e10vq

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 March 31, 2006


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

(Exact name of registrant as specified in its charter)


Delaware		59-6490478
(State or other jurisdiction		(I.R.S. Employer
of incorporation or		Identification No.)
organization)

3770 Howard Hughes Parkway, Suite 300
Las Vegas, NV		89109
(Address of principal executive offices)		(Zip Code)

(702) 735-2200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated file and large accelerated filer in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer o Accelerated filer o Non-accelerated file þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares of the Registrant’s Common Stock outstanding as of April 30, 2006 was 7,304,171.

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						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Revenues	$	43,924		$	18,513		$	63,041		$	36,767
Cost of Revenues		30,055			11,986			44,631			24,531

Gross Profit		13,869			6,527			18,410			12,236
Operating Expenses		11,614			7,113			18,045			13,808
Environmental Remediation Charge		2,800						2,800

Operating Loss		(545	)		(586	)		(2,435	)		(1,572	)
Interest and Other Income		48			148			923			257
Interest Expense		3,129			42			4,271			108

Loss Before Income Taxes and Extraordinary Gain		(3,626	)		(480	)		(5,783	)		(1,423	)
Income Tax Benefit		(1,288	)		(177	)		(2,140	)		(526	)

Loss Before Extraordinary Gain		(2,338	)		(303	)		(3,643	)		(897	)
Extraordinary Gain, Net of Tax		—			—			—			1,622

Net Income (Loss)	$	(2,338	)	$	(303	)	$	(3,643	)	$	725


Basic Earnings (Loss) Per Share:
Loss Before Extraordinary Gain	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	(0.12	)
Extraordinary Gain, Net of Tax		—			—			—			0.22

Net Income (Loss)	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	0.10


Diluted Earnings (Loss) Per Share:
Loss Before Extraordinary Gain	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	(0.12	)
Extraordinary Gain, Net of Tax		—			—			—			0.22

Net Income (Loss)	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	0.10


Weighted Average Shares Outstanding:
Basic		7,297,000			7,292,000			7,297,000			7,292,000
Diluted		7,297,000			7,292,000			7,297,000			7,292,000

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)


	March 31,			September 30,
	2006			2005

ASSETS
Current Assets:
Cash and Cash Equivalents	$	7,997		$	37,213
Accounts and Notes Receivable		23,258			12,572
Inventories		36,144			13,818
Prepaid Expenses and Other Assets		3,913			1,365
Deferred Income Taxes		834			834

Total Current Assets		72,146			65,802
Property, Plant and Equipment, Net		117,541			15,646
Intangible Assets, Net		24,011			9,763
Deferred Income Taxes		19,312			19,312
Other Assets		5,222			4,477

TOTAL ASSETS	$	238,232		$	115,000


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	14,223		$	5,231
Accrued Liabilities		7,167			2,786
Employee Related Liabilities		3,288			2,023
Environmental Remediation Reserves		3,185			4,967
Deferred Revenues		2,094			792
Current Portion of Debt		8,518			768

Total Current Liabilities		38,475			16,567
Long-Term Debt		103,460			—
Environmental Remediation Reserves		16,205			15,620
Pension Obligations and Other Long-Term Liabilities		8,843			8,144

Total Liabilities		166,983			40,331

Commitments and Contingencies
Shareholders’ Equity
Preferred Stock — No par value; 3,000,000 authorized; none outstanding		—			—
Common Stock — $.10 par value; 20,000,000 shares authorized 9,337,287 and 9,331,787 issued		933			932
Capital in Excess of Par Value		86,450			86,187
Retained Earnings		2,563			6,206
Treasury Stock - 2,034,870 shares		(16,982	)		(16,982	)
Accumulated Other Comprehensive Loss		(1,715	)		(1,674	)

Total Shareholders’ Equity		71,249			74,669

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	238,232		$	115,000

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Statements of Cash Flow
(Unaudited, Dollars in Thousands)


	Six Months Ended
	March 31,
	2006			2005

Cash Flows from Operating Activities	$	(3,826	)	$	9,835

Cash Flows from Investing Activities:
Acquisition of businesses		(108,451	)		(4,468	)
Capital expenditures		(8,251	)		(1,147	)
Proceeds from sale of assets		2,395			—

Net Cash Used in Investing Activities		(114,307	)		(5,615	)


Cash Flows from Financing Activities:
Proceeds from the issuance of long-term debt		85,000			—
Payments of long-term debt		(325	)
Short-term borrowings, net		5,927			300
Debt issuance costs		(1,716	)		—
Other		31			149

Net Cash Provided by Financing Activities		88,917			449


Net Change in Cash and Cash Equivalents		(29,216	)		4,669
Cash and Cash Equivalents, Beginning of Period		37,213			23,777

Cash and Cash Equivalents, End of Period	$	7,997		$	28,446

Cash Paid (Refunded) For:
Interest	$	2,711		$	—
Income taxes	$	(397	)	$	(452	)

Non-Cash Transaction:
Issuance of seller subordinated note, net of discount	$	19,400		$	—

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Notes to Condensed Consolidated Financial Statements
(Unaudited, Dollars in Thousands, Except per Share Amounts)

1.		INTERIM BASIS OF PRESENTATION AND ACCOUNTING POLICIES

		*Interim Basis of Presentation:* 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 six-month period ended March 31, 2006 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

		*Accounting Policies:* A description of our significant accounting policies is included in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 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 may differ from estimates on which our condensed consolidated financial statements were prepared.

		Revenue Recognition – Revenues for Specialty Chemicals, Fine Chemicals, and water treatment equipment sales are recognized when persuasive evidence of an arrangement exists, shipment has been made or customer acceptance has occurred, 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 and profit 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. 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 are derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (“AICPA”) audit and

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		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.

		*Reclassifications:* Certain prior period amounts have been reclassified to conform to the current period presentation.

2.		ACQUISITIONS

		*AFC 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	$	88,500
Fair value of Seller Subordinated Note (Face value $25,500)		19,400
Capital expenditures adjustment		17,431
Working capital adjustment		(1,268	)
EBITDAP Adjustment		(1,000	)
Other direct acquisition costs		4,788

Total purchase price	$	127,851

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			Capital Expenditures Adjustment – The capital expenditures adjustment represents net reimbursements to GenCorp for their cash capital investments, as defined in the acquisition agreements, during the period July 2005 through the closing date on November 30, 2005.

			Working Capital Adjustment – The working capital adjustment represents a net adjustment to the purchase price based on actual working capital as of the closing date compared to a target working capital amount specified in the acquisition agreements.

			EBITDAP Adjustment – The acquisition agreements include a reduction of the purchase price if AFC did not achieve a specified level of earnings before interest, taxes, depreciation, amortization, and pension expense (“EBITDAP”) for the three months ended December 31, 2005, equal to four times the difference between the targeted EBITDAP and the actual EBITDAP achieved, not to exceed $1,000. This target was not met, and accordingly, we have received $1,000 from 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 $4,788.

			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 ending September 30, 2006. In addition, if the full Earnout Adjustment becomes payable to GenCorp, the EBITDAP Adjustment will also be returned to GenCorp.

	In connection with the AFC Business acquisition, we entered into Credit Facilities and a Seller Subordinated Note, each discussed in Note 7. The total purchase price was funded with net proceeds from the Credit Facilities of $83,323, the Seller Subordinated Note of $25,500 and existing cash.

	This acquisition is being accounted for using the purchase method of accounting, under which the total purchase price is allocated to the fair values of the assets acquired and liabilities assumed. The allocation of the purchase price and the related determination of the useful lives of acquired assets are preliminary and subject to change based on a final valuation of the assets acquired and liabilities assumed. The allocation is preliminary pending completion of inventory, fixed asset and intangible asset appraisals and the actuarial calculation of the defined benefit pension plan obligation.

	The preliminary allocation of the purchase price is comprised of the following:


Historical book value of Aerojet Fine Chemicals as of November 30, 2005	$	93,181
Less liabilities not acquired
Payable to GenCorp		24,916
Cash overdraft		3,761

Adjusted historical book value of Aerojet Fine Chemicals as of November 30, 2005		121,858
Estimated fair value adjustments relating to:
Inventories		774
Prepaid expenses		(20	)
Property, plant and equipment		(11,613	)
Customer relationships, average life of 5.5 years		13,300
Backlog, average life of 1.5 years		4,800
Prepaid pension asset		(1,248	)

	$	127,851

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.

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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 Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Revenues	$	43,924		$	28,328		$	81,283		$	64,649
Loss before extraordinary gain		(2,338	)		(4,842	)		(5,470	)		(7,404	)
Net Loss		(2,338	)		(4,842	)		(5,470	)		(5,782	)

Basic earnings per share:
Loss before extraordinary gain		(0.32	)		(0.66	)		(0.75	)		(1.02	)
Net Loss		(0.32	)		(0.66	)		(0.75	)		(0.79	)

Diluted earnings per share:
Loss before extraordinary gain		(0.32	)		(0.66	)		(0.75	)		(1.02	)
Net Loss		(0.32	)		(0.66	)		(0.75	)		(0.79	)

		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 COMPENSATION

		On 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 Principles Board Opinion No. 25 intrinsic value method, under which no compensation expense was recognized because all historical options granted were at an exercise price equal to the market value of our stock on the grant date. Prior period financial statements have not been adjusted to reflect fair value share-based compensation expense under SFAS No. 123R.

		Our share-based payment arrangements are designed to attract and retain employees and directors. The amount, frequency, and terms of share-based awards may vary based on competitive practices, our operating results, and government regulations. New shares are issued upon option exercise or restricted share grants. We do not settle equity instruments in cash. We maintain two share based plans, each as discussed below.

		The American Pacific Corporation 2001 Stock Option Plan, as amended (the “2001 Plan”), permits the granting of incentive stock options meeting the requirements of Section 422 of the Internal Revenue Code and nonqualified options that do not meet the requirements of Section 422 to

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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 March 31, 2006, 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 March 31, 2006, there were 25,000 shares available for grant under the 2002 Directors Plan. This plan was approved by our shareholders.

A summary of our outstanding and vested stock option activity for the six months ended March 31, 2006 is as follows:


	Total Outstanding					Non Vested
				Weighted					Weighted
				Average					Average
				Exercise					Fair
				Price					Value
	Shares			Per Share		Shares			Per Share

Balance, September 30, 2005		523,500		$	7.08		143,750		$	3.06
Granted		37,500			4.21		37,500			2.00
Vested		—			—		(36,250	)		3.08
Exercised		(5,500	)		5.54		—			—
Expired		—			—		—			—

Balance, March 31, 2006		555,500			6.90		145,000			2.78

A summary of our exercisable stock options as of March 31, 2006 is as follows:


Number of vested stock options		410,500
Weighted-average exercise price per share	$	7.20
Aggregate intrinsic value	$	822
Weighted-average remaining contractual term in years		7.71

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.


	Six Months Ended
	March 31,
	2006			2005

Weighted-average grant date fair value per share of options granted	$	2.00		$	3.74
Significant fair value assuptions:
Expected term in years		4.75			4.50
Expected 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	$	18		$	12
Aggregate cash received for option exercises	$	30		$	24

Total compensation cost (included in operating expenses)	$	233		$	—
Tax benefit recognized		86			—

Net compensation cost	$	147		$	—

As of period end date:
Total compensation cost for non-vested awards not yet recognized	$	191
Weighted-average years to be recognized		0.5

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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 Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
	Actual			Pro Forma			Actual			Pro Forma

Net income (loss), as reported	$	(2,338	)	$	(303	)	$	(3,643	)	$	725
Pro forma compensation, net of tax					(16	)					(98	)

Pro forma net income (loss)				$	(319	)				$	627


Basic income (loss) per share:
As reported	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	0.10
Pro Forma				$	(0.04	)				$	0.09

Diluted income (loss) per share
As reported	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	0.10
Pro forma				$	(0.04	)				$	0.09

4.		SELECTED BALANCE SHEET DATA

		*Inventories:* Inventories consist of the following:


	March 31,		September 30,
	2006		2005

Finished goods	$	4,353	$	2,475
Work-in-process		14,929		2,940
Raw materials and supplies		16,862		8,403

Total	$	36,144	$	13,818

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:


	March 31,			September 30,
	2006			2005

Perchlorate customer list	$	38,697		$	38,697
Less accumulated amortization		(31,330	)		(29,380	)

		7,367			9,317

Customer relationships and backlog		18,100			—
Less accumulated amortization		(1,902	)		—

		16,198			—

Pension-related intangible		446			446

Total	$	24,011		$	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 March 31, 2006 and 2005 and $1,950 for both the six months ended March 31, 2006 and 2005.

		The pension-related intangible is an actuarially calculated amount related to unrecognized prior service cost for our defined benefit pension plan and supplemental executive retirement plan.

		In connection with our acquisition of the AFC Business, we acquired intangible assets with 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 six months ended March 31, 2006 was $1,426 and $1,902, respectively.

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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						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Net Income (Loss)	$	(2,338	)	$	(303	)	$	(3,643	)	$	725

Other Comprehensive Income (Loss):
Foreign currency translation adjustment		5			(42	)		(41	)		29
Minimum pension liability adjustment		—			(221	)		—			209

Total other comprehensive income (loss)		5			(263	)		(41	)		238

Comprehensive Income (Loss)	$	(2,333	)	$	(566	)	$	(3,684	)	$	963

6.		EARNINGS (LOSS) PER SHARE

		Shares used to compute loss per share before extraordinary gain are as follows:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Loss before extraordinary gain	$	(2,338	)	$	(303	)	$	(3,643	)	$	(897	)


Basic:
Weighted average shares		7,297,000			7,292,000			7,297,000			7,292,000


Diluted:
Weighted average shares, basic		7,297,000			7,292,000			7,297,000			7,292,000
Dilutive effect of stock options		—			—			—			—

Weighted average shares, diluted		7,297,000			7,292,000			7,297,000			7,292,000


Basic loss per share before extraordinary item	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	(0.12	)
Diluted loss per share before extraordinary item	$	(0.32	)	$	(0.04	)	$	(0.50	)	$	(0.12	)

		As of March 31, 2006, we had 555,500 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.		DEBT

		Our outstanding debt balances consist of the following:


	March 31,			September 30,
	2006			2005

Credit Facilities:
First Lien Term Loan, 8.98%	$	64,675		$	—
First Lien Revolving Credit, 8.63%		6,000			—
Second Lien Term Loan plus accrued PIK Interest, 13.98%		20,067			—
Subordinated Seller Note plus accrued PIK Interest, 9.58%, Net of Discount		20,500			—
Capital Leases and Other		736			768

Total Debt		111,978			768
Less current portion		(8,518	)		(768	)

Total Long-term Debt	$	103,460		$	—

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

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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 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 (“PIK 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.

		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.

		On November 30, 2005, we borrowed $65,000 under the First Lien Credit Facility term loan and $20,000 under the Second Lien Credit Facility. 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

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		classified as other assets and are amortized over the term of the Credit Facilities using the interest method.

		As of March 31, 2006, we had outstanding borrowings of $6,000 under the First Lien revolving credit line. As of March 31, 2006, 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 PIK Interest at a rate equal to the three–month U.S. dollar LIBOR as from time to time in effect plus a margin equal to the weighted average of the interest rate margin for the loans outstanding under the Credit Facilities, including certain changes in interest rates due to subsequent amendments or refinancing of the Credit Facilities. All principal and accrued and unpaid PIK 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 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 our 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	$	650
2007		3,250
2008		13,000
2009		6,500
2010		36,075
Thereafter		51,025

Total	$	110,500

		*Capital Leases and Other:* Capital leases and other includes $500 payable to our ES joint venture partner. The remaining balance represents bank borrowings by our ES joint venture and capital lease obligations.

		*Letters of Credit:* As of March 31, 2006, we had $2,330 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.

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8.		COMMITMENTS AND CONTINGENCIES

		*Environmental 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 .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, KMCC and its predecessor operations have manufactured significantly greater amounts of perchlorate over time than we did at the Ampac Henderson Site.

		In 1997, the Southern Nevada Water Authority (“SNWA”) detected trace amounts of the perchlorate anion in Lake Mead and the Las Vegas Wash. Lake Mead is a source of drinking water for Southern Nevada and areas of Southern California. 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 in an extensive investigation of groundwater near the Ampac Henderson site and down gradient toward the Las Vegas Wash. That investigation and related characterization which lasted more than six years, 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 up to 700 ppm, perchlorate from this Site does not materially impact, if at all, water flowing in the Las Vegas Wash toward Lake Mead. It has been well established, however, by data generated by SNWA and NDEP, that perchlorate from the Kerr McGee Henderson Site did materially impact the Las Vegas Wash and Lake Mead. Kerr McGee’s successor, Tronox LLC, operates an ex situ perchlorate groundwater remediation facility at their Henderson site and this facility has had a significant effect on the load of perchlorate entering Lake Mead over the last 5 years. Recent measurements of perchlorate in Lake Mead made by SNWA have been less than 10 ppb.

		Notwithstanding these facts, and at the direction of NDEP and 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

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		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 (“Athens System”) 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 commenced construction of the Athens System in July, 2005.

		Henderson Site Environmental Remediation Reserve –

		During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at the Henderson Site, including the costs for equipment, operating and maintenance costs, and consultants. Key factors in determining the total estimated cost include an estimate of the speed of groundwater entering the treatment area, which was then used to estimate a project life of 45 years, as well as estimates for capital expenditures and annual operating and maintenance costs. The project consists of two primary phases; the initial construction of the remediation equipment and the operating and maintenance phase. We commenced the construction phase in late fiscal 2005 and expect to complete this phase by the end of fiscal 2006. During our fiscal 2006 second quarter, we increased our total cost estimate for the construction phase by $2,800 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate.

		A summary of our environmental reserve activity for the six months ended March 31, 2006 is shown below:


Balance, September 30, 2005	$	20,587
Additions or adjustments		2,800
Expenditures		(3,997	)

Balance, March 31, 2006	$	19,390

		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.

		On November 28, 2005, AFC and DTSC entered into a Consent Agreement (“Consent Agreement”) which, effective 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.

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		We believe that if AFC is ultimately required to obtain a permit to treat hazardous waste it may have to spend additional capital 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 our customers.

		The AFC Business facility was 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 that the EPA 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, effective upon close of the sale of the AFC Business to us, AFC would not 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). 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 Seth Van Voorhees, as our Chief Financial Officer, Vice President and Treasurer, terminated. We are currently negotiating the terms of Dr. Van Voorhees departure. 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 if employment is terminated by us for cause, or if Dr. Van Voorhees terminated his employment without good reason.

		*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.

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9.		SEGMENT INFORMATION

		We 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 costs are charged to our Specialty Chemicals segment. 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.

		Effective January 1, 2006, we revised our method to measure segment operating results to a method management believes is a more meaningful measure of segment performance. Prior to that date we had included an allocation of corporate expenses to our operating segment. All periods presented have been reclassified to reflect our current measure of segment operating results.

		*Specialty Chemicals:* Our Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, used principally in solid rocket propellants for the space shuttle and defense programs, (ii) sodium azide, 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.

		One perchlorates customer accounted for 23% and 18% of our consolidated revenues for the three months and six months ended March 31, 2006, and 24% and 28% of our consolidated revenues for the three months and six months ended March 31, 2005, respectively.

		*Fine Chemicals:* On November 30, 2005, we created a new operating segment, Fine Chemicals, to report the financial performance of AFC (See Note 2). AFC is a manufacturer of active pharmaceutical ingredients and registered intermediates under cGMP guidelines for commercial customers in the pharmaceutical industry, involving high potency compounds, energetic and nucleoside chemistries, and chiral separation.

		We had one Fine Chemicals customer that accounted for 24% and 22% of our consolidated revenues during the three months and six months ended March 31, 2006, respectively.

		*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.

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The following provides financial information about our segment operations:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Revenues:
Specialty Chemicals	$	20,626		$	13,097		$	27,963		$	26,734
Fine Chemicals		18,931			—			24,103			—
Aerospace Equipment		3,489			2,144			8,134			5,879
Other Businesses		878			3,272			2,841			4,154

Total Revenues	$	43,924		$	18,513		$	63,041		$	36,767


Segment Operating Income (Loss):
Specialty Chemicals (a)	$	4,244		$	1,219		$	3,893		$	2,990
Fine Chemicals		(275	)		—			676			—
Aerospace Equipment		58			(235	)		319			(248	)
Other Businesses		154			2,519			671			3,053

Total Segment Operating Income (Loss)		4,181			3,503			5,559			5,795
Corporate Expenses		(4,726	)		(4,089	)		(7,994	)		(7,367	)
Interest and Other Income (Expense), Net		(3,081	)		106			(3,348	)		149

Loss before Income Taxes and Extraordinary Gain	$	(3,626	)	$	(480	)	$	(5,783	)	$	(1,423	)


Depreciation and Amortization:
Specialty Chemicals	$	1,446		$	1,381		$	2,886		$	2,753
Fine Chemicals		4,048			—			5,348			—
Aerospace Equipment		18			—			35			—
Other Businesses		3			3			6			7
Corporate		140			130			281			258

Total Depreciation and Amortization	$	5,655		$	1,514		$	8,556		$	3,018

(a)		Specialty Chemical operating profit for the three-month and six-month periods ended March 31, 2006 includes a charge for $2,800 related environmental remediation at our Henderson, NV project, see Note 8.

10.		INTEREST AND OTHER INCOME

		Interest and other income consist of the following:


	Three Months Ended				Six Months Ended
	March 31,				March 31,
	2006		2005		2006		2005

Interest income	$	48	$	148	$	294	$	257
Gain on sale of Hughes Parkway		—		—		580		—
Other		—		—		49		—

	$	48	$	148	$	923	$	257

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 Nevada limited partnership (“Hughes Parkway”). Hughes Parkway owns the building in which we lease office space in Las Vegas, Nevada.

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		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 PLANS

		Net periodic pension cost related to our defined benefit pension plans consists of the following:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

*Defined Benefit Pension Plan:*
Service Cost	$	309		$	250		$	535		$	536
Interest Cost		477			400			827			827
Expected Return on Plan Assets		(393	)		(343	)		(682	)		(682	)
Recognized Actuarial Losses		16			15			29			28
Amortization of Prior Service Costs		134			102			232			232

Net Periodic Pension Cost	$	543		$	424		$	941		$	941


*Supplemental Executive Retirement Plan:*
Service Cost	$	—		$	—		$	—		$	—
Interest Cost		38			37			74			74
Expected Return on Plan Assets		—			—			—			—
Recognized Actuarial Losses		11			11			21			21
Amortization of Prior Service Costs		7			7			16			16

Net Periodic Pension Cost	$	56		$	55		$	111		$	111

		For the six months ended March 31, 2006, we contributed $1,364 to the Defined Benefit Pension Plan to fund benefit payments and anticipate making approximately $479 in additional contributions through September 30, 2006. For the six months ended March 31, 2006, we contributed $63 to the Supplemental Executive Retirement Plan to fund benefit payments and anticipate making approximately $63 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 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands)

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which are subject to the safe harbor created by those sections. These forward-looking statements include, but are not limited to: statements about our business strategy, the effect of GAAP accounting pronouncements on our recognition of revenue, uncertainty regarding our future operating results and our profitability, anticipated sources of revenue and all plans, objectives, expectations and intentions contained in this report that are not historical facts. We usually use words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “future,” “intend,” or “certain” or the negative of these terms or similar expressions to identify forward-looking statements. Discussions containing such forward-looking statements may be found throughout the document. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Please see the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended September 30, 2005, and Item 1A contained in this quarterly report, for further discussion of these and other factors that could affect future results. We disclaim any obligation to update these forward-looking statements as a result of subsequent events. The business risks discussed later in this report, among other things, should be considered in evaluating our prospects and future financial performance.

The following discussion and analysis is intended to provide a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our condensed consolidated financial statements and notes thereto. A summary of our significant accounting policies is included in Note 1 to our consolidated financial statements in our Annual Report on Form 10-K for the year ended September 30, 2005.

OVERVIEW

We are principally a specialty and fine chemical company with four operating segments.

Specialty Chemicals: Our Specialty Chemicals segment is principally engaged in the production of Grade I ammonium perchlorate (“AP”) for aerospace and defense industries. In addition, we produce and sell sodium azide, the primary component of a gas generator used in certain automotive airbag safety systems, and Halotron, a chemical used in fire extinguishing systems ranging from portable fire extinguishers to airport firefighting vehicles. We also hold a 50% ownership stake in Energetic Systems, an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives.

Fine Chemicals: On November 30, 2005, we acquired the AFC Business through 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 commercial customers in the pharmaceutical industry, involving high potency compounds, energetic and nucleoside chemistries, and chiral separation. See Note 2 to our condensed consolidated financial statements for a detailed discussion of the acquisition transaction.

Aerospace Equipment: On October 1, 2004, we acquired Aerojet-General Corporation’s in-space propulsion business (“ISP”) which manufactures products for the satellite market.

Other Businesses: Our Other Businesses segment includes the production of water treatment equipment, including equipment for odor control and disinfection of water, and real estate operations. In fiscal 2005, we completed the sale of all real estate assets that were targeted for sale and we do not anticipate significant real estate sales activity in the future financial reporting periods.

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The following table reflects the revenue contribution percentage from our major product lines:


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2006			2005			2006			2005

Specialty Chemicals:
Perchlorates		33	%		40	%		29	%		44	%
Packages explosives		9	%		22	%		11	%		21	%
Sodium Azide		2	%		3	%		2	%		3	%
Halotron		3	%		5	%		3	%		5	%

Total Specialty Chemicals		47	%		70	%		45	%		73	%

Fine Chemicals		43	%		0	%		38	%		0	%

Aerospace Equipment		8	%		12	%		13	%		16	%

Other Businesses:
Real Estate		1	%		17	%		1	%		9	%
Water Treatment Equipment		1	%		1	%		3	%		2	%
Total Other Businesses		2	%		18	%		4	%		11	%

Total Revenues		100	%		100	%		100	%		100	%

Specialty Chemicals Segment

Perchlorate Chemicals –

Perchlorate chemicals account for a major portion of the Specialty Chemicals segment revenues. In general, demand for Grade I AP is driven by a relatively small number of Department of Defense (“DOD”) and National Aeronautics and Space Administration (“NASA”) contractors.

Grade I AP Customer Contracts:

We entered into an agreement (“Thiokol Agreement”) with the Thiokol Propulsion Division of Alcoa (“Thiokol”) with respect to the supply of AP through the year 2008. The Thiokol Agreement, as amended, provides that during its term we will maintain ready and qualified capacity and Thiokol will make all of its AP purchases from us, subject to certain conditions. The agreement established a pricing matrix under which Grade I AP unit prices varied inversely with the quantity of Grade I AP sold by us annually to all of our customers between 8 and 28 million pounds per year.

We also entered into an agreement with Alliant Techsystems, Inc. (“Alliant”) to extend an existing agreement through the year 2008 (“Bacchus Agreement”). The agreement establishes prices for any Grade I AP purchased by Alliant from us during the term of the agreement as extended. Under this agreement, Alliant agrees to use its efforts to cause our Grade I AP to be qualified on all new and current programs served by Alliant’s Bacchus Works.

During 2001, Alliant acquired Thiokol. We have agreed with Alliant that the individual agreements in place prior to Alliant’s acquisition of Thiokol remain in place. All Thiokol programs existing at the time of the Alliant acquisition (principally the Minuteman and Space Shuttle) continue to be priced under the Thiokol Agreement. All Alliant programs (principally the Delta, Pegasus and Titan) are priced under the Bacchus Agreement.

Alliant’s current Grade I AP purchase projections, in combination with the Grade I AP purchase projections of our other customers, indicate that the fiscal 2006 sales volume for Grade I AP is expected to be below 8 million pounds. Lower demand for Grade I AP products by Alliant under the Bacchus Agreement also have contributed to the reduction in overall demand for our Grade I AP products in fiscal 2006.

Based on these expectations of lower volumes and certain other factors, we began discussions with Alliant to determine fair and reasonable pricing for volumes less than those that were provided in the existing Thiokol Agreement. Effective April 5, 2006, we entered into Modification #3 to the Thiokol Agreement (the “Amendment”). The Amendment extends the term of the Thiokol Agreement from 2008 to 2013, establishes AP pricing at annual volumes of AP ranging from 3 million to 20 million pounds, and

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indicates certain circumstances under which the parties may terminate the contract. Under the Amendment, Grade I AP unit prices continue to vary inversely with the quantity of Grade I AP sold by us annually to all of our customers between 8 and 28 million pounds per year. Additionally, prices escalate each year for all volumes covered under the Amendment.

Grade I AP Sales Volume:

Beginning in the 1990’s, demand for perchlorate chemicals has been declining. The suspension of Space Shuttle missions after the Columbia disaster in February 2003 further reduced sales volume of our Grade I AP products. This reduced sales volume exceeded the actual consumption of Grade I AP product by our customers. As a result, our customers’ inventory levels of Grade I AP increased.

We believe that over the next several years, overall demand for Grade I AP will be largely driven by requirements for the Minuteman program which should provide a stable base for our Grade I AP revenues. Grade I AP demand could also be influenced if there is a substantial increase in Space Shuttle flights. However, it is our expectation that our customers’ Grade I AP inventories are currently sufficient to sustain nominal Space Shuttle activity for the next several years.

Our expectations of Grade I AP demands are based on information currently available to us. We have no ability to influence the demand for Grade I AP. In addition, demand for Grade I AP is program specific and dependent upon, among other things, governmental appropriations. Any decision to delay, reduce or cancel programs could have a significant adverse effect on our results of operations, cash flow and financial condition.

The U.S. has proposed a long-term human and robotic program to explore the solar system, starting with a return to the Moon. This program will require the development of new space exploration vehicles that is likely to stimulate the demand for Grade I AP. As a consequence of the new space initiatives discussed above, as well as other factors, including the completion and utilization of the International Space Station (“ISS”), the long-term demand for Grade I AP may be driven by the timing of the retirement of the Space Shuttle fleet, the development of the new crew launch vehicle (“CLV”) and the number of CLV launches, and the development and testing of the new heavy launch vehicle (“HLV”) used to transport materials and supplies to the ISS and the Moon; and the number of HLV launches.

Other Perchlorate Products:

We also produce and sell a number of other grades of AP and different types and grades of sodium and potassium perchlorates (collectively “other perchlorates”). Other perchlorates have a wide range of prices per pound, depending upon the type and grade of the product. Other perchlorates are used in a variety of applications, including munitions, explosives, propellants, and initiators. Some of these applications are in a development phase, and there can be no assurance of the success of these initiatives.

Packaged Explosives —

We also hold a 50% ownership stake in Energetic Systems, an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. Geographic markets for ES products include the U.S., Canada and Mexico.

The overall consumption of commercial explosives is expected to remain strong through 2006 as a result of continued strength of commodities like coal and aggregates, but increasing transportation and raw material costs have limited the upside potential in the commercial explosives business. Ammonium nitrate costs increased dramatically in 2006, mainly as a result of the high cost of natural gas and increases in ammonia pricing. The long awaited passage of the Transportation Highway Bill in 2005 did not provide the anticipated increase in road construction, mainly due to lack of matching funds at the state level. As a result, we have not been able to match the performance of our customer base, and continue to deal with rising raw material costs and overcapacity in the industry.

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Sodium Azide —

Worldwide demand for sodium azide has declined considerably over the last several years due to decreased uses in its historically highest use category as a gas generator component for automotive airbags. Currently, worldwide demand for sodium azide is substantially less than worldwide supply. Based principally upon market information received from airbag inflator manufacturers, we expect sodium azide use to continue to decline and that inflators using sodium azide will be phased out over a period of approximately five years.

Sodium azide is used in a variety of pharmaceutical applications and we sell into those markets. The most promising new market for sodium azide is as the active ingredient in pesticides designed to replace ozone depleting methyl bromide. We continue to pursue a program to commercialize sodium azide for this purpose.

Halotron ® Fire Extinguishing Agents —

Halotron is a series of clean fire extinguishing agents that were originally designed to replace halon-based fire extinguishing systems. Most of our Halotron related sales were made to U.S. based fire extinguisher manufacturers who continue to comprise the vast majority of demand for Halotron. Total demand for Halotron depends upon a number of factors including the willingness of commercial, government, and military consumers to spend more on a clean agent than for conventional, cheaper fire extinguishing agents that do not offer the advantages of a clean agent. The effect of competing products, as well as existing and potential governmental regulations also affects demand for Halotron products. Four of the five major U.S. fire extinguisher manufacturers, in addition to 10 non-U.S. manufacturers, sell products containing Halotron manufactured by us.

Fine Chemicals Segment

AFC is a manufacturer of Active Pharmaceutical Ingredients (“APIs”) and registered intermediates for commercial customers in the pharmaceutical industry. In fiscal 2005 (twelve months ended November 30, 2005), the AFC Business generated nearly all of its sales from existing products that are FDA-approved and currently on the market. AFC is a pharmaceutical fine chemicals manufacturer that operates in compliance with the U.S. Food and Drug Administration’s (“FDA”) current Good Manufacturing Practices (“cGMP”). AFC has distinctive competencies in chiral separations, highly potent/cytotoxic compounds and energetic chemistry.

Chiral Compounds — Many chemicals used as pharmaceuticals are chiral in nature. Chiral chemicals exist in two different forms, or enantiomers, which are mirror images of each other. The different enantiomers can have very different properties, including efficacy as a drug substance. As a result, the FDA is requesting pharmaceutical companies to identify and separate the enantiomers of a new drug and study their biological activities through separate clinical trials. If they are found to be different and especially if one is causing side effects, then the FDA will request that the desired enantiomer be chirally pure (i.e. separated from its counterpart). To achieve this chiral purity several techniques are available. The desired single enantiomer can be produced using asymmetric synthesis or can be isolated from the other one by techniques such as chromatography.

Simulated Moving Bed (“SMB”) technology is a continuous separation technique based on the principle of chromatography. SMB technology was developed in the early sixties for the petroleum industry and was applied to pharmaceuticals in the nineties. Since this is a binary separation technique it is ideally suited for the separation of enantiomers. Recently several chirally pure drugs have been manufactured using a purification step using SMB and approved by the FDA. This technology allows the separation and obtainment of two enantiomers with high purity while asymmetric synthesis can only obtain a single enantiomer at a time. In many cases, the use of SMB technology results in a reduction and a simplification of the synthesis resulting in an economic gain. Currently, the market for custom manufacturing using SMB technology is substantially covered by four companies: AFC at its California

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site, Groupe Novasep SAS through its subsidiary Finorga in France, Daicel Chemical Industries, Ltd. in its manufacturing site in Japan and Honeywell International Inc. located in Ireland.

High Potency Compounds – High potency compounds are a rapidly growing segment of the pharmaceutical fine chemicals industry. High potency compounds are by nature extremely hazardous to handle and produce. The manufacture of high potency compounds requires high containment manufacturing facilities and a high-degree of expertise to ensure safe, quality production. AFC has the expertise to design processes and facilities to minimize and control potential exposure. The most common high potency compounds are used for oncology (i.e. anti-cancer). AFC estimates that there are currently over 600 anti-cancer drugs in the development pipeline and most utilize high potency compounds.

There is currently limited competition in the market for manufacturing high potency compounds, as it requires a high level of expertise to safely and effectively manufacture these chemicals. The need for such expertise has discouraged many firms from entering this market. Entry into this market also requires a capital investment for specialized facilities if the market entrant does not already have access to such facilities.

Energetic Chemistry and Anti-Viral Compounds – Energetic chemistry offers cleaner, higher yield processes to target compounds, which is increasingly important as purity specifications of pharmaceutical products become more stringent. At present, over 50 drugs currently on the market employ energetic chemistry platforms similar to the platforms of AFC in their synthesis processes, and the use of energetic chemistry is increasing at AFC. Safe operation of an energetic chemicals plant requires a great deal of expertise. Currently, AFC is one of a few companies in the world with the capability to use energetic chemistry on a commercial-scale under cGMP. One of the largest and fastest growing applications for energetic chemistry in pharmaceutical fine chemicals is anti-viral drugs. The majority of this growth has resulted from the increase of HIV-related drugs. We expect that HIV drugs will continue to drive growth in the anti-viral product segment, given the increased government sponsorship for fighting the epidemic. For example, in May 2003, the U.S. passed into law a five-year, $15 billion anti-HIV bill designed to increase the supply of HIV-fighting drugs to third-world nations.

Aerospace Equipment Segment

The ISP business is the sole contributor to the Aerospace Equipment segment. The ISP business manufactures in-space propulsion thrusters that are either monopropellant or bipropellant based products. Monopropellant thrusters utilize a single liquid fuel source (typically hydrazine), whereas bipropellant thrusters use a combination of a liquid fuel (typically monomethylhydrazine) and an oxidizer.

The selection of a propulsion system is based on the satellite’s or spacecraft’s mission and encompasses a variety of factors, including (i) type of mission, (ii) length of mission, (iii) type of orbit, (iv) weight of vehicle, (v) type of launch vehicle, and (vi) price. The ISP business supplies both government and commercial satellite customers. Sales to these customers are usually awarded based on product performance, pricing, and reliability.

The market for ISP products is expected to grow modestly over the next several years. Government funding for defense, earth observation and space-systems satellites is stable, but continued budget pressure will stretch the timing of some of these programs. Funding for missile defense programs is also expected to remain flat given budget pressures. The commercial satellite industry is expecting higher growth as a result of demand from broadband, HDTV and communications applications. Higher growth rates are expected in the markets for ISP products after the next several years as a result of the replacement of existing military and defense communications constellation systems.

Other Businesses Segment

The Other Businesses segment includes sales from our real estate and water treatment equipment businesses.

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Water Treatment Equipment —

PEPCON Systems™ designs, manufactures and services equipment used to purify air or water in municipal, industrial and power generation applications. The systems are based on an electrochemical process to produce disinfection chemicals and are marketed under the ChlorMaster™ and OdorMaster™ names. Disinfection chemicals are used by (i) municipalities and sewage plants for the disinfection of drinking water, effluent and waste water; (ii) power plants, desalination plants, chemical plants and on-shore/off-shore crude oil facilities for the control of marine growth in seawater used in cooling water circuits; and (iii) by composting plants for the deodorizing of malodorous compounds in contaminated air.

The heart of the process is a proprietary electrochemical cell which uses brine or seawater to produce the disinfection chemicals. We compete with companies that utilize other technologies and those that utilize technologies similar to ours. Our success depends principally upon our ability to be cost competitive and, at the same time, to provide a quality product and service. A significant portion of our Water Treatment Equipment sales are to overseas customers, specifically in the Middle and Far East.

Real Estate —

Our real estate operations have been in a wind-down phase over the last several years. In fiscal 2005 we completed the sale of all our Nevada real estate assets that were targeted for sale.

Raw Materials and Manufacturing Costs

The principal elements comprising our cost of sales are raw materials (including inbound freight), component parts, electric power, labor, purchasing, receiving, inspection, warehousing, manufacturing overhead, delivery costs, depreciation and amortization. The major raw materials used in our production processes are graphite, sodium chlorate, ammonia, hydrochloric acid, sodium metal, nitrous oxide and HCFC-123. Our operations consume a significant amount of power (electricity and natural gas); the pricing of these power costs can be volatile. Significant increases in the cost of raw materials may have an adverse impact on margins if we are unable to pass along such increases to our customers.

All the raw materials used in our manufacturing processes typically are available in commercial quantities. A substantial portion of the total cash costs of operating our specialty and fine chemical plants, consisting mostly of labor and overhead, are largely fixed in nature.

Profitability

Although our operating results have not been subject to seasonal fluctuations, they have been and are expected to continue to be subject to variations from quarter to quarter and year to year due to the following factors, among others:

	•		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 perchlorate chemicals, fine 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.

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RESULTS OF OPERATIONS

Revenues


	March 31,				Increase			Percentage
	2006		2005		(Decrease)			Change

Three Months Ended:
Specialty Chemicals	$	20,626	$	13,097	$	7,529			57	%
Fine Chemicals		18,931		—		18,931			—
Aerospace Equipment		3,489		2,144		1,345			63	%
Other Businesses		878		3,272		(2,394	)		(73	%)

Total Revenues	$	43,924	$	18,513	$	25,411			137	%


Six Months Ended:
Specialty Chemicals	$	27,963	$	26,734	$	1,229			5	%
Fine Chemicals		24,103		—		24,103			—
Aerospace Equipment		8,134		5,879		2,255			38	%
Other Businesses		2,841		4,154		(1,313	)		(32	%)

Total Revenues	$	63,041	$	36,767	$	26,274			71	%

The overall increase in revenues reflects:

•		An increase in Specialty Chemicals segment revenues is principally due to both higher volumes and prices during the fiscal 2006 three month and six month periods compared to the prior year periods. 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 periods include significant revenues from the sale of real estate. Our sales of real estate were substantially complete in fiscal 2005.

Cost of Revenues


	March 31,						Increase		Percentage
	2006			2005			(Decrease)		Change

Three Months Ended:
Revenues	$	43,924		$	18,513		$	25,411		137	%
Cost of Revenues		30,055			11,986			18,069		151	%

Gross Margin		13,869			6,527			7,342		112	%
Gross Margin Percentage		32	%		35	%

Six Months Ended:
Revenues	$	63,041		$	36,767		$	26,274		71	%
Cost of Revenues		44,631			24,531			20,100		82	%

Gross Margin		18,410			12,236			6,174		50	%
Gross Margin Percentage		29	%		33	%

Cost of sales increased during the three months and six months ended March 31, 2006 primarily due to the related increases in sales. Gross margin percentage was 29% for the six months ended March 31, 2006 compared to 33% for the prior fiscal year period. The fiscal 2005 six-month period includes a significant real estate sale which contributed approximately 6 margin points to the prior year. Except for the results of our fiscal 2005 real estate sales, our consolidated gross margins improved for the six months ended March 31, 2006 compared to the prior year period, which included gross margin improvements from each of our operating segments.

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Operating Expenses


	March 31,						Increase		Percentage
	2006			2005			(Decrease)		Change

Three Months Ended:
Operating Expenses	$	11,614		$	7,113		$	4,501		63	%
Percentage of Revenues		26	%		38	%

Six Months Ended:
Operating Expenses	$	18,045		$	13,808		$	4,237		31	%
Percentage of Revenues		29	%		38	%

Total operating expenses for the three months and six months ended March 31, 2006 increased compared to the prior year periods. The increase is primarily due to the addition of our Fine Chemicals segment. In addition, corporate expenses increased due to higher legal fees and consulting expenses, and Aerospace Equipment operating expenses increased due to its volume increases. Specialty Chemicals operating expenses decreased due environmental related expenses incurred in fiscal 2005 prior to the commencement of our remediation project, which we did not incur in fiscal 2006.

Environmental Remediation Charge

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 included an estimate of the speed of groundwater entering the treatment area, which was then used to estimate a project life of 45 years, as well as estimates for capital expenditures and annual operating and maintenance costs. The project consists of two primary phases; the initial construction of the remediation equipment and the operating and maintenance phase. We commenced the construction phase in late fiscal 2005 and expect to complete this phase by the end of fiscal 2006. Through March 31, 2006, we incurred construction costs of approximately $5,800. During our fiscal 2006 second quarter, we increased our total cost estimate for the construction phase by $2,800 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate.

Segment Operating Profit and Operating Loss


	March 31,						Increase			Percentage
	2006			2005			(Decrease)			Change

Three Months Ended:
Specialty Chemicals	$	4,244		$	1,219		$	3,025			248	%
Fine Chemicals		(275	)		—			(275	)		—
Aerospace Equipment		58			(235	)		293			(125	%)
Other Businesses		154			2,519			(2,365	)		(94	%)

Segment Operating Profit		4,181			3,503			678			19	%
Corporate Expenses		(4,726	)		(4,089	)		(637	)		16	%

Operating Loss	$	(545	)	$	(586	)	$	41			(7	%)


Six Months Ended:
Specialty Chemicals	$	3,893		$	2,990		$	903			30	%
Fine Chemicals		676			—			676			—
Aerospace Equipment		319			(248	)		567			(229	%)
Other Businesses		671			3,053			(2,382	)		(78	%)

Segment Operating Profit		5,559			5,795			(236	)		(4	%)
Corporate Expenses		(7,994	)		(7,367	)		(627	)		9	%

Operating Loss	$	(2,435	)	$	(1,572	)	$	(863	)		55	%

Segment operating profit includes all sales and expenses directly associated with each segment. Environmental remediation costs are charged to our Specialty Chemicals segment. Corporate general and administrative costs and interest are not allocated to segment operating results.

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Specialty Chemicals operating profit for the fiscal 2006 periods includes a charge for environmental remediation of $2,800, discussed above. Excluding the environmental remediation charge, Specialty Chemicals operating profit improved $3,703 compared to the prior year six-month period. The improvement reflects both higher gross margins for our perchlorate products due to better absorption of fixed production costs at higher volumes and reduced operating expenses.

Aerospace Equipment operating profit improved primarily due to better absorption of fixed manufacturing costs at higher revenue levels.

The decline in Other Businesses operating profit is due to real estate sales in the fiscal 2005 periods which did not recur in the fiscal 2006 periods.

The increase in corporate expenses in the fiscal 2006 periods reflects higher legal and consulting fees related to our AFC integration and negotiations with regarding the amendment to our Grade I AP pricing agreement.

Interest Income/Interest and Other Expense


	March 31,				Increase			Percentage
	2006		2005		(Decrease)			Change

Three Months Ended:
Interest Income	$	48	$	148	$	(100	)		(68	%)
Interest and Other Expense	$	3,129	$	42	$	3,087			7,350	%
Six Months Ended:
Interest Income	$	923	$	257	$	666			259	%
Interest and Other Expense	$	4,271	$	108	$	4,163			3,855	%

Interest and other income for the six months ended March 31, 2006, includes a gain of $580 related to the sale of our interest in a real estate partnership. This transaction is discussed in more detail in Note 10 to our condensed consolidated financial statements.

Interest expense increased due to the debt we incurred in connection with our acquisition of the AFC Business. See discussion of the Credit Facilities and Seller Subordinated Note under the heading Capital and Liquidity below.

Income Taxes

Our effective tax rate was 37% for both the six months ended March 31, 2006 and 2005. Our effective annual tax rate for fiscal 2006 reflects higher state income taxes associated with our newly-acquired, California-based AFC operations, offset by the effect of items that are not deductible for tax purposes. Our estimated effective tax rate could fluctuate in future periods if our estimates of profit or loss change.

Extraordinary Gain

In October 2004, we acquired ISP. The fair value of the current assets acquired and current liabilities assumed exceeded the purchase price. Accordingly, non-current assets were recorded at zero, and an extraordinary gain of $1,622 (net of approximately $953 income tax expense) was recorded based on the excess fair value of net assets over the purchase price.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires that we adopt accounting policies and 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.

Application of the critical accounting policies discussed below requires significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to

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differ materially from the estimates made, the reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

Sales and Revenue Recognition

Revenues for Specialty Chemicals, Fine Chemicals, and water treatment equipment sales are recognized when persuasive evidence of an arrangement exists, shipment has been made or customer acceptance has occurred, 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 and profit from these Bill and Hold transactions at the point at which title and risk of ownership transfer from us. 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. 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 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. A significant change in estimated costs on one or more contract could have a material effect on our results of operations in any given period.

Depreciable or Amortizable Lives of Long-Lived Assets

Our depreciable or amortizable long-lived assets include property, plant and equipment and intangible assets, which are recorded at cost. Depreciation or amortization is recorded using the straight-line method over the asset’s estimated economic useful life. Economic useful life is the duration of time that we expect the asset to be productively employed by us, which may be less than its physical life. Our significant assumptions that affect the determination of estimated economic useful life include: wear and tear, obsolescence, technical standards, contract life, and changes in market demand for products.

The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, changes in technological advances, changes in the estimated future demand for products, or excessive wear and tear may result in a shorter estimated useful life than originally anticipated. In these cases, we would depreciate the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis.

Impairment of Long-Lived Assets

We test our property, plant and equipment and amortizable intangible assets for recoverability when events or changes in circumstances indicate that their carrying amounts may not be recoverable. Examples of such circumstances include, but are not limited to, operating or cash flow losses from the

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use of such assets or changes in our intended uses of such assets. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If we determine that an asset is not recoverable, then we would record an impairment charge if the carrying value of the assets exceeds its fair value.

Fair value is based on estimated discounted future cash flows expected to be generated by the asset or asset group. The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include: industry and market conditions, sales volume and prices, costs to produce and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. We use reasonable and supportable assumptions when performing impairment reviews but cannot predict the occurrence of future events and circumstances that could result in impairment charges.

Environmental Costs

We are subject to environmental regulations that relate to our past and current operations. We record liabilities for environmental remediation costs when our assessments indicate that remediation efforts are probable and the costs can be reasonably estimated. When the available information is sufficient to estimate the amount of the liability, that estimate is used. When the information is only sufficient to estimate a range of probable liability, and no amount within the range is more likely than the other, the low end of the range is used. Estimates of liabilities are based on currently available facts, existing technologies and presently enacted laws and regulations. These estimates are subject to revision in future periods based on actual costs or new circumstances. Accrued environmental remediation costs include the undiscounted cost of equipment, operating and maintenance costs, and fees to outside law firms or consultants, for the estimated duration of the remediation activity. Estimating environmental costs requires us to exercise substantial judgment regarding the cost, effectiveness and duration of our remediation activities. Actual future expenditures could differ materially to our current estimates.

We evaluate potential claims for recoveries from other parties separately from our estimated liabilities. We record an asset for expected recoveries when recovery of the amounts are probable.

Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. This method also requires the recognition of future tax benefits such as net operating loss carryforwards and other tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Valuation allowances are provided to reduce deferred tax assets to an amount that is more likely than not to be realized. We evaluate the likelihood of realizing our deferred tax assets by estimating sources of future taxable income and the impact of tax planning strategies. The effect of a change in the valuation allowance is reported in the current period tax provision.

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.

Pension Benefits

We sponsor defined benefit pension plans in various forms for employees who meet eligibility requirements. Several assumptions and statistical variables are used in actuarial models to calculate the pension expense and liability related to the various plans. We determine the assumptions about the discount rate, the expected rate of return on plan assets and the future rate of compensation increases based on consultation with investment advisors and historical plan data. The actuarial models also use assumptions on demographic factors such as retirement, mortality and turnover. Depending on the

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assumptions selected, pension expense could vary significantly and could have a material effect on reported earnings. The assumptions used can also materially affect the measurement of benefit obligations.

Application of the critical accounting policies discussed above requires significant judgments, often as the result of the need to make estimates of matters that are inherently uncertain. If actual results were to differ materially from the estimates made, the reported results could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially different results.

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 to our condensed consolidated financial statements for additional information.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

Operating Activities: Significant components of cash flow from operations include:


	Six Months Ended
	March 31,						Increase			Percentage
	2006			2005			(Decrease)			Change

Loss before extraordinary gain	$	(3,643	)	$	(897	)	$	(2,746	)		306	%
Depreciation and amortization		8,556			3,018			5,538			183	%
Stock based compensation		233			—			233			—
Amortization of debt issue costs and Seller Note Discount		397			—			397			—
Payment -in-kind interest		897			—			897			—
Changes in Operating Assets and Liabilities:
Accounts receivable		(2,979	)		9,772			(12,751	)		(130	%)
Inventories		(5,528	)		(1,506	)		(4,022	)		267	%
Prepaid expenses		(2,417	)		(664	)		(1,753	)		264	%
Environmental remediation reserves		(1,197	)		—			(1,197	)		—
Accounts payable and accrued expenses		3,772			(110	)		3,882			(3,529	%)
Other		(1,917	)		222			(2,139	)		(964	%)

Cash Flow Provided (Used) in Operating Activities	$	(3,826	)	$	9,835		$	(13,661	)		(139	%)

The decline in cash flows from operating activities for our fiscal year 2006 six month period reflects:

•		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 of $3,997, offset by additional reserves recorded of $2,800. This project had not commenced in the prior year.

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•

Cash used for prepaid expenses, primarily annual insurance policies which are paid at the beginning of the fiscal year.

The decline in cash flow from operating activities was offset by cash provided by an increase in accounts payable and accrued expenses, primarily due to accrued interest and AFC direct acquisitions costs.

Investing Activities: Significant components of cash flow from investing activities include:


	Six Months Ended
	March 31,						Increase			Percentage
	2006			2005			(Decrease)			Change

Acquisition of businesses	$	(108,451	)	$	(4,468	)	$	(103,983	)		2,327	%
Capital expenditures		(8,251	)		(1,147	)		(7,104	)		619	%
Proceeds from sale of assets		2,395			—			2,395			—

Cash Flow Used in Investing Activities	$	(114,307	)	$	(5,615	)	$	(108,692	)		1,936	%

Cash used for acquisitions during the fiscal 2006 period relates to the acquisition of the AFC Business on November 30, 2005. The total cash of $108,451 was provided by net proceeds from debt issuances of $83,323 and existing cash balances. See Note 2 to the condensed consolidated financial statements for a more detail discussion.

Cash used for acquisitions in the first quarter of fiscal 2005 relates to our acquisition of our Aerospace Equipment segment.

Capital expenditures increased primarily due to the inclusion of AFC. Historically, our capital expenditures relate primarily to our Specialty Chemicals segment. With our acquisition of the AFC Business in November 2005, we expect our capital expenditures to increase significantly compared to pre-AFC acquisition periods.

Proceeds from the sale of assets relates to the sale of our interest in a real estate partnership. This transaction is discussed in more detail in Note 10 to our condensed consolidated financial statements.

Financing Activities: Significant components of cash flow from financing activities include:


	March 31,					Increase			Percentage
	2006			2005		(Decrease)			Change

Proceeds from the issuance of long-term debt	$	85,000		$	—	$	85,000			—
Payments of long-term debt		(325	)		—		(325	)		—
Short-term borrowings, net		5,927			—		5,927			—
Debt issue costs		(1,716	)		—		(1,716	)		—
Other		31			449		(418	)		(93	%)

Cash Flow Used in Investing Activities	$	88,917		$	449	$	88,468			19,703	%

Financing activities during the six months ended March 31, 2006 relate to our new Credit Facilities. See discussion below.

Liquidity and Capital Resources

As of March 31, 2006, we had cash of $7,997. Our primary source of working capital is cash flow from our operations and our revolving credit line which had availability of approximately $4,000 as of April 30, 2006. In addition, we may incur additional debt to fund capital projects, strategic initiatives or for other general corporate purposes, subject to our existing leverage, the value of our unencumbered assets and borrowing limitations imposed by our lenders. The availability of our cash is affected by the timing, pricing and magnitude of orders for our products.

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The timing of our cash outflows is affected by payments and expenses related to capital projects, interest on our debt obligations and environmental remediation or other contingencies discussed in Note 8 to our condensed consolidated financial statements, which may place demands on our short-term liquidity, As a result of the litigation and contingencies, we have incurred legal and other costs, and we may incur material legal and other costs associated with the resolution of litigation and contingencies in future periods. If such costs are material, to the extent not recovered by insurance, they would adversely affect our liquidity.

We currently believe that our cash flows from operations, existing cash balances and existing or future debt arrangements will be adequate for the foreseeable future to satisfy the needs of our operations.

In connection with our acquisition of the AFC Business, discussed in Note 2 to our condensed consolidated financial statements, we incurred substantial debt including a $65,000 First Lien Term Loan, a $20,000 Second Lien Term Loan, and a $25,500 Seller Subordinated Note, each discussed below. Our acquisition of the AFC Business was funded with net proceeds from the Credit Facilities of $83,323 (after debt issuance costs), the Seller Subordinated Note of $25,500 and existing cash. In addition, during our fiscal 2006 second quarter we borrowed $6,000 against our revolving credit facility.

Credit Facilities and Seller Subordinated Note

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 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. 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 interest rate exposure related to 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.

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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 March 31, 2006, 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 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 AMPAC 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 AMPAC 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).

Environmental Remediation — Henderson Site

- 34 -

maintenance costs. The project consists of two primary phases; the initial construction of the remediation equipment and the operating and maintenance phase. We commenced the construction phase in late fiscal 2005 and expect to complete this phase by the end of fiscal 2006. Through March 31, 2006, we incurred construction costs of approximately $5,800. During our fiscal 2006 second quarter, we increased our total cost estimate for the construction phase by $2,800 due primarily to changes in the engineering designs, delays in receiving permits and the resulting extension of construction time. These estimates are based on information currently available to us and may be subject to material adjustment upward or downward in future periods as new facts or circumstances may indicate. Changes in this estimate could be material to our results of operations in any given period.

For the remainder of fiscal 2006, we expect to use cash provided by operations to fund approximately $2,800 for the remaining construction phase of our remediation project. Once the project moves to its operating and maintenance phase, cash usage should decline to approximately $800 annually for the next several years.

Dividend and Stock Repurchase Program

In January 2003, our Board of Directors approved a program for use in determining any dividends and stock repurchases. This plan is subject to the Board’s determination that a dividend is appropriate in light of our overall financial condition, prospects and anticipated cash needs. Beginning November 2005, our Credit Facilities significantly limit our ability to use cash to repurchase shares or issue dividends under the program.

Contractual Obligations and Off-Balance Sheet Arrangements

Our contractual commitments are comprised primarily of long term debt (including the Credit Facilities and Seller Subordinated Note) and the related interest payments, operating leases, environmental remediation obligations, and pension obligations. In addition, we issue letters of credits related to the performance of our products. During the quarter ended March 31, 2006, we borrowed $6,000 under our revolving credit facility. The amount is classified as current debt on our balance sheet. With the exception of this new borrowing, our obligations have not changed materially from the amounts disclosed in our annual report on Form 10-K for the year ended September 30, 2005.

Effective March 25, 2006, the employment of Seth Van Voorhees, as our Chief Financial Officer, Vice President and Treasurer, terminated. We are currently negotiating the terms of Dr. Van Voorhees departure. 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 if employment is terminated by us for cause, or if Dr. Van Voorhees terminated his employment without good reason.

We do not have any other material off-balance sheet arrangements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in Thousands)

We are exposed to interest rate risk primarily due to changes in interest rates for our long-term debt.

As of December 31, 2005, our outstanding debt of $111,978 is comprised primarily of variable rate borrowings under our Credit Facilities and Seller Subordinated Note. The interest rate on these borrowings varies with changes in the LIBOR rate.

We estimate interest rate risk as the potential change in fair value of our debt or earnings resulting from a hypothetical 100 bps adverse change in interest rates. We estimate that a hypothetical increase in the LIBOR rate of 100 bps would have the effect of increasing our fiscal year 2006 estimated interest expense by $86.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Based on their evaluation as of March 31, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) were effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls

On November 30, 2005, we completed our acquisition of the AFC business. We are in the process of integrating the AFC operations and will be conducting a control review. Excluding the AFC Business acquisition, there were no changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

For a description of our legal proceedings, see Note 8 to our condensed consolidated financial statements.

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.

(a) Declining demand (including excess customer inventories) or downward pricing pressure for our products as a result of general or specific economic conditions,

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(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.

(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.

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

Voting results of matters submitted to a vote of Security Holders at our Annual Meeting of Stockholders held on March 7, 2006 were as follows:

Item No. 1 — Election of Class B Director (through March 2008).


Name	Votes For		Votes Withheld
C. Keith Rooker		4,280,832		2,812,503

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Item No. 2 — Election of Class C Directors (through March 2009).


Name	Votes For		Votes Withheld
Fred D. Gibson, Jr.		4,311,343		2,781,992
Berlyn D. Miller		4,981,755		2,111,580

Each of the Nominees received less than 80% of the votes cast. Accordingly, in accordance with the Registrant’s Certificate of Incorporation and Bylaws, they will each remain in office, but must be re-nominated for election by the stockholders at the next Annual Meeting in March 2007.

Item No. 3 — Approval of the adoption of the American Pacific Corporation 2006 Incentive Stock Plan:


Votes For	Against		Abstained
2,024,570		3,198,587		16,202

Item No. 4 — Ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the fiscal year ending September 30, 2006:


Votes For	Against		Abstained
7,032,529		49,730		11,077

ITEM 5. OTHER INFORMATION — None.

ITEM 6. EXHIBITS


10.1+		Modification #3 to the Thiokol Long Term Pricing Agreement dated April 5, 2006.

10.2		Interim agreement between the Registrant and Dana M. Kelley, as acting Chief Financial Officer dated March 27, 2006.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

+		Confidential treatment has been requested with respect to certain portions of this document.

*		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.

- 38 -

EXHIBIT INDEX


10.1+		Modification #3 to the Thiokol Long Term Pricing Agreement dated April 5, 2006.

10.2		Interim agreement between the Registrant and Dana M. Kelley, as acting Chief Financial Officer dated March 27, 2006.

31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*		Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

+		Confidential treatment has been requested with respect to certain portions of this document.

*		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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PART I. FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Statements of Operations (unaudited)	2

	Condensed Consolidated Balance Sheets (unaudited)	3

	Condensed Consolidated Statements of Cash Flows (unaudited)	4

	Notes to Condensed Consolidated Financial Statements (unaudited)	5

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	36

ITEM 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	36

ITEM 1A.	Risk Factors	36

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

ITEM 3.	Defaults Upon Senior Securities	37

ITEM 4.	Submission of Matters to a Vote of Security Holders	37

ITEM 5.	Other Information	37

ITEM 6.	Exhibits	38
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


		AMERICAN PACIFIC CORPORATION

Date: May 15, 2006		/s/ JOHN R. GIBSON

		John R. Gibson
		Chief Executive Officer and President

Date: May 15, 2006		/s/ DANA M. KELLEY

		Dana M. Kelley
		Acting Chief Financial Officer

	1.		Exhibit B to this Modification establishes pricing for lower quantities and adds pricing for years 2009 through 2013. For years 2006 and beyond, the prices in Exhibit B replace the prices in Exhibit A of the original agreement. References to Exhibit A for years 2006 and on will now be references to Exhibit B. Also, for years 2006 and beyond, the prices in Exhibit A for volumes exceeding 20,000,000 pounds shall no longer be applicable. Effective beginning in 2009, upon expiration of the Alliant Agreement, all ATK purchases shall be placed under this Agreement. In the event volumes exceed 20,000,000 pounds per year, the parties shall negotiate mutually acceptable pricing that shall not exceed the prices per pound established in Exhibit B for 19,000,001 — 20,000,000 pounds.

	2.		D5 program AP prices for 2006 and on are now established in the Note shown on Exhibit B.

	3.		[THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY]

	4.		AMPAC agrees to maintain ready and qualified capacity to the current level of safety and performance; maintain qualified status and programmatic support on all DoD and NASA Programs; and maintain the current capability to produce the entire range of AP products using the current qualified manufacturing process. Both production lines (trains) at AMPAC shall be maintained in this ready and qualified condition and production shall utilize both lines in order to prevent cross contamination with other products.

	5.		The parties agree to extend the period of performance of the Reclaimed Ammonium Perchlorate Sales/Purchase Agreement dated January 30, 2001 (as amended) through September 30, 2013. In the event the AMPAC’s market for the resale of Reclaimed AP substantially degrades compared to the current market, the parties agree to enter into good faith negotiations to restructure AMPAC’s obligations for purchase of Reclaimed AP such that AMPAC will not be put in a position where AMPAC is required to: (1) sell Reclaimed AP at a lower value than it pays Thiokol for the material, or (2) dispose of Reclaimed AP due to the inability to sell the material. Pending any restructure of the

	6.		In the event industry volumes fan below [THIS AMOUNT HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] pounds and ATK’s customers require ATK to purchase from another source or if ATK becomes non-competitive in the market due to high AP pricing compared to another source of AP, then ATK shall not be required to purchase all of its volume from AMPAC. Prior to ATK purchasing from another source, ATK and AMPAC shall work together in good faith in an attempt to establish pricing that is acceptable to ATK’s customers or pricing that enables ATK to be competitive.

	7.		In Paragraph 9 (Term and Termination of Agreement), the following provisions are added to address termination of the Thiokol agreement:

	i.		One of the parties petitions for bankruptcy or reorganization under bankruptcy laws, or makes an assignment for the benefit of creditors. Termination is at the election of the other party.

	ii.		One of the parties becomes physically incapable of performing or is ineligible to perform its obligations under the contract due to circumstances such as debarment, suspension, or other legal action. Termination is at the ejection of the other party.

	8.		ATK shall pay [THIS MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND HAS BEEN FILED SEPARATELY] for the right to have AP stored at the AMPAC facility at no additional cost. This applies to all ATK purchases under the Thiokol Agreement and the Alliant Agreement.

	9.		Effective with the date of this agreement the Provision 8. Disputes shall be replaced with the following:

			DISPUTES

			With the exception of the AMPAC Historical Environmental Remediation Claim which is addressed in paragraph 10 below, any c1aim, controversy or dispute arising out of or relating to this Agreement which is not disposed of by mutual agreement shall be submitted to mediation by a mutually agreeable mediator. Senior level executives for both parties must participate in the mediation and exert good faith effort to settle the dispute. If good faith efforts to mediate do not result in a settlement, the dispute shall be decided by binding arbitration conducted under the rules of the American Arbitration Association. Pending final resolution of any claim, controversy or dispute, the parties will diligently proceed with performance of this Agreement.

	a.		This does not include: a waiver of amounts owed to the other party resulting from differences in interim versus final billings.

	b.		AMPAC Historical Environmental Remediation Costs:


		Salary:		$170,000 annual

		Benefits:		No charge insurance: medical, dental, vision, prescription drug, long term disability, business travel and life. Other benefits such as defined benefit pension plan and 401(k) plan as provided by the Company.

				The Company will grant three weeks vacation.



John R. Gibson		Dana M. Kelley
President & CEO		Interim CFO & Director, Finance

May 9, 2006		May 9, 2006

Date		Date

1.		I have reviewed this quarterly report on Form 10-Q of American Pacific Corporation (the “registrant”);

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)		designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)		evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and

	d)		disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably like to materially affect, the registrant’s internal control over financial reporting; and

	a)		all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	(i)		The Quarterly Report of the Company on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

	(ii)		The information contained in the Report fairly represents, in all material respects, the financial condition and results of operations of the Company.