##### Table of Contents



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 Quarterly Period Ended June 30, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
 Commission File Number 1-8137
 AMERICAN PACIFIC CORPORATION
  Delaware
(State or other jurisdiction
of incorporation or
organization)
    
    59-6490478
(I.R.S. Employer
Identification No.)3770 Howard Hughes Parkway, Suite 300
Las Vegas, NV
(Address of principal executive offices)
    
    89169
(Zip Code)
 702) 735-2200
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated file þ
 o þ




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##### Table of Contents



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
    
    
    20ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    40ITEM 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    41ITEM 1A. Risk Factors
    
    
    41ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42ITEM 3. Defaults Upon Senior Securities
    
    
    42ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    42ITEM 5. Other Information
    
    
    42ITEM 6. Exhibits
    
    
    42EX-10.1EX-10.2EX-10.3EX-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 Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    42,840
    
    
    $
    12,580
    
    
    $
    99,102
    
    
    $
    41,634Cost of Revenues
    
    
    30,931
    
    
    
    9,517
    
    
    
    70,288
    
    
    
    28,357Gross Profit
    
    
    11,909
    
    
    
    3,063
    
    
    
    28,814
    
    
    
    13,277Operating Expenses
    
    
    10,187
    
    
    
    5,793
    
    
    
    26,468
    
    
    
    17,462Environmental Remediation Charges
    
    
    
    
    
    
    22,400
    
    
    
    2,800
    
    
    
    22,400Operating Income (Loss)
    
    
    1,722
    
    
    
    (25,130
    )
    
    
    (454
    )
    
    
    (26,585
    )Interest and Other Income
    
    
    55
    
    
    
    176
    
    
    
    978
    
    
    
    433Interest Expense
    
    
    3,280
    
    
    
    
    
    
    
    7,405
    
    
    
    Loss from Continuing Operations
before Income Tax
    
    
    (1,503
    )
    
    
    (24,954
    )
    
    
    (6,881
    )
    
    
    (26,152
    )Income Tax Benefit
    
    
    (642
    )
    
    
    (9,241
    )
    
    
    (2,624
    )
    
    
    (9,699
    )Loss from Continuing Operations
    
    
    (861
    )
    
    
    (15,713
    )
    
    
    (4,257
    )
    
    
    (16,453
    )Loss from Discontinued Operations, Net of Tax
    
    
    (192
    )
    
    
    (79
    )
    
    
    (439
    )
    
    
    (236
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,622Net Loss
    
    $
    (1,053
    )
    
    $
    (15,792
    )
    
    $
    (4,696
    )
    
    $
    (15,067
    )Basic Earnings (Loss) Per Share:Loss from Continuing Operations
    
    $
    (0.12
    )
    
    $
    (2.15
    )
    
    $
    (0.58
    )
    
    $
    (2.26
    )Loss from Discontinued Operations, Net of Tax
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.03
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.22Net Loss
    
    $
    (0.14
    )
    
    $
    (2.16
    )
    
    $
    (0.64
    )
    
    $
    (2.07
    )Diluted Earnings (Loss) Per Share:Loss from Continuing Operations
    
    $
    (0.12
    )
    
    $
    (2.15
    )
    
    $
    (0.58
    )
    
    $
    (2.26
    )Loss from Discontinued Operations, Net of Tax
    
    
    (0.02
    )
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.03
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.22Net Loss
    
    $
    (0.14
    )
    
    $
    (2.16
    )
    
    $
    (0.64
    )
    
    $
    (2.07
    )Weighted Average Shares Outstanding:Basic
    
    
    7,304,000
    
    
    
    7,297,000
    
    
    
    7,299,000
    
    
    
    7,294,000Diluted
    
    
    7,304,000
    
    
    
    7,297,000
    
    
    
    7,299,000
    
    
    
    7,294,000
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)
 June 30,
    
    September 30,2006
    
    2005ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    5,189
    
    
    $
    37,213Accounts and Notes Receivable
    
    
    23,782
    
    
    
    12,572Inventories
    
    
    35,064
    
    
    
    13,818Prepaid Expenses and Other Assets
    
    
    4,799
    
    
    
    1,365Deferred Income Taxes
    
    
    834
    
    
    
    834Assets of Discontinued Operations Held for Sale
    
    
    10,676
    
    
    
    Total Current Assets
    
    
    80,344
    
    
    
    65,802Property, Plant and Equipment, Net
    
    
    109,432
    
    
    
    15,646Intangible Assets, Net
    
    
    21,609
    
    
    
    9,763Deferred Income Taxes
    
    
    19,312
    
    
    
    19,312Other Assets
    
    
    5,234
    
    
    
    4,477TOTAL ASSETS
    
    $
    235,931
    
    
    $
    115,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    12,187
    
    
    $
    5,231Accrued Liabilities
    
    
    5,557
    
    
    
    2,786Employee Related Liabilities
    
    
    3,296
    
    
    
    2,023Environmental Remediation Reserves
    
    
    1,750
    
    
    
    4,967Deferred Revenues
    
    
    3,875
    
    
    
    792Current Portion of Debt
    
    
    6,614
    
    
    
    768Liabilities of Discontinued Operations Held for Sale
    
    
    3,582
    
    
    
    Total Current Liabilities
    
    
    36,861
    
    
    
    16,567Long-Term Debt
    
    
    103,420
    
    
    
    Environmental Remediation Reserves
    
    
    15,980
    
    
    
    15,620Pension Obligations and Other Long-Term Liabilities
    
    
    9,169
    
    
    
    8,144Total Liabilities
    
    
    165,430
    
    
    
    40,331Commitments and ContingenciesShareholders EquityPreferred Stock  No par value; 3,000,000 authorized; none outstanding
    
    
    
    
    
    
    Common Stock  $.10 par value; 20,000,000 shares authorized,
9,357,287 and 9,331,787 issued
    
    
    935
    
    
    
    932Capital in Excess of Par Value
    
    
    86,649
    
    
    
    86,187Retained Earnings
    
    
    1,510
    
    
    
    6,206Treasury Stock  2,034,870 shares
    
    
    (16,982
    )
    
    
    (16,982
    )Accumulated Other Comprehensive Loss
    
    
    (1,611
    )
    
    
    (1,674
    )Total Shareholders Equity
    
    
    70,501
    
    
    
    74,669TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    235,931
    
    
    $
    115,000
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Statements of Cash Flow
(Unaudited, Dollars in Thousands)
 Nine Months EndedJune 30,2006
    
    2005Cash Flows from Operating Activities:Net Loss from Continuing Operations
    
    $
    (4,257
    )
    
    $
    (16,453
    )Adjustments to Reconcile Net Income (Loss) from ContinuingOperations to Net Cash from Operating Activities:Depreciation and amortization
    
    
    14,166
    
    
    
    4,205Non-cash interest expense
    
    
    2,314
    
    
    
    Share-based compensation
    
    
    287
    
    
    
    Deferred income taxes
    
    
    
    
    
    
    (9,613
    )Gain on sale of assets
    
    
    (610
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,399
    )
    
    
    4,424Inventories
    
    
    (6,273
    )
    
    
    (2,485
    )Prepaid expenses
    
    
    (3,461
    )
    
    
    (724
    )Accounts payable and accrued liabilities
    
    
    6,361
    
    
    
    750Deferred revenues
    
    
    (284
    )
    
    
    Environmental remediation reserves
    
    
    (2,857
    )
    
    
    22,400Other
    
    
    618
    
    
    
    354Discontinued operations, net
    
    
    482
    
    
    
    (425
    )Net cash provided by operating activities
    
    
    1,087
    
    
    
    2,433Cash Flows from Investing Activities:Acquisition of businesses
    
    
    (108,462
    )
    
    
    (4,468
    )Capital expenditures
    
    
    (13,429
    )
    
    
    (1,354
    )Proceeds from sale of assets
    
    
    2,395
    
    
    
    Discontinued operations, net
    
    
    (403
    )
    
    
    (257
    )Net Cash Used in Investing Activities
    
    
    (119,899
    )
    
    
    (6,079
    )Cash Flows from Financing Activities:Proceeds from the issuance of long-term debt
    
    
    85,000
    
    
    
    Payments of long-term debt
    
    
    (496
    )
    
    
    Short-term borrowings, net
    
    
    4,000
    
    
    
    Debt issuance costs
    
    
    (1,782
    )
    
    
    Other
    
    
    158
    
    
    
    163Discontinued operations, net
    
    
    (92
    )
    
    
    300Net Cash Provided by Financing Activities
    
    
    86,788
    
    
    
    463Net Change in Cash and Cash Equivalents
    
    
    (32,024
    )
    
    
    (3,183
    )Cash and Cash Equivalents, Beginning of Period
    
    
    37,213
    
    
    
    23,777Cash and Cash Equivalents, End of Period
    
    $
    5,189
    
    
    $
    20,594Cash Paid (Refunded) For:Interest
    
    $
    5,063
    
    
    $
    Income taxes
    
    $
    (440
    )
    
    $
    (452
    )Non-Cash Transaction:Issuance of seller subordinated note, net of discount
    
    $
    19,400
    
    
    $
    
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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, 2005. The operating
results and cash flows for the nine-month period ended June 30, 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, 2005.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.In addition, we consolidate our 50% interest in the Energetic Systems (ESI) joint venture 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.In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on
our determination that ESIs product lines were no longer a strategic fit with our business
strategies. The carrying amount of ESIs assets and liabilities are reported as held for sale
as of June 30, 2006. 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 operating segment (See Note 12).Use of Estimates  The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenue and expenses. Judgments and
assessments of uncertainties are required in applying our accounting policies in many areas. For
example, key assumptions and estimates are particularly important when determining our projected
liabilities for pension benefits, useful lives for depreciable and amortizable assets, deferred
tax assets and long-lived assets, including intangible assets. Other areas in which significant
uncertainties exist include, but are not limited to, costs that may be incurred in connection
with environmental matters and the resolution of litigation and
other contingencies. Actual results may differ from estimates on which our condensed
consolidated financial statements were prepared.
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Revenue Recognition  Revenues for Specialty Chemicals, Fine Chemicals, and water
treatment equipment are recognized when persuasive evidence of an arrangement exists, shipment
has been made, title passes, the price is fixed or determinable and collectibility is reasonably
assured. Some of our perchlorate and fine chemical products customers have requested that we
store materials purchased from us in our facilities (Bill and Hold transactions). We recognize
the revenue from these Bill and Hold transactions at the point at which title and risk of
ownership transfer to our customers. These customers have specifically requested in writing,
pursuant to a contract, that we invoice for the finished product and hold the finished product
until a later date.Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for
in conformity with the American Institute of Certified Public Accountants (AICPA) audit and
accounting guide, Audits of Federal Government Contracts and the AICPAs Statement of Position
No. 81-1, Accounting for Performance of Construction-Type and Certain Production Type
Contracts. We account for these contracts using the percentage-of-completion method and measure
progress on a cost-to-cost basis. The percentage-of-completion method recognizes revenue as work
on a contract progresses. Revenues are calculated based on the percentage of total costs
incurred in relation to total estimated costs at completion of the contract. For fixed-price and
fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract,
the loss is recognized immediately.Recently Issued or Adopted Accounting Standards:In November 2004, the FASB issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costsan amendment of ARB No. 43,
Chapter 4. The statement clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as current-period charges
and requires the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The statement was effective for us on October 1, 2005 and
had no material impact on our financial statements.In December 2004, the FASB issued SFAS No. 123R (revised 2004), Share-Based Payment which
requires all entities to recognize compensation expense in an amount equal to the fair value of
share-based payments granted to employees and directors. This statement was effective for us on
October 1, 2005; see Note 3 for additional information.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. The Company
is currently evaluating the impact of this standard on the Condensed Consolidated Financial
Statements.Reclassifications:Certain prior period amounts have been reclassified to conform to the
current period presentation.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 cGMP guidelines for customers in
the pharmaceutical industry. Its facilities in California offer specialized engineering
capabilities including
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Cash
    
    $
    88,500Fair value of Seller Subordinated Note (Face value $25,500)
    
    
    19,400Capital expenditures adjustment
    
    
    17,431Working capital adjustment
    
    
    (1,268
    )EBITDAP Adjustment
    
    
    (1,000
    )Other direct acquisition costs
    
    
    4,799Total purchase price
    
    $
    127,862
 Capital Expenditures Adjustment
 Working Capital Adjustment
 EBITDAP Adjustment
 Subordinated Seller Note
 Direct Acquisition Costs
 Earnout Adjustment
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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
    
    
    774Prepaid expenses
    
    
    (20
    )Property, plant and equipment
    
    
    (11,602
    )Customer relationships, average life of 5.5 years
    
    
    13,300Backlog, average life of 1.5 years
    
    
    4,800Prepaid pension asset
    
    
    (1,248
    )$
    127,862
   Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenues
    
    $
    42,840
    
    
    $
    24,342
    
    
    $
    117,344
    
    
    $
    81,278Loss from continuing operations
    
    
    (861
    )
    
    
    (19,109
    )
    
    
    (6,068
    )
    
    
    (26,371
    )Net Loss
    
    
    (1,053
    )
    
    
    (19,188
    )
    
    
    (6,507
    )
    
    
    (24,985
    )Basic and diluted loss per share:Loss from continuing operations
    
    
    (0.12
    )
    
    
    (2.62
    )
    
    
    (0.83
    )
    
    
    (3.62
    )Net Loss
    
    
    (0.14
    )
    
    
    (2.63
    )
    
    
    (0.89
    )
    
    
    (3.43
    )
 The pro forma financial information is not necessarily indicative of what the financial
position or results of operations would have been if the combination had occurred on the
above-mentioned dates. Additionally, it is not indicative of future results of operations and
does not reflect any additional costs, synergies or other changes that may occur as a result of
the acquisition.ISP Acquisition:October 1, 2004, we acquired the former Atlantic Research Corporations
in-space propulsion business (ISP or ISP Acquisition) from Aerojet-General Corporation for
$4,505.We accounted for this acquisition using the purchase method of accounting. The fair value of
the current assets acquired and current liabilities assumed was approximately $6,972. Since the
purchase price was less than the fair value of the net current assets acquired, non-current
assets were recorded at zero and an after-tax extraordinary gain of $1,622 was recognized (net
of approximately $953 of income tax expense).3.
    
    SHARE-BASED COMPENSATIONOn October 1, 2005, we adopted SFAS No. 123R, Share-Based Payment (SFAS No. 123R) 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 recognized 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
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Total Outstanding
    
    
    Non VestedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    FairPrice
    
    
    
    
    
    
    ValueShares
    
    
    Per Share
    
    
    Shares
    
    
    Per ShareBalance, September 30, 2005
    
    
    523,500
    
    
    $
    7.08
    
    
    
    143,750
    
    
    $
    3.06Granted
    
    
    37,500
    
    
    
    4.21
    
    
    
    37,500
    
    
    
    2.00Vested
    
    
    
    
    
    
    
    
    
    
    (36,250
    )
    
    
    3.08Exercised
    
    
    (25,500
    )
    
    
    6.17
    
    
    
    
    
    
    
    Expired / Cancelled
    
    
    (20,000
    )
    
    
    6.34
    
    
    
    (20,000
    )
    
    
    2.90Balance, June 30, 2006
    
    
    515,500
    
    
    
    6.95
    
    
    
    125,000
    
    
    
    2.76
  Number of vested stock options
    
    
    390,500Weighted-average exercise price per share
    
    $
    7.24Aggregate intrinsic value
    
    $
    368Weighted-average remaining contractual term in years
    
    
    7.37
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Nine MonthsJune 30,2006
    
    2005Weighted-average grant date fair value per share of options granted
    
    $
    2.00
    
    
    $
    3.74Significant fair value assuptions:Expected term in years
    
    
    4.75
    
    
    
    4.50Expected volatility
    
    
    50.0
    %
    
    
    50.0
    %Expected dividends
    
    
    0.0
    %
    
    
    0.0
    %Risk-free interest rates
    
    
    4.4
    %
    
    
    3.5
    %Total intrinsic value of options exercised
    
    $
    54
    
    
    $
    12Aggregate cash received for option exercises
    
    $
    158
    
    
    $
    23Total compensation cost (included in operating expenses)
    
    $
    287
    
    
    $
    Tax benefit recognized
    
    
    110
    
    
    
    Net compensation cost
    
    $
    177
    
    
    $
    As of period end date:Total compensation cost for non-vested awards
not yet recognized
    
    $
    79Weighted-average years to be recognized
    
    
    0.3
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Actual
    
    
    Pro Forma
    
    
    Actual
    
    
    Pro FormaNet loss, as reported
    
    $
    (1,053
    )
    
    $
    (15,792
    )
    
    $
    (4,696
    )
    
    $
    (15,067
    )Pro forma compensation, net of tax
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (72
    )Pro forma net loss
    
    
    
    
    
    $
    (15,802
    )
    
    
    
    
    
    $
    (15,139
    )Basic loss per share:As reported
    
    $
    (0.14
    )
    
    $
    (2.16
    )
    
    $
    (0.64
    )
    
    $
    (2.07
    )Pro Forma
    
    
    
    
    
    $
    (2.17
    )
    
    
    
    
    
    $
    (2.08
    )Diluted loss per shareAs reported
    
    $
    (0.14
    )
    
    $
    (2.16
    )
    
    $
    (0.64
    )
    
    $
    (2.07
    )Pro forma
    
    
    
    
    
    $
    (2.17
    )
    
    
    
    
    
    $
    (2.08
    )
 4.
    
    SELECTED BALANCE SHEET DATAInventories:Inventories consist of the following:
 June 30,
    
    September 30,2006
    
    2005Finished goods
    
    $
    6,114
    
    
    $
    2,475Work-in-process
    
    
    14,948
    
    
    
    2,940Raw materials and supplies
    
    
    14,002
    
    
    
    8,403Total
    
    $
    35,064
    
    
    $
    13,818
 - 10 -




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##### Table of Contents



Intangible Assets:
 June 30,
    
    September 30,2006
    
    2005Perchlorate customer list
    
    $
    38,697
    
    
    $
    38,697Less accumulated amortization
    
    
    (32,305
    )
    
    
    (29,380
    )6,392
    
    
    
    9,317Customer relationships and backlog
    
    
    18,100
    
    
    
    Less accumulated amortization
    
    
    (3,329
    )
    
    
    14,771
    
    
    
    Pension-related intangible
    
    
    446
    
    
    
    446Total
    
    $
    21,609
    
    
    $
    9,763
 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 June 30, 2006 and
2005 and $2,925 for both the nine months ended June 30, 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
preliminary estimated fair values of $13,300 for customer relationships and $4,800 for existing
customer backlog. These assets have definite lives and are assigned to our Fine Chemicals
segment. Amortization expense for the three months and nine months ended June 30, 2006 was
$1,427 and $3,329, respectively.5.
    
    COMPREHENSIVE INCOME (LOSS)Other comprehensive income (loss) consists of adjustments to our minimum pension liabilities and foreign currency translation adjustments.
Comprehensive income (loss) consists of the following:
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Net Loss
    
    $
    (1,053
    )
    
    $
    (15,792
    )
    
    $
    (4,696
    )
    
    $
    (15,067
    )Other Comprehensive Income (Loss):Foreign currency translation adjustment
    
    
    (93
    )
    
    
    23
    
    
    
    (52
    )
    
    
    52Minimum pension liability adjustment
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    21Total other comprehensive income (loss)
    
    
    (93
    )
    
    
    (165
    )
    
    
    (52
    )
    
    
    73Comprehensive Loss
    
    $
    (1,146
    )
    
    $
    (15,957
    )
    
    $
    (4,748
    )
    
    $
    (14,994
    )
 - 11 -




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##### Table of Contents



6.
    
    EARNINGS (LOSS) PER SHAREShares used to compute loss per share from continuing operations are as follows:
 Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Loss from Continuing Operations
    
    $
    (861
    )
    
    $
    (15,713
    )
    
    $
    (4,257
    )
    
    $
    (16,453
    )Basic:Weighted average shares
    
    
    7,304,000
    
    
    
    7,297,000
    
    
    
    7,299,000
    
    
    
    7,294,000Diluted:Weighted average shares, basic
    
    
    7,304,000
    
    
    
    7,297,000
    
    
    
    7,299,000
    
    
    
    7,294,000Dilutive effect of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares, diluted
    
    
    7,304,000
    
    
    
    7,297,000
    
    
    
    7,299,000
    
    
    
    7,294,000Basic loss per share from continuing operations
    
    $
    (0.12
    )
    
    $
    (2.15
    )
    
    $
    (0.58
    )
    
    $
    (2.26
    )Diluted loss per share from continuing operations
    
    $
    (0.12
    )
    
    $
    (2.15
    )
    
    $
    (0.58
    )
    
    $
    (2.26
    )
 As of June 30, 2006, we had 515,500 antidilutive options outstanding. The stock options
are antidilutive because we are reporting a loss from continuing operations and 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 and our stock
price increases.7.
    
    DEBTOur outstanding debt balances consist of the following:
 June 30,
    
    September 30,2006
    
    2005Credit Facilities:First Lien Term Loan, 9.50%
    
    $
    64,512
    
    
    $
    First Lien Revolving Credit, 9.50%
    
    
    4,000
    
    
    
    Second Lien Term Loan plus accrued PIK Interest, 14.50%
    
    
    20,119
    
    
    
    Subordinated Seller Note plus accrued PIK Interest, 10.04%, Net of Discount
    
    
    21,371
    
    
    
    Capital Leases
    
    
    32
    
    
    
    ESI Debt  Discontinued Operations
    
    
    
    
    
    
    768Total Debt
    
    
    110,034
    
    
    
    768Less Current Portion
    
    
    (6,614
    )
    
    
    (768
    )Total Long-term Debt
    
    $
    103,420
    
    
    $
    
 Credit Facilities:
  - 12 -




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##### Table of Contents




    
    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.
    Seller Subordinated Note:
 - 13 -




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##### Table of Contents



Years ending September 30:2006
    
    $
    6502007
    
    
    3,2502008
    
    
    13,0002009
    
    
    6,5002010
    
    
    36,075Thereafter
    
    
    51,025Total
    
    $
    110,500
 Letters of Credit:As of June 30, 2006, we had $2,048 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 $42,256 at June 30, 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. As of
June 30, 2006, 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 value of the swap agreements at June
30, 2006 was $11.8.
    
    COMMITMENTS AND CONTINGENCIESEnvironmental Matters:Review of Perchlorate Toxicity by EPA Perchlorate (the anion) is not currently included in the list of hazardous substances compiled
by the 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
 - 14 -




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Perchlorate Remediation Project in Henderson, Nevada 
      - 15 -




---



##### Table of Contents



Henderson Site Environmental Remediation Reserve 
   Balance, September 30, 2005
    
    $
    20,587Additions or adjustments
    
    
    2,800Expenditures
    
    
    (5,657
    )Balance, June 30, 2006
    
    $
    17,730
 DTSC Matters 
    - 16 -




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##### Table of Contents



Other 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 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. Under the employment agreement, if we
terminate Dr. Van Voorhees without cause or if Dr. Van Voorhees terminates his employment for
good reason, Dr. Van Voorhees is entitled to receive severance payments in the form of salary
continuation for three years. In addition, all unvested stock options granted to Dr. Van
Voorhees become fully vested. These severance benefits are not available to him if employment
is terminated by us for cause, or if Dr. Van Voorhees terminated his employment without good
reason. We expect that the terms of Dr. Van Voorhees departure will be settled through
arbitration proceedings as provided by his contract.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.During fiscal 2006, , we revised our method to measure segment operating results to a method
management believes is a more meaningful measure of segment performance. Effective January 1,
2006, general corporate expenses are not allocated to our operating segments. Effective April
1,
 - 17 -




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##### Table of Contents



Specialty Chemicals: â
   Fine Chemicals:
  Aerospace Equipment:
 Other Businesses:
 - 18 -




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenues:Specialty Chemicals
    
    $
    11,098
    
    
    $
    9,309
    
    
    $
    32,282
    
    
    $
    28,330Fine Chemicals
    
    
    25,889
    
    
    
    
    
    
    
    49,992
    
    
    
    Aerospace Equipment
    
    
    5,232
    
    
    
    2,842
    
    
    
    13,366
    
    
    
    8,721Other Businesses
    
    
    621
    
    
    
    429
    
    
    
    3,462
    
    
    
    4,583Total Revenues
    
    $
    42,840
    
    
    $
    12,580
    
    
    $
    99,102
    
    
    $
    41,634Segment Operating Income (Loss):Specialty Chemicals
    
    $
    1,983
    
    
    $
    890
    
    
    $
    8,935
    
    
    $
    3,996Fine Chemicals
    
    
    3,758
    
    
    
    
    
    
    
    4,434
    
    
    
    Aerospace Equipment
    
    
    445
    
    
    
    (104
    )
    
    
    764
    
    
    
    (352
    )Other Businesses
    
    
    (456
    )
    
    
    (40
    )
    
    
    215
    
    
    
    3,013Total Segment Operating Income
    
    
    5,730
    
    
    
    746
    
    
    
    14,348
    
    
    
    6,657Corporate Expenses
    
    
    (4,008
    )
    
    
    (3,476
    )
    
    
    (12,002
    )
    
    
    (10,842
    )Environmental Remediation Charges
    
    
    
    
    
    
    (22,400
    )
    
    
    (2,800
    )
    
    
    (22,400
    )Interest and Other Income (Expense), Net
    
    
    (3,225
    )
    
    
    176
    
    
    
    (6,427
    )
    
    
    433Loss from Continuing Operations before Tax
    
    $
    (1,503
    )
    
    $
    (24,954
    )
    
    $
    (6,881
    )
    
    $
    (26,152
    )Depreciation and Amortization:Specialty Chemicals
    
    $
    1,287
    
    
    $
    1,277
    
    
    $
    3,849
    
    
    $
    3,799Fine Chemicals
    
    
    4,486
    
    
    
    
    
    
    
    9,834
    
    
    
    Aerospace Equipment
    
    
    19
    
    
    
    6
    
    
    
    54
    
    
    
    6Other Businesses
    
    
    3
    
    
    
    3
    
    
    
    9
    
    
    
    9Corporate
    
    
    139
    
    
    
    132
    
    
    
    420
    
    
    
    391Total Depreciation and Amortization
    
    $
    5,934
    
    
    $
    1,418
    
    
    $
    14,166
    
    
    $
    4,205
 10.
    
    INTEREST AND OTHER INCOMEInterest and other income consist of the following:
 Three Months Ended
    
    Nine MonthsJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Interest income
    
    $
    74
    
    
    $
    176
    
    
    $
    369
    
    
    $
    433Gain on sale of Hughes Parkway
    
    
    
    
    
    
    
    
    
    
    580
    
    
    
    Other
    
    
    (19
    )
    
    
    
    
    
    
    29
    
    
    
    $
    55
    
    
    $
    176
    
    
    $
    978
    
    
    $
    433
   - 19 -




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##### Table of Contents



11.
    
    DEFINED BENEFIT PLANS
  Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Defined Benefit Pension Plan:Service Cost
    
    $
    268
    
    
    $
    268
    
    
    $
    804
    
    
    $
    804Interest Cost
    
    
    413
    
    
    
    413
    
    
    
    1,240
    
    
    
    1,240Expected Return on Plan Assets
    
    
    (341
    )
    
    
    (341
    )
    
    
    (1,023
    )
    
    
    (1,023
    )Recognized Actuarial Losses
    
    
    15
    
    
    
    15
    
    
    
    43
    
    
    
    43Amortization of Prior Service Costs
    
    
    116
    
    
    
    116
    
    
    
    348
    
    
    
    348Net Periodic Pension Cost
    
    $
    471
    
    
    $
    471
    
    
    $
    1,412
    
    
    $
    1,412Supplemental Executive Retirement Plan:Service Cost
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Interest Cost
    
    
    37
    
    
    
    37
    
    
    
    111
    
    
    
    111Expected Return on Plan Assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Recognized Actuarial Losses
    
    
    11
    
    
    
    11
    
    
    
    32
    
    
    
    32Amortization of Prior Service Costs
    
    
    7
    
    
    
    7
    
    
    
    23
    
    
    
    23Net Periodic Pension Cost
    
    $
    55
    
    
    $
    55
    
    
    $
    166
    
    
    $
    166
   - 20 -




---



##### Table of Contents



12.
    
    ASSETS AND LIABILITIED HELD FOR SALE  DISCONTINUED OPERATIONS
   Three Months Ended
    
    
    Nine Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues
    
    $
    3,173
    
    
    $
    3,721
    
    
    $
    9,952
    
    
    $
    11,434Loss before income tax
    
    $
    (315
    )
    
    $
    (113
    )
    
    $
    (720
    )
    
    $
    (338
    )Benefit for income tax
    
    
    (123
    )
    
    
    (34
    )
    
    
    (281
    )
    
    
    (102
    )Loss from discontinued operations, net
    
    $
    (192
    )
    
    $
    (79
    )
    
    $
    (439
    )
    
    $
    (236
    )
  June 30,2006Accounts receivable
    
    $
    1,496Inventories
    
    
    1,420Property, plant and equipment, net
    
    
    7,576Other
    
    
    184Total assets held for sale
    
    $
    10,676Accounts payable and accrued liabilities
    
    $
    2,906Debt
    
    
    676Total liabilities held for sale
    
    $
    3,582
 - 21 -




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
   OVERVIEW
  Specialty Chemicals:
  Fine Chemicals:
 Aerospace Equipment:
 - 22 -




---



##### Table of Contents



Other Businesses:
  Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Specialty Chemicals:Perchlorates
    
    
    22
    %
    
    
    63
    %
    
    
    28
    %
    
    
    58
    %Sodium Azide
    
    
    2
    %
    
    
    4
    %
    
    
    2
    %
    
    
    4
    %Halotron
    
    
    2
    %
    
    
    7
    %
    
    
    3
    %
    
    
    6
    %Total Specialty Chemicals
    
    
    26
    %
    
    
    74
    %
    
    
    33
    %
    
    
    68
    %Fine Chemicals
    
    
    60
    %
    
    
    0
    %
    
    
    50
    %
    
    
    0
    %Aerospace Equipment
    
    
    12
    %
    
    
    22
    %
    
    
    13
    %
    
    
    21
    %Other Businesses:Real Estate
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    8
    %Water Treatment Equipment
    
    
    2
    %
    
    
    3
    %
    
    
    3
    %
    
    
    3
    %Total Other Businesses
    
    
    2
    %
    
    
    4
    %
    
    
    4
    %
    
    
    11
    %Total Revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Specialty Chemicals Segment
 Perchlorate
Chemicals 
       - 23 -




---



##### Table of Contents



Sodium
Azide 
  - 24 -




---



##### Table of Contents




    
    The licensing to Gowan of our rights to intellectual property regarding azide-based pest
management products, including the trademark SEPTM 100,
    
    Joint investment and efforts to further develop and obtain regulatory registration of
azide-based pest management products,
    
    Our supply of the products to Gowan, and
    
    Gowans exclusive marketing and sales of the products worldwide.
  Halotron
® Fire Extinguishing Agents 
  Fine Chemicals Segment
   - 25 -




---



##### Table of Contents



Aerospace Equipment Segment
    - 26 -




---



##### Table of Contents



Other Businesses Segment
  Water
Treatment Equipment 
   Real
Estate 
  Raw Materials and Manufacturing Costs
   Profitability
  
    
    as discussed in Note 8 to our consolidated financial statements, we may
incur material legal and other costs associated with environmental remediation,
litigation and other contingencies;
    
    the volume and timing of sales in the future is uncertain;
    
    the results of periodic reviews for impairments of long-lived assets;
    
    and the ability to pass on increases in raw material costs to our customers.
 - 27 -




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##### Table of Contents



RESULTS OF OPERATIONS
 Revenues
 June 30,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Specialty Chemicals
    
    $
    11,098
    
    
    $
    9,309
    
    
    $
    1,789
    
    
    
    19
    %Fine Chemicals
    
    
    25,889
    
    
    
    
    
    
    
    25,889
    
    
    
    Aerospace Equipment
    
    
    5,232
    
    
    
    2,842
    
    
    
    2,390
    
    
    
    84
    %Other Businesses
    
    
    621
    
    
    
    429
    
    
    
    192
    
    
    
    45
    %Total Revenues
    
    $
    42,840
    
    
    $
    12,580
    
    
    $
    30,260
    
    
    
    241
    %Nine Months Ended:Specialty Chemicals
    
    $
    32,282
    
    
    $
    28,330
    
    
    $
    3,952
    
    
    
    14
    %Fine Chemicals
    
    
    49,992
    
    
    
    
    
    
    
    49,992
    
    
    
    Aerospace Equipment
    
    
    13,366
    
    
    
    8,721
    
    
    
    4,645
    
    
    
    53
    %Other Businesses
    
    
    3,462
    
    
    
    4,583
    
    
    
    (1,121
    )
    
    
    (24
    %)Total Revenues
    
    $
    99,102
    
    
    $
    41,634
    
    
    $
    57,468
    
    
    
    138
    %
  
    
    Specialty Chemicals revenues are comprised primarily of sales of perchlorate products, which increased during
the fiscal 2006 periods due to the effect of higher pricing at lower sales volumes. Perchlorate sales tend to vary
significantly in any given quarter based on the timing of orders and shipments to customers.
    
    An increase due to the inclusion of our newly-acquired AFC Business.
    
    An increase in Aerospace Equipment segment revenues. Our Aerospace Equipment segment ended fiscal 2005 with a
strong backlog at its domestic location and continues to have strong commercial and government new order bookings
in fiscal 2006. This has resulted in greater production and revenue levels during fiscal 2006.
    
    A decrease in revenues from our Other Businesses segment. The fiscal 2005 nine-month period include
significant revenues from the sale of real estate. Our sales of real estate were substantially complete in fiscal
2005.
 Cost of Revenues and Gross Margin
 June 30,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Revenues
    
    $
    42,840
    
    
    $
    12,580
    
    
    $
    30,260
    
    
    
    241
    %Cost of Revenues
    
    
    30,931
    
    
    
    9,517
    
    
    
    21,414
    
    
    
    225
    %Gross Margin
    
    
    11,909
    
    
    
    3,063
    
    
    
    8,846
    
    
    
    289
    %Gross Margin Percentage
    
    
    28
    %
    
    
    24
    %Nine Months Ended:Revenues
    
    $
    99,102
    
    
    $
    41,634
    
    
    $
    57,468
    
    
    
    138
    %Cost of Revenues
    
    
    70,288
    
    
    
    28,357
    
    
    
    41,931
    
    
    
    148
    %Gross Margin
    
    
    28,814
    
    
    
    13,277
    
    
    
    15,537
    
    
    
    117
    %Gross Margin Percentage
    
    
    29
    %
    
    
    32
    %
  - 28 -




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##### Table of Contents




    
    Gross margin percentage for Specialty Chemicals and
Aerospace Equipment improved in fiscal 2006 compared to the
prior year periods primarily due to higher pricing of
Specialty Chemical products and better manufacturing overhead
absorption for Aerospace Equipment.
    
    While AFC contributes significant gross margin dollars,
its gross margin percentage is less than that of Specialty
Chemicals. The effect of including AFC in fiscal 2006 is a
reduction in the consolidated gross margin percentage.
    
    Gross margin from Other Businesses declined in fiscal
2006. The fiscal 2005 nine-month period includes a
significant real estate sale which contributed approximately 5
margin points to the prior year consolidated gross margin
percentage.
 Operating Expenses
 June 30,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Operating Expenses
    
    $
    10,187
    
    
    $
    5,793
    
    
    $
    4,394
    
    
    
    76
    %Percentage of Revenues
    
    
    24
    %
    
    
    46
    %Nine Months Ended:Operating Expenses
    
    $
    26,468
    
    
    $
    17,462
    
    
    $
    9,006
    
    
    
    52
    %Percentage of Revenues
    
    
    27
    %
    
    
    42
    %
  Environmental Remediation Charge
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##### Table of Contents



Segment Operating Profit (Loss)
 June 30,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Specialty Chemicals
    
    $
    1,983
    
    
    $
    890
    
    
    $
    1,093
    
    
    
    123
    %Fine Chemicals
    
    
    3,758
    
    
    
    
    
    
    
    3,758
    
    
    
    Aerospace Equipment
    
    
    445
    
    
    
    (104
    )
    
    
    549
    
    
    
    (528
    %)Other Businesses
    
    
    (456
    )
    
    
    (40
    )
    
    
    (416
    )
    
    
    1,040
    %Segment Operating Profit
    
    
    5,730
    
    
    
    746
    
    
    
    4,984
    
    
    
    668
    %Corporate Expenses
    
    
    (4,008
    )
    
    
    (3,476
    )
    
    
    (532
    )
    
    
    15
    %Environmental Remediation Charges
    
    
    
    
    
    
    (22,400
    )
    
    
    22,400
    
    
    
    (100
    %)Operating Income (Loss)
    
    $
    1,722
    
    
    $
    (25,130
    )
    
    $
    26,852
    
    
    
    (107
    %)Nine Months Ended:Specialty Chemicals
    
    $
    8,935
    
    
    $
    3,996
    
    
    $
    4,939
    
    
    
    124
    %Fine Chemicals
    
    
    4,434
    
    
    
    
    
    
    
    4,434
    
    
    
    Aerospace Equipment
    
    
    764
    
    
    
    (352
    )
    
    
    1,116
    
    
    
    (317
    %)Other Businesses
    
    
    215
    
    
    
    3,013
    
    
    
    (2,798
    )
    
    
    (93
    %)Segment Operating Profit
    
    
    14,348
    
    
    
    6,657
    
    
    
    7,691
    
    
    
    116
    %Corporate Expenses
    
    
    (12,002
    )
    
    
    (10,842
    )
    
    
    (1,160
    )
    
    
    11
    %Environmental Remediation Charges
    
    
    (2,800
    )
    
    
    (22,400
    )
    
    
    19,600
    
    
    
    (88
    %)Operating Income (Loss)
    
    $
    (454
    )
    
    $
    (26,585
    )
    
    $
    26,131
    
    
    
    (98
    %)
   
    
    Higher gross margins for our perchlorate products due to (i) price increases, (ii) better absorption of fixed
production costs at higher volumes, and (iii) reduced operating expenses.
    
    A decease in operating losses generated by our azide products, and
    
    Consistent, yet nominal operating income from our Halotron products.
    Interest
and Other Income/Interest Expense
 June 30,
    
    Increase
    
    Percentage2006
    
    2005
    
    (Decrease)
    
    ChangeThree Months Ended:Interest and Other Income
    
    $
    55
    
    
    $
    176
    
    
    $
    (121
    )
    
    
    (69
    %)Interest Expense
    
    $
    3,280
    
    
    $
    
    
    
    $
    3,280
    
    
    
    0
    %Nine Months Ended:Interest and Other Income
    
    $
    978
    
    
    $
    433
    
    
    $
    545
    
    
    
    126
    %Interest Expense
    
    $
    7,405
    
    
    $
    
    
    
    $
    7,405
    
    
    
    0
    %
  - 30 -




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##### Table of Contents



Income Taxes
  Discontinued Operations
   Fiscal Year Ending September 30, 2006
    
    Fiscal Year Ending September 30, 20051st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    1st Quarter
    
    2nd Quarter
    
    3rd Quarter
    
    4th QuarterRevenues
    
    $
    2,632
    
    
    $
    4,147
    
    
    $
    3,173
    
    
    $
    3,554
    
    
    $
    4,159
    
    
    $
    3,721
    
    
    $
    4,100Income (Loss) before tax
    
    $
    (844
    )
    
    $
    439
    
    
    $
    (315
    )
    
    $
    (317
    )
    
    $
    92
    
    
    $
    (113
    )
    
    $
    (670
    )Benefit for income tax
    
    
    (329
    )
    
    
    171
    
    
    
    (123
    )
    
    
    (96
    )
    
    
    28
    
    
    
    (34
    )
    
    
    (204
    )Discontinued operations, net
    
    $
    (515
    )
    
    $
    268
    
    
    $
    (192
    )
    
    $
    (221
    )
    
    $
    64
    
    
    $
    (79
    )
    
    $
    (466
    )
 Extraordinary Gain
  CRITICAL ACCOUNTING POLICIES
   - 31 -




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Sales and Revenue Recognition
   Depreciable or Amortizable Lives of Long-Lived Assets
   Impairment of Long-Lived Assets
   - 32 -




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Environmental Costs
   Income Taxes
   Pension Benefits
   - 33 -




---



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Recently Issued or Adopted Accounting Standards
    - 34 -




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows
 Operating Activities:
 Nine Months EndedJune 30,
    
    
    Increase
    
    
    Percentage2006
        

    2005
        
    (Decrease)
        
    ChangeLoss from continuing operations
    
    $
    (4,257
    )
    
    $
    (16,453
    )
    
    $
    12,196
    
    
    
    (74
    %)Depreciation and amortization
    
    
    14,166
    
    
    
    4,205
    
    
    
    9,961
    
    
    
    237
    %Stock based compensation
    
    
    287
    
    
    
    
    
    
    
    287
    
    
    
    Non-cash interest expense
    
    
    2,314
    
    
    
    
    
    
    
    2,314
    
    
    
    Additions to remediation reserves
    
    
    2,800
    
    
    
    22,400
    
    
    
    (19,600
    )
    
    
    (88
    %)Expenditures for remediation
    
    
    (5,657
    )
    
    
    
    
    
    
    (5,657
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    (9,613
    )
    
    
    9,613
    
    
    
    (100
    %)Changes in Operating Assets and Liabilities:Accounts receivable
    
    
    (5,399
    )
    
    
    4,424
    
    
    
    (9,823
    )
    
    
    (222
    %)Inventories
    
    
    (6,273
    )
    
    
    (2,485
    )
    
    
    (3,788
    )
    
    
    152
    %Prepaid expenses
    
    
    (3,461
    )
    
    
    (724
    )
    
    
    (2,737
    )
    
    
    378
    %Accounts payable and accrued expenses
    
    
    6,361
    
    
    
    750
    
    
    
    5,611
    
    
    
    748
    %Discontinued operations, net
    
    
    482
    
    
    
    (425
    )
    
    
    907
    
    
    
    (213
    %)Other
    
    
    (276
    )
    
    
    354
    
    
    
    (630
    )
    
    
    (178
    %)Cash Flow Provided (Used) in Operating Activities
    
    $
    1,087
    
    
    $
    2,433
    
    
    $
    (1,346
    )
    
    
    (55
    %)
  
    
    An increase in depreciation and amortization due to our acquisition of AFC.
    
    Non-cash interest expense which includes accrued payment-in-kind interest under our
Second Lien Credit Facility and Seller Subordinated Note and amortization of debt issue costs.
  
    
    Reserves for our Henderson remediation project were initially established in June 2005.
At that time the project had not commenced and no amounts had been spent against the reserve
balance. Conversely, in fiscal 2006 to date, we have spent $5,657, primarily for the
construction phase of the project.
    
    Our accounts receivable have increased. These balances fluctuate based primarily on the
timing of shipments of our Specialty Chemicals and Fine Chemical products. In addition, ISP
accounts receivable balances fluctuate due to the timing of revenue recognized under the
percentage-of-completion method verses when amounts become billable and are collected under
the related contracts. We do not grant significant extended payment terms and we have no
material balances that have aged significantly past their due dates. Fiscal 2005 began with
higher Specialty Chemical
accounts receivable balances. The amounts were collected in fiscal 2005, resulting in cash
provided by accounts receivable. Conversely, fiscal 2006 began with relatively low Specialty
Chemical accounts receivable balances. Cash used for accounts receivable in fiscal 2006 is due
primarily to the increase in AFC accounts receivable subsequent to its acquisition. AFC
accounts receivable balance was higher due to increases in its business volume and the timing of
certain customer balances which were collected after the quarter ended.
    
    Inventory balances have increased primarily for AFC.
Inventory balances normally fluctuate at AFC based on the
product mix in production, or expected to be in production, at
any given point in time.
    
    Cash used for prepaid expenses has increased in the
current year primarily due to an increase in the benefit
recorded for income taxes.
 - 35 -




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##### Table of Contents




    
    Cash provided by accounts payable and accrued expenses
relates primarily to increases in AFC accounts payable
subsequent to its acquisition date.
 Investing Activities:
 Nine Months EndedJune 30,
    
    
    Increase
    
    
    Percentage2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeAcquisition of businesses
    
    $
    (108,462
    )
    
    $
    (4,468
    )
    
    $
    (103,994
    )
    
    
    2,328
    %Capital expenditures
    
    
    (13,429
    )
    
    
    (1,354
    )
    
    
    (12,075
    )
    
    
    892
    %Proceeds from sale of assets
    
    
    2,395
    
    
    
    
    
    
    
    2,395
    
    
    
    Discontinued operations, net
    
    
    (403
    )
    
    
    (257
    )
    
    
    (146
    )
    
    
    57
    %Cash Flow Used in Investing Activities
    
    $
    (119,899
    )
    
    $
    (6,079
    )
    
    $
    (113,820
    )
    
    
    1,872
    %
    Financing Activities:
 Nine Months EndedJune 30,
    
    
    Increase
    
    
    Percentage2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeProceeds from the issuance of long-term debt
    
    $
    85,000
    
    
    $
    
    
    
    $
    85,000
    
    
    
    Payments of long-term debt
    
    
    (496
    )
    
    
    
    
    
    
    (496
    )
    
    
    Short-term borrowings, net
    
    
    4,000
    
    
    
    
    
    
    
    4,000
    
    
    
    Debt issue costs
    
    
    (1,782
    )
    
    
    
    
    
    
    (1,782
    )
    
    
    Other
    
    
    158
    
    
    
    163
    
    
    
    (5
    )
    
    
    (3
    %)Discontinued operations, net
    
    
    (92
    )
    
    
    300
    
    
    
    (392
    )
    
    
    (131
    %)Cash Flow Provided by Financing Activities
    
    $
    86,788
    
    
    $
    463
    
    
    $
    86,325
    
    
    
    18,645
    %
  Liquidity and Capital Resources
   - 36 -




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Credit Facilities and Seller Subordinated Note
 Credit
Facilities
     - 37 -




---



##### Table of Contents




    
    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.
  Seller
Subordinated Note
 Interest Rate Swap Agreements
  - 38 -




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##### Table of Contents



Environmental
Remediation  Henderson Site
   Dividend and Stock Repurchase Program
  Contractual Obligations and Off-Balance Sheet Arrangements
    - 39 -




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in Thousands)
     
 ITEM 4. CONTROLS AND PROCEDURES
     - 40 -




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 1A. RISK FACTORS
  1.
    (a)
    Declining demand (including excess customer inventories) or downward pricing pressure for
our products as a result of general or specific economic conditions,(b)
    governmental budget decreases affecting the DOD or NASA, including the status of the Space
Shuttle Program (including President Bushs current plan to ultimately terminate shuttle
operations), that would cause further decreases in demand for Grade I AP,(c)
    technological advances and improvements with respect to existing or new competitive products
causing a reduction or elimination of demand for Grade I AP and other perchlorates, sodium
azide, Halotron, explosives or thrusters, and fine chemicals,(d)
    the ability and desire of purchasers to change existing products or substitute other
products for our products based upon perceived quality, environmental effects and pricing, and(e)
    the fact that perchlorate chemicals, sodium azide, Halotron and our water treatment products
have limited applications and highly concentrated customer bases.2.
    
    Our ability to attain sufficient cash liquidity due to adverse operating performance, adverse
developments concerning the availability of credit under our revolving credit facility due to
covenant limitations or other factors could limit the overall availability of funds to us. We
may not have successfully anticipated our future capital needs or the timing of such needs and
we may need to raise additional funds in order to take advantage of unanticipated
opportunities.3.
    
    The cost and effects of legal and administrative proceedings, settlements and investigations,
particularly those investigations described in Note 8 to our condensed consolidated financial
statements, as well as the costs resulting from regulatory and environmental matters that may
have a negative impact on sales or costs.4.
    
    Our ability to profitably integrate, manage and operate new businesses and/or investments
competitively and cost effectively (including the recently acquired AFC).5.
    
    Competitive factors including, but not limited to, our limitations respecting financial
resources and our ability to compete against companies with substantially greater resources,
significant excess market supply in the sodium azide market and in the perchlorate market,
potential patent coverage issues, and the development or penetration of competing new
products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives
businesses.6.
    
    Underutilization of our manufacturing facilities resulting in production inefficiencies and
increased costs, the inability to recover facility costs, reductions in margins, and
impairment issues.
 - 41 -




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##### Table of Contents



7.
    
    The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and
other activities of governments, agencies or similar organizations, including, but not limited
to, environmental, safety and transportation issues.8.
    
    Provisions of our Certificate of Incorporation and Bylaws and Series D Preferred Stock, and
the dividend of preference stock purchase rights and related Rights Agreement, could have the
effect of making it more difficult for potential acquirers to obtain a control position in us.
 
 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
  
 ITEM 6. EXHIBITS
 10.1
    
    Master International Swaps and Derivatives Association (ISDA) Agreement, between the
Registrant and Bank of America, N.A.10.2
    
    Schedule No. 1 to Master ISDA Agreement, between the Registrant and Bank of America, N.A.10.3
    
    Schedule No. 2 to Master ISDA Agreement, between the Registrant and Bank of America, N.A.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. - 42 -




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##### Table of Contents



SIGNATURES
  AMERICAN PACIFIC CORPORATIONDate: August 4, 2006
    
    /s/ JOHN R. GIBSONJohn R. GibsonChief Executive Officer and PresidentDate: August 4, 2006
    
    /s/ DANA M. KELLEYDana M. KelleyActing Chief Financial Officer
 - 43 -