borrow additional funds; or
    
    increase our vulnerability to general adverse economic and industry conditions.
 If we are unable to generate sufficient cash flow to service our debt and fund our operating costs,
our liquidity may be adversely affected.
   
    
    incur additional debt, incur contingent obligations and issue additional preferred stock;
    
    create liens;
    
    pay dividends, distributions or make other specified restricted payments, and restrict the ability of certain of our
subsidiaries to pay dividends or make other payments to us;
    
    sell assets;
    
    make certain capital expenditures, investments and acquisitions;
    
    enter into certain transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of our assets.
  -42-




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Our Shareholder Rights Plan, Certificate of Incorporation and Bylaws discourage unsolicited
takeover proposals and could prevent stockholders from realizing a premium on their common stock.
  
    
    a classified Board of Directors;
    
    the ability of our Board of Directors to designate the terms of and issue new series of preferred stock;
    
    advance notice requirements for nominations for election to our Board of Directors; and
    
    special voting requirements for the amendment of our certificate of incorporation and bylaws.
  
 ITEM 2. UNREGISTERED SALES 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  None.
 
 ITEM 6. EXHIBITS
 31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2*
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
 
 *
    
    Exhibits 32.1 and 32.2 are furnished to accompany this quarterly report on Form 10-Q but
shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of
1934 or otherwise and shall not be deemed incorporated by reference into any registration
statements filed under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as
amended. -43-




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SIGNATURES
  AMERICAN PACIFIC CORPORATIONDate:  February 14, 2007
    /s/ JOHN R. GIBSONJohn R. GibsonChief Executive Officer - 44 -