##### Table of Contents



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, 2007
 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 or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 3770 Howard Hughes Parkway, Suite 300
Las Vegas, Nevada 89169
 702) 735-2200
 þ o
 o þ o
 o þ




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##### 



AMERICAN PACIFIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements
    
    
    1Condensed Consolidated Statements of Operations (unaudited)
    
    
    1Condensed Consolidated Balance Sheets (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4ITEM 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32ITEM 4.
    
    Controls and Procedures
    
    
    32PART 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 INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 
 AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited, Dollars in Thousands, Except per Share Amounts)
 Three Months EndedDecember 31,2007
    
    
    2006Revenues
    
    $
    46,890
    
    
    $
    34,888Cost of Revenues
    
    
    29,461
    
    
    
    21,980Gross Profit
    
    
    17,429
    
    
    
    12,908Operating Expenses
    
    
    10,205
    
    
    
    8,513Operating Income
    
    
    7,224
    
    
    
    4,395Interest and Other Income, Net
    
    
    378
    
    
    
    94Interest Expense
    
    
    2,704
    
    
    
    3,303Income before Income Tax
    
    
    4,898
    
    
    
    1,186Income Tax Expense
    
    
    2,035
    
    
    
    547Net Income
    
    $
    2,863
    
    
    $
    639Earnings per Share:Basic
    
    $
    0.39
    
    
    $
    0.09Diluted
    
    $
    0.38
    
    
    $
    0.09Weighted Average Shares Outstanding:Basic
    
    
    7,434,000
    
    
    
    7,324,000Diluted
    
    
    7,584,000
    
    
    
    7,367,000
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands, Except per Share Amounts)
 December 31,
    
    
    September 30,2007
    
    
    2007ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    38,160
    
    
    $
    21,426Accounts Receivable, Net
    
    
    13,949
    
    
    
    25,236Inventories, Net
    
    
    50,094
    
    
    
    47,023Prepaid Expenses and Other Assets
    
    
    2,300
    
    
    
    2,258Deferred Income Taxes
    
    
    5,504
    
    
    
    2,101Total Current Assets
    
    
    110,007
    
    
    
    98,044Property, Plant and Equipment, Net
    
    
    116,099
    
    
    
    116,965Intangible Assets, Net
    
    
    4,482
    
    
    
    5,767Deferred Income Taxes
    
    
    18,580
    
    
    
    19,385Other Assets
    
    
    9,540
    
    
    
    9,246TOTAL ASSETS
    
    $
    258,708
    
    
    $
    249,407LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    13,635
    
    
    $
    10,867Accrued Liabilities
    
    
    7,698
    
    
    
    7,829Accrued Interest
    
    
    4,125
    
    
    
    1,686Employee Related Liabilities
    
    
    5,143
    
    
    
    7,222Deferred Revenues and Customer Deposits
    
    
    8,782
    
    
    
    7,755Current Portion of Environmental Remediation Reserves
    
    
    686
    
    
    
    726Current Portion of Long-Term Debt
    
    
    254
    
    
    
    252Total Current Liabilities
    
    
    40,323
    
    
    
    36,337Long-Term Debt
    
    
    110,309
    
    
    
    110,373Environmental Remediation Reserves
    
    
    14,444
    
    
    
    14,697Pension Obligations and Other Long-Term Liabilities
    
    
    17,422
    
    
    
    12,311Total Liabilities
    
    
    182,498
    
    
    
    173,718Commitments and ContingenciesShareholders EquityPreferred Stock  No par value; 3,000,000 authorized; none outstanding
    
    
    
    
    
    
    Common Stock  $0.10 par value; 20,000,000 shares authorized,
9,470,041 and 9,463,541 issued
    
    
    947
    
    
    
    946Capital in Excess of Par Value
    
    
    87,618
    
    
    
    87,513Retained Earnings
    
    
    9,868
    
    
    
    7,296Treasury Stock  2,034,870 shares
    
    
    (16,982
    )
    
    
    (16,982
    )Accumulated Other Comprehensive Loss
    
    
    (5,241
    )
    
    
    (3,084
    )Total Shareholders Equity
    
    
    76,210
    
    
    
    75,689TOTAL
LIABILITIES AND SHAREHOLDERS EQUITY
    
    $

    258,708
    

    $
    249,407
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AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Cash Flow
Unaudited, Dollars in Thousands)
 Three Months EndedDecember 31,2007
    
    
    2006Cash Flows from Operating Activities:Net Income
    
    $
    2,863
    
    
    $
    639Adjustments to Reconcile Net Income
to Net Cash Provided (Used) by Operating Activities:Depreciation and amortization
    
    
    4,815
    
    
    
    5,144Non-cash interest expense
    
    
    164
    
    
    
    1,075Share-based compensation
    
    
    29
    
    
    
    49Excess tax benefit from stock option exercises
    
    
    (28
    )
    
    
    Deferred income taxes
    
    
    (13
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    11,238
    
    
    
    1,956Inventories, net
    
    
    (3,071
    )
    
    
    (13,919
    )Prepaid expenses
    
    
    (283
    )
    
    
    (576
    )Accounts payable
    
    
    1,875
    
    
    
    5,961Accrued liabilities
    
    
    (131
    )
    
    
    599Accrued interest
    
    
    2,439
    
    
    
    19Employee related liabilities
    
    
    (2,079
    )
    
    
    (1,758
    )Deferred revenues and customer deposits
    
    
    1,027
    
    
    
    (2,250
    )Environmental remediation reserves
    
    
    (293
    )
    
    
    (1,013
    )Pension obligations, net
    
    
    227
    
    
    
    257Other
    
    
    (560
    )
    
    
    (164
    )Net Cash Provided (Used) by Operating Activities
    
    
    18,219
    
    
    
    (3,981
    )Cash Flows from Investing Activities:Capital expenditures
    
    
    (1,500
    )
    
    
    (1,430
    )Discontinued operations  collection of note receivable
    
    
    
    
    
    
    7,510Net Cash Provided (Used) by Investing Activities
    
    
    (1,500
    )
    
    
    6,080Cash Flows from Financing Activities:Payments of long-term debt
    
    
    (62
    )
    
    
    (7,287
    )Issuances of common stock
    
    
    49
    
    
    
    Excess tax benefit from stock option exercises
    
    
    28
    
    
    
    Net Cash Provided (Used) by Financing Activities
    
    
    15
    
    
    
    (7,287
    )Net Change in Cash and Cash Equivalents
    
    
    16,734
    
    
    
    (5,188
    )Cash and Cash Equivalents, Beginning of Period
    
    
    21,426
    
    
    
    6,872Cash and Cash Equivalents, End of Period
    
    $
    38,160
    
    
    $
    1,684Cash Paid
(Received) For:Interest
    
    $
    101
    
    
    $
    2,209Income taxes
    
    
    (152
    )
    
    
    68Non-Cash Investing
and Financing
Transactions:Capital
leases originated
    
    $
    
    
    
    $
    321Additions to Property, Plant and
Equipment not yet
paid
    
    
    1,542
    
    
    
    
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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 POLICIES
 Interim Basis of Presentation.
 Accounting Policies.
 Principles of Consolidation.
 Recently Issued or Adopted Accounting Standards.
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1. INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
   2. SHARE-BASED COMPENSATION
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2. SHARE-BASED COMPENSATION (continued)
   Total Outstanding
    
    
    Non VestedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    FairPrice
    
    
    
    
    
    
    ValueShares
    
    
    Per Share
    
    
    Shares
    
    
    Per ShareBalance, September 30, 2007
    
    
    430,000
    
    
    $
    7.05
    
    
    
    9,500
    
    
    $
    3.63Granted
    
    
    24,997
    
    
    
    16.93
    
    
    
    24,997
    
    
    
    7.87Vested
    
    
    
    
    
    
    
    
    
    
    (9,500
    )
    
    
    3.63Exercised
    
    
    (6,500
    )
    
    
    7.55
    
    
    
    
    
    
    
    Expired / Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2007
    
    
    448,497
    
    
    
    7.60
    
    
    
    24,997
    
    
    
    7.87
  Number of vested stock options
    
    
    423,500Weighted-average exercise price per share
    
    $
    7.05Aggregate intrinsic value
    
    $
    4,237Weighted-average remaining contractual term in years
    
    
    6.5
  Three Months EndedDecember 31,2007
    
    
    2006Weighted-average grant date fair value per share of options granted
    
    $
    7.86
    
    
    $
    3.68Significant fair value assumptions:Expected term in years
    
    
    5.75
    
    
    
    5.25Expected volatility
    
    
    45.0
    %
    
    
    47.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rates
    
    
    3.4
    %
    
    
    4.7
    %Total intrinsic value of options exercised
    
    $
    70
    
    
    $
    Aggregate cash received for option exercises
    
    $
    49
    
    
    $
    Total compensation cost (included in operating expenses)
    
    $
    29
    
    
    $
    49Tax benefit recognized
    
    
    12
    
    
    
    18Net compensation cost
    
    $
    17
    
    
    $
    31As of period end date:Total compensation cost for non-vested awards
not yet recognized
    
    $
    168
    
    
    $
    28Weighted-average years to be recognized
    
    
    1.4
    
    
    
    0.8
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3. SELECTED BALANCE SHEET DATA
 Inventories.
 December 31,
    
    
    September 30,2007
    
    
    2007Finished goods
    
    $
    6,033
    
    
    $
    3,261Work-in-process
    
    
    28,723
    
    
    
    29,225Raw materials and supplies
    
    
    15,338
    
    
    
    14,537Total
    
    $
    50,094
    
    
    $
    47,023
 Intangible Assets.
 December 31,
    
    
    September 30,2007
    
    
    2007Perchlorate customer list
    
    $
    38,697
    
    
    $
    38,697Less accumulated amortization
    
    
    (38,155
    )
    
    
    (37,180
    )542
    
    
    
    1,517Customer relationships and backlog
    
    
    10,244
    
    
    
    10,244Less accumulated amortization
    
    
    (6,304
    )
    
    
    (5,994
    )3,940
    
    
    
    4,250Total
    
    $
    4,482
    
    
    $
    5,767
   4. COMPREHENSIVE INCOME (LOSS)
  Three Months EndedDecember 31,2007
    
    
    2006Net Income
    
    $
    2,863
    
    
    $
    639Other Comprehensive Income (Loss) -Foreign currency translation adjustment
    
    
    (47
    )
    
    
    22SERP Amendment, net of tax (See Note 10)
    
    
    (2,110
    )
    
    
    Comprehensive Income
    
    $
    706
    
    
    $
    661
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5. EARNINGS PER SHARE
  Three Months EndedDecember 31,2007
    
    
    2006Net income
    
    $
    2,863
    
    
    $
    639Basic Weighted Average Shares
    
    
    7,434,000
    
    
    
    7,324,000Diluted:Weighted average shares, basic
    
    
    7,434,000
    
    
    
    7,324,000Dilutive effect of stock options
    
    
    150,000
    
    
    
    43,000Weighted average shares, diluted
    
    
    7,584,000
    
    
    
    7,367,000Basic earnings per share
    
    $
    0.39
    
    
    $
    0.09Diluted earnings per share
    
    $
    0.38
    
    
    $
    0.09
  6. DEBT
  December 31,
    
    
    September 30,2007
    
    
    2007Senior Notes, 9%, due 2015
    
    $
    110,000
    
    
    $
    110,000Capital Leases, due through 2009
    
    
    563
    
    
    
    625Total Debt
    
    
    110,563
    
    
    
    110,625Less Current Portion
    
    
    (254
    )
    
    
    (252
    )Total Long-term Debt
    
    $
    110,309
    
    
    $
    110,373
 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 an applicable 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;
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6. DEBT (continued)
 
    
    until February 1, 2010, up to 35% of the principal amount of the Senior Notes at a
redemption price of 109% with the proceeds of certain sales of our equity securities; and
    
    under certain changes of control, we must offer to purchase the Senior Notes at 101% of
their aggregate principal amount, plus accrued interest.
  
    
    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 leaseback 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.
  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.
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6. DEBT (continued)
   Letters of Credit.
 7. COMMITMENTS AND CONTINGENCIES
 Environmental Matters.
 Review of Perchlorate Toxicity by the EPA.
 Perchlorate Remediation Project in Henderson, Nevada.
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7. COMMITMENTS AND CONTINGENCIES (continued)
    Henderson Site Environmental Remediation Reserve.
  -11-




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7. COMMITMENTS AND CONTINGENCIES (continued)
  Balance, September 30, 2007
    
    $
    15,423Additions or adjustments
    
    
    Expenditures
    
    
    (293
    )Balance, December 31, 2007
    
    $
    15,130
 AFC Environmental Matters.
   Other Matters.
 8. SEGMENT INFORMATION
  Specialty Chemicals. â
 -12-




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8.
    
    SEGMENT INFORMATION (continued)Fine Chemicals.Our Fine Chemicals segment includes the operating results of our wholly-owned
subsidiary Ampac Fine Chemicals LLC. AFC is a manufacturer of active 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.Aerospace Equipment. Our Aerospace Equipment segment includes the operating results of our
wholly-owned subsidiary Ampac-ISP Corp. (ISP). ISP 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. Our real estate activities are substantially complete.Our revenues are characterized by individually significant orders and relatively few customers.
As a result, in any given reporting period, certain customers may account for more than ten
percent of our consolidated revenues. The following table provides disclosure of the percentage
of our consolidated revenues attributed to customers that exceed ten percent of the total in
each of the given periods.
 Three Months EndedDecember 31,2007
    
    2006Specialty chemicals customer
    
    
    24
    %Specialty chemicals customer
    
    
    
    
    
    
    16
    %Fine chemicals customer
    
    
    24
    %
    
    
    14
    %Fine chemicals customer
    
    
    21
    %Fine chemicals customer
    
    
    
    
    
    
    20
    %Fine chemicals customer
    
    
    
    
    
    
    10
    %
  Three Months EndedDecember 31,2007
    
    2006Revenues:Specialty Chemicals
    
    $
    15,549
    
    
    $
    11,790Fine Chemicals
    
    
    26,762
    
    
    
    17,591Aerospace Equipment
    
    
    3,735
    
    
    
    3,976Other Businesses
    
    
    844
    
    
    
    1,531Total Revenues
    
    $
    46,890
    
    
    $
    34,888Segment Operating Income (Loss):Specialty Chemicals
    
    $
    5,879
    
    
    $
    3,493Fine Chemicals
    
    
    4,661
    
    
    
    2,919Aerospace Equipment
    
    
    173
    
    
    
    186Other Businesses
    
    
    (18
    )
    
    
    593Total Segment Operating Income
    
    
    10,695
    
    
    
    7,191Corporate Expenses
    
    
    (3,471
    )
    
    
    (2,796
    )Operating Income
    
    $
    7,224
    
    
    $
    4,395
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8.
    
    SEGMENT INFORMATION (continued)
 Three Months EndedDecember 31,2007
    
    2006Depreciation and Amortization:Specialty Chemicals
    
    $
    1,258
    
    
    $
    1,282Fine Chemicals
    
    
    3,372
    
    
    
    3,697Aerospace Equipment
    
    
    57
    
    
    
    32Other Businesses
    
    
    3
    
    
    
    3Corporate
    
    
    125
    
    
    
    130Total Depreciation and Amortization
    
    $
    4,815
    
    
    $
    5,144
 9.
    
    INCOME TAXESWe adopted the provisions of FIN 48 on October 1, 2007. As a result of the implementation of FIN
48, we made a comprehensive review of our portfolio of uncertain tax positions in accordance
with recognition standards established by FIN 48. In this regard, an uncertain tax position
represents our expected treatment of a tax position taken in a filed tax return, or planned to
be taken in a future tax return, that has not been reflected in measuring income tax expense for
financial reporting purposes. Upon the adoption of FIN 48, we recorded a liability for
unrecognized tax benefits of $3,949, of which $291 would impact our effective tax rate if we
were to sustain the positions as filed. We expect that it is reasonably possible that our
liability for unrecognized tax benefits will be reduced by $62 during the next twelve months due
to the expiration of certain statutes of limitations.We recognize accrued interest and penalties related to unrecognized tax benefits in income tax
expense. As of October 1, 2007, we had accrued approximately $154 for the payment of tax-related
interest and no amounts for penalties. During the three months ended December 31, 2007, we
accrued an additional $19 of interest related to unrecognized tax benefits.We file income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and
the U.K. With few exceptions, we are no longer subject to federal or state income tax
examinations for years before 2004.10.
    
    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, the Ampac Fine Chemicals LLC Pension Plan for Salaried
Employees, and the Ampac Fine Chemicals LLC Pension Plan for Bargaining Unit Employees
(collectively, the Pension Plans).We maintain a Supplemental Executive Retirement Plan (the SERP). Prior to November 2007, the
SERP included our former and current Chief Executive Officers. In November 2007, our board of
directors approved the amendment and restatement of the SERP. Under the terms of the amended
and restated SERP, certain of our officers and their beneficiaries are entitled to receive a
monthly annuity benefit following their retirement from the Company. The amendment and
restatement of the SERP, which became effective as of October 1, 2007, amends, among other
provisions, the list of participants in the SERP to include three additional executive officers
of the Company and the method of calculating a participants benefit under the SERP. As a
result of the SERP amendment and restatement, effective October 1, 2007, we recorded an increase
in our SERP liability of $3,516 which represents the actuarial value of the amended SERP
benefits applied to prior service periods of the participants (Prior Service Costs). An entry
for the corresponding amount was recorded as an increase to Accumulated Other Comprehensive
Loss. Unrecognized Prior Service Costs will be
amortized as additional pension expense over the average estimated remaining service period of
the participants of eight years.
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10.
    
    DEFINED BENEFIT PLANS (continued)We maintain two 401(k) plans in which participating employees may make contributions. One covers
substantially all U.S. employees except AFC bargaining unit employees and the other covers AFC
bargaining unit employees. We make matching contributions for AFC and Aerospace Equipment U.S.
employees. In addition, we make a profit sharing contribution for Aerospace Equipment U.S.
employees.We provide healthcare and life insurance benefits to substantially all of our employees.Net periodic pension cost related to the Pension Plans consists of the following:
 Three Months EndedDecember 31,2007
    
    2006Pension Plans:Service Cost
    
    $
    507
    
    
    $
    391Interest Cost
    
    
    563
    
    
    
    425Expected Return on Plan Assets
    
    
    (521
    )
    
    
    (376
    )Recognized Actuarial Losses
    
    
    14
    
    
    
    123Amortization of Prior Service Costs
    
    
    107
    
    
    
    12Net Periodic Pension Cost
    
    $
    670
    
    
    $
    575Supplemental Executive Retirement Plan:Service Cost
    
    $
    87
    
    
    $
    Interest Cost
    
    
    86
    
    
    
    35Expected Return on Plan Assets
    
    
    
    
    
    
    Recognized Actuarial Losses
    
    
    106
    
    
    
    6Amortization of Prior Service Costs
    
    
    
    
    
    
    11Net Periodic Pension Cost
    
    $
    279
    
    
    $
    52
 For the three months ended December 31, 2007, we contributed $628 to the Pension Plans to
fund benefit payments and anticipate making approximately $2,446 in additional contributions
through September 30, 2008. For the three months ended December 31, 2007, we contributed $32 to
the SERP to fund benefit payments and anticipate making approximately $95 in additional
contributions through September 30, 2008.11.
    
    GUARANTOR SUBSIDIARIESAs discussed in Note 6, on February 6, 2007, American Pacific Corporation, a Delaware
corporation (the Parent) issued and sold $110,000 aggregate principal amount of Senior Notes.
In connection with the issuance of the Senior Notes, the Parents U.S. subsidiaries (Guarantor
Subsidiaries) jointly, fully, severally, and unconditionally guaranteed the Senior Notes. The
Parents sole foreign subsidiary (Non-Guarantor Subsidiary) is not a guarantor of the Senior
Notes. Each of the Parents subsidiaries is wholly-owned. The Parent has no independent assets
or operations. The following presents condensed consolidating financial information separately
for the Parent, Guarantor Subsidiaries and Non-Guarantor Subsidiary:
 -15-




---



##### Table of Contents



11.
    
    GUARANTOR SUBSIDIARIES (continued)
 Condensed Consolidating Balance Sheet 
December 31, 2007
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedAssets:Cash and Cash Equivalents
    
    $
    
    
    
    $
    38,041
    
    
    $
    119
    
    
    $
    
    
    
    $
    38,160Accounts Receivable, Net
    
    
    
    
    
    
    14,245
    
    
    
    711
    
    
    
    (1,007
    )
    
    
    13,949Inventories, Net
    
    
    
    
    
    
    49,271
    
    
    
    823
    
    
    
    
    
    
    
    50,094Prepaid Expenses and Other Assets
    
    
    
    
    
    
    2,248
    
    
    
    52
    
    
    
    
    
    
    
    2,300Deferred Income Taxes
    
    
    
    
    
    
    5,504
    
    
    
    
    
    
    
    
    
    
    
    5,504Total Current Assets
    
    
    
    
    
    
    109,309
    
    
    
    1,705
    
    
    
    (1,007
    )
    
    
    110,007Property, Plant and Equipment, Net
    
    
    
    
    
    
    115,952
    
    
    
    147
    
    
    
    
    
    
    
    116,099Intangible Assets, Net
    
    
    
    
    
    
    4,482
    
    
    
    
    
    
    
    
    
    
    
    4,482Deferred Income Taxes
    
    
    
    
    
    
    18,580
    
    
    
    
    
    
    
    
    
    
    
    18,580Other Assets
    
    
    
    
    
    
    9,540
    
    
    
    
    
    
    
    
    
    
    
    9,540Intercompany Advances
    
    
    79,294
    
    
    
    1,840
    
    
    
    
    
    
    
    (81,134
    )
    
    
    Investment in Subsidiaries
    
    
    106,916
    
    
    
    (758
    )
    
    
    
    
    
    
    (106,158
    )
    
    
    Total Assets
    
    $
    186,210
    
    
    $
    258,945
    
    
    $
    1,852
    
    
    $
    (188,299
    )
    
    $
    258,708Liabilitites and Stockholders Equity:Accounts Payable and Other Current Liabilities
    
    $
    
    
    
    $
    30,838
    
    
    $
    770
    
    
    $
    (1,007
    )
    
    $
    30,601Environmental Remediation Reserves
    
    
    
    
    
    
    686
    
    
    
    
    
    
    
    
    
    
    
    686Deferred Revenues
    
    
    
    
    
    
    8,782
    
    
    
    
    
    
    
    
    
    
    
    8,782Intercompany Advances
    
    
    
    
    
    
    79,294
    
    
    
    1,840
    
    
    
    (81,134
    )
    
    
    Current Portion of Debt
    
    
    
    
    
    
    254
    
    
    
    
    
    
    
    
    
    
    
    254Total Current Liabilities
    
    
    
    
    
    
    119,854
    
    
    
    2,610
    
    
    
    (82,141
    )
    
    
    40,323Long-Term Debt
    
    
    110,000
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    110,309Environmental Remediation Reserves
    
    
    
    
    
    
    14,444
    
    
    
    
    
    
    
    
    
    
    
    14,444Other Long-Term Liabilities
    
    
    
    
    
    
    17,422
    
    
    
    
    
    
    
    
    
    
    
    17,422Total Liabilities
    
    
    110,000
    
    
    
    152,029
    
    
    
    2,610
    
    
    
    (82,141
    )
    
    
    182,498Total Stockholders Equity
    
    
    76,210
    
    
    
    106,916
    
    
    
    (758
    )
    
    
    (106,158
    )
    
    
    76,210Total Liabilities and
Stockholders Equity
    
    $
    186,210
    
    
    $
    258,945
    
    
    $
    1,852
    
    
    $
    (188,299
    )
    
    $
    258,708
 Condensed Consolidating Statement of Operations 
Three Months Ended December 31, 2007
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    46,522
    
    
    $
    379
    
    
    $
    (11
    )
    
    $
    46,890Cost of Revenues
    
    
    
    
    
    
    29,067
    
    
    
    405
    
    
    
    (11
    )
    
    
    29,461Gross Profit (Loss)
    
    
    
    
    
    
    17,455
    
    
    
    (26
    )
    
    
    
    
    
    
    17,429Operating Expenses
    
    
    
    
    
    
    10,042
    
    
    
    163
    
    
    
    
    
    
    
    10,205Operating Income (Loss)
    
    
    
    
    
    
    7,413
    
    
    
    (189
    )
    
    
    
    
    
    
    7,224Interest and Other Income
    
    
    2,670
    
    
    
    379
    
    
    
    (1
    )
    
    
    (2,670
    )
    
    
    378Interest Expense
    
    
    2,670
    
    
    
    2,704
    
    
    
    
    
    
    
    (2,670
    )
    
    
    2,704Income (Loss) before Income Tax and
Equity Account for Subsidiaries
    
    
    
    
    
    
    5,088
    
    
    
    (190
    )
    
    
    
    
    
    
    4,898Income Tax Expense
    
    
    
    
    
    
    2,035
    
    
    
    
    
    
    
    
    
    
    
    2,035Income (Loss) before
Equity Account for Subsidiaries
    
    
    
    
    
    
    3,053
    
    
    
    (190
    )
    
    
    
    
    
    
    2,863Equity Account for Subsidiaries
    
    
    2,863
    
    
    
    (190
    )
    
    
    
    
    
    
    (2,673
    )
    
    
    Net Income (Loss)
    
    $
    2,863
    
    
    $
    2,863
    
    
    $
    (190
    )
    
    $
    (2,673
    )
    
    $
    2,863
 -16-




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##### Table of Contents



11.
    
    GUARANTOR SUBSIDIARIES (continued)
 Condensed
Consolidating Statement of Cash Flows 
Three Months Ended December 31, 2007
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedNet Cash Provided by Operating Activities
    
    $
    
    
    
    $
    18,174
    
    
    $
    45
    
    
    $
    
    
    
    $
    18,219Cash Flows from Investing Activities:Capital expenditures
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Net Cash Used in Investing Activities
    
    
    
    
    
    
    (1,500
    )
    
    
    
    
    
    
    
    
    
    
    (1,500
    )Cash Flows from Financing Activities:Payments of long-term debt
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (62
    )Issuance of common stock
    
    
    49
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Excess tax benefit from exrecise of stock options
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28Intercompany advances, net
    
    
    (77
    )
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    Net Cash Provided by Financing Activities
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15Net Change in Cash and Cash Equivalents
    
    
    
    
    
    
    16,689
    
    
    
    45
    
    
    
    
    
    
    
    16,734Cash and Cash Equivalents, Beginning of Period
    
    
    
    
    
    
    21,352
    
    
    
    74
    
    
    
    
    
    
    
    21,426Cash and Cash Equivalents, End of Period
    
    $
    
    
    
    $
    38,041
    
    
    $
    119
    
    
    $
    
    
    
    $
    38,160
 Condensed Consolidating Balance Sheet 
September 30, 2007
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedAssets:Cash and Cash Equivalents
    
    $
    
    
    
    $
    21,352
    
    
    $
    74
    
    
    $
    
    
    
    $
    21,426Accounts Receivable
    
    
    
    
    
    
    25,262
    
    
    
    1,053
    
    
    
    (1,079
    )
    
    
    25,236Inventories
    
    
    
    
    
    
    46,311
    
    
    
    712
    
    
    
    
    
    
    
    47,023Prepaid Expenses and Other Assets
    
    
    
    
    
    
    2,160
    
    
    
    98
    
    
    
    
    
    
    
    2,258Deferred Income Taxes
    
    
    
    
    
    
    2,101
    
    
    
    
    
    
    
    
    
    
    
    2,101Total Current Assets
    
    
    
    
    
    
    97,186
    
    
    
    1,937
    
    
    
    (1,079
    )
    
    
    98,044Property, Plant and Equipment, Net
    
    
    
    
    
    
    116,814
    
    
    
    151
    
    
    
    
    
    
    
    116,965Intangible Assets, Net
    
    
    
    
    
    
    5,767
    
    
    
    
    
    
    
    
    
    
    
    5,767Deferred Income Taxes
    
    
    
    
    
    
    19,385
    
    
    
    
    
    
    
    
    
    
    
    19,385Other Assets
    
    
    
    
    
    
    9,246
    
    
    
    
    
    
    
    
    
    
    
    9,246Intercompany Advances
    
    
    78,976
    
    
    
    1,840
    
    
    
    
    
    
    
    (80,816
    )
    
    
    Investment in Subsidiaries
    
    
    106,713
    
    
    
    (521
    )
    
    
    
    
    
    
    (106,192
    )
    
    
    Total Assets
    
    $
    185,689
    
    
    $
    249,717
    
    
    $
    2,088
    
    
    $
    (188,087
    )
    
    $
    249,407Liabilitites and Stockholders Equity:Accounts
Payable and Other Current Liabilities
    
    
    $
    
    
    $
    27,914
    
    
    $
    769
    
    
    $
    (1,079
    )
    
    $
    27,604Environmental Remediation Reserves
    
    
    
    
    
    
    726
    
    
    
    
    
    
    
    
    
    
    
    726Deferred Revenues
    
    
    
    
    
    
    7,755
    
    
    
    
    
    
    
    
    
    
    
    7,755Intercompany Advances
    
    
    
    
    
    
    78,976
    
    
    
    1,840
    
    
    
    (80,816
    )
    
    
    Current Portion of Debt
    
    
    
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    252Total Current Liabilities
    
    
    
    
    
    
    115,623
    
    
    
    2,609
    
    
    
    (81,895
    )
    
    
    36,337Long-Term Debt
    
    
    110,000
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    110,373Environmental Remediation Reserves
    
    
    
    
    
    
    14,697
    
    
    
    
    
    
    
    
    
    
    
    14,697Other Long-Term Liabilities
    
    
    
    
    
    
    12,311
    
    
    
    
    
    
    
    
    
    
    
    12,311Total Liabilities
    
    
    110,000
    
    
    
    143,004
    
    
    
    2,609
    
    
    
    (81,895
    )
    
    
    173,718Total Stockholders Equity
    
    
    75,689
    
    
    
    106,713
    
    
    
    (521
    )
    
    
    (106,192
    )
    
    
    75,689Total Liabilities and
Stockholders Equity
    
    $
    185,689
    
    
    $
    249,717
    
    
    $
    2,088
    
    
    $
    (188,087
    )
    
    $
    249,407
 -17-




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##### Table of Contents



11.
    
    GUARANTOR SUBSIDIARIES (continued)
 Condensed Consolidating Statement of Operations 
Three Months Ended December 31, 2006
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    34,565
    
    
    $
    344
    
    
    $
    (21
    )
    
    $
    34,888Cost of Revenues
    
    
    
    
    
    
    21,698
    
    
    
    303
    
    
    
    (21
    )
    
    
    21,980Gross Profit (Loss)
    
    
    
    
    
    
    12,867
    
    
    
    41
    
    
    
    
    
    
    
    12,908Operating Expenses
    
    
    
    
    
    
    8,388
    
    
    
    125
    
    
    
    
    
    
    
    8,513Operating Income (Loss)
    
    
    
    
    
    
    4,479
    
    
    
    (84
    )
    
    
    
    
    
    
    4,395Interest and Other Income
    
    
    3,255
    
    
    
    93
    
    
    
    1
    
    
    
    (3,255
    )
    
    
    94Interest Expense
    
    
    3,255
    
    
    
    3,303
    
    
    
    
    
    
    
    (3,255
    )
    
    
    3,303Income (Loss) from Continuing Operations before
Income Tax and Equity Account for Subsidiaries
    
    
    
    
    
    
    1,269
    
    
    
    (83
    )
    
    
    
    
    
    
    1,186Income Tax Expense
    
    
    
    
    
    
    547
    
    
    
    
    
    
    
    
    
    
    
    547Income (Loss) from Continuing Operations before
Equity Account for Subsidiaries
    
    
    
    
    
    
    722
    
    
    
    (83
    )
    
    
    
    
    
    
    639Equity Account for Subsidiaries
    
    
    639
    
    
    
    (83
    )
    
    
    
    
    
    
    (556
    )
    
    
    Net Income (Loss) from Continuing Operations
    
    $
    639
    
    
    $
    639
    
    
    $
    (83
    )
    
    $
    (556
    )
    
    $
    639
 Condensed Consolidating Statement of Cash Flows 
Three Months Ended December 31, 2006
 Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiary
    
    Eliminations
    
    ConsolidatedNet Cash Used by Operating Activities
    
    $
    
    
    
    $
    (3,392
    )
    
    $
    (589
    )
    
    $
    
    
    
    $
    (3,981
    )Cash Flows from Investing Activities:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (1,423
    )
    
    
    (7
    )
    
    
    
    
    
    
    (1,430
    )Discontinued operations, net
    
    
    
    
    
    
    7,510
    
    
    
    
    
    
    
    
    
    
    
    7,510Net Cash Provided (Used) by Investing Activities
    
    
    
    
    
    
    6,087
    
    
    
    (7
    )
    
    
    
    
    
    
    6,080Cash Flows from Financing Activities:Payments of long-term debt
    
    
    (7,230
    )
    
    
    (57
    )
    
    
    
    
    
    
    
    
    
    
    (7,287
    )Intercompany advances, net
    
    
    7,230
    
    
    
    (7,806
    )
    
    
    576
    
    
    
    
    
    
    
    Net Cash Provided (Used) by Financing Activities
    
    
    
    
    
    
    (7,863
    )
    
    
    576
    
    
    
    
    
    
    
    (7,287
    )Net Change in Cash and Cash Equivalents
    
    
    
    
    
    
    (5,168
    )
    
    
    (20
    )
    
    
    
    
    
    
    (5,188
    )Cash and Cash Equivalents, Beginning of Period
    
    
    
    
    
    
    6,758
    
    
    
    114
    
    
    
    
    
    
    
    6,872Cash and Cash Equivalents, End of Period
    
    $
    
    
    
    $
    1,590
    
    
    $
    94
    
    
    $
    
    
    
    $
    1,684
 -18-




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
   OUR COMPANY
   -19-




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##### Table of Contents



OUR BUSINESS SEGMENTS
  Three Months EndedDecember 31,2007
    
    2006Specialty Chemicals:Perchlorates
    
    
    31
    %
    
    
    29
    %Sodium Azide
    
    
    0
    %
    
    
    3
    %Halotron
    
    
    2
    %
    
    
    2
    %Total Specialty Chemicals
    
    
    33
    %
    
    
    34
    %Fine Chemicals
    
    
    57
    %
    
    
    51
    %Aerospace Equipment
    
    
    8
    %
    
    
    11
    %Other Businesses:Real Estate
    
    
    1
    %
    
    
    1
    %Water Treatment Equipment
    
    
    1
    %
    
    
    3
    %Total Other Businesses
    
    
    2
    %
    
    
    4
    %Total Revenues
    
    
    100
    %
    
    
    100
    %
 Specialty Chemicals.
   Fine Chemicals .
 -20-




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##### Table of Contents




    
    Alternative Supply May Not Be Readily Available. We are currently the sole source supplier
on several of our fine chemicals products.
    
    Regulatory Approval.Applications to and approvals from the FDA and other regulatory
authorities generally require the chemical contractor to be named. Switching contractors may
require additional regulatory approval and could take as long as 1-2 years.
    
    Significant Financial Costs.Switching contractors can result in significant costs
associated with technology transfer, process validation and re-filing with the FDA and other
regulatory authorities.
 Aerospace Equipment.
 Other Businesses .
 RESULTS OF OPERATIONS
 REVENUES
 December 31,
    
    Increase
    
    Percentage2007
    
    2006
    
    (Decrease)
    
    ChangeThree Months Ended:Specialty Chemicals
    
    $
    15,549
    
    
    $
    11,790
    
    
    $
    3,759
    
    
    
    32
    %Fine Chemicals
    
    
    26,762
    
    
    
    17,591
    
    
    
    9,171
    
    
    
    52
    %Aerospace Equipment
    
    
    3,735
    
    
    
    3,976
    
    
    
    (241
    )
    
    
    (6
    %)Other Businesses
    
    
    844
    
    
    
    1,531
    
    
    
    (687
    )
    
    
    (45
    %)Total Revenues
    
    $
    46,890
    
    
    $
    34,888
    
    
    $
    12,002
    
    
    
    34
    %
 Specialty Chemicals.
 -21-




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##### Table of Contents




    
    A 66% increase in Grade I AP volume in the fiscal 2008 first quarter, offset partially by a
15% decrease in the related average price per pound.
    
    Sodium azide revenues decreased 93% in the fiscal 2008 first quarter compared to the prior
year quarter.
    
    Halotron revenues decreased 11% in the fiscal 2008 first quarter compared to the prior year
quarter.
     Fine Chemicals
 Aerospace Equipment.
 Other Businesses.
 COST OF REVENUES AND GROSS MARGIN
 December 31,
    
    Increase
    
    Percentage2007
    
    2006
    
    (Decrease)
    
    ChangeThree Months Ended:Revenues
    
    $
    46,890
    
    
    $
    34,888
    
    
    $
    12,002
    
    
    
    34
    %Cost of Revenues
    
    
    29,461
    
    
    
    21,980
    
    
    
    7,481
    
    
    
    34
    %Gross Margin
    
    
    17,429
    
    
    
    12,908
    
    
    
    4,521
    
    
    
    35
    %Gross Margin Percentage
    
    
    37
    %
    
    
    37
    %
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
    
    Specialty Chemicals segment depreciation and amortization expense, which is included in
cost of sales, was $1,258, or 8% of Specialty Chemicals revenue for the fiscal 2008 first
quarter, compared to $1,282, or 11% of Specialty Chemicals revenue for the fiscal 2007 first
quarter. As a result of the improved coverage of depreciation and amortization expense by the
higher revenue level in the most recent quarter, and raw material cost reductions for Halotron
products, the Specialty Chemicals segment gross margin percentage improved by approximately
eight points.
    
    A decrease of approximately four points in Fine Chemicals segment gross margin percentage
compared to the prior fiscal year period primarily due to a change in product mix. To a lesser
extent, the gross margin percentage was negatively affected by lower factory utilization
during the last quarter of fiscal 2007, which in turn increased the cost of inventories which
were sold in the first quarter of fiscal 2008.
    
    An increase of approximately two points in Aerospace Equipment segment gross margin
percentage due to favorable performance on the segments primary production contracts.
 OPERATING EXPENSES
 December 31,
    
    Increase
    
    Percentage2007
    
    2006
    
    (Decrease)
    
    ChangeThree Months Ended:Operating Expenses
    
    $
    10,205
    
    
    $
    8,513
    
    
    $
    1,692
    
    
    
    20
    %Percentage of Revenues
    
    
    22
    %
    
    
    24
    %
  
    
    An increase in Specialty Chemicals segment operating expenses of $370 primarily due to
environmental related costs and employee compensation.
    
    An increase in Fine Chemicals segment operating expenses of $506 due to additional
personnel costs, primarily recruiting and relocation expenses.
    
    An increased in corporate operating expenses of $675 due to a $649 increase in employee
compensation and retirement benefit expenses and a $305 increase in Sarbanes-Oxley compliance
costs, offset somewhat by numerous other minor decreases in corporate operating expenses.
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SEGMENT OPERATING INCOME (LOSS)
 December 31,
    
    
    Increase
    
    

    Percentage2007
    
    2006

    
    (Decrease)
    
    

    ChangeThree Months Ended:Specialty Chemicals
    
    $
    5,879
    
    
    $
    3,493
    
    
    $
    2,386
    
    
    
    68
    %Fine Chemicals
    
    
    4,661
    
    
    
    2,919
    
    
    
    1,742
    
    
    
    60
    %Aerospace Equipment
    
    
    173
    
    
    
    186
    
    
    
    (13
    )
    
    
    (7
    %)Other Businesses
    
    
    (18
    )
    
    
    593
    
    
    
    (611
    )
    
    
    (103
    %)Segment Operating
    
    
    10,695
    
    
    
    7,191
    
    
    
    3,504
    
    
    
    49
    %Income
Corporate Expenses
    
    
    (3,471
    )
    
    
    (2,796
    )
    
    
    (675
    )
    
    
    24
    %Operating Income
    
    $
    7,224
    
    
    $
    4,395
    
    
    $
    2,829
    
    
    
    64
    %
  LIQUIDITY AND CAPITAL RESOURCES
 CASH FLOWS
 Three Months Ended December 31,
    
    
    Increase
    
    
    Percentage2007
    
    2006

    
    (Decrease)
    
    

    ChangeCash Provided
(Used) By:Operating activities
    
    $
    18,219
    
    
    $
    (3,981
    )
    
    $
    22,200
    
    
    
    (558
    %)Financing activities
    
    
    (1,500
    )
    
    
    6,080
    
    
    
    (7,580
    )
    
    
    125
    %Investing activities
    
    
    15
    
    
    
    (7,287
    )
    
    
    7,302
    
    
    
    (100
    %)Net change in cash
for period
    
    $
    16,734
    
    
    $
    (5,188
    )
    
    $
    21,922
    
    
    
    423
    %
 Operating Activities.
 
    
    An increase in cash due to improved profitability of our operations of $2,764.
    
    An improvement in cash flow from working capital accounts of $16,874, excluding the effects
of interest and income taxes.
    
    A reduction in cash taxes paid of $220.
    
    A reduction in cash used for interest payments of $2,108.
    
    A reduction in cash used for environmental remediation of $720.
    
    Other increases in cash used for operating activities of $486.
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Investing Activities.
  Financing Activities.
 LIQUIDITY AND CAPITAL RESOURCES
    LONG-TERM DEBT AND REVOLVING CREDIT FACILITIES
 Senior Notes.
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
    
    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 an applicable 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;
    
    until February 1, 2010, up to 35% of the principal amount of the Senior Notes at a
redemption price of 109% with the proceeds of certain sales of our equity securities; and
    
    under certain changes of control, we must offer to purchase the Senior Notes at 101% of
their aggregate principal amount, plus accrued interest.
  
    
    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 leaseback 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.
  Revolving Credit Facility.
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
    
    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.
   ENVIRONMENTAL REMEDIATION  AMPAC HENDERSON SITE
  CONTRACTUAL OBLIGATIONS
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OFF-BALANCE SHEET ARRANGEMENTS
 Letters of Credit.
 Employee Agreements.
  DIVIDEND AND SHARE REPURCHASE PROGRAM
  CRITICAL ACCOUNTING POLICIES
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Sales and Revenue Recognition. Revenue Recognition in Financial Statements Revenue Recognition,
  Depreciable or Amortizable Lives of Long-Lived Assets.
  Impairment of Long-Lived Assets. W
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Environmental Costs .
  Income Taxes.
  Pension Benefits.
 Recently Issued or Adopted Accounting Standards.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in Thousands)
  
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS (Dollars in Thousands)
   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.
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%
  The inherent limitations of our fixed-price or similar contracts may impact our profitability.
  The numerous and often complex laws and regulations and regulatory oversight to which our
operations and properties are subject, the cost of compliance, and the effect of any failure to
comply could reduce our profitability and liquidity.
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A significant portion of our business depends on contracts with the government or its prime
contractors and these contracts are impacted by governmental priorities and are subject to
potential fluctuations in funding or early termination, including for convenience, any of which
could material adversely effect our operating results, financial condition or cash flows.
   We may be subject to potentially material costs and liabilities in connection with environmental
liabilities.
  Review of Perchlorate Toxicity by EPA.
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Perchlorate Remediation Project in Henderson, Nevada.
 Henderson Site Environmental Remediation Reserve.
 Other Environmental Matters.
 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.
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For each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments, most
production is conducted in a single facility and any significant disruption or delay at a
particular facility could have a material adverse effect on our business, financial position and
results of operations.
  The release or explosion of dangerous materials used in our business could disrupt our operations
and cause us to incur additional costs and liability.
  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.
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Each of our Specialty Chemicals, Fine Chemicals and Aerospace Equipment segments may be unable to
comply with customer specifications and manufacturing instructions or may experience delays or
other problems with existing or new products, which could result in increased costs, losses of
sales and potential breach of 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 or if the product is subsequently
recalled, then the operating results of AFC may be negatively impacted.
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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
sufficient financial resources to finance the necessary capital expenditures, its business and
results of operations may be harmed.
  We may be subject to potential product liability claims that could affect our earnings and
financial condition and harm our reputation.
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Technology innovations in the markets that we serve may create alternatives to our products and
result in reduced sales.
  We are subject to competition in certain industries where we participate and therefore may not be
able to compete successfully.
  Due to the nature of our business, our sales levels may fluctuate causing our quarterly operating
results to fluctuate.
  The volatility of the chemical industry affects our capacity utilization and causes fluctuations in
our results of operations.
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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.
   We have a substantial amount of debt, and the cost of servicing that debt could adversely affect
our ability to take actions, our liquidity or our financial condition.
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
    
    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;
    
    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 leaseback 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.
  Our shareholder rights plan, Restated Certificate of Incorporation, as amended, and Amended and
Restated By-laws 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
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
    
    special voting requirements for the amendment of our Restated Certificate of Incorporation, as
amended, and Amended and Restated By-laws.
  Our proprietary rights may be violated or compromised, which could damage our operations.
  
 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  See attached exhibit index.
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SIGNATURES
  AMERICAN PACIFIC CORPORATIONDate: February 11, 2008
    /s/ JOHN R. GIBSONJohn R. GibsonChairman of the Board and Chief
Executive Officer
(Principal Executive Officer) /s/ DANA M. KELLEYDana M. KelleyVice President, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer) -44-




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EXHIBIT INDEX
 EXHIBIT NO.
    
    DOCUMENT DESCRIPTION3.1
    
    Amended and Restated By-Laws of American Pacific Corporation (incorporated by reference to
Exhibit 3.1 the Companys Current Report on Form 8-K, filed with the SEC on November 15, 2007)10.1
    
    American Pacific Corporation Supplemental Executive Retirement Plan, amended and restated and
effective as of October 1, 2007 (incorporated by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed with the SEC on November 15, 2007)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, as amended, or otherwise subject to the liability of that section, and shall not be
deemed to be incorporated by reference into any filing under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended. -45-