##### 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 December 31, 2005
 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)
    
    89109
(Zip Code)
 702) 735-2200
 þ £
 £ £ þ
 £ þ




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##### 



AMERICAN PACIFIC CORPORATION
QUARTERLY REPORT ON FORM 10-Q
 PART I. FINANCIAL INFORMATIONITEM 1. Condensed Consolidated Statements of Operations (unaudited)
    
    
    2Condensed Consolidated Balance Sheets (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows (unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    5ITEM 1A. Risk Factors
    
    
    21ITEM 2. Managements Discussion and Analysis of Financial Condition
and results of Operations
    
    
    22ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    37ITEM 4. Controls and Procedures
    
    
    38PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    38ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    38ITEM 3. Defaults Upon Senior Securities
    
    
    38ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    38ITEM 5. Other Information
    
    
    38ITEM 6. Exhibits
    
    
    38EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL STATEMENTS
 
 ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited, Dollars in Thousands, Except per Share Amounts)
 Three Months EndedDecember 31,2005
    
    2004Revenues
    
    $
    19,117
    
    
    $
    18,254Cost of Revenues
    
    
    14,576
    
    
    
    12,545Gross Profit
    
    
    4,541
    
    
    
    5,709Operating Expenses
    
    
    6,431
    
    
    
    6,695Operating Income (Loss)
    
    
    (1,890
    )
    
    
    (986
    )Interest and Other Income
    
    
    875
    
    
    
    109Interest Expense
    
    
    1,142
    
    
    
    66Income (Loss) Before Income Taxes and Extraordinary Gain
    
    
    (2,157
    )
    
    
    (943
    )Income Tax Provision (Benefit)
    
    
    (852
    )
    
    
    (349
    )Income (Loss) Before Extraordinary Gain
    
    
    (1,305
    )
    
    
    (594
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    1,622Net Income (Loss)
    
    $
    (1,305
    )
    
    $
    1,028Basic Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain
    
    $
    (0.18
    )
    
    $
    (0.08
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    0.22Net Income (Loss)
    
    $
    (0.18
    )
    
    $
    0.14Diluted Earnings (Loss) Per Share:Income (Loss) Before Extraordinary Gain
    
    $
    (0.18
    )
    
    $
    (0.08
    )Extraordinary Gain, Net of Tax
    
    
    
    
    
    
    0.22Net Income (Loss)
    
    $
    (0.18
    )
    
    $
    0.14Weighted Average Shares Outstanding:Basic
    
    
    7,297,000
    
    
    
    7,292,000Diluted
    
    
    7,297,000
    
    
    
    7,292,000
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)
 December 31,
    
    September 30,2005
    
    2005ASSETSCurrent Assets:Cash and Cash Equivalents
    
    $
    2,911
    
    
    $
    37,213Accounts and Notes Receivable
    
    
    24,539
    
    
    
    12,572Inventories
    
    
    37,104
    
    
    
    13,818Prepaid Expenses and Other Assets
    
    
    3,646
    
    
    
    1,365Deferred Income Taxes
    
    
    834
    
    
    
    834Total Current Assets
    
    
    69,034
    
    
    
    65,802Property, Plant and Equipment, Net
    
    
    116,304
    
    
    
    15,646Intangible Assets, Net
    
    
    26,412
    
    
    
    9,763Deferred Income Taxes
    
    
    19,312
    
    
    
    19,312Other Assets
    
    
    5,176
    
    
    
    4,477TOTAL ASSETS
    
    $
    236,238
    
    
    $
    115,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts Payable
    
    $
    17,165
    
    
    $
    5,231Accrued Liabilities
    
    
    7,441
    
    
    
    2,786Employee Related Liabilities
    
    
    3,376
    
    
    
    2,023Environmental Remediation Reserves
    
    
    2,220
    
    
    
    4,967Deferred Revenues
    
    
    2,217
    
    
    
    792Accrued Interest and Current Portion of Debt
    
    
    2,072
    
    
    
    768Total Current Liabilities
    
    
    34,491
    
    
    
    16,567Long-Term Debt
    
    
    103,306
    
    
    
    Environmental Remediation Reserves
    
    
    15,620
    
    
    
    15,620Pension Obligations and Other Long-Term Liabilities
    
    
    9,368
    
    
    
    8,144Total Liabilities
    
    
    162,785
    
    
    
    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
    
    
    932
    
    
    
    932Capital in Excess of Par Value
    
    
    86,322
    
    
    
    86,187Retained Earnings
    
    
    4,901
    
    
    
    6,206Treasury
Stock  2,034,870 shares
    
    
    (16,982
    )
    
    
    (16,982
    )Accumulated Other Comprehensive Loss
    
    
    (1,720
    )
    
    
    (1,674
    )Total Shareholders Equity
    
    
    73,453
    
    
    
    74,669TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    236,238
    
    
    $
    115,000
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AMERICAN PACIFIC CORPORATION
 
 Condensed Consolidated Statements of Cash Flow
(Unaudited, Dollars in Thousands)
 Three Months EndedDecember 31,2005
    
    2004Cash Flows from Operating Activities
    
    $
    (5,734
    )
    
    $
    3,109Cash Flows from Investing Activities:Acquisition of businesses
    
    
    (111,471
    )
    
    
    (4,468
    )Capital expenditures
    
    
    (2,643
    )
    
    
    (568
    )Proceeds from sale of assets
    
    
    2,395
    
    
    
    Investment in and advances to joint venture
    
    
    
    
    
    
    (141
    )Net Cash Used in Investing Activities
    
    
    (111,719
    )
    
    
    (5,177
    )Cash Flows from Financing Activities:Proceeds from the issuance of long-term debt
    
    
    85,000
    
    
    
    Payments of long-term debt
    
    
    (162
    )
    
    
    Debt issuance costs
    
    
    (1,677
    )
    
    
    Other
    
    
    (10
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    83,151
    
    
    
    Net Change in Cash and Cash Equivalents
    
    
    (34,302
    )
    
    
    (2,068
    )Cash and Cash Equivalents, Beginning of Period
    
    
    37,213
    
    
    
    23,777Cash and Cash Equivalents, End of Period
    
    $
    2,911
    
    
    $
    21,709
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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 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 three-month period ended December 31, 2005 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 AFC Business, we began consolidating 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 (ES) 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.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 will inevitably differ to some extent from estimates on which our condensed consolidated
financial statements were prepared.Revenue Recognition  Revenues for Specialty Chemicals and water treatment equipment sales 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 product customers have requested that we store materials purchased from us in our
Cedar City facility (Bill and Hold transactions). We recognize the revenue and profit from
these Bill and Hold transactions at the point at which title and risk of ownership transfer to
our customers. We receive cash for the full amount of real estate sales at the time of closing
which is when the sale is recorded.Revenues from our Aerospace Equipment segment is derived from contracts that are accounted for
in conformity with the American Institute of Certified Public Accountants (AICPA) audit and
accounting
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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.Revenues from our Fine Chemicals segment are generally
recognized as products are shipped or
customer acceptance has occurred, all other significant customer obligations have been met and
collection is reasonably assured. Sales are recorded net of provisions for customer pricing
allowances. We recognize revenue under two contracts upon transfer of ownership and customer
acceptance of the finished product, but before the finished product is delivered to the
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.Recently Issued or Adopted Accounting Standards:In November 2004, the FASB issued SFAS 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.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 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. The assets were acquired and
liabilities assumed by our newly formed, wholly-owned subsidiary, Ampac Fine Chemicals (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 high containment for high potency compounds,
energetic and nucleoside chemistries, and chiral separation using the first commercial-scale
simulated moving bed in the United States.The estimated total consideration for the AFC Business acquisition is comprised of the
following:
 Cash
    
    $
    88,500Fair value of Seller Subordinated Note (Face value $25,500)
    
    
    19,400Preliminary capital expenditures adjustment
    
    
    17,431Preliminary working capital adjustment
    
    
    (1,268
    )EBITDAP Adjustment
    
    
    (1,000
    )Other direct acquisition costs
    
    
    4,712Total purchase price
    
    $
    127,775
 Capital Expenditures Adjustment    The capital expenditures adjustment represents
reimbursements to GenCorp for their cash capital investments, as defined in the acquisition
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agreements, during the period July 2005 through the closing date on November 30, 2005. On
November 30, 2005, we paid $17,355, based on GenCorps initial estimate of this amount.
After our review of the closing balance sheet, we determined that the capital expenditures
adjustment is $17,431, and accordingly, have recorded a payable to GenCorp in the amount of
$76. This amount is subject to adjustment based on post-closing document reviews.Working Capital Adjustment The working capital adjustment represents an adjustment to the
purchase price based on actual working capital as of the closing date compared to a target
working capital amount specified in the acquisition agreements. On November 30, 2005, we
paid $2,404, based on GenCorps initial estimate of this amount. After our review of the
closing balance sheet, we determined that the working capital adjustment is ($1,268), and
accordingly, have recorded a receivable from GenCorp in the amount of $3,672. This amount
is subject to adjustment based on post-closing document reviews.EBITDAP Adjustment The acquisition agreements include a reduction of the purchase price if
AFC does not achieve a specified level of earnings before interest, taxes, depreciation,
amortization, and pension expense (EBITDAP) for the three months ended December 31, 2005,
equal to four times the difference between the targeted EBITDAP and the actual EBITDAP
achieved, not to exceed $1,000. This target was not met, and accordingly, we have recorded
a $1,000 receivable from GenCorp and reflected this as a reduction of the purchase price.
This adjustment is subject to review by GenCorp.Subordinated Seller Note The fair value of the Seller Subordinated Note was determined by
discounting the required principal and interest payments at a rate of 15%, which the Company
believes is appropriate for instruments with comparable terms.Direct Acquisition Costs The Company estimates its total direct acquisition costs,
consisting primarily of legal and due diligence fees, to be approximately $4,712.Earnout Adjustment In addition to the amounts included in the purchase price above, the
purchase price is subject to an additional contingent cash payment of up to $5,000 based on
targeted financial performance of AFC during the year ended September 30, 2006. In
addition, if the full Earnout Adjustment becomes payable to GenCorp, the EBITDAP Adjustment
will also be returned to GenCorp.
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The preliminary allocation of the purchase price is comprised of the following:
 Historical book value of Aerojet Fine Chemicals as of November 30, 2005
    
    $
    93,181Less liabilities not acquiredPayable to GenCorp
    
    
    24,916Cash overdraft
    
    
    3,761Adjusted historical book value of Aerojet Fine Chemicals as of November 30, 2005
    
    
    121,858Estimated fair value adjustments relating to:Inventories
    
    
    774Prepaid expenses
    
    
    (20
    )Property, plant and equipment
    
    
    (11,689
    )Customer relationships, average life of 5.5 years
    
    
    13,300Backlog, average life of 1.5 years
    
    
    4,800Prepaid pension asset
    
    
    (1,248
    )$
    127,775
 Intangible assets, consisting of customer relationships and existing customer backlog, have
definite lives and will be amortized over their estimated useful lives using the straight-line
method.The following pro forma information has been prepared from our historical financial statements
and those of the AFC Business. The pro forma information gives effect to the combination as if
it had occurred on October 1, 2005 and 2004, respectively.
 Three Months EndedDecember 31,2005
    
    
    2004Revenues
    
    $
    37,359
    
    
    $
    36,321Loss before extraordinary gain
    
    
    (2,493
    )
    
    
    (2,250
    )Net Loss
    
    
    (2,493
    )
    
    
    (628
    )Basic earnings per share:Loss before extraordinary gain
    
    
    (0.34
    )
    
    
    (0.31
    )Net Loss
    
    
    (0.34
    )
    
    
    (0.09
    )Diluted earnings per share:Loss before extraordinary gain
    
    
    (0.34
    )
    
    
    (0.31
    )Net Loss
    
    
    (0.34
    )
    
    
    (0.09
    )
 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).
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3.
    
    SHARE-BASED COMPENSATIONOn October 1, 2005, we adopted SFAS No. 123R, Share-Based Payments (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, for the quarter ended December 31, 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 Principles Board 25 intrinsic value method, under which no compensation expense
was recognized because all historical options granted were at an exercise price equal to the
market value of our stock on the grant date. Prior period financial statements have not been
adjusted to reflect fair value share-based compensation expense under
SFAS No. 123R.Our share-based payment arrangements are designed to attract and retain employees and directors.
The amount, frequency, and terms of share-based awards may vary based on competitive practices,
our operating results, and government regulations. New shares are issued upon option exercise or
restricted share grants. We currently maintain three share based plans, each as discussed
below.The American Pacific Corporation 2001 Stock Option Plan, as amended (the 2001 Plan), permits
the granting of incentive stock options meeting the requirements of Section 422 of the Internal
Revenue Code and nonqualified options that do not meet the requirements of Section 422 to
employees, officers, directors and consultants. Options granted under the 2001 Plan generally
vest 50% at the grant date and 50% on the one-year anniversary of the grant date, and expire in
ten years. As of December 31, 2005, there were 19,000 shares available for grant under the 2001
Plan. This plan was approved by our shareholders.The American Pacific Corporation 2002 Directors Stock Option Plan (the 2002 Directors Plan)
compensates outside Directors with annual grants of stock options or upon other discretionary
events. Options are granted to each eligible director at a price equal to the fair market value
of our common stock on the date of the grant. Options granted under
the 2002 Directors Plan
generally vest 50% at the grant date and 50% on the one-year anniversary of the grant date, and
expire in ten years. As of September 30, 2005, there were 25,000 shares available for grant
under the 2002 Directors Plan. This plan was approved by our shareholders.In January 2005, our Board of Directors approved the American Pacific Corporation 2006 Stock
Incentive Plan (the 2006 Plan) which permits the granting of stock options, stock appreciation
rights, restricted stock, restricted stock units and dividend equivalent rights to employees,
directors and consultants. This plan is subject to shareholders approval at our March 2006
annual meeting. If approved by our shareholders, the 2006 Plan will allow for a maximum number
of shares to be issued of 750,000, with each award having a maximum contractual term of ten
years.
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A summary of our outstanding and vested stock option activity for the three months ended
December 31, 2005 is as follows:
 Total Outstanding
    
    
    Non VestedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    FairShares
    
    
    Price
    
    
    Shares
    
    
    ValueBalance, September 30, 2005
    
    
    523,500
    
    
    $
    7.08
    
    
    
    143,750
    
    
    $
    3.06Granted
    
    
    37,500
    
    
    
    4.21
    
    
    
    37,500
    
    
    
    2.00Vested
    
    
    
    
    
    
    
    
    
    
    (36,250
    )
    
    
    3.08Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31, 2005
    
    
    561,000
    
    
    
    6.89
    
    
    
    145,000
    
    
    
    2.78
 A summary of our vested stock options as of December 31, 2005 is as follows:
 Number of vested stock options
    
    
    416,000Weighted-average exercise price
    
    $
    7.18Aggregate intrinsic value
    
    $
    Weighted-average remaining contractual term in years
    
    
    7.95
 We determine the fair value of share-based awards at their grant date, using a
Black-Scholes option-pricing model applying the assumptions in the following table. Actual
compensation, if any, ultimately realized by optionees may differ significantly from the amount
estimated using an option valuation model. Three Months EndedDecember 31,2005
    
    2004Weighted-average grant date fair value 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
    
    $
    
    
    
    $
    Total compensation cost (included in operating expenses)
    
    $
    134
    
    
    $
    Tax benefit recognized
    
    
    53
    
    
    
    Net compensation cost
    
    $
    81
    
    
    $
    As of period end date:Total compensation cost for non-vested awards
not yet recognized
    
    $
    290Weighted-average years to be recognized
    
    
    0.7
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SFAS No. 123R requires us to present pro forma
information for periods prior to the adoption as if we had
accounted for all stock-based compensation under the fair value
method. Had share-based compensation costs been recorded last year,
the effect on our net income and earnings per share would have been as follows:
 Three Months EndedDecember 31,2005
    
    
    2004Actual
    
    
    Pro FormaNet income (loss), as reported
    
    $
    (1,305
    )
    
    $
    1,028Pro forma compensation, net of tax
    
    
    
    
    
    
    (82
    )Pro forma net loss
    
    
    
    
    
    $
    946Basic loss per share:As reported
    
    $
    (0.18
    )
    
    $
    0.14Pro Forma
    
    
    
    
    
    $
    0.13Diluted loss per shareAs reported
    
    $
    (0.18
    )
    
    $
    0.14Pro forma
    
    
    
    
    
    $
    0.13
 4.
    
    SELECTED BALANCE SHEET DATAInventories:Inventories consist of the following:
 December 31,
    
    September 30,2005
    
    2005Finished goods
    
    $
    4,102
    
    
    $
    2,475Work-in-process
    
    
    14,499
    
    
    
    2,940Raw materials and supplies
    
    
    18,503
    
    
    
    8,403Total
    
    $
    37,104
    
    
    $
    13,818
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Intangible Assets:We account for our intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Intangible assets consist of the following:
 December 31,
    
    September 30,2005
    
    2005Perchlorate customer list
    
    $
    38,697
    
    
    $
    38,697Less accumulated amortization
    
    
    (30,355
    )
    
    
    (29,380
    )8,342
    
    
    
    9,317Customer relationships and backlog
    
    
    18,100
    
    
    
    Less accumulated amortization
    
    
    (476
    )
    
    
    17,624
    
    
    
    Pension-related intangible
    
    
    446
    
    
    
    446Total
    
    $
    26,412
    
    
    $
    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 December 31, 2005
and 2004.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 ended December 31, 2005, was $476.5
    
    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 EndedDecember 31,2005
    
    2004Net Income (Loss)
    
    $
    (1,305
    )
    
    $
    1,028Other Comprehensive Income (Loss):Foreign currency translation adjustment
    
    
    (46
    )
    
    
    Minimum pension liability adjustment
    
    
    
    
    
    
    429Total other comprehensive income (loss)
    
    
    (46
    )
    
    
    429Comprehensive Income (Loss)
    
    $
    (1,351
    )
    
    $
    1,457
 
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6.
    
    EARNINGS (LOSS) PER SHAREShares used to compute earnings (loss) per share before extraordinary gain are as follows:
 Three Months EndedDecember 31,2005
    
    2004Loss before extraordinary gain
    
    $
    (1,305
    )
    
    $
    (594
    )Basic:Weighted average shares
    
    
    7,297,000
    
    
    
    7,292,000Diluted:Weighted average shares, basic
    
    
    7,297,000
    
    
    
    7,292,000Dilutive effect of stock options
    
    
    
    
    
    
    Weighted average shares, diluted
    
    
    7,297,000
    
    
    
    7,292,000Basic loss per share before extraordinary item
    
    $
    (0.18
    )
    
    $
    (0.08
    )Diluted loss per share before extraordinary item
    
    $
    (0.18
    )
    
    $
    (0.08
    )
 As of December 31, 2005, we had 561,000 antidilutive options outstanding. The stock
options are antidilutive because we are reporting a loss before extraordinary gain 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:
 December 31,
    
    September 30,2005
    
    2005Credit Facilities:First Lien Term Loan
    
    $
    64,838
    
    
    $
    First Lien Revolving Credit
    
    
    
    
    
    
    Second Lien Term Loan
    
    
    20,017
    
    
    
    Subordinated Seller Note, Net of Discount
    
    
    19,725
    
    
    
    Capital Leases and Other
    
    
    798
    
    
    
    768Total Debt
    
    
    105,378
    
    
    
    768Less current portion
    
    
    (2,072
    )
    
    
    (768
    )Total Long-term Debt
    
    $
    103,306
    
    
    $
    
 Credit Facilities:In connection with our acquisition of the AFC Business, discussed in
Note 2, on November 30, 2005, we entered into a $75,000 first lien credit agreement (the First
Lien Credit Facility) with Wachovia Capital Markets, LLC and other lenders. We also entered
into a $20,000 second lien credit agreement (the Second Lien Credit Facility, and together
with the First Lien Credit
Facility, the Credit Facilities) with Wachovia Capital Markets, LLC, and certain other
lenders. The Credit Facilities are collateralized by substantially all of our assets and the
assets of our domestic subsidiaries.The First Lien Credit Facility provides for term loans in the aggregate principal amount of
$65,000. The term loans will be repaid in twenty consecutive quarterly payments in increasing
amounts, with the final payment due and payable on November 30, 2010. The First Lien Credit
Facility also provides for a revolving credit line in an aggregate principal amount of up to
$10,000 at any time outstanding, which includes a letter of credit sub-facility in the aggregate
principal amount of up to $5,000 and a swing-line sub-facility in the aggregate principal amount
of up to $2,000. The initial scheduled
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maturity of the revolving credit line is November 30,
2010. The revolving credit line may be increased by an amount of up to $5,000 within three years
from the date of the Credit Facilities.The Second Lien Credit Facility provides for term loans in the aggregate principal amount of
$20,000 with a scheduled maturity of November 30, 2011, with the full amount of such term loans
being payable on such date. We are required to pay a premium for certain prepayments, if any, of
the Second Lien Credit Facility made before November 30, 2008.The interest rates per annum applicable to loans under the Credit Facilities are, at our option,
the Alternate Base Rate (as defined in the Credit Facilities) or LIBOR Rate (as defined in the
Credit Facilities) plus, in each case, an applicable margin. Under the First Lien Credit
Facility such margin is tied to our total leverage ratio. A portion of the interest payment due
under the Second Lien Credit Facility will accrue as payment-in-kind interest and is added to
the then outstanding principal. In addition, under the revolving credit facility, we will be
required to pay (i) a commitment fee in an amount equal to the applicable percentage per annum
on the average daily unused amount of the revolving commitments and (ii) other fees related to
the issuance and maintenance of the letters of credit issued pursuant to the letters of credit
sub-facility. Additionally, we will be required to pay to the administrative agent certain
agency fees under both Credit Facilities. Within 180 days of closing of the Credit Facilities we
are required to hedge a portion of the obligations under the Credit Facilities.On November 30, 2005, we borrowed $65,000 under the First Lien Credit Facility term loan at an
annual interest rate of 8.42% and $20,000 under the Second Lien Credit Facility at an annual
interest rate of 13.42%. Net proceeds of $83,323, after debt issuance costs of $1,677, were
used to fund a portion of the AFC Business acquisition price. Debt issue costs are classified
as other assets and are amortized over the term of the Credit Facilities using the interest
method.Certain events, including asset sales, excess cash flow, recovery events in respect of property,
and debt and equity issuances will require us to make payments on the outstanding obligations
under the Credit Facilities. These prepayments are separate from the events of default and any
related acceleration described below.The Credit Facilities include certain negative covenants restricting or limiting our ability to,
among other things:
 
    
    incur debt, incur contingent obligations and issue certain types of preferred stock;
    
    create liens;
    
    pay dividends, distributions or make other specified restricted payments;
    
    make certain investments and acquisitions;
    
    enter into certain transactions with affiliates;
    
    enter into sale and leaseback transactions; and
    
    merge or consolidate with any other entity or sell, assign, transfer,
lease, convey or otherwise dispose of assets.
 Financial covenants under the Credit Facilities include quarterly requirements for Total
Leverage Ratio, First Lien Coverage Ratio, Fixed Charge Coverage Ratio, Consolidated Capital
Expenditures and minimum Consolidated EBITDA. The Credit Facilities also contain usual and
customary events of default (subject to certain threshold amounts and grace periods). If an
event of default occurs and
is continuing, we may be required to repay the obligations under the Credit Facilities prior to
their stated maturity and the commitments under the First Lien Credit Facility may be
terminated.
 As of December 31, 2005, we were in compliance with the various covenants contained in the Credit
Facilities.
 Seller Subordinated Note:In connection with our acquisition of the AFC Business, discussed in
Note 2, we issued an unsecured subordinated seller note in the principal amount of $25,500 to
Aerojet-General Corporation, a subsidiary of GenCorp. The note accrues interest on a
payment-in-kind basis at a rate equal to the threemonth U.S. dollar LIBOR as from time to time
in effect plus a margin equal to the weighted average of the interest rate margin for the loans
outstanding under the
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Credit Facilities, including certain changes in interest rates due to
subsequent amendments or refinancing of the Credit Facilities. All principal and accrued and
unpaid interest will be due on November 30, 2012. Subject to the terms of the Credit Facilities,
we may be required to repay up to $6,500 of the note and interest thereon on or after September
30, 2007. The note is subordinated to the senior debt under or related to the Credit Facilities,
our other indebtedness in respect to any working capital, revolving credit or term loans, or any
other extension of credit by a bank or insurance company or other financial institution, other
indebtedness relating to leases, indebtedness in connection with the acquisition of businesses
or assets, and the guarantees of each of the previously listed items, provided that the
aggregate principal amount of obligations of the Company or any of its Subsidiaries shall not exceed
the greater of (i) the sum of (A) the aggregate principal amount of the outstanding First Lien
Obligations (as such term is defined in the Intercreditor Agreement referred to in the Credit
Facilities) not in excess of $95,000 plus (B) the aggregate principal amount of the outstanding
Second Lien Obligations (as defined in the Intercreditor Agreement) not in excess of $20,000,
and (ii) an aggregate principal balance of Senior Debt (as defined in the note) which would not
cause the Company to exceed as of the end of any fiscal quarter a Total Leverage Ratio of 4.50 to 1.00
(as such term is defined in, and as such ratio is determined under, the First Lien Credit
Facility) (disregarding any obligations in respect of Hedging Agreements (as defined in the
First Lien Credit Facility) constituting First Lien Obligations or Second Lien Obligations or
any increase in the amount of the Senior Debt resulting from any payment-in-kind interest added
to principal each to be disregarded in calculating the aggregate principal amount of such
obligations).Principal maturities for term loans under the Credit Facilities and the Seller Subordinated Note
are as follows:
 Years ending September 30:2006
    
    $
    6502007
    
    
    3,2502008
    
    
    13,0002009
    
    
    6,5002010
    
    
    36,075Thereafter
    
    
    51,025Total
    
    $
    110,500
 Capital Leases and Other:Capital leases and other includes $500 payable to our
ES joint venture partner. The remaining balance represents short term bank borrowings by our ES joint
venture and capital lease obligations.Letters of Credit:As of December 31, 2005, we had $2,307 in outstanding standby letters of credit which mature through November 2008. 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.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 assessment
together with other perchlorate related science was reviewed by the National Academy of Sciences (NAS).
This NAS report was released on January 11, 2005. The recommendations contained in this NAS report indicate
that human health is protected in drinking water at a level of 24.5 parts per billion (ppb). Certain states have also conducted risk assessments and have set preliminary levels from 1  14 ppb. The EPA has established a reference dose for perchlorate of
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.0007 mg/kg/day which is equal to a Drinking Water Equivalent
Level (DWEL) of 24.5 ppb. A decision as to whether or not to establish a Maximum Contaminate
Level (MCL) is pending. The outcome of these federal EPA actions, as well as any similar
state regulatory action, will influence the number, if any, of potential sites that may be
subject to remediation action.Perchlorate Remediation Project in Henderson, Nevada We commercially manufactured perchlorate chemicals at a facility in Henderson, Nevada (the
Ampac Henderson Site) from 1958 until the facility was destroyed in May 1988, after which we
relocated our production to a new facility in Iron County, Utah. Kerr-McGee Chemical Corp
(KMCC) also operated a perchlorate production facility in Henderson, Nevada during 1967 to
1998. Between 1956 to 1967, American Potash operated a perchlorate production facility at the
same site. For many years prior to 1956, other entities also manufactured perchlorate chemicals
at that site. In 1998, Kerr-McGee Chemical LLC became the operating entity and it ceased the
production of perchlorate at the Kerr McGee Henderson Site. Thereafter, it continued to produce
other chemicals at this site until it was recently sold. As a result of a longer production
history at Henderson, the KMCC and predecessor operations have manufactured significantly
greater amounts of perchlorate over time than we did at the Ampac Henderson Site.In 1997, the Southern Nevada Water Authority (SNWA) detected trace amounts of the
perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water
for Southern Nevada and areas of Southern California. Las Vegas Wash flows into Lake Mead from
the Las Vegas valley.In response to this discovery by SNWA, and at the request of the Nevada Division of
Environmental Protection (NDEP), we engaged an extensive investigation of groundwater near the
Ampac Henderson site and down gradient toward Las Vegas Wash. That investigation was rigorous
employing some of the most qualified experts in the field of hydrogeology. This investigation
concluded that, although there is perchlorate in the groundwater in the vicinity of the Ampac
Henderson Site ranging from 0 to approximately 700 ppm, perchlorate from this Site does not
materially impact, if at all, water flowing in the Las Vegas Wash toward Lake Mead. It has been
well established by data generated by SNWA and NDEP, however, that perchlorate from the Kerr
McGee Henderson Site did materially impact the Las Vegas Wash and Lake Mead. Kerr McGees
successor, Tronox LLC, operates an ex situ perchlorate groundwater remediation facility at their
Henderson site and this facility has had a significant effect on the load of perchlorate
entering Lake Mead over the last 5 years. Recent measurements of perchlorate in Lake Mead made
by SNWA have been less than 10 ppb.Notwithstanding these facts, and at the direction of NDEP and EPA, we conducted a rigorous
investigation of remediation technologies for perchlorate in groundwater with the intention of
remediating groundwater near the Ampac Henderson Site. The technology that was chosen as most
efficient and appropriate is in situ bioremediation (ISB). The technology reduces perchlorate
in the groundwater by precise addition of an appropriate carbon source to the groundwater itself
while it is still in the ground (as opposed to an above ground, more conventional, ex situ
process). This induces naturally occurring organisms in the groundwater to reduce the
perchlorate among other oxygen containing compounds.In 2002, we conducted a pilot test in the field of the ISB technology and it was successful. On
the basis of the successful test and other evaluations, in fiscal 2005 we submitted a Work Plan
to NDEP for the construction of a Leading Edge Remediation Facility near the Ampac Henderson
Site. The conditional approval of the Work Plan by NDEP in our third quarter of fiscal 2005
allowed us to generate estimated costs for the installation and operation of the Leading Edge
and Source Remediation Facilities that will address perchlorate from the Ampac Henderson Site.We are continuing to cooperating with Federal, State and local agencies in the characterization
of perchlorate found in groundwater in Henderson. We are also exploring potential reimbursement
for
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the costs related to the Perchlorate Remediation Project at Henderson, NV from government
agencies or their affiliates. There are no assurances, however, that we will be successful in
obtaining such cost recovery.Henderson Site Environmental Remediation Reserve During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate
of the probable costs of our remediation efforts at the Henderson Site, including the costs for
equipment, operating and maintenance costs, and consultants. Key factors in determining the
total estimated cost include an estimate of the speed of groundwater entering the treatment
area, which was then used to estimate a project life of 45 years, as well as estimates for
capital expenditures and annual operating and maintenance costs. This estimate is based on
information currently available to us and may be subject to material adjustment upward or
downward in future periods as new facts or circumstances may indicate.A summary of our environmental reserve activity for the three months ended December 31, 2005 is
shown below:
 Balance, September 30, 2005
    
    $
    20,587Additions or adjustments
    
    
    Expenditures
    
    
    (2,747
    )Balance, December 31, 2005
    
    $
    17,840
 DTSC Matters The California Department of Toxic Substances Control (DTSC) contends that the AFC Business
neutralization or stabilization of several liquid stream processes within a closed loop
manufacturing system constitutes treatment of a hazardous waste without the required
authorizations from DTSC. We disagree. On September 2, 2005, the DTSC Inspector issued an
Inspection Report relevant to the DTSCs June 2004 inspection of the AFC Business facility. The
Inspection Report concluded that the referenced activities constitute treatment of hazardous
waste and directed Aerojet Fine Chemicals to submit an application for a permit modification to
treat hazardous waste. DTSC extended the time in which to respond to the Inspection Report to
January 9, 2006. During that extended time, GenCorp worked with us and DTSC in preparing a
Consent Agreement.On November 28, 2005, AFC and DTSC entered into a Consent Agreement (Consent Agreement) which,
upon close of the sale of the AFC Business to us, authorizes AFC to continue operations for
up to two years while the parties resolve whether the manufacturing processes are exempt from
regulation by the DTSC. The Consent Agreement is deemed a full settlement of the DTSC
Allegations and any other violations that could have been brought against AFC based upon
information known to DTSC on the date of the Consent Agreement.We believe that if AFC is ultimately required to obtain a permit to treat hazardous waste it may
have to modify its facilities. The effects on our operating results, liquidity and cash flow
could be significant. In addition, we may not be able to pass along any increases in operating
costs to customers.The AFC facility is subject to several National Emissions Standards for Hazardous Air Pollutants
for pharmaceutical manufacturing under the Clean Air Act because of its location on property
contiguous with Aerojet and under common control of GenCorp. AFC
requested the EPA to make a determination that, upon close of the sale of
Aerojet Fine Chemicals to us, AFCs facility would no longer be subject to these requirements.On December 1, 2005, the Air Division of the EPA Region IX notified the Company that, upon close
of
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the sale of the AFC Business to us, the AFC will no longer be a major source subject to
National Emissions Standards for Hazardous Air Pollutants for pharmaceutical manufacturing under
the Clean Air Act.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). This 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 have not been 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,
if and when completed.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 have not
contributed to or do not exacerbate existing contamination on or under the Aerojet Superfund
site.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 plus a proportionate allocation of corporate general and
administrative expenses. Environmental remediation costs are charged to our Specialty Chemicals segment. Interest is not
allocated to segment results.Specialty Chemicals:Our Specialty Chemicals segment manufactures and sells: (i) perchlorate
chemicals, used principally in solid rocket propellants for the space shuttle and defense
programs, (ii) sodium azide, used principally in the inflation of certain automotive airbag
systems, (iii) Halotronâ, clean gas fire extinguishing agents designed to replace halons,
and (iv) the ES joint venture which manufactures commercial explosives and specializes in the
development and testing of energetic compounds.No individual perchlorates customer exceeded 10% of our consolidated revenues for the three
months ended December 31, 2005. We had one perchlorates customer that accounted for 33% of our
consolidated revenues during the three months ended December 31, 2004.Fine Chemicals:On November 30, 2005, we created a new operating segment, Fine Chemicals, to
report the financial performance of AFC. AFC is a manufacturer of active pharmaceutical
ingredients and registered intermediates under cGMP guidelines for commercial customers in the
pharmaceutical
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industry, involving high potency compounds, energetic and nucleoside chemistries,
and chiral separation.We had one Fine Chemicals customer that accounted for 17% of our consolidated revenues during
the three months ended December 31, 2005.Aerospace Equipment:On October 1, 2004, we created a new operating segment, Aerospace
Equipment, to report the financial performance of our ISP business (see Note 2). The ISP
business manufactures and sells in-space propulsion systems, thrusters (monopropellant or
bipropellant) and propellant tanks.Other Businesses:Our Other Businesses segment contains our water treatment equipment and real
estate activities. Our water treatment equipment business designs, manufactures and markets
systems for the control of noxious odors, the disinfection of water streams and the treatment of
seawater. We have completed all planned sales of our improved land in the Gibson Business Park
(near Las Vegas, Nevada) and we do not anticipate significant real estate sales activity in
future financial reporting periods.The following provides financial information about our segment operations:
 Three Months EndedDecember 31,2005
    
    
    2004Revenues:Specialty Chemicals
    
    $
    7,337
    
    
    $
    13,637Fine Chemicals
    
    
    5,172
    
    
    
    Aerospace Equipment
    
    
    4,645
    
    
    
    3,735Other Businesses
    
    
    1,963
    
    
    
    882Total Revenues
    
    $
    19,117
    
    
    $
    18,254Operating Income (Loss)Specialty Chemicals
    
    $
    (2,434
    )
    
    $
    (970
    )Fine Chemicals
    
    
    132
    
    
    
    Aerospace Equipment
    
    
    7
    
    
    
    (186
    )Other Businesses
    
    
    405
    
    
    
    170Total Operating Income (Loss)
    
    
    (1,890
    )
    
    
    (986
    )Interest and Other Income (Expense), Net
    
    
    (267
    )
    
    
    43Loss before Income Taxes and Extraordinary Gain
    
    $
    (2,157
    )
    
    $
    (943
    )
 10.
    
    INTEREST AND OTHER INCOMEInterest and other income consist of the following:
 Three Months EndedDecember 31,2005
    
    
    2004Interest income
    
    $
    246
    
    
    $
    109Gain on sale of Hughes Parkway
    
    
    580Other
    
    
    49$
    875
    
    
    $
    109
 We owned a 70% interest as general and limited partner in Gibson Business Park Associates
1986-I (the Partnership), a real estate development limited partnership. The remaining 30%
limited partners include certain current and former members of our Board of Directors. The
Partnership, in turn, owned a 33% limited partner interest in 3770 Hughes Parkway Associates
Limited Partnership, a
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Nevada limited partnership (Hughes Parkway). Hughes Parkway owns the
building in which we lease office space in Las Vegas, Nevada.In October 2005, Partnership sold its interest in Hughes Parkway, which resulted in a net gain
and cash distribution to us of $2,395. Concurrent with, and as a condition of, the sale of the
Partnerships interest in Hughes Parkway, we renewed our office space lease through February
2009. We accounted for the transaction as a sale leaseback. Accordingly, we deferred gain
totaling $1,815 representing the present value of future lease payments. We amortize the
deferred gain (as a reduction of rental expense), using the straight-line method over the term
of the lease. We recognized the remaining gain of $580, which is reported as interest and other
income.
 11.
    
    DEFINED BENEFIT PLANSNet periodic pension cost related to our defined benefit pension plans consists of the
following:
 Three Months EndedDecember 31,2005
    
    
    2004Defined Benefit Pension Plan:Service Cost
    
    $
    227
    
    
    $
    222Interest Cost
    
    
    349
    
    
    
    343Expected Return on Plan Assets
    
    
    (288
    )
    
    
    (283
    )Recognized Actuarial Losses
    
    
    12
    
    
    
    12Amortization of Prior Service Costs
    
    
    98
    
    
    
    96Net Periodic Pension Cost
    
    $
    398
    
    
    $
    390Supplemental Executive Retirement Plan:Service Cost
    
    $
    
    
    
    $
    Interest Cost
    
    
    37
    
    
    
    67Expected Return on Plan Assets
    
    
    
    
    
    
    Recognized Actuarial Losses
    
    
    11
    
    
    
    19Amortization of Prior Service Costs
    
    
    7
    
    
    
    14Net Periodic Pension Cost
    
    $
    55
    
    
    $
    100
 For the three months ended December 31, 2005, we contributed $399 to the Defined Benefit Pension
Plan to fund benefit payments and anticipate making approximately $1,436 in additional
contributions through September 30, 2006. For the three months ended December 31, 2005, we
contributed $32 to the Supplemental Executive Retirement Plan to fund benefit payments and
anticipate making approximately $95 in additional contributions through September 30, 2006.In connection with our acquisition of the AFC Business, we
assumed the pension obligations for existing employees and received
related plan assets. These assets and pension obligations were placed
into two newly formed defined benefit pension plans that cover
substantially all of AFCs employees. As part of our purchase
price allocation, we are in the process of determining the
actuarially calculated fair value of the assets and pension
obligations in accordance with applicable accounting standards.
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ITEM 1A. RISK FACTORS
 Various discussions in this Quarterly Report on Form 10-Q contain forward-looking statements
concerning our future products, expenses, revenue, liquidity and cash needs, as well as our plans
and strategies. These forward-looking statements are based on current expectations and we assume no
obligation to update this information. Numerous factors could cause our actual results to differ
significantly from the results described in these forward-looking statements, including but not
limited to the following risk factors. Please see the section titled Risk Factors in our Annual
Report on Form 10-K for the year ended September 30, 2005, for further discussion of these and
other factors that could affect future results.1.
    
    (a) Declining demand (including excess customer inventories) or downward pricing pressure for
our products as a result of general or specific economic conditions,
     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 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.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.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
   OVERVIEW
  Specialty Chemicals:
 Fine Chemicals:
 Aerospace Equipment:
 Other Businesses:
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Three Months EndedDecember
31,2005
    
    
    2004Specialty Chemicals:Perchlorates
    
    
    18
    %
    
    
    48
    %Packages explosives
    
    
    14
    %
    
    
    20
    %Sodium Azide
    
    
    3
    %
    
    
    3
    %Halotron
    
    
    4
    %
    
    
    4
    %Total Specialty Chemicals
    
    
    39
    %
    
    
    75
    %Fine Chemicals
    
    
    27
    %
    
    
    0
    %Aerospace Equipment
    
    
    24
    %
    
    
    20
    %Other Businesses:Real Estate
    
    
    2
    %
    
    
    1
    %Water Treatment Equipment
    
    
    8
    %
    
    
    4
    %Total Other Businesses
    
    
    10
    %
    
    
    5
    %Total Revenues
    
    
    100
    %
    
    
    100
    %
 Specialty Chemicals Segment
 Perchlorate Chemicals 
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
    
    The timing of the Space Shuttles return to flight.
    
    The number of Shuttle flights between now and the retirement of the Shuttle fleet.
    
    The amount of inventory of Grade I AP owned by our customers.
    
    The amount of NASAs and the DODs annual budget over the next several years.
  
    
    The timing of the retirement of the Space Shuttle fleet.
    
    The timing of the development of the new crew launch vehicle
(CLV) and the number of CLV launches.
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##### Table of Contents




    
    The timing of the development and testing of the new heavy launch
vehicle (HLV) used to transport material and supplies to the ISS
and the Moon; and the number of HLV launches.
   Packaged Explosives 
   Sodium Azide 
   Halotron ® Fire Extinguishing Agents 
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Fine Chemicals Segment
       - 26 -




---



##### Table of Contents



Aerospace Equipment Segment
    Other Businesses Segment
  Water Treatment Equipment 
   Real Estate 
  - 27 -




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##### Table of Contents



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 magnitude, pricing and timing of perchlorate chemicals, sodium azide,
Halotron, packaged explosives and water treatment equipment 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.
 RESULTS OF OPERATIONS
 Revenues
 Three Months EndedDecember 31,
    
    
    Increase
    
    
    Percentage2005
    
    
    2004
    
    
    (Decrease)
    
    
    ChangeRevenues:Specialty Chemicals
    
    $
    7,337
    
    
    $
    13,637
    
    
    $
    (6,300
    )
    
    
    (46
    %)Fine Chemicals
    
    
    5,172
    
    
    
    
    
    
    
    5,172
    
    
    
    Aerospace Equipment
    
    
    4,645
    
    
    
    3,735
    
    
    
    910
    
    
    
    24
    %Other Businesses
    
    
    1,963
    
    
    
    882
    
    
    
    1,081
    
    
    
    123
    %Total Revenues
    
    $
    19,117
    
    
    $
    18,254
    
    
    $
    863
    
    
    
    5
    %
  
    
    A decline in Specialty Chemicals segment revenues principally due to lower volume of perchlorate sales
compared to the prior year period. Perchlorate sales tend to vary significantly in any given quarter based in the
timing of orders and shipments to customers.
    
    An increase due to the inclusion of our newly-acquired AFC.
    
    An increase in Aerospace Equipment segment revenues. Our Aerospace Equipment segment ended fiscal 2005 with a
strong backlog at its domestic location, which resulted in greater production and revenue levels in the first
quarter of fiscal 2006.
    
    An increase in revenues from our Other Businesses segment primarily due to strong spare parts sales for water
treatment equipment.
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Cost of Revenues
 Three Months EndedDecember 31,
    
    
    Increase
    
    
    Percentage2005
    
    
    2004
    
    
    (Decrease)
    
    
    ChangeRevenues
    
    $
    19,117
    
    
    $
    18,254
    
    
    $
    863
    
    
    
    5
    %Cost of Revenues
    
    
    14,576
    
    
    
    12,545
    
    
    
    2,031
    
    
    
    16
    %Gross Margin
    
    
    4,541
    
    
    
    5,709
    
    
    
    (1,168
    )
    
    
    (20
    %)Gross Margin Percentage
    
    
    24
    %
    
    
    31
    %
  Operating Expenses
 Three Months EndedDecember 31,
    
    
    Increase
    
    
    Percentage2005
    
    
    2004
    
    
    (Decrease)
    
    
    ChangeOperating Expenses
    
    $
    6,431
    
    
    $
    6,695
    
    
    $
    (264
    )
    
    
    (4
    %)Percentage of Revenues
    
    
    34
    %
    
    
    37
    %19,117
    
    
    
    18,254
  Segment Operating Loss
 Three Months EndedDecember 31,
    
    
    Increase
    
    
    Percentage2005
    
    
    2004
    
    
    (Decrease)
    
    
    ChangeSpecialty Chemicals
    
    $
    (2,434
    )
    
    $
    (970
    )
    
    $
    (1,464
    )
    
    
    151
    %Fine Chemicals
    
    $
    132
    
    
    $
    
    
    
    
    132
    
    
    
    Aerospace Equipment
    
    
    7
    
    
    
    (186
    )
    
    
    193
    
    
    
    (104
    %)Other Businesses
    
    
    405
    
    
    
    170
    
    
    
    235
    
    
    
    138
    %$
    (1,890
    )
    
    $
    (986
    )
    
    $
    (904
    )
    
    
    92
    %
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Interest Income/Interest and Other Expense
 Three Months EndedDecember 31,
    
    
    Increase
    
    
    Percentage2005
    
    
    2004
    
    
    (Decrease)
    
    
    ChangeInterest Income
    
    $
    875
    
    
    $
    109
    
    
    $
    766
    
    
    
    703
    %Interest and Other Expense
    
    $
    1,142
    
    
    $
    66
    
    
    $
    1,076
    
    
    
    1,630
    %
   Income Taxes
  Extraordinary Gain
  CRITICAL ACCOUNTING POLICIES
   Sales and Revenue Recognition
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Depreciable or Amortizable Lives of Long-Lived Assets
   Impairment of Long-Lived Assets
   Environmental Costs
  - 31 -




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Income Taxes
   Pension Benefits
  Recently Issued or Adopted Accounting Standards
   - 32 -




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LIQUIDITY AND CAPITAL RESOURCES
 Cash Flows
 Operating Activities:
 Three Months EndedDecember 31,
    
    Increase
    
    Percentage2005
    
    2004
    
    (Decrease)
    
    ChangeLoss before extraordinary gain
    
    $
    (1,305
    )
    
    $
    (594
    )
    
    $
    (711
    )
    
    
    120
    %Depreciation and amortization
    
    
    2,901
    
    
    
    1,607
    
    
    
    1,294
    
    
    
    81
    %Stock based compensation
    
    
    134
    
    
    
    
    
    
    
    134
    
    
    
    0
    %Amortization of debt issue costs and Seller Note discount
    
    
    149
    
    
    
    
    
    
    
    149
    
    
    
    0
    %Payment-in-kind interest
    
    
    225
    
    
    
    
    
    
    
    225
    
    
    
    0
    %Changes in Operating Assets and LiabilitiesAccounts receivable
    
    
    331
    
    
    
    2,891
    
    
    
    (2,560
    )
    
    
    (89
    %)Inventories
    
    
    (6,488
    )
    
    
    284
    
    
    
    (6,772
    )
    
    
    (2,385
    %)Prepaid expenses
    
    
    (2,150
    )
    
    
    (1,339
    )
    
    
    (811
    )
    
    
    61
    %Environmental remediation reserves
    
    
    (2,747
    )
    
    
    
    
    
    
    (2,747
    )
    
    
    0
    %Accounts payable and accrued expenses
    
    
    4,295
    
    
    
    468
    
    
    
    4,570
    
    
    
    976
    %Other
    
    
    (1,079
    )
    
    
    (208
    )
    
    
    (871
    )
    
    
    419
    %Cash Flow Provided (Used) in Operating Activities
    
    $
    (5,734
    )
    
    $
    3,109
    
    
    $
    (8,100
    )
    
    
    (261
    %)
  
    
    Fluctuations in our accounts receivable and inventory
balances. These balances fluctuate based primarily on the
timing of shipments of our Specialty Chemicals products. We
do not grant significant extended payment terms and we have no
material balances that have aged significantly past their due
dates.
    
    Cash used in the current year for the Henderson
Remediation project. This project had not commenced in the
prior year.
    
    Cash used for prepaid expenses, primarily annual
insurance policies which are paid at the beginning of the
fiscal year.
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Investing Activities:
 Three Months EndedDecember 31,
    
    Increase
    
    Percentage2005
    
    2004
    
    (Decrease)
    
    ChangeAcquisition of businesses
    
    $
    (111,471
    )
    
    $
    (4,468
    )
    
    $
    (108,503
    )
    
    
    2,428
    %Capital expenditures
    
    
    (2,643
    )
    
    
    (568
    )
    
    
    (1,318
    )
    
    
    232
    %Proceeds from sale of assets
    
    
    2,395
    
    
    
    
    
    
    
    2,395
    
    
    
    0
    %Other
    
    
    
    
    
    
    (141
    )
    
    
    141
    
    
    
    (100
    %)Cash Flow Used in Investing Activities
    
    $
    (111,719
    )
    
    $
    (5,177
    )
    
    $
    (107,285
    )
    
    
    2,072
    %
     Financing Activities:
 Three Months EndedDecember 31,
    
    Increase
    
    Percentage2005
    
    2004
    
    (Decrease)
    
    ChangeProceeds from the issuance of long-term debt
    
    $
    85,000
    
    
    $
    
    
    
    $
    85,000
    
    
    
    Payments of long-term debt
    
    
    (162
    )
    
    
    
    
    
    
    (162
    )
    
    
    Debt issue costs
    
    
    (1,677
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    Other
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    
    Cash Flow Used in Investing Activities
    
    $
    83,151
    
    
    $
    
    
    
    $
    83,151
    
    
    
    
  Liquidity and Capital Resources
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Credit Facilities and Seller Subordinated Note
 Credit Facilities
    - 35 -




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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.
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Environmental Remediation  Henderson Site
  Dividend and Stock Repurchase Program
  Contractual Obligations and Off-Balance Sheet Arrangements
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4. CONTROLS AND PROCEDURES
     
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  None.
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES  None.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  None.
 
 ITEM 5. OTHER INFORMATION  None.
 
 ITEM 6. EXHIBITS
 31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1*
    
    Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2*
    
    Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002*
    
    Exhibits 32.1 and 32.2 are furnished to accompany this quarterly report on Form 10-Q but
shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of
1934 or otherwise and shall not be deemed incorporated by reference into any registration
statements filed under the Securities Act of 1933, as amended, or the Exchange Act of 1934, as
amended.
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SIGNATURES
  AMERICAN PACIFIC CORPORATIONDate: February 14, 2006
    
    /s/ JOHN R. GIBSONJohn R. GibsonChief Executive Officer and PresidentDate: February 14, 2006
    
    /s/ SETH L. VAN VOORHEESSeth L. Van VoorheesVice President, Treasurer & Chief Financial Officer
 - 39 -