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 June 30, 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 (State or other jurisdiction of incorporation or organization)		59-6490478 (I.R.S. Employer Identification No.)

3770 Howard Hughes Parkway, Suite 300 Las Vegas, NV (Address of principal executive offices)		89169 (Zip Code)

(702) 735-2200
(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 filer 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 July 31, 2006 was 7,322,417.

PART I. FINANCIAL STATEMENTS

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AMERICAN PACIFIC CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited, Dollars in Thousands, Except per Share Amounts)


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Revenues	$	42,840		$	12,580		$	99,102		$	41,634
Cost of Revenues		30,931			9,517			70,288			28,357

Gross Profit		11,909			3,063			28,814			13,277
Operating Expenses		10,187			5,793			26,468			17,462
Environmental Remediation Charges		—			22,400			2,800			22,400

Operating Income (Loss)		1,722			(25,130	)		(454	)		(26,585	)
Interest and Other Income		55			176			978			433
Interest Expense		3,280			—			7,405			—

Loss from Continuing Operations before Income Tax		(1,503	)		(24,954	)		(6,881	)		(26,152	)
Income Tax Benefit		(642	)		(9,241	)		(2,624	)		(9,699	)

Loss from Continuing Operations		(861	)		(15,713	)		(4,257	)		(16,453	)
Loss from Discontinued Operations, Net of Tax		(192	)		(79	)		(439	)		(236	)
Extraordinary Gain, Net of Tax		—			—			—			1,622

Net Loss	$	(1,053	)	$	(15,792	)	$	(4,696	)	$	(15,067	)


Basic Earnings (Loss) Per Share:
Loss from Continuing Operations	$	(0.12	)	$	(2.15	)	$	(0.58	)	$	(2.26	)
Loss from Discontinued Operations, Net of Tax		(0.02	)		(0.01	)		(0.06	)		(0.03	)
Extraordinary Gain, Net of Tax		—			—			—			0.22

Net Loss	$	(0.14	)	$	(2.16	)	$	(0.64	)	$	(2.07	)


Diluted Earnings (Loss) Per Share:
Loss from Continuing Operations	$	(0.12	)	$	(2.15	)	$	(0.58	)	$	(2.26	)
Loss from Discontinued Operations, Net of Tax		(0.02	)		(0.01	)		(0.06	)		(0.03	)
Extraordinary Gain, Net of Tax		—			—			—			0.22

Net Loss	$	(0.14	)	$	(2.16	)	$	(0.64	)	$	(2.07	)


Weighted Average Shares Outstanding:
Basic		7,304,000			7,297,000			7,299,000			7,294,000
Diluted		7,304,000			7,297,000			7,299,000			7,294,000

See accompanying notes to condensed consolidated financial statements

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AMERICAN PACIFIC CORPORATION

Condensed Consolidated Balance Sheets
(Unaudited, Dollars in Thousands)


	June 30,			September 30,
	2006			2005

ASSETS
Current Assets:
Cash and Cash Equivalents	$	5,189		$	37,213
Accounts and Notes Receivable		23,782			12,572
Inventories		35,064			13,818
Prepaid Expenses and Other Assets		4,799			1,365
Deferred Income Taxes		834			834
Assets of Discontinued Operations Held for Sale		10,676			—

Total Current Assets		80,344			65,802
Property, Plant and Equipment, Net		109,432			15,646
Intangible Assets, Net		21,609			9,763
Deferred Income Taxes		19,312			19,312
Other Assets		5,234			4,477

TOTAL ASSETS	$	235,931		$	115,000


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts Payable	$	12,187		$	5,231
Accrued Liabilities		5,557			2,786
Employee Related Liabilities		3,296			2,023
Environmental Remediation Reserves		1,750			4,967
Deferred Revenues		3,875			792
Current Portion of Debt		6,614			768
Liabilities of Discontinued Operations Held for Sale		3,582			—

Total Current Liabilities		36,861			16,567
Long-Term Debt		103,420			—
Environmental Remediation Reserves		15,980			15,620
Pension Obligations and Other Long-Term Liabilities		9,169			8,144

Total Liabilities		165,430			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, 9,357,287 and 9,331,787 issued		935			932
Capital in Excess of Par Value		86,649			86,187
Retained Earnings		1,510			6,206
Treasury Stock — 2,034,870 shares		(16,982	)		(16,982	)
Accumulated Other Comprehensive Loss		(1,611	)		(1,674	)

Total Shareholders’ Equity		70,501			74,669

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	235,931		$	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)


	Nine Months Ended
	June 30,
	2006			2005

Cash Flows from Operating Activities:
Net Loss from Continuing Operations	$	(4,257	)	$	(16,453	)
Adjustments to Reconcile Net Income (Loss) from Continuing
Operations to Net Cash from Operating Activities:
Depreciation and amortization		14,166			4,205
Non-cash interest expense		2,314			—
Share-based compensation		287			—
Deferred income taxes		—			(9,613	)
Gain on sale of assets		(610	)		—
Changes in operating assets and liabilities:
Accounts receivable		(5,399	)		4,424
Inventories		(6,273	)		(2,485	)
Prepaid expenses		(3,461	)		(724	)
Accounts payable and accrued liabilities		6,361			750
Deferred revenues		(284	)		—
Environmental remediation reserves		(2,857	)		22,400
Other		618			354
Discontinued operations, net		482			(425	)

Net cash provided by operating activities		1,087			2,433


Cash Flows from Investing Activities:
Acquisition of businesses		(108,462	)		(4,468	)
Capital expenditures		(13,429	)		(1,354	)
Proceeds from sale of assets		2,395			—
Discontinued operations, net		(403	)		(257	)

Net Cash Used in Investing Activities		(119,899	)		(6,079	)


Cash Flows from Financing Activities:
Proceeds from the issuance of long-term debt		85,000			—
Payments of long-term debt		(496	)		—
Short-term borrowings, net		4,000			—
Debt issuance costs		(1,782	)		—
Other		158			163
Discontinued operations, net		(92	)		300

Net Cash Provided by Financing Activities		86,788			463


Net Change in Cash and Cash Equivalents		(32,024	)		(3,183	)
Cash and Cash Equivalents, Beginning of Period		37,213			23,777

Cash and Cash Equivalents, End of Period	$	5,189		$	20,594


Cash Paid (Refunded) For:
Interest	$	5,063		$	—
Income taxes	$	(440	)	$	(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 nine-month period ended June 30, 2006 are not necessarily indicative of the results that will be achieved for the full fiscal year or for future periods.

		*Accounting Policies:* A description of our significant accounting policies is included in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2005.

		Principles of Consolidation — Our consolidated financial statements include the accounts of American Pacific Corporation and our wholly owned subsidiaries. In connection with our acquisition of the fine chemicals business (the “AFC Business”) of GenCorp, Inc. (“GenCorp”), through the purchase of substantially all of the assets of Aerojet Fine Chemicals LLC and the assumption of certain of its liabilities, we began consolidating our newly formed, wholly-owned subsidiary, Ampac Fine Chemicals (“AFC”) on November 30, 2005 (See Note 2). All significant intercompany accounts have been eliminated.

		In addition, we consolidate our 50% interest in the Energetic Systems (“ESI”) joint venture in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities,” which requires companies to consolidate variable interest entities that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) hold a significant variable interest in, or have significant involvement with, an existing variable interest entity.

		In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. The carrying amount of ESI’s assets and liabilities are reported as held for sale as of June 30, 2006. Revenues and expenses associated with ESI’s operations are presented as discontinued operations for all periods presented. ESI was formerly reported within our Specialty Chemicals operating segment (See Note 12).

		Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Judgments and assessments of uncertainties are required in applying our accounting policies in many areas. For example, key assumptions and estimates are particularly important when determining our projected liabilities for pension benefits, useful lives for depreciable and amortizable assets, deferred tax assets and long-lived assets, including intangible assets. Other areas in which significant uncertainties exist include, but are not limited to, costs that may be incurred in connection with environmental matters and the resolution of litigation and other contingencies. Actual results may differ from estimates on which our condensed consolidated financial statements were prepared.

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		Revenue Recognition — Revenues for Specialty Chemicals, Fine Chemicals, and water treatment equipment are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Some of our perchlorate and fine chemical products customers have requested that we store materials purchased from us in our facilities (“Bill and Hold” transactions). We recognize the revenue from these Bill and Hold transactions at the point at which title and risk of ownership transfer to our customers. These customers have specifically requested in writing, pursuant to a contract, that we invoice for the finished product and hold the finished product until a later date.

		Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (“AICPA”) audit and accounting guide, “Audits of Federal Government Contracts” and the AICPA’s Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production Type Contracts.” We account for these contracts using the percentage-of-completion method and measure progress on a cost-to-cost basis. The percentage-of-completion method recognizes revenue as work on a contract progresses. Revenues are calculated based on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately.

		*Recently Issued or Adopted Accounting Standards:* In November 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4”. The statement clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The statement was effective for us on October 1, 2005 and had no material impact on our financial statements.

		In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based Payment” which requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments granted to employees and directors. This statement was effective for us on October 1, 2005; see Note 3 for additional information.

		In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.

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

2.		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 AFC Business of GenCorp through the purchase of substantially all of the assets of Aerojet Fine Chemicals, LLC and the assumption of certain of its liabilities. The assets were acquired and liabilities assumed by our newly formed, wholly-owned subsidiary, Ampac Fine Chemicals or AFC. AFC is a manufacturer of active pharmaceutical ingredients and registered intermediates under cGMP guidelines for customers in the pharmaceutical industry. Its facilities in California offer specialized engineering capabilities including

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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		4,799

Total purchase price	$	127,862

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 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 $4,799.

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 $83,218, 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.

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


Historical book value of Aerojet Fine Chemicals as of November 30, 2005	$	93,181
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		(11,602	)
Customer relationships, average life of 5.5 years		13,300
Backlog, average life of 1.5 years		4,800
Prepaid pension asset		(1,248	)

	$	127,862

Intangible assets, consisting of customer relationships and existing customer backlog, have definite lives and will be amortized over their estimated useful lives using the straight-line method.

The following pro forma information has been prepared from our historical financial statements and those of the AFC Business. The pro forma information gives effect to the combination as if it had occurred on October 1, 2005 and 2004, respectively.


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Revenues	$	42,840		$	24,342		$	117,344		$	81,278
Loss from continuing operations		(861	)		(19,109	)		(6,068	)		(26,371	)
Net Loss		(1,053	)		(19,188	)		(6,507	)		(24,985	)

Basic and diluted loss per share:
Loss from continuing operations		(0.12	)		(2.62	)		(0.83	)		(3.62	)
Net Loss		(0.14	)		(2.63	)		(0.89	)		(3.43	)

		The pro forma financial information is not necessarily indicative of what the financial position or results of operations would have been if the combination had occurred on the above-mentioned dates. Additionally, it is not indicative of future results of operations and does not reflect any additional costs, synergies or other changes that may occur as a result of the acquisition.

		*ISP Acquisition:* October 1, 2004, we acquired the former Atlantic Research Corporation’s in-space propulsion business (“ISP” or “ISP Acquisition”) from Aerojet-General Corporation for $4,505.

		We accounted for this acquisition using the purchase method of accounting. The fair value of the current assets acquired and current liabilities assumed was approximately $6,972. Since the purchase price was less than the fair value of the net current assets acquired, non-current assets were recorded at zero and an after-tax extraordinary gain of $1,622 was recognized (net of approximately $953 of income tax expense).

3.		SHARE-BASED 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

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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 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 June 30, 2006, there were 39,000 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 June 30, 2006, there were 25,000 shares available for grant under the 2002 Directors Plan. This plan was approved by our shareholders.

A summary of our outstanding and vested stock option activity for the nine months ended June 30, 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		(25,500	)		6.17		—			—
Expired / Cancelled		(20,000	)		6.34		(20,000	)		2.90

Balance, June 30, 2006		515,500			6.95		125,000			2.76

A summary of our exercisable stock options as of June 30, 2006 is as follows:


Number of vested stock options		390,500
Weighted-average exercise price per share	$	7.24
Aggregate intrinsic value	$	368
Weighted-average remaining contractual term in years		7.37

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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.


	Nine Months
	June 30,
	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	$	54		$	12
Aggregate cash received for option exercises	$	158		$	23

Total compensation cost (included in operating expenses)	$	287		$	—
Tax benefit recognized		110			—

Net compensation cost	$	177		$	—


As of period end date:
Total compensation cost for non-vested awards not yet recognized	$	79
Weighted-average years to be recognized		0.3

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						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	Actual			Pro Forma			Actual			Pro Forma

Net loss, as reported	$	(1,053	)	$	(15,792	)	$	(4,696	)	$	(15,067	)
Pro forma compensation, net of tax					(10	)					(72	)

Pro forma net loss				$	(15,802	)				$	(15,139	)


Basic loss per share:
As reported	$	(0.14	)	$	(2.16	)	$	(0.64	)	$	(2.07	)
Pro Forma				$	(2.17	)				$	(2.08	)

Diluted loss per share
As reported	$	(0.14	)	$	(2.16	)	$	(0.64	)	$	(2.07	)
Pro forma				$	(2.17	)				$	(2.08	)


4.		SELECTED BALANCE SHEET DATA

		*Inventories:* Inventories consist of the following:


	June 30,		September 30,
	2006		2005

Finished goods	$	6,114	$	2,475
Work-in-process		14,948		2,940
Raw materials and supplies		14,002		8,403

Total	$	35,064	$	13,818

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Intangible Assets: We account for our intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Intangible assets consist of the following:


	June 30,			September 30,
	2006			2005

Perchlorate customer list	$	38,697		$	38,697
Less accumulated amortization		(32,305	)		(29,380	)

		6,392			9,317

Customer relationships and backlog		18,100			—
Less accumulated amortization		(3,329	)		—

		14,771			—

Pension-related intangible		446			446

Total	$	21,609		$	9,763

		The perchlorate customer list is an asset of our Specialty Chemicals segment and is subject to amortization. Amortization expense was $975 for both the three months ended June 30, 2006 and 2005 and $2,925 for both the nine months ended June 30, 2006 and 2005.

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

		In connection with our acquisition of the AFC Business, we acquired intangible assets with preliminary estimated fair values of $13,300 for customer relationships and $4,800 for existing customer backlog. These assets have definite lives and are assigned to our Fine Chemicals segment. Amortization expense for the three months and nine months ended June 30, 2006 was $1,427 and $3,329, respectively.

5.		COMPREHENSIVE INCOME (LOSS)

		Other comprehensive income (loss) consists of adjustments to our minimum pension liabilities and foreign currency translation adjustments. Comprehensive income (loss) consists of the following:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Net Loss	$	(1,053	)	$	(15,792	)	$	(4,696	)	$	(15,067	)

Other Comprehensive Income (Loss):
Foreign currency translation adjustment		(93	)		23			(52	)		52
Minimum pension liability adjustment		—			(188	)		—			21

Total other comprehensive income (loss)		(93	)		(165	)		(52	)		73

Comprehensive Loss	$	(1,146	)	$	(15,957	)	$	(4,748	)	$	(14,994	)

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6.		EARNINGS (LOSS) PER SHARE

		Shares used to compute loss per share from continuing operations are as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Loss from Continuing Operations	$	(861	)	$	(15,713	)	$	(4,257	)	$	(16,453	)


Basic:
Weighted average shares		7,304,000			7,297,000			7,299,000			7,294,000


Diluted:
Weighted average shares, basic		7,304,000			7,297,000			7,299,000			7,294,000
Dilutive effect of stock options		—			—			—			—

Weighted average shares, diluted		7,304,000			7,297,000			7,299,000			7,294,000


Basic loss per share from continuing operations	$	(0.12	)	$	(2.15	)	$	(0.58	)	$	(2.26	)
Diluted loss per share from continuing operations	$	(0.12	)	$	(2.15	)	$	(0.58	)	$	(2.26	)

		As of June 30, 2006, we had 515,500 antidilutive options outstanding. The stock options are antidilutive because we are reporting a loss from continuing operations and the exercise price of certain options exceeds the average fair market value of our stock for the period. These options could be dilutive in future periods if our operations are profitable and our stock price increases.

7.		DEBT

		Our outstanding debt balances consist of the following:


	June 30,			September 30,
	2006			2005

Credit Facilities:
First Lien Term Loan, 9.50%	$	64,512		$	—
First Lien Revolving Credit, 9.50%		4,000			—
Second Lien Term Loan plus accrued PIK Interest, 14.50%		20,119			—
Subordinated Seller Note plus accrued PIK Interest, 10.04%, Net of Discount		21,371			—
Capital Leases		32			—
ESI Debt — Discontinued Operations		—			768

Total Debt		110,034			768
Less Current Portion		(6,614	)		(768	)

Total Long-term Debt	$	103,420		$	—

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.

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The Second Lien Credit Facility provides for term loans in the aggregate principal amount of $20,000 with all principal and accrued PIK interest due on November 30, 2011. 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.

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 $83,218, after debt issuance costs of $1,782, were used to fund a portion of the AFC Business acquisition price. Debt issue costs are classified as other assets and are amortized over the term of the Credit Facilities using the interest method.

As of June 30, 2006, we had outstanding borrowings of $4,000 under the First Lien revolving credit line. As of June 30, 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.

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Subject to the terms of the Credit Facilities, we may be required to repay up to $6,500 of the note and accrued PIK 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 (excluding accrued PIK Interest) 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

		*Letters of Credit:* As of June 30, 2006, we had $2,048 in outstanding standby letters of credit which mature through May 2012. These letters of credit principally secure performance of certain environmental protection equipment sold by us and payment of fees associated with the delivery of natural gas and power.

		*Interest Rate Swap Agreements*: In May 2006, we entered into two interest rate swap agreements, expiring on June 30, 2008, for the purpose of hedging a portion of our exposure to changes in variable rate interest on our Credit Facilities. Under the terms of the swap agreements, which have an aggregate notional amount of $42,256 at June 30, 2006, we pay fixed rate interest and receive variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received is recorded as an adjustment to interest expense. As of June 30, 2006, the swap agreements do not qualify for hedge accounting treatment. We record an asset or liability for the fair value of the swap agreements, with the effect of marking these contracts to fair value being recorded as an adjustment to interest expense. The aggregate fair value of the swap agreements at June 30, 2006 was $11.

8.		COMMITMENTS AND 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

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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 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

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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. In June 2006, we began operations of an interim Athens System that is, as of July 2006, reducing perchlorate concentrations in system extracted groundwater in Henderson.

Henderson Site Environmental Remediation Reserve —

During our fiscal 2005 third quarter, we recorded a charge for $22,400 representing our estimate of the probable costs of our remediation efforts at the Henderson Site, including the costs for equipment, operating and maintenance costs, and consultants. Key factors in determining the total estimated cost include an estimate of the speed of groundwater entering the treatment area, which was then used to estimate a project life of 45 years, as well as estimates for capital expenditures and annual operating and maintenance costs. The project consists of two primary phases; the initial construction of the remediation equipment and the operating and maintenance phase. We commenced the construction phase in late fiscal 2005, completed an interim system in June 2006, and expect to complete the permanent facility of this phase by or soon after 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 nine months ended June 30, 2006 is shown below:


Balance, September 30, 2005	$	20,587
Additions or adjustments		2,800
Expenditures		(5,657	)

Balance, June 30, 2006	$	17,730

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.

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.

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		Other AFC Environmental Matters —

		AFC’s facility is located on land leased from Aerojet. The leased land is part of a tract of land owned by Aerojet designated as a “Superfund Site” under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The tract of land had been used by Aerojet and affiliated companies to manufacture and test rockets and related equipment since the 1950s. Although the chemicals identified as contaminants on the leased land were not used by Aerojet Fine Chemicals as part of its operations, CERCLA, among other things, provides for joint and severable liability for environmental liabilities including, for example, the environmental remediation expenses.

		As part of the agreement to sell the AFC Business, an Environmental Indemnity Agreement was entered into whereby GenCorp agreed to indemnify us against any and all environmental costs and liabilities arising out of or resulting from any violation of environmental law prior to the effective date of the sale, or any release of hazardous substances by the AFC Business, Aerojet or GenCorp on the premises or Aerojet’s Sacramento site prior to the effective date of the sale.

		On November 29, 2005, EPA Region IX provided us with a letter indicating that the EPA does not intend to pursue any clean up or enforcement actions under CERCLA against future lessees of the Aerojet Fine Chemicals property for existing contamination, provided that the lessees do not contribute to or do not exacerbate existing contamination on or under the Aerojet Superfund site.

		*Employment Matters:*

		Effective March 25, 2006, the employment of Dr. Seth Van Voorhees, as our Chief Financial Officer, Vice President and Treasurer, terminated. Dr. Van Voorhees was employed by us pursuant to an employment agreement dated December 1, 2005. Under the employment agreement, if we terminate Dr. Van Voorhees without cause or if Dr. Van Voorhees terminates his employment for good reason, Dr. Van Voorhees is entitled to receive severance payments in the form of salary continuation for three years. In addition, all unvested stock options granted to Dr. Van Voorhees become fully vested. These severance benefits are not available to him if employment is terminated by us for cause, or if Dr. Van Voorhees terminated his employment without good reason. We expect that the terms of Dr. Van Voorhees’ departure will be settled through arbitration proceedings as provided by his contract.

		*Other Matters:*

		We are from time to time involved in other claims or lawsuits. We believe that current claims or lawsuits against us, individually and in the aggregate, will not have a material adverse effect on our financial condition, cash flows or results of operations.

9.		SEGMENT 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 charges, corporate general and administrative costs, which consist primarily of executive, investor relations, accounting, human resources and information technology expenses, and interest are not allocated to segment operating results.

		During fiscal 2006, , we revised our method to measure segment operating results to a method management believes is a more meaningful measure of segment performance. Effective January 1, 2006, general corporate expenses are not allocated to our operating segments. Effective April 1,

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2006, environmental remediation charges are not charged to our operating segments. Prior to the effective dates, we had included an allocation of corporate expenses to our operating segments and environmental remediation charges were allocated to our Specialty Chemicals segment. All periods presented have been reclassified to reflect our current method to measure segment operating results.

Specialty Chemicals: Our Specialty Chemicals segment manufactures and sells: (i) perchlorate chemicals, used principally in solid rocket propellants for the space shuttle and defense programs, (ii) sodium azide, a chemical used in pharmaceutical manufacturing and historically used principally in the inflation of certain automotive airbag systems, and (iii) Halotronâ, clean gas fire extinguishing agents designed to replace halons.

In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. Revenues and expenses associated with ESI’s operations are presented as discontinued operations for all periods presented. ESI, which manufactures and distributes packaged explosives, was formerly reported within our Specialty Chemicals operating segment (See Note 12).

One perchlorates customer accounted for 16% and 18% of our consolidated revenues for the three months and nine months ended June 30, 2006, and 45% and 39% of our consolidated revenues for the three months and nine months ended June 30, 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 32% and 28% of our consolidated revenues during the three months and nine months ended June 30, 2006, respectively. An additional Fine Chemicals customer accounted for 13% of our consolidated revenues for the three months ended June 30, 2006.

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. As of our fiscal year 2005, we had 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						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Revenues:
Specialty Chemicals	$	11,098		$	9,309		$	32,282		$	28,330
Fine Chemicals		25,889			—			49,992			—
Aerospace Equipment		5,232			2,842			13,366			8,721
Other Businesses		621			429			3,462			4,583

Total Revenues	$	42,840		$	12,580		$	99,102		$	41,634


Segment Operating Income (Loss):
Specialty Chemicals	$	1,983		$	890		$	8,935		$	3,996
Fine Chemicals		3,758			—			4,434			—
Aerospace Equipment		445			(104	)		764			(352	)
Other Businesses		(456	)		(40	)		215			3,013

Total Segment Operating Income		5,730			746			14,348			6,657
Corporate Expenses		(4,008	)		(3,476	)		(12,002	)		(10,842	)
Environmental Remediation Charges		—			(22,400	)		(2,800	)		(22,400	)
Interest and Other Income (Expense), Net		(3,225	)		176			(6,427	)		433

Loss from Continuing Operations before Tax	$	(1,503	)	$	(24,954	)	$	(6,881	)	$	(26,152	)


Depreciation and Amortization:
Specialty Chemicals	$	1,287		$	1,277		$	3,849		$	3,799
Fine Chemicals		4,486			—			9,834			—
Aerospace Equipment		19			6			54			6
Other Businesses		3			3			9			9
Corporate		139			132			420			391

Total Depreciation and Amortization	$	5,934		$	1,418		$	14,166		$	4,205

10.		INTEREST AND OTHER INCOME

		Interest and other income consist of the following:


	Three Months Ended					Nine Months
	June 30,					June 30,
	2006			2005		2006		2005

Interest income	$	74		$	176	$	369	$	433
Gain on sale of Hughes Parkway		—			—		580		—
Other		(19	)		—		29		—

	$	55		$	176	$	978	$	433

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.

In October 2005, the Partnership sold its interest in Hughes Parkway, which resulted in a net gain and cash distribution to us of $2,395. Concurrent with, and as a condition of, the sale of the Partnership’s interest in Hughes Parkway, we renewed our office space lease through February 2009. We accounted for the transaction as a sale leaseback. Accordingly, we deferred gain totaling $1,815 representing the present value of future lease payments. We amortize the deferred gain (as a reduction of rental expense), using the straight-line method over the term of the lease. We recognized the remaining gain of $580, which is reported as interest and other income.

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11.

DEFINED BENEFIT PLANS

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

*Defined Benefit Pension Plan:*
Service Cost	$	268		$	268		$	804		$	804
Interest Cost		413			413			1,240			1,240
Expected Return on Plan Assets		(341	)		(341	)		(1,023	)		(1,023	)
Recognized Actuarial Losses		15			15			43			43
Amortization of Prior Service Costs		116			116			348			348

Net Periodic Pension Cost	$	471		$	471		$	1,412		$	1,412


*Supplemental Executive Retirement Plan:*
Service Cost	$	—		$	—		$	—		$	—
Interest Cost		37			37			111			111
Expected Return on Plan Assets		—			—			—			—
Recognized Actuarial Losses		11			11			32			32
Amortization of Prior Service Costs		7			7			23			23

Net Periodic Pension Cost	$	55		$	55		$	166		$	166

For the nine months ended June 30, 2006, we contributed $1,356 to the Defined Benefit Pension Plan to fund benefit payments and anticipate making approximately $479 in additional contributions through September 30, 2006. For the nine months ended June 30, 2006, we contributed $95 to the Supplemental Executive Retirement Plan to fund benefit payments and anticipate making approximately $31 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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12.

ASSETS AND LIABILITIED HELD FOR SALE — DISCONTINUED OPERATIONS

In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. We expect the plan of sale to be completed within one year. Revenues and expenses associated with ESI’s operations are presented as discontinued operations for all periods presented. ESI was formerly reported within our Specialty Chemicals operating segment.

Summarized financial information for ESI is as follows:


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Revenues	$	3,173		$	3,721		$	9,952		$	11,434


Loss before income tax	$	(315	)	$	(113	)	$	(720	)	$	(338	)
Benefit for income tax		(123	)		(34	)		(281	)		(102	)

Loss from discontinued operations, net	$	(192	)	$	(79	)	$	(439	)	$	(236	)

The carrying amount of ESI’s assets and liabilities, which are reported as held for sale as of June 30, 2006, are comprised of the following:


	June 30,
	2006
Accounts receivable	$	1,496
Inventories		1,420
Property, plant and equipment, net		7,576
Other		184

Total assets held for sale	$	10,676


Accounts payable and accrued liabilities	$	2,906
Debt		676

Total liabilities held for sale	$	3,582

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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, a chemical used in pharmaceutical manufacturing and historically 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 (“ESI”), an entity we consolidate under FIN 46(R) that manufactures and distributes commercial explosives. In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. Revenues and expenses associated with ESI’s operations are presented as discontinued operations for all periods presented. ESI was formerly reported within our Specialty Chemicals operating segment.

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.

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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.

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


	Three Months Ended						Nine Months Ended
	June 30,						June 30,
	2006			2005			2006			2005

Specialty Chemicals:
Perchlorates		22	%		63	%		28	%		58	%
Sodium Azide		2	%		4	%		2	%		4	%
Halotron		2	%		7	%		3	%		6	%

Total Specialty Chemicals		26	%		74	%		33	%		68	%

Fine Chemicals		60	%		0	%		50	%		0	%

Aerospace Equipment		12	%		22	%		13	%		21	%

Other Businesses:
Real Estate		0	%		1	%		1	%		8	%
Water Treatment Equipment		2	%		3	%		3	%		3	%

Total Other Businesses		2	%		4	%		4	%		11	%

Total Revenues		100	%		100	%		100	%		100	%

Specialty Chemicals Segment

Perchlorate Chemicals —

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 million 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

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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 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 3 million and 20 million pounds per year. Additionally, prices escalate each year for all volumes covered under the Amendment.

Grade I AP Sales Volume:

Since 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 of Space Shuttle 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 may likely 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.

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 significantly and that inflators using sodium azide will be phased out over a

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period of approximately three to five years. Sodium azide is also used in a variety of pharmaceutical applications and we sell into those markets.

For the last several years, we have been involved in the experimental development of azide-based pest management products as a replacement product for methyl bromide (“SEP 100”). SEP 100 has undergone extensive field trials on a variety of applications, including turf, cut flowers, and food crops and is currently under review by the U.S. Environmental Protection Agency. Test results to date have been positive, indicating that SEP 100 is as effective, or in certain circumstances, more effective than methyl bromide in certain pre-plant applications. However, there are no assurances regarding EPA or other regulatory approval or market acceptance of the products.

In June 2006, we entered into joint venture, license and supply agreements (collectively, the “Gowan Agreements”) with Gowan Company, LLC. The Gowan Agreements provide for:

	•		The licensing to Gowan of our rights to intellectual property regarding azide-based pest management products, including the trademark SEP^TM 100,

	•		Joint investment and efforts to further develop and obtain regulatory registration of azide-based pest management products,

	•		Our supply of the products to Gowan, and

	•		Gowan’s exclusive marketing and sales of the products worldwide.

We believe that azide-based pest management products present a strategic long-term opportunity to diversify the commercial uses of our azide products. Through our Gowan Agreements, we will continue to invest in further development, regulatory approval and marketing of these products over the next several years.

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 approximately 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. 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.

Energetic Chemistry — Energetic chemistry offers a clean, high yield process to target compounds, which is increasingly important as purity specifications of pharmaceutical products become more stringent. At present, numerous drugs currently on the market employ energetic chemistry platforms similar to the platforms of AFC; the use of energetic chemistry is increasing at AFC. Safe operation of an energetic chemicals plant requires a great deal of expertise. 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 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 and influenza-combating drugs.

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High Potency Compounds — We believe that high potency compounds are a growing segment of the pharmaceutical fine chemicals industry. High potency compounds are toxic by nature, thus 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). We believe that there are numerous 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.

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 may 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 isolated from the other one by techniques such as chromatography or it can be produced using asymmetric synthesis.

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. 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 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.

Aerospace Equipment Segment

ISP is the sole contributor to the Aerospace Equipment segment. ISP manufactures in-space propulsion thrusters and systems 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. ISP 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 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 expected to remain high and ISP has entered the market with their Low Cost Kill Vehicle program. The commercial satellite industry is expecting steady growth as a result of demand from broadband, HDTV

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and communications applications with ISP placed strategically with all key primes. With advanced products hitting the market ISP is capturing additional market share.

Other Businesses Segment

The Other Businesses segment includes our water treatment equipment business and real estate operations.

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, component parts, electric power, direct labor, manufacturing overhead (purchasing, receiving, inspection, warehousing, and facilities), 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 or component parts 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 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


	June 30,				Increase			Percentage
	2006		2005		(Decrease)			Change

Three Months Ended:
Specialty Chemicals	$	11,098	$	9,309	$	1,789			19	%
Fine Chemicals		25,889		—		25,889			—
Aerospace Equipment		5,232		2,842		2,390			84	%
Other Businesses		621		429		192			45	%

Total Revenues	$	42,840	$	12,580	$	30,260			241	%


Nine Months Ended:
Specialty Chemicals	$	32,282	$	28,330	$	3,952			14	%
Fine Chemicals		49,992		—		49,992			—
Aerospace Equipment		13,366		8,721		4,645			53	%
Other Businesses		3,462		4,583		(1,121	)		(24	%)

Total Revenues	$	99,102	$	41,634	$	57,468			138	%

The overall increase in revenues reflects:

•		Specialty Chemicals revenues are comprised primarily of sales of perchlorate products, which increased during the fiscal 2006 periods due to the effect of higher pricing at lower sales volumes. Perchlorate sales tend to vary significantly in any given quarter based on the timing of orders and shipments to customers.

•		An increase due to the inclusion of our newly-acquired AFC Business.

•		An increase in Aerospace Equipment segment revenues. Our Aerospace Equipment segment ended fiscal 2005 with a strong backlog at its domestic location and continues to have strong commercial and government new order bookings in fiscal 2006. This has resulted in greater production and revenue levels during fiscal 2006.

•		A decrease in revenues from our Other Businesses segment. The fiscal 2005 nine-month period include significant revenues from the sale of real estate. Our sales of real estate were substantially complete in fiscal 2005.

Cost of Revenues and Gross Margin


	June 30,						Increase		Percentage
	2006			2005			(Decrease)		Change

Three Months Ended:
Revenues	$	42,840		$	12,580		$	30,260		241	%
Cost of Revenues		30,931			9,517			21,414		225	%

Gross Margin		11,909			3,063			8,846		289	%
Gross Margin Percentage		28	%		24	%

Nine Months Ended:
Revenues	$	99,102		$	41,634		$	57,468		138	%
Cost of Revenues		70,288			28,357			41,931		148	%

Gross Margin		28,814			13,277			15,537		117	%
Gross Margin Percentage		29	%		32	%

Cost of sales increased during the three months and nine months ended June 30, 2006 primarily due to the related increases in sales. Gross margin percentage was 29% for the nine months ended June 30, 2006 compared to 32% for the prior fiscal year period. The following factors effected our consolidated gross margin comparisons:

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•		Gross margin percentage for Specialty Chemicals and Aerospace Equipment improved in fiscal 2006 compared to the prior year periods primarily due to higher pricing of Specialty Chemical products and better manufacturing overhead absorption for Aerospace Equipment.

•		While AFC contributes significant gross margin dollars, its gross margin percentage is less than that of Specialty Chemicals. The effect of including AFC in fiscal 2006 is a reduction in the consolidated gross margin percentage.

•		Gross margin from Other Businesses declined in fiscal 2006. The fiscal 2005 nine-month period includes a significant real estate sale which contributed approximately 5 margin points to the prior year consolidated gross margin percentage.

Operating Expenses


	June 30,						Increase		Percentage
	2006			2005			(Decrease)		Change

Three Months Ended:
Operating Expenses	$	10,187		$	5,793		$	4,394		76	%
Percentage of Revenues		24	%		46	%

Nine Months Ended:
Operating Expenses	$	26,468		$	17,462		$	9,006		52	%
Percentage of Revenues		27	%		42	%

Total operating expenses for the three months and nine months ended June 30, 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 insurance, legal fees and consulting expenses, and Aerospace Equipment operating expenses increased due to its volume increases. Specialty Chemicals operating expenses decreased due to a reduction in environmental related expenses incurred in fiscal 2005 prior to the commencement of our remediation project.

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 or soon after the end of fiscal 2006. Since the inception of the project and through June 30, 2006, we incurred construction costs of approximately $7,470. 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. We made no adjustments to our remediation estimates during our fiscal 2006 third quarter. These estimates are based on information currently available to us and may be subject to material adjustments upward or downward in future periods as new facts or circumstances may indicate.

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Segment Operating Profit (Loss)


	June 30,						Increase			Percentage
	2006			2005			(Decrease)			Change

Three Months Ended:
Specialty Chemicals	$	1,983		$	890		$	1,093			123	%
Fine Chemicals		3,758			—			3,758			—
Aerospace Equipment		445			(104	)		549			(528	%)
Other Businesses		(456	)		(40	)		(416	)		1,040	%

Segment Operating Profit		5,730			746			4,984			668	%
Corporate Expenses		(4,008	)		(3,476	)		(532	)		15	%
Environmental Remediation Charges		—			(22,400	)		22,400			(100	%)

Operating Income (Loss)	$	1,722		$	(25,130	)	$	26,852			(107	%)


Nine Months Ended:
Specialty Chemicals	$	8,935		$	3,996		$	4,939			124	%
Fine Chemicals		4,434			—			4,434			—
Aerospace Equipment		764			(352	)		1,116			(317	%)
Other Businesses		215			3,013			(2,798	)		(93	%)

Segment Operating Profit		14,348			6,657			7,691			116	%
Corporate Expenses		(12,002	)		(10,842	)		(1,160	)		11	%
Environmental Remediation Charges		(2,800	)		(22,400	)		19,600			(88	%)

Operating Income (Loss)	$	(454	)	$	(26,585	)	$	26,131			(98	%)

Segment operating profit includes all sales and expenses directly associated with each segment. Environmental remediation charges, corporate general and administrative costs and interest are not allocated to segment operating results.

The improvement in Specialty Chemicals operating profit for the fiscal 2006 periods reflects:

•		Higher gross margins for our perchlorate products due to (i) price increases, (ii) better absorption of fixed production costs at higher volumes, and (iii) reduced operating expenses.

•		A decease in operating losses generated by our azide products, and

•		Consistent, yet nominal operating income from our Halotron products.

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 is primarily due to higher insurance costs. In addition, the fiscal 2006 period includes higher legal and consulting fees related to our AFC integration and negotiations regarding the amendment to our Grade I AP pricing agreement.

Interest and Other Income/Interest Expense


	June 30,				Increase			Percentage
	2006		2005		(Decrease)			Change

Three Months Ended:
Interest and Other Income	$	55	$	176	$	(121	)		(69	%)
Interest Expense	$	3,280	$	—	$	3,280			0	%

Nine Months Ended:
Interest and Other Income	$	978	$	433	$	545			126	%
Interest Expense	$	7,405	$	—	$	7,405			0	%

Interest and other income for the nine months ended June 30, 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.

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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 rates for the three months and nine months ended June 30, 2006 were 42.7% and 38.1%, respectively. Our effective tax rate was 37.0% for both the three and nine months ended June 30, 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 and adjustments recorded in the third quarter of fiscal 2006 to true-up estimates of federal income tax for the prior year. Our estimated effective tax rate could fluctuate in future periods based on the significance of our permanent items to total estimated taxable income.

Discontinued Operations

In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. We expect the plan of sale to be completed within one year. Revenues and expenses associated with ESI’s operations are presented as discontinued operations for all periods presented. ESI was formerly reported within our Specialty Chemicals operating segment.

Summarized financial information for ESI is as follows:


	Fiscal Year Ending September 30, 2006								Fiscal Year Ending September 30, 2005
	1st Quarter			2nd Quarter		3rd Quarter			1st Quarter			2nd Quarter		3rd Quarter			4th Quarter

Revenues	$	2,632		$	4,147	$	3,173		$	3,554		$	4,159	$	3,721		$	4,100


Income (Loss) before tax	$	(844	)	$	439	$	(315	)	$	(317	)	$	92	$	(113	)	$	(670	)
Benefit for income tax		(329	)		171		(123	)		(96	)		28		(34	)		(204	)

Discontinued operations, net	$	(515	)	$	268	$	(192	)	$	(221	)	$	64	$	(79	)	$	(466	)

Extraordinary Gain

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 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.

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Sales and Revenue Recognition

Revenue Recognition — Revenues for Specialty Chemicals, Fine Chemicals, and water treatment equipment are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Some of our perchlorate and fine chemical products customers have requested that we store materials purchased from us in our facilities (“Bill and Hold” transactions). We recognize the revenue from these Bill and Hold transactions at the point at which title and risk of ownership transfer to our customers. These customers have specifically requested in writing, pursuant to a contract, that we invoice for the finished product and hold the finished product until a later date.

Revenues from our Aerospace Equipment segment are derived from contracts that are accounted for in conformity with the American Institute of Certified Public Accountants (“AICPA”) audit and accounting guide, “Audits of Federal Government Contracts” and the AICPA’s Statement of Position No. 81-1, “Accounting for Performance of Construction-Type and Certain Production Type Contracts.” We account for these contracts using the percentage-of-completion method and measure progress on a cost-to-cost basis. The percentage-of-completion method recognizes revenue as work on a contract progresses. Revenues are calculated based on the percentage of total costs incurred in relation to total estimated costs at completion of the contract. For fixed-price and fixed-price-incentive contracts, if at any time expected costs exceed the value of the contract, the loss is recognized immediately.

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. 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 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.

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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 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.

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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.

In July 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of this standard on the Condensed Consolidated Financial Statements.

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LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

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


	Nine Months Ended
	June 30,						Increase			Percentage
	2006			2005			(Decrease)			Change
Loss from continuing operations	$	(4,257	)	$	(16,453	)	$	12,196			(74	%)
Depreciation and amortization		14,166			4,205			9,961			237	%
Stock based compensation		287			—			287			—
Non-cash interest expense		2,314			—			2,314			—
Additions to remediation reserves		2,800			22,400			(19,600	)		(88	%)
Expenditures for remediation		(5,657	)		—			(5,657	)		—
Deferred income taxes		—			(9,613	)		9,613			(100	%)
Changes in Operating Assets and Liabilities:
Accounts receivable		(5,399	)		4,424			(9,823	)		(222	%)
Inventories		(6,273	)		(2,485	)		(3,788	)		152	%
Prepaid expenses		(3,461	)		(724	)		(2,737	)		378	%
Accounts payable and accrued expenses		6,361			750			5,611			748	%
Discontinued operations, net		482			(425	)		907			(213	%)
Other		(276	)		354			(630	)		(178	%)

Cash Flow Provided (Used) in Operating Activities	$	1,087		$	2,433		$	(1,346	)		(55	%)

Significant changes in non-cash items in loss from continuing operations include:

•		An increase in depreciation and amortization due to our acquisition of AFC.

•		Non-cash interest expense which includes accrued payment-in-kind interest under our Second Lien Credit Facility and Seller Subordinated Note and amortization of debt issue costs.

Significant items that reduce cash flow from operations include:

•		Reserves for our Henderson remediation project were initially established in June 2005. At that time the project had not commenced and no amounts had been spent against the reserve balance. Conversely, in fiscal 2006 to date, we have spent $5,657, primarily for the construction phase of the project.

•		Our accounts receivable have increased. These balances fluctuate based primarily on the timing of shipments of our Specialty Chemicals and Fine Chemical products. In addition, ISP accounts receivable balances fluctuate due to the timing of revenue recognized under the percentage-of-completion method verses when amounts become billable and are collected under the related contracts. We do not grant significant extended payment terms and we have no material balances that have aged significantly past their due dates. Fiscal 2005 began with higher Specialty Chemical accounts receivable balances. The amounts were collected in fiscal 2005, resulting in cash provided by accounts receivable. Conversely, fiscal 2006 began with relatively low Specialty Chemical accounts receivable balances. Cash used for accounts receivable in fiscal 2006 is due primarily to the increase in AFC accounts receivable subsequent to its acquisition. AFC accounts receivable balance was higher due to increases in its business volume and the timing of certain customer balances which were collected after the quarter ended.

•		Inventory balances have increased primarily for AFC. Inventory balances normally fluctuate at AFC based on the product mix in production, or expected to be in production, at any given point in time.

•		Cash used for prepaid expenses has increased in the current year primarily due to an increase in the benefit recorded for income taxes.

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•

Cash provided by accounts payable and accrued expenses relates primarily to increases in AFC accounts payable subsequent to its acquisition date.

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


	Nine Months Ended
	June 30,						Increase			Percentage
	2006			2005			(Decrease)			Change
Acquisition of businesses	$	(108,462	)	$	(4,468	)	$	(103,994	)		2,328	%
Capital expenditures		(13,429	)		(1,354	)		(12,075	)		892	%
Proceeds from sale of assets		2,395			—			2,395			—
Discontinued operations, net		(403	)		(257	)		(146	)		57	%

Cash Flow Used in Investing Activities	$	(119,899	)	$	(6,079	)	$	(113,820	)		1,872	%

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 $108,462 was provided by net proceeds from debt issuances of $83,218 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:


	Nine Months Ended
	June 30,					Increase			Percentage
	2006			2005		(Decrease)			Change
Proceeds from the issuance of long-term debt	$	85,000		$	—	$	85,000			—
Payments of long-term debt		(496	)		—		(496	)		—
Short-term borrowings, net		4,000			—		4,000			—
Debt issue costs		(1,782	)		—		(1,782	)		—
Other		158			163		(5	)		(3	%)
Discontinued operations, net		(92	)		300		(392	)		(131	%)

Cash Flow Provided by Financing Activities	$	86,788		$	463	$	86,325			18,645	%

Financing activities during the nine months ended June 30, 2006 relate to our new Credit Facilities. See discussion below.

Liquidity and Capital Resources

As of June 30, 2006, we had cash of $5,189. Our primary source of working capital is cash flow from our operations and our revolving credit line which had availability of approximately $6,000 as of June 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 inflows is affected by the timing, pricing and magnitude of orders for our products.

The timing of our cash outflows is affected by payments and expenses related to the manufacture of our products, 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

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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 $83,218 (after debt issuance costs), the Seller Subordinated Note of $25,500 and existing cash.

As of June 30, 2006, we had borrowed $4,000 against our revolving credit facility.

In June 2006, our board of directors approved and we committed to a plan to sell ESI, based on our determination that ESI’s product lines were no longer a strategic fit with our business strategies. We expect the plan of sale to be completed within one year. Operating cash flows of ESI are not material to our consolidated liquidity.

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 Second Lien Credit Facility provides for term loans in the aggregate principal amount of $20,000 with a principal and accrued interest due on November 30, 2011. 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.

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 $83,218, after debt issuance costs of $1,782, were used to fund a portion of the AFC Business acquisition price.

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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.

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).

Interest Rate Swap Agreements

In May 2006, we entered into two interest rate swap agreements, expiring on June 30, 2008, for the purpose of hedging a portion of our exposure to changes in variable rate interest on our Credit Facilities. Under the terms of the swap agreements, which have an aggregate notional amount of $42,256 at June 30, 2006, we pay fixed rate interest and receive variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received is recorded as an adjustment to interest

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expense. The swap agreements do not qualify for hedge accounting treatment. We record an asset or liability for the fair value of the swap agreements, with the effect of marking these contracts to fair value being recorded as an adjustment to interest expense. The aggregate fair value of the swap agreements at June 30, 2006 was $11.

Environmental Remediation — Henderson Site

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 or soon after the end of fiscal 2006. Since the inception of the project and through June 30, 2006, we incurred construction costs of approximately $7,470. 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. We made no adjustment to our remediation estimates during our fiscal 2006 third quarter. 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 $1,200 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 to these obligations, we have contingent obligations for letters of credits we issue related to the performance of our products, and severance that may become payable under certain employment agreements. As of June 30, 2006, we had outstanding borrowings of $4,000 under our revolving credit facility, which is classified as current debt on our balance sheet. With the exception of this borrowing, our contractual commitments have not changed materially from the amounts disclosed in our annual report on Form 10-K for the year ended September 30, 2005.

We use derivative financial instruments, specifically interest rate swap agreements, to manage our exposure to changes in interest rates. Under the terms of our interest rate swap agreements, which have an aggregate notional amount of $42,256 at June 30, 2006, we pay fixed rate interest and receive variable rate interest based on a specific spread over three-month LIBOR.

Effective March 25, 2006, the employment of Dr. Seth Van Voorhees, as our Chief Financial Officer, Vice President and Treasurer, terminated. Dr. Van Voorhees was employed by us pursuant to an employment agreement dated December 1, 2005. Under the employment agreement, if we terminate Dr. Van Voorhees without cause or if Dr. Van Voorhees terminates his employment for good reason, Dr. Van

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Voorhees is entitled to receive severance payments in the form of salary continuation for three years. In addition, all unvested stock options granted to Dr. Van Voorhees become fully vested. These severance benefits are not available to him if employment is terminated by us for cause, or if Dr. Van Voorhees terminated his employment without good reason. We expect that the terms of Dr. Van Voorhees’ departure will be settled through arbitration proceedings as provided by his contract.

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

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 variable-rate long-term debt. We manage a portion of our exposure to changes in interest rates through the use of interest rate swap agreements.

As of June 30, 2006, our outstanding debt of $110,034 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 estimated annual interest expense by $1,100, excluding the effect of our interest rate swap agreements.

In addition, we have two interest rate swap agreements that expire in June 2008. Under the terms of the swap agreements, which have an aggregate notional amount of $42,256 at June 30, 2006, we pay fixed rate interest and receive variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received is an adjustment to our interest expense. The aggregate fair value of the swap agreements at June 30, 2006 was $11.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures

Based on their evaluation as of June 30, 2006, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) 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.

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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.

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

	(b)	governmental budget decreases affecting the DOD or NASA, including the status of the Space Shuttle Program (including President Bush’s current plan to ultimately terminate shuttle operations), that would cause further decreases in demand for Grade I AP,

	(c)	technological advances and improvements with respect to existing or new competitive products causing a reduction or elimination of demand for Grade I AP and other perchlorates, sodium azide, Halotron, explosives or thrusters, and fine chemicals,

	(d)	the ability and desire of purchasers to change existing products or substitute other products for our products based upon perceived quality, environmental effects and pricing, and

	(e)	the fact that perchlorate chemicals, sodium azide, Halotron and our water treatment products have limited applications and highly concentrated customer bases.

2.		Our ability to attain sufficient cash liquidity due to adverse operating performance, adverse developments concerning the availability of credit under our revolving credit facility due to covenant limitations or other factors could limit the overall availability of funds to us. We may not have successfully anticipated our future capital needs or the timing of such needs and we may need to raise additional funds in order to take advantage of unanticipated opportunities.

3.		The cost and effects of legal and administrative proceedings, settlements and investigations, particularly those investigations described in Note 8 to our condensed consolidated financial statements, as well as the costs resulting from regulatory and environmental matters that may have a negative impact on sales or costs.

4.		Our ability to profitably integrate, manage and operate new businesses and/or investments competitively and cost effectively (including the recently acquired AFC).

5.		Competitive factors including, but not limited to, our limitations respecting financial resources and our ability to compete against companies with substantially greater resources, significant excess market supply in the sodium azide market and in the perchlorate market, potential patent coverage issues, and the development or penetration of competing new products, particularly in the propulsion, airbag inflation, fire extinguishing and explosives businesses.

6.		Underutilization of our manufacturing facilities resulting in production inefficiencies and increased costs, the inability to recover facility costs, reductions in margins, and impairment issues.

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7.		The effects of, and changes in, trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies or similar organizations, including, but not limited to, environmental, safety and transportation issues.

8.		Provisions of our Certificate of Incorporation and Bylaws and Series D Preferred Stock, and the dividend of preference stock purchase rights and related Rights Agreement, could have the effect of making it more difficult for potential acquirers to obtain a control position in us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS — None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES — None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS — None.

ITEM 5. OTHER INFORMATION

On May 25, 2006, we entered into two interest rate swap agreements, expiring on June 30, 2008, for the purpose of hedging a portion of our exposure to changes in variable rate interest on our Credit Facilities. Under the terms of the swap agreements, which have an aggregate notional amount of $42,256 at June 30, 2006, we pay fixed rate interest and receive variable rate interest based on a specific spread over three-month LIBOR. The differential to be paid or received is recorded as an adjustment to interest expense.

ITEM 6. EXHIBITS

10.1		Master International Swaps and Derivatives Association (“ISDA”) Agreement, between the Registrant and Bank of America, N.A.

10.2		Schedule No. 1 to Master ISDA Agreement, between the Registrant and Bank of America, N.A.

10.3		Schedule No. 2 to Master ISDA Agreement, between the Registrant and Bank of America, N.A.

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


*		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			40
ITEM 4. Controls and Procedures			40

PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings			41
ITEM 1A. Risk Factors			41
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
ITEM 3. Defaults Upon Senior Securities			42
ITEM 4. Submission of Matters to a Vote of Security Holders			42
ITEM 5. Other Information			42
ITEM 6. Exhibits			42
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2


		AMERICAN PACIFIC CORPORATION

Date: August 4, 2006		/s/ JOHN R. GIBSON

		John R. Gibson
		Chief Executive Officer and President

Date: August 4, 2006		/s/ DANA M. KELLEY

		Dana M. Kelley
		Acting Chief Financial Officer